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Duke Energy Employee Advocate

Electric Deregulation - March, 2001


"Blessed is he who has nothing to say, and cannot be persuaded to say it." - James Russell Lowell


California Rate Hike Punishes Consumers for Illegal Corporate Behavior
Public Citizen - Press Release - March 27, 2001

WASHINGTON, D.C. -- The 40 percent rate hike approved today by California's Public Utilities Commission (PUC) will unfairly force consumers to subsidize price gouging by power generators, Public Citizen said today. Rather than boost rates and further harm already beleaguered consumers, the federal government should cap the wholesale price of power.

The PUC approved the rate hike after claiming it was necessary to send price signals to consumers to conserve and to give the state and the utilities more room to cover escalating bills from purchasing increasingly expensive wholesale electricity. The rate hike will be in addition to a 9-15 percent rate increase the PUC approved in January and a 10 percent increase already scheduled for next year. Before January's and today's rate hikes, California had the ninth highest residential electric rates in the nation, according to the Energy Information Agency.

But raising rates to force consumers to conserve won't work when wholesale prices do not reflect free market prices, because the effectiveness of price signals depends upon a functioning market, said Tyson Slocum, senior researcher at Public Citizen's Critical Mass Energy and Environment Program. Citing the lack of competition in the wholesale market, the California Independent System Operator and the Federal Energy Regulatory Commission have both accused power producers of manipulating supplies to keep wholesale market prices artificially high. As long as a handful of corporations illegally manipulate the system, price signals can never be an effective tool to entice consumers to conserve, Slocum said. Further, the proposal is at odds with that of administrative law judge Christine Walwyn, who recently advised the PUC that rate increases were not necessary.

In addition, it is important to remember that the price freeze was enacted as a compromise in the 1996 deregulation legislation: Consumers would pay 100 percent of the utilities' mortgage payments, and their electric rates would be frozen until they finished paying off the utilities' bills. Abandoning the rate freeze without providing consumers a refund for their past overpayments allows the utilities to get off scot-free.

"Once again, politicians and regulators abandon consumers in favor of their corporate campaign contributors," Slocum, said. "Approving a rate hike will result in consumers subsidizing the power generators' price gouging. The proper way to restore order is for the Federal Energy Regulatory Commission to impose region-wide wholesale price caps and to assess heavy fines on the thirteen power generators who are intentionally overcharging and therefore creating this crisis."

Public Citizen is a nonprofit consumer advocacy organization based in Washington, D.C. For more information, please visit www.citizen.org



Duke Energy Offers To Forego Charges
Associated Press - March 26, 2001

A North Carolina energy supplier offered Monday to slice nearly $20 million off California's emergency power bill for January and February if its debtors agree to pay.

Under increasing pressure from state and federal regulators, Duke Energy offered to forego part of what it charged for power during Stage 3 alerts in January and February.

The power went to California's Independent System Operator, which runs 75 percent of the state's power grid, and to the now-defunct Power Exchange. North Carolina-based Duke offered to drop $19.8 million in so-called ``credit premiums,'' but only after the two entities agree to pay $273 per megawatt hour for power supplied in January and $430 per megawatt hour in February. ISO spokesman Patrick Dorinson refused to comment on the offer. Duke has not been paid for any power sent to California in January and February, spokesman Tom Williams said Monday. The Federal Energy Regulatory Commission said recently that $273 in January and $430 in February were the highest rates that any supplier could charge without triggering suspicion of gouging. Williams would not say how often Duke's rates exceeded those caps during the two months, nor would he say how many megawatt hours Duke sold to California during the stretch. But he did admit Duke often charged more than those rates. He called the additional charges ``credit premiums'' _ typical fees within the industry. Suppliers often charge customers more if they have bad credit or suspect they will be unable to pay.

FERC has said that Duke potentially owes California $21.14 million in overcharges for the first two months of the year. The company's offer was not meant to be an admission of price gouging, Williams said. ``We have not been paid a dime,'' Williams said. ``It is not unusual to have credit premiums.'' Duke, along with Reliant Energy Services, Dynegy Power Marketing Inc., Williams Energy Services Corp., Mirant and Portland General Electric, may have overcharged California by as much as $125 million in January and February, FERC has said. Since the state's power crisis erupted, power at times has cost 15 to 20 times more than it did a year ago. Before the energy crisis started, electricity was selling at an average wholesale cost of $30 a megawatt hour. The crisis stems from 1995 state laws attempting to deregulate the California power market. The attempt has been criticized for sinking the utilities, trapping them between state-mandated price caps and soaring electricity prices on the open market.



The Price of Power
New York Times - By PAUL KRUGMAN - March 25, 2001

Welcome to the Cartel California. Last week a report by the Independent System Operator, which runs California's power grid, made it more or less official: the electricity crisis in the Golden State is partly the result of market manipulation by power generators. The report alleges that generators overcharged the state's utilities, which distribute power to consumers, by more than $6 billion over a 10-month period.

The report is almost certain to be ignored by federal authorities. But I'll come back to that in a minute. First, there are a couple of things I need to make clear about the report's claims.

The I.S.O. is not alleging that power generators were part of some vast conspiracy. Actually, I shouldn't have used the word "cartel" in the opening sentence. The generators didn't have to conspire: the logic of the situation made it easy, almost irresistible, for each individual company to manipulate the market. In fact, to believe that the generators didn't engage in market manipulation, you have to believe that they are either saints or very bad businessmen, because they would have been passing up an obvious opportunity to increase their profits.

Imagine the situation: it's a hot summer, and the California electricity market is very tight. You are one of only a handful of major players selling wholesale electricity. Surely the thought has to occur to you: what would happen to prices if one of my plants just happened to go off line? And when companies act on that thought . . . well, you get the picture.

It's also important to realize that accusations that power companies were withholding electricity to drive up prices didn't emerge out of nowhere when the crisis erupted; this isn't a case of politicians suddenly looking for scapegoats. On the contrary, economists were raising red flags about the possibility of market manipulation long before California's woes hit the headlines. Indeed, some economists warned about the issue before California even deregulated: there was clear evidence that "market power" was a problem in Britain, which began experimenting with deregulation and privatization years before the movement came to America.

And the research evidence continues to pile up. Just before the I.S.O. issued its report, the economists Paul Joskow and Edward Kahn circulated a study that found strong evidence that "exercise of market power" played a large role in raising electricity prices last summer. The authors aren't leftists, or even opponents of deregulation. They were merely trying to look objectively at the evidence, which points more or less unmistakably to the conclusion that deliberate withholding of electricity to drive up prices has been an important factor in the California crisis.

Still, there is every reason to believe that Washington will turn a deaf ear to this evidence. As an article in this newspaper explained on Friday, the Federal Energy Regulatory Commission, which is supposed to act as the nation's watchdog over the energy industry, lately seems more like a lapdog. I was particularly struck with the report that FERC's staff found that California's power companies "had the potential to exercise market power," but could not conclude that they had actually used that power. As I said, those power generators must be saints, bad businessmen, or both.

What should the regulators be doing? I'm skeptical about proposals to make the generators pay big fines; it's not clear that you could figure out which company was responsible for which part of the problem, or for that matter that the companies were doing anything illegal. What FERC could do is impose a temporary cap on wholesale prices. This would limit the financial damage to California ó the state government is currently spending more than a billion dollars a month to subsidize electricity purchases. And in a market where "exercise of market power" is a major factor, a wholesale price cap might actually increase supplies, because power companies would no longer have an incentive to withhold electricity to drive up its price.

But it's not going to happen. Blame knee-jerk free-market ideology, or the political influence of the power companies (many of which are based in, yes, Texas). Whatever the reason, it is hard to imagine an administration less likely to be sympathetic to California's plight than the one currently in power.

And if this indifference makes Californians angry, it should.



Was Electric Deregulation Cover for Union-busting in Power Plants?
Orange County Weekly - by Nick Schou - March 23 - 29, 2001

A few weeks ago, hundreds of angry union activists demonstrated outside the AES electrical power plant in Huntington Beach. Chanting slogans and waving banners, they denounced AES, Enron and some private, Texas-based companies, claiming that the much-vaunted 1996 deregulation of the power industry was really a cover for good old-fashioned layoffs and union-bashing. One of those protesters, who said he works inside an Orange County power plant, agreed to share his perspective. Out of fear of retaliation by plant officials, he asked to remain anonymous.

OC Weekly: Everybody hates power companies these days. Whatís your gripe?

Protestor: What nobody realizes about deregulation is that its main purpose was to allow companies like Southern California Edison (SCE) to sell their older plants. SCE, Pacific Gas & Electric, and San Diego Gas & Electric all helped craft this legislation so they could sell their old plants and focus on something much easier: transmitting the electricity and charging the consumer. In the past four years, companies like Enron and AES have come into Southern California and wiped out the labor unions. If you want to work at the AES plant in Huntington Beach, for example, you have to work nonunion. They decertified the union there, and then they started to lay people off. Everyone has been affected, from full-time operators and machinists to part-time scrubbers and maintenance workers.

What about plant safety?

These companies are trying to make a profit, so if that means they operate a plant with less people, their attitude is "So what?" Since the power industry was deregulated, we have had to do more work with less people. There are only three operators on a shift where I work, and there used to be five. There are four shifts each day, so you only have 12 guys that actually operate the entire plant. Making electricity is my job and my pre-occupation, so safety always comes first. But that doesnít mean things donít get overlooked.

What do you actually do?

I am a power-plant operator. I operate the plant to make electricity. I turn fresh water into steam. That entails operating acid pumps to keep the feed waterís PH level low and mixing chemicals and injecting them into the steam.

Tell me something that only an operator of a power plant would know.

It takes a tremendous amount of water to both make steam and rinse the boilers with cooling water. And there are two different kinds of water we have to use: fresh water to make the steam and salt water to cool the condenser. Is that what you wanted to know?

Is it dangerous?

There is a lot of stuff to watch, and there are not a lot of people doing it, so a lot of things get overlooked. At my plant, you have exactly three guys working together to make it through the day. It can be very dangerous. Fatigued steel and tube leaks are common things; we have tube failures all the time. But until somebody gets hurt or a power plant blows up, nobody will know how dangerous a job like mine truly is. Thatís the horse Iím riding on, so to speak, or the lion Iím trying to tame.

So whatís the most disturbing thing youíve seen?

Iíve seen guys get blown up. Iíve made three rescues. I have fought fires, and I saw a close friend get burns on 80 percent of his body. Iíve been on shift when we had a tube leak, which blew the casing out of the side of the boiler. A few years ago, we performed a body recovery in El Segundo. Somebody was diving near the intake pumps, looking for lobsters. He was sucked in through a set of screens. We recovered his body in the forebay. He was some guy who went diving out there to scam some lobsters. You arenít supposed to do that; itís illegal.

Why should anyone care about union-busting and downsizing inside the power plants?

Because itís part of the big picture behind this whole mess. These companies are trying to run the plants as cheaply as they can. But without the right investmentóespecially in terms of laborówe are going to have a much worse power crisis this summer. Iíll bet my own paycheck that there will be a lot of people without power this summer in Orange County. My plant was built in the 1920s. How long do you think itís going to last before it breaks down again and they have to rebuild it? Right now, itís actually shut down for maintenance. They gave us three weeks to make sure everything will work for a whole year. Thatís not enough time. Something will get overlooked, and then weíll have to shut the plant down again. That means no power, folks.

If you could tell the "folks" one thing, what would it be?

Everybody knows that power plants pollute, but people donít realize that every plant gets a certain number of nitrous oxide "credits." These credits are like any other commodityóyou can buy and sell themóbut every station is allocated only a certain number. When you run out of credits, you have to shut the plant down. Unless California changes this law, we are going to have another power crisis this summer. Weíre all equally to blame because we vote for this stuff, but the Air Quality Management District is out of freaking control.

And?

Conserve electricity, man. If you donít need a light on, turn it off. If you can be comfortable without your air conditioning blasting in your face, turn it off. Conserve, conserve, conserve; thatís all I can say. And when some piece of legislation comes along that will allow California to build new power plants, vote for it.



U.S. Energy Agency Is Weak in Oversight of Utilities
New York Times - March 23, 2001

The pressure was intense when federal regulators met privately last month to debate remedies for soaring electricity prices in California.

Officials of the Federal Energy Regulatory Commission, the agency whose mandate is to ensure "just and reasonable" electricity rates nationwide, had evidence that a few companies had been selling electricity to California at prices far above the cost of generating it. The agency faced an imminent deadline to challenge those prices or let the companies possibly pocket hundreds of millions of dollars in unfair profits.

An internal memorandum laid out two choices. The agency could audit and punish "bad actors," the companies that were exploiting the market. Or it could identify "bad hours," when electricity shortages were most acute and spiking prices were arguably nobody's fault, and order refunds for only the most exorbitant prices.

"It may be easier to identify bad hours than bad actors," the memorandum said.

The commission took the easier way. It decided not to investigate reports of abuses by companies, but issued an order that could require them to refund to the state utilities up to $124 million collected during a relatively few "bad hours" in January and February. That is hundreds of millions of dollars less than California might have claimed, since the most potential overcharging occurred during "good hours," when power was more plentiful but prices were often just as extreme. The order ignored those hours.

Today, in a criticism of the agency's lack of aggressiveness, California regulators estimated that generators had charged $6.2 billion above competitive levels over 10 months. They urged the agency to dig deeper, hoping it would demand more refunds or other stiff remedies. But the agency's track record ó one of complacency in the eyes of state officials ó leaves California regulators skeptical that Washington will confront the big power producers. The small, obscure agency, tucked behind the rail yard of Union Station here, has largely soft-pedaled its role as the electricity industry's top cop, even though it has wide authority to keep power companies in line. To keep rates reasonable, it can impose price caps, strip companies of the right to charge market rates, force them to return excessive profits and even suspend deregulation altogether.

Instead, the agency has largely left it to private companies to pry open the $250 billion electricity industry, which has historically been controlled by monopoly utilities and state officials. The agency's defenders, including its chairman, Curt Hebert Jr., a fierce advocate of unfettered markets, say that its largely hands-off approach reflects the delicate balancing of competing interests ó a commitment to protect consumers while not stifling market forces. But politicians, utility executives, energy economists and local regulators say California's rolling blackouts and skyrocketing electricity prices are the signs of a market running amok. They accuse the agency of standing aside as companies manipulate their way to windfall profits. The agency's critics, who include one of its own commissioners and numerous staff members, say that its enforcement mission has been blunted by free-market passions and the influence of industry insiders in its ranks.

When the agency began its first national investigation of high electricity prices last year, it named a newly recruited industry insider, Scott Miller, to lead the effort. Mr. Miller and his colleagues said in their report that there was "insufficient data" in California to prove any profiteering by generating companies. Yet his own former employer, PG&E Energy Trading, was at the time a subject of a civil antitrust investigation by the Justice Department that focused on electricity market abuses in New England.

The agency has given state regulators a lead role in monitoring local power markets. Yet even as these regulators have urged the agency to be more aggressive in investigating suspicions that companies have abused their power in California, New England, the Midwest and the mid-Atlantic, they have frequently been ignored or rebuffed. Critics say that the agency began deregulation before it was ready or willing to make sure the markets worked effectively. They accuse it of showing favoritism to industry ó allowing companies, for example, to ignore requirements to file detailed reports of market transactions that are critical to proving accusations of market abuses. "We need to wake up to the fact that this is a dysfunctional market that is being gamed and manipulated by those who participate in it," said William Massey, a commissioner of the agency who has become one of its leading critics.

The agency's inaction, the critics say, leads to "gaming" ó jockeying for profits that does not necessarily involve illegality ó and outright market manipulation. Consumers and utilities are the victims, paying billions of dollars more for electricity than if the markets were truly competitive.

Agency officials acknowledge that enforcement of market rules to curb gaming and manipulation had not been a high priority in previous years. But they defended their recent California order as proof that they intend to keep markets free of abuse. They add that the agency is also pressuring two generators to refund almost $11 million for possibly manipulating the California market last spring.

Agency officials and some outside analysts say that poorly conceived deregulation plans by states, a shortage of power plants, rising natural gas prices, and even the weather have had more impact on electricity prices than abuses by companies or any failings by the agency. They say the agency must balance the competing interests of generators, local regulators and utility companies if it is to keep deregulation on track.

"We're trying to craft a system that gives breathing room to develop a market, but not so much room that undue market power punishes consumers," Mr. Hebert said.

Fight Over Deregulation

Today's debate traces back to the 1930's, when President Franklin D. Roosevelt backed legislation to break up utility monopolies. The Federal Power Act of 1935 gave the Federal Power Commission a mandate to ensure "just and reasonable" electricity rates. The Federal Power Commission was abolished in 1977 and replaced by the Federal Energy Regulatory Commission, an independent agency with 1,200 employees that also oversees oil pipelines and the natural gas market. The president appoints the chairman and four commissioners ó two Democrats and two Republicans with staggered terms of five years. Two Republican seats are currently unfilled.

The deregulation of the electricity markets began in the late 1980's, after the agency had begun opening the gas markets. By 1996, the commissioners issued a landmark order that forced utility companies to open their transmission lines to other utilities and electricity wholesalers. The commission and many private economists expected that by prying open protected markets, electricity prices would immediately fall.

That possibility set off a deregulation frenzy, most prominently in California, New York, New England and the mid-Atlantic states. Generating companies rushed to expand in the new, borderless market.

But the agency's balancing act has grown more difficult as electricity deregulation has spread nationwide. Congress has forced it to trim its staff in recent years. Officials complain that investigating abuses in electricity markets strains their resources.

And as the California crisis has worsened, the commissioners have begun sparring publicly among themselves about what to do. This week, Mr. Massey, a Democratic commissioner, and Mr. Hebert (pronounced AY-bear), a Republican, sat side by side before a House panel and argued diametrically opposed positions. Mr. Hebert said high prices in California "were sending the right signals to get supply there." Mr. Massey called the prices that generators were charging "unlawful" and said that his agency, by not reining them in, "is simply not doing its job."

The agency's leadership has been in flux for months. Congressional and industry officials in Washington say President Bush is considering replacing Mr. Hebert, whom he named to the top post less than two months ago, with Pat Wood, who runs the Texas public utility commission. A White House spokeswoman had no comment on the reports.



Energy Overcharge of $5.5 Billion Is Alleged
L. A. Times - March 22, 2001

Money should be refunded to taxpayers and utilities, the state grid operator says, citing evidence of market manipulation. Suppliers deny the accusation.

Wholesale electricity suppliers overcharged California by about $5.5 billion between May and last month, and that money should be refunded to the state's taxpayers and financially strapped utilities, the state power grid operator said Wednesday.

Generators engaged in market manipulation and consistent patterns of bidding far above costs in the deregulated energy market, the California Independent System Operator found in a study of pricing data. The findings support the widespread belief that these suppliers reaped massive additional revenue by manipulating the market.

Spokesmen for the companies denied the accusation.

The study, prepared for a filing with federal regulators today, is central to Cal-ISO's efforts to seek reimbursement for what it considers excessive charges by electricity suppliers during the state's energy crisis.

"This might be the first time we told them the total impact and magnitude [of the overcharging]," said Anjali Sheffrin, Cal-ISO's director of market analysis. "We think the entire amount deserves consideration for refunds." Using confidential bidding data on tens of thousands of electricity sales, Cal-ISO found that five companies that together supply about 30% of the power delivered to customers of the state's investor-owned utilities engaged in two types of behavior that tended to push up prices:

* They effectively withheld supplies by bidding at excessive prices, even though they could have made some money selling more electricity.

* Less frequently, they had power generation available but did not bid at all.

The study concluded that energy suppliers commonly offered their electricity at twice their cost. For example, Sheffrin said, the average markup in August was 100% during peak hours.

A spokeswoman at the Federal Energy Regulatory Commission, which oversees wholesale electricity pricing across the country, declined to comment Wednesday, saying, "This is part of an ongoing proceeding."

FERC member William L. Massey, who has considered previous commission actions on refunds to be inadequate, said it would be improper for him to comment on a report that has not yet been filed. But when told of the $5.5-billion total, Massey said: "That doesn't shock me in any way."

"Prices over the past 10 months in California have greatly exceeded the federal standards of just and reasonable prices, and I think they have exceeded the standards by possibly billions of dollars," he said.

Cal-ISO, which oversees grid operations and an emergency energy market, previously detailed $550 million in alleged overcharges for December and January and asked FERC for refunds. But the commission has proposed refunds of only a tiny fraction of that amount.

The study covered five major in-state power suppliers--Reliant Energy, Dynegy, Williams/AES, Duke Energy and Mirant, formerly Southern Energy--plus 16 power importers, all of which deliver power to customers of Pacific Gas & Electric Co., Southern California Edison and San Diego Gas & Electric Co.

"All [21] overcharged, but some excessively and some by moderate amounts," Sheffrin said.

Cal-ISO's public filing will quantify the alleged overcharging by each company, but the companies will be identified only by a number. The code will be provided to FERC, Sheffrin said, and Cal-ISO lawyers will determine how much information about the companies will be made public.

State, U.S. Investigations

California electricity markets and the companies that buy and sell power in the state have been the subject of several investigations by state and federal authorities since wholesale electricity prices first skyrocketed in May.

Electricity suppliers have repeatedly denied manipulating the California market in any way, whether through above-cost bidding in spot markets or through physical withholding of electricity to drive up prices.



Second Day of Blackouts Disrupts 500,000 Homes and Businesses
L. A. Times - March 21, 2001

Grid operators say the shortage should ease in the next few days, but officials see a grim summer.

Electricity blackouts rolled through California for a second straight day Tuesday, disrupting business in one of the world's most technologically advanced economies and leaving schoolchildren groping in the dark.

Jinxed by a combination of bad luck and bad decisions, utilities were forced to cut off power to more than half a million homes and businesses from San Diego to the Oregon border.

"This is a taste, almost like an appetizer, of a really unpalatable meal that's going to be served up this summer," said Michael Shames of the Utility Consumers' Action Network in San Diego, himself a victim of a rolling blackout that hit his office in San Diego early Tuesday.



Federal Refund Order Validates Call for Price Caps
Public Citizen - Press Release - March 21, 2001

Although Regulators Find Evidence of Profiteering, Bush Refuses to Consider Only Option to Protect Consumers

Emerging evidence of price-gouging in California's deregulated electricity market supports calls for regional wholesale price caps, Public Citizen said today.

As California endures another wave of rolling blackouts, federal regulators and the state's electricity grid manager are questioning whether power producers have been escalating the crisis by creating artificial shortages and by gouging utilities and consumers.

In fact, the federal government has told 13 power generators that they may have to refund $69 million in overcharges if they can't justify their prices by March 23. Although ordering refunds is an important acknowledgment that the wholesale market is overpriced, only the Federal Energy Regulatory Commission (FERC) has the ability to force power producers to sell their power at reasonable prices.

If FERC were to set a regional wholesale price cap in the West - as eight of 11 Western governors have asked - the federal government would protect consumers and taxpayers by ensuring that electricity is sold close to its cost. Therefore, it should set such a cap, Public Citizen maintains.

However, Energy Secretary Spencer Abraham told a Senate hearing on March 15 that "the only action the [Bush] administration will not take is the implementation of price caps."

Public Citizen urges the administration to reconsider.

"Without region-wide wholesale price caps, the electricity market will continue to be overpriced, placing the region's taxpayers and consumers at risk," said Wenonah Hauter, director of Public Citizen's Critical Mass Energy and Environment Program. "Rather than defending the right of energy companies to charge outrageous prices for electricity, the Bush administration should be protecting consumers from greedy corporations."

The California Independent System Operator (CAISO) acts as traffic cop, managing the flow of electricity supply and demand. In February, it issued a report (Report on Real Time Supply Costs Above Single Price Auction Threshold: December 8, 2000 - January 31, 2001) detailing how 13 power generators overcharged Californians by $562 million in December and January. The study found that total energy costs charged by these power generators was $11 billion in those two months, compared with $7 billion for all 12 months of 1999. Although the ISO manages the grid, it lacks authority to regulate the wholesale market. Only FERC has the authority to do that.

In December, FERC found that California's sky-high wholesale electricity prices were not just and reasonable but declined to do anything about it. In response to the CAISO report, however, FERC was forced to act, placing 13 power generators on notice that they would be liable for up to $69 million in overcharges for January's sales alone. These companies have until March 23 to either refund the amount or justify why they were selling electricity so far above the amount other generators were selling. FERC has yet to rule on alleged overcharges for the months of December, February and March.

FERC is investigating allegations that power producers have been intentionally taking plants off line to constrict supply and drive up the price of electricity. The power plants - Alamitos and Huntington Beach - are owned by Virginia-based AES, and the power is marketed by Oklahoma-based Williams. According to the FERC report, the plants were not operating in April and May "for reasons not directly related to the necessary and timely maintenance" of the facilities. As a result of the dubious plant shutdown, the state had to purchase electricity from an alternative AES-owned, Williams-marketed plant for $750 per megawatt hour - 10 times the $63 per megawatt hour charged when the Alamitos and Huntington Beach plants were operational.

"It's about time FERC got off the sidelines and cracked down on these profiteering corporations," Hauter said. "California taxpayers are forking over $50 million a day to these greedy companies, so it is high time the government stepped in to protect consumers."



More Rolling Blackouts in Heat-Stricken California
New York Times - March 20, 2001

In a preview of summer trouble, a heat wave combined with the sudden failure of two large power generators prompted hours of rotating blackouts today from San Francisco to Beverly Hills. The blackouts were the first since January and the longest yet, affecting at least a million customers from noon into the rush hour, officials said.

Even as Energy Secretary Spencer Abraham warned in Washington that the nation faced the worst energy supply crisis since the oil embargoes and gas station lines of the 1970's, Californians once again found themselves working in darkened offices, standing over half-cooked lunchtime steaks, closing stores and creeping warily through crowded city intersections without working traffic lights.

"I had one guy who almost wiped me out," on the road, said Debbie Cain, who works in the office at Folsom High School, east of Sacramento, where teachers used megaphones, not bells, to change classes. "He hadn't caught on yet."

The blackouts, lasting up to two hours each and the first to occur in some 140 cities in Southern California, were the latest fallout from the state's ill-fated experiment with the partial deregulation of its electricity market, which let wholesale prices float while capping retail rates.

That has left the state's two major investor-owned utilities on the verge of bankruptcy and unable to pay suppliers, including smaller generators that use natural gas or solar power, wind and wood waste products to generate more than a quarter of the total daily electricity needs of some 30,000 megawatts, or enough to power roughly 30 million households.

As a result, in recent weeks, the small generators themselves have been unable to buy fuel and have shut down about half their capacity, or 3,100 megawatts, officials said, while a bill to help them remains stalled in the State Legislature.

At the same time, plants that have been operating without a break for months have been taken out of operation for maintenance or repairs, reducing supplies by an additional 12,000 megawatts, and imported power supplies from the Pacific Northwest are running well below typical levels because of low rainfall and hydroelectric supplies there. "This just demonstrates that we're operating at very tight margins," said Patrick Dorinson, a spokesman for the California Independent System Operator, the agency that was set up to manage the state's power grid after deregulation. "It's clearly the worst day we've ever had in California."

Officials said the immediate cause of the hastily ordered blackouts was the midmorning failure of the two power generators after a transformer fire at a plant on the California- Nevada border, coupled with a greater demand for air-conditioning as a result of unseasonably high temperatures, which climbed to 87 in downtown Los Angeles today.

But electricity grid operators warned that intense conservation efforts were still needed, especially during peak evening hours of demand, and that another round of blackouts was possible.

Today, a prominent advocacy group, the Foundation for Taxpayer and Consumer Rights in Santa Monica, Calif., issued a report contending that the power shortages were not caused by increased demand and a shortage of new power plants but were artificially created by price- gouging power-generating companies.

The utilities and power generators have consistently denied such accusations, but the Federal Energy Regulatory Commission has determined that some power sales in January and February were priced too high. The commission ordered the generators to refund some $124 million in charges.



U.S. Orders Duke Energy to Justify Prices in California
New York Times - March 17, 2001

Federal regulators told power suppliers in California's volatile electricity market today to refund $55 million to state utilities unless they could justify prices that regulators called excessive.

The Federal Energy Regulatory Commission issued the refund notice, which affected six leading electricity generators, to cover the month of February. Last Friday, it issued a similar order reviewing sales in January. In that action, the agency asked generators either to justify or refund $69 million in sales.

The refund mandates are part of a new push by the commission to intervene in California's troubled electricity market. State and national political leaders have put pressure on the agency to use its authority ó it has the obligation to insure just and reasonable electricity rates nationwide ó to limit skyrocketing prices while the state tries to unravel its failed effort at deregulation.

The agency has indicated that it will also scrutinize electricity transactions in March and April, possibly forcing refunds if it finds that generators have charged rates above what the agency determines to be their highest costs of production.

While the intervention has won support from some California officials and the Bush administration, the agency's orders have been criticized as too narrow by some California market watchers and one of the federal agency's commissioners.

The agency decided to apply a so-called rate screen, effectively a price cap, to electricity transactions that occur during California's Stage 3 emergencies. Emergencies are declared when electricity supplies fall to within 1.5 percent of demand. The agency has said that generators are most likely to charge excessive prices when supplies are tightest.

But California has seen similarly high prices even when it is not forced to declare a Stage 3 emergency, California officials say. They have criticized the agency for effectively blessing the profits generators have made during those nonemergency periods by excluding them from the universe of potential refunds.

The agency has also imposed a relatively high rate screen ó a proxy number intended to simulate the operating costs of the state's most inefficient generating plants ó on all sellers of electricity during crisis hours. California officials had urged the agency to investigate the actual costs of individual generators and compare them to the prices they charged, tailoring penalties to the behavior of each generator.

In January, the commission set the rate screen at $273 per megawatt- hour. In February, the screen rose to $430 per megawatt-hour. The commission said in a statement that higher natural gas prices accounted for some of the increase.

"This sounds like a step backward instead of the aggressive action we need from FERC," said Senator Dianne Feinstein, Democrat of California, referring to the agency.

"Before the energy crisis started in California, electricity was selling at an average wholesale cost of $30 a megawatt-hour," Senator Feinstein said. "And now, FERC is saying a baseline of $430 a megawatt-hour is a reasonable cost. Something is really wrong here."

Agency officials declined to comment on the rationale behind their order.

The refunds to date are a small fraction of total electricity sales in the state. California officials, using a different methodology and a different time frame to calculate price abuses, had asked the agency to force refunds of $550 million for December and January.

California utility executives have estimated that unless prices are abated much more aggressively in coming months, the state could end up paying a $70 billion electricity bill in 2001, compared with $28 billion last year. The latest refund notice named Duke Energy Trading and Marketing, Dynegy Power Marketing, Portland General Electric Company, Reliant Energy Services, the Mirant Corporation and Williams Energy Services, six of the country's largest power marketers. Dynegy was asked to justify or refund $20.1 million in sales, and Williams was asked to defend or rebate $21.5 million.

Spokesmen for the companies named have said that their companies operated legally and ethically in California. Most of the companies said they planned to accept the agency's invitation to defend their prices.



Lawmakers To Probe California Energy
Associated Press - March 14, 2001

In a move that could force out-of-state power suppliers to detail their finances, the state Senate is launching an investigation into whether they illegally manipulated California's electricity market. Senate leader John Burton said Wednesday that a panel will ask executives of energy wholesalers to testify - under subpoena, if necessary.

``Clearly, early evidence suggests that there has been market manipulation by the power generators, which led to rolling blackouts and then higher electric prices,'' he said. If the panel finds evidence of illegal activity, Burton said, the state attorney general should go to court to seek refunds. Jan Smutny-Jones, executive director of the Independent Energy Producers industry group, said wholesalers will cooperate, but warned that if it becomes a ``witch hunt'' it could discourage them from building plants in California. ``We believe this investigation will find nothing except that power producers have been working around the clock to keep the lights on in California,'' Smutny-Jones said.

Wholesalers have been accused of shutting down plants to create a power shortage and drive up prices. Burton said California saw a 4 percent increase in demand from 1999 to 2000, while wholesale power prices in that time rose 328 percent. The wholesalers have denied wrongdoing and blamed high prices on the poor planning of California lawmakers who voted to deregulate the state's electricity market in 1996. Tom Williams, spokesman for Duke Energy of Charlotte, N.C., expressed annoyance at the news of a Senate probe. ``It is wearing thin,'' he said. ``There has been investigation, upon investigation, upon investigation, upon investigation, and there have never been findings of wrongdoing.'' Reliant Energy spokesman Richard Wheatley said the probe was ``a negative development'' in the state's ongoing negotiations for long-term power contracts with wholesalers. ``What needs to be done is less finger-pointing and more constructive solutions being brought to fruition,'' Wheatley said. Last week, federal regulators said wholesalers overcharged California utilities at least $69 million in January.

The keepers of California's power grid also said suppliers imposed $555 million in unreasonable charges in December and January. Energy watchdogs hope that by subpoenaing records and compelling testimony, the Senate committee will uncover evidence of price-gouging. ``If they are the crooks they appear to be, we need to get them to discuss their behavior in the public's eye,'' said Doug Heller, consumer advocate for the Foundation for Taxpayer and Consumer Rights. Much of the outrage has focused on a few out-of-state energy companies whose profits doubled and tripled last year as California's wholesale electricity prices soared. They include Dynegy and Reliant Energy, both based in Houston, Duke, Mirant of Atlanta, and Williams Energy of Tulsa, Okla. Attorneys general in California, Washington and Oregon are pursuing similar investigations. Also Wednesday, the Federal Energy Regulatory Commission said they will make several changes in oversight to expand the West's power supply, including speeding approval of natural gas pipeline projects and letting major power users who cut consumption resell the electricity they save.



Federal Agency Orders Power Generators to Justify Prices
New York Times - By JOSEPH KAHN - March 10, 2001

The Federal Energy Regulatory Commission told 13 power generating companies today to justify the record-high prices they have charged California utilities for electricity or refund profits that the federal agency said might have been excessive.

The action, which covers $69 million in electricity sales in January, is the agency's first that directly addresses widespread accusations that generators have made windfall profits during California's power crisis.

The order establishes a new and largely hypothetical threshold of $273 a megawatt hour, which the agency estimated was the highest cost any power generator had for producing electricity in the least efficient plant serving California's market. The order covers any sales made above that price during what California calls Stage 3 hours ó when the state declares a power emergency and requires all available generators to produce at peak capacity.

The 13 generators and marketers cited as selling electricity at prices in excess of $273 a megawatt hour during those specified crisis hours will have 15 days to decide whether to defend their prices or issue credits to utilities. Some generators have argued that high prices in the market reflect short supply and the shaky finances of the state's utilities, not price gouging.

California regulators praised the order, saying it would help them corral prices. But it was immediately criticized by one commissioner and some experts with the agency who argued that the action effectively cleared the vast majority of high- priced sales that generating companies have recently made in the state.

Three of the nation's largest wholesalers of electricity, Dynergy Power Marketing, Duke Energy Trading and Marketing and Reliant Energy Services, made most of the sales in question, according to the order by the federal agency. The order was released late today.

Executives from Duke and Reliant said their companies would submit documents to justify the transactions in question, arguing that the creditworthiness of California utilities and the high price of natural gas ó a key resource for electricity generation ó accounted for a large part of the price spikes.

"When you see price spikes in a market, those are buyers competing for scarce resources, and the resources were very scarce at that time," said Jeremy Dreier, a spokesman for Duke, which was cited in 363 transactions involving nearly $18 million in sales.

Earlier this month, California regulators called on the federal commission, which has the mandate to ensure that electricity prices are "just and reasonable," to order generators to refund $555 million of overcharges in December and January.

The federal order scrutinized sales made in January alone and excluded some publicly owned electricity companies. But the commission also rejected the standard used by the state and set a much higher threshold for demonstrating that companies abused the market.

The agency has been under pressure to use its powers to relieve California's electricity crisis, which has cost the state's leading utility companies more than $13 billion and created a political storm in Sacramento as politicians struggled to keep the lights on while keeping electricity bills from rising sharply.

The agency has rejected California's appeals to set price caps on electricity sales. But in December it vowed to keep closer tabs on prices charged in the state's auction markets, setting up today's potential refund order.

"Today's refund order demonstrates the commission's commitment to ensure appropriate and reasonable prices in the wholesale electricity market given the supply and demand imbalance in California," said Curt L. Hebert, the commission chairman.

Charles Robinson, general counsel for the California Independent System Operator, which manages the state's electrical grid, said he was pleased that the agency had "stepped up to the plate."

But he said that state regulators were still reviewing the order and might seek a rehearing to try to expand the number of transactions that might be subject to refunds.

The order was approved 2 to 1 by three sitting commissioners, with Mr. Hebert, a Republican, and Linda K. Breathitt, a Democrat, voting in favor. William L. Massey, a Democrat, opposed the measure and issued a strongly worded dissent, calling the measure "arbitrary, capricious and an abuse of discretion" because it sharply restricted the scope of the agency's refund order.

The agency usually has five commissioners. President Bush has yet to fill two vacant slots.

Mr. Massey and some other commission officials and outside experts contended that the order let generators off lightly.

Mr. Massey argued that 81 percent of high-priced transactions in January were effectively excluded from scrutiny by the agency's new order. He said that the order set a precedent ó one he called arbitrarily favorable to generators ó that was likely to apply when the agency examined transactions in other months.

"There is no logic to this methodology other than limiting the universe of potential refunds," Mr. Massey wrote.



Power Executives Score Big Bonuses
San Diego Channel 10 News - March 4, 2001

Consumer Groups Call Bonuses Corporate Greed

Executives at two companies that have sold electricity at high prices during California's power crunch were compensated handsomely for their work.

In federal filings, officials at Enron of Texas and Duke Energy of North Carolina report they received millions in bonus pay last year.

The two companies tie executive pay to profits and stock performance.

Though Enron does not generate power in California, the company collects seven percent of its operating revenue by trading power as a commodity in the state.

Enron's chairman, Ken Lay, received nearly $16 million in stock and cash above his $1.3 million salary last year. That compares with less than $4 million in bonuses in 1999.

Duke Energy's chairman, Richard Priory, nearly doubled his bonus to $1.9 million in 2000.

Consumer groups assailed the news as corporate greed.

An Enron spokesman attributes the increase in Lay's bonus to an 86 percent jump in the company's stock during the year 2000Ö



California Independent System Operator Says Suppliers Overcharged
L. A. Times - By NANCY VOGEL and JENIFER WARREN - March 2, 2001

Wholesale electricity suppliers overcharged California's utilities more than $500 million during December and January, an amount that the federal government should demand be refunded, according to a no-holds-barred state report released Thursday.

The report by the California Independent System Operator, which oversees the flow of electricity in the state, said power suppliers charged $11 billion during those two months alone--more than they did for all of 1999. Studying various market dynamics, the agency concluded that there was a "prima facie case" that the unnamed generators and marketers had charged $562 million above "just and reasonable" prices, warranting further investigation and federal hearings into the appropriateness of refunds.

The state report is the most accusatory of a number of studies undertaken to determine why wholesale electricity prices have soared in California since last summer, throwing the state's biggest utilities into financial crisis and dashing hopes for lower consumer rates under deregulation.

The study also provides new ammunition to members of California's congressional delegation, who have unsuccessfully been pressing the Federal Energy Regulatory Commission to impose price ceilings on wholesale electricity costs.

Generators defended their operating practices and rejected the allegation that they had raked in unfairly large profits in December and January.

"We have played by the rules, acted ethically and legally in all our operations," said Richard Wheatley, a spokesman for Houston-based Reliant Energy, which owns power plants capable of supplying more than 3 million homes. "We have nothing to hide."

To calculate the cost of producing electricity in those months, Cal-ISO analysts assumed power plant owners were buying natural gas from the spot market, where prices soared this winter, and were running old, inefficient plants. They also assumed relatively high prices for air emission credits in Southern California and added a 10% buffer to the operating costs.

Cal-ISO officials then compared these costs with the prices sellers were paid. Their report did not name the individual sellers, which range from the province of British Columbia to the publicly owned Los Angeles Department of Water and Power to private companies.

Several lawmakers praised the report as long overdue.

"It's about time," said state Sen. Debra Bowen (D-Marina del Rey), chairwoman of the Senate Energy Committee. She said that the desire among some legislators to seize power plants and take other drastic actions stems from the sense that "there's no one willing to enforce the provisions of the federal power act regarding just and reasonable rates.

"The utilities are doing a great job looking out for their shareholders, but who is looking out for ratepayers?" she asked.

Consumer advocacy groups applauded Cal-ISO's action and said the agency's evidence of overcharges underscored the need for hard price caps or a tax on generator profits.

"It's certainly not news to us that the generators are charging excessive wholesale prices," said Mindy Spatt, spokeswoman for the Utility Reform Network of San Francisco. "If there had been a real price cap, this investigation would not be necessary."

California's congressional delegation has pushed hard in recent months for legislation that would impose temporary price controls on wholesale power supplies in the West. On Wednesday, a bipartisan team met with Curtis Hebert, chairman of the Federal Energy Regulatory Commission, and came away discouraged by Hebert's opposition to price caps.

The federal commission has imposed a so-called "soft cap" of $150 per megawatt-hour in California's electricity market. When sellers ask a higher price they must explain why it is necessary.



California ISO To Ask FERC To Cut Dec and Jan Power Bills
Dow Jones - March 1, 2001

The California Independent System Operator asked the Federal Energy Regulatory Commission Thursday to cut suppliers' invoices for December and January power by $550 million, according to staff members of the ISO.

Total bills for December from merchant generators and power marketers for bulk power sold in the ISO's wholesale power market are $1.5 billion, and January's total is expected to be about the same.

The filing is in accordance with the FERC's Dec. 1 ruling on the California wholesale electricity markets, which required generators to justify all sales for more than $150 a megawatt-hour by documenting generation costs.

Under the FERC ruling, the ISO has 60 days to complain that prices charged were 'unfair and unreasonable' and to ask the FERC to reduce prices. If no complaint is filed within 60 days of the delivery of the power, the agreed upon prices stand.

The ISO complaint names the suppliers that it says overcharged the state, but the list of suppliers isn't being made public. The list includes most of the merchant power producers in the state, western utilities outside of California and some power marketing companies, according to one source.

Sellers could be subject to potential refund liability, pending a FERC decision, but the new price can be no lower than the seller's marginal costs or opportunity costs. Western utilities outside of California that are short on supplies have been paying prices much higher than the cost of generation. So market prices, which would be opportunity costs to ISO sellers, have been very high.

In December and January, however, many potential suppliers to the ISO stopped selling to California because they feared the state's investor-owned utilities wouldn't be able to pay their ISO bills - fears that turned out to be accurate. Those that continued to sell to the ISO did so at a premium to the market of as much as 100% to reflect the credit risks involved.

A copy of the complaint to FERC wasn't immediately available from the ISO or FERC. The ISO plans to hold a press conference on the complaint later Thursday.


Deregulation - February 2001