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July - Duke Energy Employee Advocate

Deregulation - November 2000

"The Love of Money is the Root of ALL Evil"

Deregulation Lawsuits Against Duke Energy
The Orange County Register - November 30, 2000

More than a dozen power companies face lawsuits that accuse them of conspiring to boost electricity prices and orchestrating power shortages in California.

A civil lawsuit, filed Wednesday in Superior Court here, claims that big power generators, including units of PG&E Corp. and of SDG&E's parent, Sempra Energy, violated state antitrust and consumer protection laws by manipulating the state's electricity market.

Power generators say the lawsuit faces serious hurdles because three agencies have investigated California's electricity crisis and found no evidence of market manipulation. Earlier this month, the Federal Energy Regulatory Commission said California's electricity rates are "unjust and unreasonable," and called the wholesale power market "seriously flawed." But the federal agency fell short of asking for refunds from power generators because of a lack of evidence. Leonard Simon, the lead lawyer in the case, is no stranger to class-action antitrust and price-fixing suits. Three years ago, he helped win a $1 billion settlement from Wall Street firms accused of inflating the prices of Nasdaq stocks. His latest suit seeks restitution and damages from power generators.

Because the lawsuit is backed by the Utility Consumers Action Network, the San Diego-based watchdog group that has been a major critic of electricity deregulation, and is directed by a team of veteran consumer lawyers, it is widely seen as the most serious court challenge to face the companies so far.

"They are the big guns who will fight the big gougers," said Michael Shames, the executive director of UCAN, which is working with lawyers on the case but will not be a plaintiff. The suit, which seeks class-action status on behalf of all residential and business consumers in California, is the second civil action to be filed here against power companies so far this week. On Tuesday, consumer advocate Harvey Rosenfield said the Foundation for Taxpayer and Consumer Rights drafting a statewide initiative to essentially re-regulate California's energy market, which began moving toward deregulation in the spring of 1998.

Simon said yesterday he was confident that he would be able to unearth the evidence of collusion evidence that has so far eluded state and federal investigators because he and his colleagues are committed to spending years on the case and mastering the intricacies of an impenetrably complex electricity market.

"It's going to take years," said Simon. "It's not going to be easy. But there's a simplicity to it, too. These companies were supposed to be competing. We don't think they did." Michael Aguirre, one of the other legal veterans behind the suit, said private attorneys had been forced to step in because the state and federal government officials had essentially bungled their probes into this summer's price crisis. "Watching the public officials, it has become abundantly clear that unless consumers take direct action, nothing will change," he said.

Sempra Energy, a defendant named in the lawsuit that is both a power generator and an electric utility, called the allegations "completely false and frivolous." Tom Williams, a spokesman for Duke Energy, another defendant, said the three investigations by FERC, the Power Exchange, and the California Independent System Operator, which manages the power grid found that power generators did nothing wrong and simply worked within the rules laid out under deregulation in 1998.

"All three found there was no inappropriate behavior or illegal behavior," he said.

But the crisis continues to be a thorny issue with no resolution in sight. As a result of deregulation, monthly utility bills tripled this summer in southern Orange County and San Diego County the only region in the state to be exposed to true market prices. The state Legislature intervened with a temporary rate rollback for SDG&E's 1.2 million customers.

So most consumers aren't even aware of the higher prices because of price caps.

The actions taken by consumer groups are designed to thwart attempts by the state's three electric utilities SDG&E, Southern California Edison, and PG&E which have lobbied lawmakers and state regulators to be reimbursed $6 billion for the higher cost of electricity this summer, which could not be passed on to consumers because of price caps.

Defendants named in the suit include: Duke Energy Trading and Marketing; Dynegy Power Marketing Inc.; Enron Energy Services; Enron Power Marketing Inc.; Morgan Stanley Capital Group; NRG Energy; PG&E Energy Trading, a unit of PG&E Corp.; Reliant Energy Services, a unit of Reliant Energy Inc.; Sempra Energy Trading and Sempra Energy Resources, units of Sempra Energy Inc.; Southern Company Energy Marketing; Williams Energy Marketing; and Trading and Williams Energy Services Co.

Activists Propose Ballot Initiative to Reregulate Electricity Industry
L. A. Times - November 29, 2000

A consumer advocacy group announced a proposed ballot initiative Tuesday that would allow a takeover of the multibillion-dollar electricity industry in California by the state government.

The plan, offered as a solution to the current crisis in electrical energy and the threat of higher rates next year, calls for reregulation of the industry and a windfall profits tax on excessive utility rates.

It also would prohibit companies from charging customers for energy procurement costs that exceed a certain level, a practice known as back-billing.

Harvey Rosenfield, president of the Santa Monica-based Foundation for Taxpayer and Consumer Rights, outlined his proposed 2002 initiative at a news conference.

Using a familiar pressure tactic, the activist said he was offering the program to Gov. Gray Davis and the Legislature. But, indicating that he believed they would reject it, Rosenfield said he intends to take the plan to the voters as an initiative.

In making the apparent take-it-or-leave-it offer, he told reporters, "We do not compromise."

Rosenfield, a critic of the controversial deregulation law enacted by legislators and then-Gov. Pete Wilson in 1996, said Davis and current lawmakers must correct the mess immediately.

"It's their job to fix it, but there is ample reason to question whether they will do the right thing," he said. He noted that the well-heeled energy industry is among the most politically influential in California.

Steve Maviglio, Davis' chief spokesman, said the governor "has not ruled [Rosenfield's proposal] in or ruled it out. He's working hard with all parties to fashion an appropriate solution."

Deregulation, which was championed by the utilities, temporarily put the brakes on electricity rates. But unexpectedly last summer, the unregulated system seemed to go haywire in San Diego and southern Orange counties, where some rates surged by 300%.

Even as California approaches winter, energy shortage alerts have emerged as a new cold weather phenomenon.

"Our purpose is to restore a reliable and affordable electricity system in California," Rosenfield said. He alleged that the utility industry wants the deregulation rules rewritten so they "can foist another $5 billion to $6 billion in unjustified charges on the beleaguered ratepayers."

California Returns to the Edge of an Emergency on Electricity
The New York Times - November 17, 2000

LOS ANGELES, Nov. 16 - California got a cold dose of reality this week as temperatures dropped to unseasonably low levels, resulting in warnings about possible electricity blackouts ahead and reminders that steep increases in natural gas prices might be coming.

For three days running, the state's Independent System Operator, the agency that oversees the high-voltage power grid serving 75 percent of the state, declared Stage 2 Electrical Emergencies as reserves dropped to less than 5 percent on Monday, Tuesday and Wednesday. If reserves fall below 1.5 percent, a Stage 3 emergency is declared and rotating blackouts are possible.

Officials said late Wednesday that they hoped a warming trend would ease the situation. Only a Stage 1 emergency, which calls for voluntary energy conservation, was established from 4 to 10 p.m.

While much of the problem developed because generators had been taken out of operation for maintenance, a spokeswoman for the Independent System Operator, said it highlighted how strapped the state had become for electricity.

"The growth in California and the demand for electricity has really caught up with reality," said Lorie O'Donley, a public information officer for the agency. "We're operating with a pretty slim reserve most days."

California, which has been at the forefront of deregulation of the electric industry, has come under scrutiny after electricity supplies dropped to critical levels this past summer and electric bills in San Diego more than doubled.

"In the summer we had some problems because of high demand with air conditioners and the like," Ms. O'Donley said. "But we've gotten to the point where the supply and demand equation is so close we may be seeing more problems throughout the year."

The current shortage worsened when the amount of power expected to be imported from the Northwest was cut by a third on Wednesday because the power was needed in Washington and Oregon, which were experiencing cold weather.

During the summer, those states provide electricity for California, and the state returns the favor during winter. But development of power supplies has lagged behind the rapid growth on the West Coast, leaving utility companies scrambling to serve their customers.

In addition to advisories about shortages, officials with the Pacific Gas and Electric Company, which serves 13 million people in Northern and Central California, urged consumers to conserve energy during the current cold snap as natural gas prices are expected to be about 50 percent higher this year.

Utility Rate Cuts Fail to Materialize after Deregulation in Massachusetts
The Boston Globe - November 10, 2000

By now, proponents of deregulating Massachusetts' electric industry told us, Bay State businesses and residents should have been enjoying at least a 15 percent rate cut and vibrant competition for our electric business.

But 2 1/2 years after a landmark industry restructuring law took effect, rates are on the verge of jumping for many customers by 10 percent or more, with some Massachusetts Electric customers facing a 68 percent increase in the cost of power.

The vast gap between what deregulation advocates promised and what has actually been achieved has some industry observers wondering: Has the law been a big bust?

"It's obviously not working the way it was intended to work," Attorney General Thomas F. Reilly said yesterday. "I don't think there's any question about it. Whatever the benefits of it were going to be, they are going to be wiped out in one fell swoop."

Typical was a full-page ad that ran in the Globe the week before the vote, one of whose claims was that the law "cuts electric rates a minimum of 15 percent by September 1, 1999, and caps rates for at least 6 years." What the ad left unmentioned -- except if you followed a footnote to section 183 of the law -- was that the 15 percent cut and cap were subject to being adjusted upward for inflation.

Now utilities argue that "inflation" means not just the consumer price index, but spikes in the cost of fuel. For many customers, those increases are rapidly wiping out virtually all the savings achieved by the mandated rate cuts that took effect in March 1998 and September 1999. Even Reilly acknowledges the law seems to let them make that claim.

U.S. Justice Department prosecutors have an ongoing investigation into possible price-fixing efforts by generators in one market last winter.

While it lasted just one afternoon, the freak combination of hot weather and plant shutdowns on May 8 that sent spot-market power prices to 200 times normal levels continues to scare off many resellers from entering the New England market. The one-day spike reaped tens of millions of dollars in windfalls for generators, and many brokers fear conditions still exist here for price spikes that could wipe out a whole year's profits.

Study Warns of Increases in Electricity Cost if Wisconsin Deregulates
The Wisconsin State Journal - November 9, 2000

Wisconsin consumers will be jolted by big increases in the cost of turning on their lights and air conditioners if Wisconsin deregulates its electric industry. That is, unless the state's largest utility company sells its power plants, a study says.

The trouble is: Wisconsin Energy Corp. of Milwaukee owns the lion's share of power in the state -- 56 percent of the generation, says the study by Tabors Caramanis & Associates, a Cambridge, Mass. electric industry consultant.

At the same time, with Lakes Michigan and Superior lining two of Wisconsin's borders and only four overtaxed transmission lines bringing in electricity from other states, the state has few options for tapping into outside utilities that may have excess, and less expensive, power.

"Wisconsin's market concentration and electrical isolation make deregulation a challenge," lead author, Alex Rudkevich, said in a statement.

The six-month study warns that if state regulators no longer had a say on rates the company charges for electricity, Wisconsin Energy could push prices way up unless some major changes are made. The recommendations include:

Requiring Wisconsin Energy to sell its power plants to three independent companies, one for its nuclear and hydro plants and two for its other power plants.

Requiring Wisconsin utilities to sign long-term contracts to buy and sell electricity, to keep prices stable. Making sure that more power plants are built in the state by independent producers from outside Wisconsin and adding transmission lines to expand options for electricity from other states.

Otherwise, if electricity is deregulated in the state, Wisconsin Energy could lead the way for price increases by all the state utilities, ranging from 15 to 75 percent, the study says.

The result would be a projected, average hike in consumers' electric bills of 20 percent over 1998 rates, the study says.

"If there's any market player who can strategically increase prices, all of the (utilities) benefit at the cost of consumers," Tabors Caramanis senior analyst Ezra Hausman said in a telephone interview.

Utility company profits, meanwhile, could jump 50 to 250 percent, the study says

Pricing Probe Of Duke Energy and Others
Coastal Alliance Press Release November 8, 2000

Duke Energy, which is seeking to expand the Morro Bay Power Plant, is among power-plant owners that are refusing to produce key documents in an investigation into whether the owners colluded to rig wholesale energy prices and profiteer in the California electricity market last summer, the California Public Utilities Commission reported.

In a story in the Los Angeles Times dated Tuesday, Nov. 7, the Commission (PUC) also said it is asking federal regulators for help in obtaining the documents from Duke and the other energy generators. Here is what else the Times article had to say:

In a filing Monday (Nov. 6) with the Federal Energy Regulatory Commission, the PUC asked the federal commission to force several generators to respond to subpoenas for documents about their finances, costs and electricity trades.

The generators have refused to produce the documents partly because they contend that the PUC's protective order is not strong enough to keep this competitively sensitive material out of the hands of other market players.

The PUC motion targets six corporations that own most of the power plants in California: AES Corp., Duke Energy Corp., Dynegy Inc., Reliant Energy Inc., Southern Co. and Williams Cos. AES has produced some of the documents the PUC seeks, but the other companies have not, the commission said in its filing.

A Dynegy spokesman said the Houston-based energy company was studying the motion, which was filed late Monday (Nov. 6), and could not comment.

Representatives of the other companies could not be reached for comment.

In its motion, the PUC said it was "astonished at the level of opposition . . . from the generators."

The federal agency last week said its own informal investigation had found no evidence that California's record wholesale electricity prices since June were caused by individual companies manipulating the market. (However, a Times story of Nov. 2 said that the reason the Commission found no evidence was "partly because there was not enough time to conduct...a thorough, formal investigation.")

The PUC complained in its filing that unless the agency compels the generators to immediately provide the requested information, the California regulators will not be able to substantiate charges of market-power abuse. In a report to Gov. Gray Davis last Aug. 8 on the state energy shortage, the PUC said "we believe enough evidence of questionable behavior [by power companies] exists that the Attorney General should conduct an investigation into these statewide market practices."

CONTACT: Jack McCurdy, vice president, 772-8426, or Don Boatman, 772-9147.

Opposition Builds to Duke's Morro Bay Power Plant

CPUC accuses power generators of stonewalling investigation
Associated Press - November 7, 2000

SAN FRANCISCO (AP) - The California Public Utilities Commission said Monday its investigation into the state's soaring electricity prices will be short-circuited unless federal regulators force the inquiry's targets to turn over key documents.

In a motion filed with the Federal Energy Regulatory Commission, the CPUC asked for an order that would require six major power companies to detail their profits and provide other sensitive financial information by Thursday. The power companies have resisted previous requests, state regulators said, because they are worried the documents won't be kept confidential and their businesses will be hurt by the disclosures. Describing the staunch industry resistance as ``astonishing,'' the CPUC concluded the power generators' complaints ``are nothing more than stall tactics.''

A spokesman for Tulsa, Okla.-based Williams Energy, one of the power generators named in the filing, said the company is trying to cooperate with the investigation while also protecting sensitive information. ``There is no strategic effort to stall, by any means,'' said Tim Thuston, managing director of government relations for Williams.

The five other power generators mentioned in the CPUC's filing didn't immediately return calls from The Associated Press. The other companies flagged by the PUC were: Arlington, Va.-based AES Corp., Charlotte, N.C. - based Duke Energy Corp., Houston-based Dynegy Inc., Houston-based Reliant Energy Inc. and Atlanta-based Southern Energy Inc.

These power generators have helped meet California's rising electricity demands by selling the energy to the state's major utilities, including PG&E Corp. and Southern California Edison.

State regulators said they need more information to determine why California electricity prices doubled and tripled during the summer. The run-up occurred two years after California deregulated its electricity market. Except for San Diego residents, most Californians have been shielded from the price shock because of a rate freeze that expires in March 2002. However, PG&E and Southern California Edison are seeking to recover $5 billion in additional electricity costs.

The energy wholesalers attribute the rising prices to basic market forces. They contend California has an inadequate electricity supply to support its booming high-tech economy _ an imbalance that drives up prices.

Consumer advocates and even some California utility executives believe the high prices stem from price-gouging by out-of-state generators who may have engaged in illegal market manipulation. The PUC said it needs the requested documents to respond to a FERC report released last week. In that report, FERC concluded that California's electricity market had become dysfunctional, but found no evidence of market manipulation.

The CPUC is seeking documents beyond the scope of the FERC inquiry, Thuston said. To meet a Nov. 22 deadline for commenting on the findings in FERC's report, the CPUC said it needs to have the generators' documents by the end of this week.

``FERC should not exonerate the generators of wrongdoing without requiring the generators to submit themselves to CPUC scrutiny,'' state regulators said in their motion.

The CPUC's move drew praise from other interested parties in California's electricity drama. ``FERC's report was pretty generic, so I'm glad to see someone taking leadership on this issue,'' said Nettie Hoge, executive director for TURN, a utility watchdog group. ``If the power generators have nothing to hide, why don't they cough up the information?''

PG&E said the PUC ``is appropriately putting the spotlight in the wholesale marketplace and the prices charged by out-of-state generators.''

If PG&E can't recoup its additional electricity costs from future rate hikes, the utility hopes to get the money back from the generators who sold the energy.

Opposition Builds to Duke's Morro Bay Power Plant
L. A. Times - November 6, 2000

MORRO BAY--They tower over the shoreline as prominently as the town's defining landmark, Morro Rock. The three power plant exhaust stacks have jutted 450 feet above the coast since 1954.

For many residents, the hum of the plant's generators is as natural as the crashing surf or the stream of cars flowing along California 1. So plans by Duke Energy Corp. to replace the plant with a new one might be expected to move ahead smoothly, like the surfers who ride its hot water discharge out to the breaking waves.

But the construction plans have set off a grass-roots environmental movement in this placid resort and retirement town in San Luis Obispo County.

Residents have placed an initiative on Tuesday's ballot to require a public vote before the plant can be expanded or replaced. Backers of the measure say mandating voter approval will prompt the town's 10,000 residents to more closely scrutinize the plant, which many take for granted.

We've lived with the plant so long that people just accepted it and thought it would always be there, because nobody had ever really talked about its impact," said Jack McCurdy, who supports Measure Q and is vice president of the Coastal Alliance on Plant Expansion, a group founded to study the plant's environmental impact.

McCurdy said the fact that 1,200 residents--nearly twice the required number--signed the petition to place Measure Q on the ballot reflects a new willingness to take a critical look at the plant.

The Morro Bay movement comes at a time, however, when other cities are favoring power plant construction, after a summer electricity shortage that doubled some customer bills in San Diego and south Orange counties. California now consumes 20% more power than it produces.

If approved by state utility regulators, the new plant would produce up to 1,300 megawatts of electricity, up from its current capacity of 1,030 megawatts. Duke officials said the company will spend $600 million on the project.

Henriette Groot, Coastal Alliance's president, said she and others suspect that the plant is already damaging fish and wild bird populations, and should be further studied before an expansion is approved. "The Duke plans are really bothering us from an environmental point of view. We need many more facts before a decision can be made," Groot said.

So far, the Morro Bay City Council has favored Duke's expansion plans, approving a nonbinding memorandum of understanding in February in support of the project. Morro Bay Mayor Rodger Anderson and David Elliot, a city councilman, wrote the ballot statement against Measure Q. They argue that state authorities would have the power to override a vote by city residents anyway. Measure Q is one of two ballot measures pertaining to the plant. The other, Measure P, is an advisory measure that asks residents whether the City Council should support the plant project.

Duke has also generated support for its project by arguing that it will be an environmental improvement. Duke plans to shut the existing plant and replace it with a cleaner, more efficient facility. The new units would be running by 2003. Duke officials say that in addition to being more fuel-efficient--and thus more profitable--air emissions will be cut 40%.

"It's good for our business and good for the environment," said Steven Goschke, Duke's plant manager at Morro Bay. Perhaps as important, the new plant will use exhaust stacks about a third as tall as the current ones, which will be razed by 2007, according to Duke's plan. The shorter stacks would block less of Morro Bay's scenic views, a point Duke officials have underscored by placing green bands around the existing stacks at 146 feet, the proposed stack height. But members of the Coastal Alliance and Morro Bay Neighbors, the political group backing Measure Q, argue that residents should look beyond comparing the current plant to the proposed facility. Don Boatman, a Coastal Alliance member who works as a power plant consultant, says the city or a citizens group could buy the plant, run it long enough to finance the purchase, then shut it down.

The state's power needs, Boatman said, can be met by plants already approved for construction elsewhere. Duke officials have dismissed such a purchase plan, saying the plant is not for sale. But Boatman said that if public opinion in Morro Bay turns against the plant, that could change. The city could deny land use variances for the plant, Boatman said, or it could refuse to renew Duke's 50-year lease on the site, which expires in 2004. "If the lease isn't renewed, the plant will be for sale," Boatman said.

Without a lease renewal, Duke could sue to continue to operate the plant. Duke spokesman Tom Williams said the company believes that the plant project doesn't need land use variances because it falls within current requirements.

The plant, Williams said, will remain part of the Morro Bay landscape regardless of the expansion. "One alternative for us is to leave it," because the current plant is profitable. "We can continue to run it as it is. It's still viable and will be for years," he said.

The Ultimate in Electric Deregulation

East Greenwich man charged with stealing electricity
Associated Press - November 2, 2000

EAST GREENWICH, R.I. (AP) _ An East Greenwich man charged with bypassing an electric meter stole $192,000 worth of electricity over the last 14 years, state police said.

Bernard J. Carbone, 48, was arraigned before a bail commissioner on Monday. e was released on $10,000 personal recognizance pending a pretrial hearing.

If convicted, Carbone faces up to 30 days in prison or a $500 fine, Lt. Michael P. Iarossi said. Iarossi said since December 1986, Carbone stole $192,000 worth of electricity, an average of $1,142 a month. Iarossi could not explain how Carbone could have used so much power, The Providence Journal reported.

Iarossi said Carbone used a device buried at the base of his home's electric meter to tap electricity for his house without paying for it.

Well, If You Say So

Hurley sees no conflict with SCANA job
Associated Press - November 2, 2000

FAYETTEVILLE, N.C. (AP) _ A state legislator on a panel looking at deregulating the electric industry sees no conflict with his job helping a utility build a power plant in Fayetteville. State Rep. Bill Hurley, D-Cumberland, was hired by SCANA Corp. to persuade the city to build a $265 million electric power plant with the company.

``It has nothing to do with my legislative position or the deregulation study commission which I serve on,'' Hurley, a former Fayetteville mayor, said Wednesday.

The company wants to run a large natural gas line to Fayetteville to fuel a 500-megawatt power plant it would jointly own with the city. Carolina Power & Light Co. has a competing proposal to provide power for Fayetteville and questions Hurley's relationship with SCANA. The Fayetteville City Council is scheduled to consider on Monday whether to tell SCANA to start preliminary work on the project.

CP&L discussed the situation with House Speaker Jim Black, said company spokesman Keith Poston. ``We were shocked and disappointed that he would take money from SCANA while sitting on the study commission and while weighing in on their proposal in Fayetteville,'' Poston said.

In response, Hurley refunded a $1,000 contribution that CP&L's political action committee had given him for this year's election, Hurley said.

Hurley's job with SCANA doesn't violate state laws on lobbying, said Jane Gray, the counsel to the speaker.

``There's no question of any illegal activity,'' she said. The law applies only to people lobbying to influence the General Assembly, she said.

Hurley's role is to introduce SCANA's people to the City Council and other key people, and to familiarize SCANA with the area, he and the company said.

The relationship won't influence how he votes in Raleigh, Hurley said, and he doesn't think his position as a lawmaker will bully the city into accepting SCANA's offer.

U. S. Panel Proposes Big Market
Change To Curb California's Electricity Prices

The Wall Street Journal - November 2, 2000

The Federal Energy Regulatory Commission proposed sweeping changes in California's deregulated electricity market in a bid to push down high electricity prices.

The proposed order, which will be open to industry and public comment before being implemented, comes as Californians are suffering record high power prices. The proposals go further than many industry watchers had expected but stop short of ordering that profits be seized from generators and refunded to consumers, as the state's utilities and many public officials had demanded. The move also marks the first time the federal government has intervened to make major changes in a state market since the era of electricity deregulation began four years ago.

"California's market had become a threat to the health and financial well-being of the average citizen," said FERC Chairman James Hoecker. "We had to do something after the tsunami hit."

The draft order proposes to cap wholesale electricity prices for two years at $150 per megawatt hour but to allow electricity-plant owners to receive higher prices, on a case-by-case basis, if they can demonstrate they deserve it. The cap in New York and New England, other deregulated markets, is $1,000 per megawatt hour. The cap has been set higher there because competition in those markets has held down retail prices. The four-member commission, in authorizing the new "soft cap" for wholesale prices charged in California, dismissed a variable-price scheme adopted last week by the California Independent System Operator, the organization responsible for keeping enough electricity on hand to meet actual demand. That scheme, which now won't be implemented, would have capped prices at between $65 and $250 per megawatt hour, depending on demand.

An important element in FERC's new pricing plan is that it makes it less likely that a single generator will be able to effectively set the price that everyone receives, as has previously been the case. Under the old regime, even a small generator could ramp up prices for the entire spot market if it could position itself as the last unit called into service to meet demand. The commission came down hard in its interpretation of the high prices seen in the California market last summer. It said the wholesale prices paid to generators failed to satisfy the federal test that electricity rates be "just and reasonable." But Mr. Hoecker, FERC's chairman, also said the commission had no authority to order profits seized from power generators and traders so that refunds could be made to those who paid the high prices. "We exercise such authority as Congress gives us," he said. "It's as simple as that."

Mr. Hoecker acknowledged that FERC's decision not to seek refunds would undoubtedly disappoint California regulators, utilities and consumer advocates. "They expected a lynching and . . . the disgorgement of ill-gotten gains," he said.

FERC's decision to not take action on refunds, at least for now, leaves the state of California with a major mess on its hands. Since June, wholesale power costs have exceeded the amount utilities were able to charge their customers by more than $5 billion. For now, utilities are footing the bill since customer rates are frozen and it is impossible to pass those costs along. But the utilities are lobbying state regulators for permission to dump the cost on consumers, offering to soften the blow somewhat by stretching out the collection period over four or five years. State regulators and legislators, without help from FERC to retrieve profits from generators and traders, now have an unpalatable choice: leave the burden on utilities or back-bill consumers who never asked for deregulation in the first place.

The commission also effectively issued a vote of no confidence to the governance structure used by the state's market-making organizations, the ISO, which operates the transmission system and runs a "balancing market" to keep energy supplies in sync with fluctuating demand, and the California Power Exchange, which runs a day-ahead market and a forward auction.

Both organizations have large,unwieldy stakeholder boards consisting of representatives of different interest groups such as generators, utilities, large consumers and others and have been accused of putting the parochial interests of members ahead of the state's 35 million consumers. "They've become a debating society among interest groups," says Curt Hebert, one of the commissioners.

FERC said it wants the boards of the ISO and the power exchange dissolved, most likely within 60 days. In their place, it wants smaller, disinterested boards such as those that exist in the East, where New York, New England and the mid-Atlantic states all have ISOs. It didn't, however, order the boards merged as some members had speculated might occur.

Terry Winter, chief executive of the ISO, said he was an "avid supporter" of the stakeholder boards that looked like a worthy experiment in democracy "until all the heavy financial and political pressures caved in on them" last summer. This year alone, the ISO board changed price ceilings three times as different coalitions garnered the necessary votes, each time sending shock waves through the markets.

In general, observers reacted positively to the FERC proposals, which will be the subject of a public hearing on Nov. 9. Generators were relieved there won't be refunds and were happy that the new "soft cap" system would allow price variation among generators with different costs. Steve Bergstrom, president of Dynegy Inc., which owns power plants in California, said he is pleased "FERC has shown it isn't going to stop deregulation."

Utilities were pleased at the effort at cost containment and purchasing flexibility. But Mike Florio, an attorney for a San Francisco consumer group who sits on both the ISO and Power Exchange boards, said he finds it impossible to reconcile FERC's conclusion that prices weren't fair with its reluctance to seize profits. "I thought `just and reasonable' rates were a requirement of the law, not just some guiding principle," he said.

Federal Regulators Propose Changes to California Electricity Market
Orange County Register - November 2, 2000

Nov. 2--Federal regulators on Wednesday proposed sweeping changes to fix California's troubled electricity market, calling it "seriously flawed," but found no evidence that power sellers had manipulated prices. Though the Federal Energy Regulatory Commission called wholesale prices in California this summer "unjust and unreasonable," they did not find any collusion by power sellers. The FERC probe will remain open until 2002 and sellers will be liable to pay refunds if any market abuse is found.

Gov. Gray Davis described the FERC report as a mixed blessing. "The good news is that they agree with our premise that the market is dysfunctional and the rates are unreasonable and unjust," Davis said at a press conference in Sacramento. "The bad news is there is no immediate remedy for ratepayers here in California. I believe refunds are necessary." FERC made several proposals to stabilize wholesale electric prices, including

Giving utilities more options to enter long-term contracts, typically at lower prices, by buying and selling power outside the Power Exchange, the state's market for power. Setting a new, lower price cap for electricity sold at the Exchange.

The higher prices ignited a political firestorm when outraged consumers in San Diego and south Orange County became the first in the nation to pay market prices for electricity. Many consumers saw their electric bills triple or quadruple before the Legislature imposed a temporary rate cap. "Never have residential electricity customers been as exposed to economic risk and financial hardship as they were in San Diego," FERC Chairman James Hoecker said.Power sellers generally praised the report for not finding generators at fault for the price spikes.

"We're studying the economics and price ramifications of a price cap," said Thomas C. Williams, a spokesman for Duke Energy. FERC's proposals only addressed wholesale prices, which routinely have traded above $100 a megawatt hour and even peaked at $863 a megawatt hour this summer compared with about $30 a megawatt hour a year ago. (On consumers' bills, that translates to 10 cents a kilowatt hour, up from three cents a year ago.) While FERC regulates the wholesale market, the California Public Utilities Commission regulates consumer prices. In the coming months, state regulators and possibly the Legislature will decide whether customers will foot a hefty $5.1 billion bill for the higher prices utilities paid this summer, when most consumers were shielded by a rate freeze. The state's three electric utilities have paid billions of dollars more than anticipated to keep the lights on.

Nettie Hoge, TURN's executive director, said FERC's decision "places the financial responsibility for this disaster squarely on the backs of those least responsible for it consumers."

U.S. to Decide Action on State Energy Crisis
Los Angeles Times - November 1, 2000

The fate of California's rocky experiment in electricity deregulation hangs in the balance today as federal regulators meet to decide whether to intercede in the state's dysfunctional $23-billion energy market or to let free-market forces continue to wreak havoc.

The four-member Federal Energy Regulatory Commission will release a long-awaited staff report analyzing the root causes of California's energy crisis and, more important, issue a draft order or action plan on how to solve the problems of runaway wholesale electricity costs.

During public hearings in San Diego in September, FERC Chairman James J. Hoecker promised that the commission would take action and "do whatever it takes" to repair California's electricity market, whose deregulation was set in motion by landmark state legislation in September 1996.

Just what the report and order will say remained a matter of intense speculation on the eve of their release. The FERC commissioners could impose new price caps or order an overhaul of the California Power Exchange and the Independent System Operator, the state agencies that conduct daily auctions for electricity. The commissioners may ask the state to undertake new initiatives to foster more competition in a retail power market still dominated by the three big investor-owned utilities.

But an indictment of power generation companies--which some in the state accuse of "gaming," or manipulating the system to wield unfair "market power" and wringing excessive profits from customers--is unlikely, according to published reports and state industry principals and government officials.

The FERC commissioners are said to blame market deficiencies and defects in California for a supply-demand imbalance that sent wholesale electricity prices skyrocketing in July to an average of 12.9 cents a kilowatt-hour, more than triple the July 1999 average of 3.9 cents. A typical residential customer of San Diego Gas & Electric, the first state utility to fully deregulate, saw his or her bills triple before state legislators stepped in to cap retail rates in August.

Just as worrisome to many observers is that wholesale electricity rates remain sky-high today, even after the end of peak summer power demand. Wholesale rates in October averaged about 10 cents a kilowatt-hour, double the average cost a year ago, said Patrick Dorinson, a spokesman for the Independent System Operator.

In any case, billions of dollars of investments as well as the political careers of prominent California politicians could be affected by what FERC does. U.S. Energy Secretary Bill Richardson is coming out from Washington to hold a news conference with Gov. Gray Davis in Sacramento this morning to announce new, unspecified initiatives to address California's electricity problems.

The Davis administration has gone on record demanding that FERC, which oversees the transmission and wholesale selling of electricity around the country, to step in and discharge its legal duty to restore "just and fair" electricity rates in California. The ballooning of electricity rates in San Diego during the summer created a political firestorm that raged unabated until the state Legislature imposed its caps.

Rates paid by retail customers in the Southern California Edison and Pacific Gas & Electric coverage areas are frozen as well for the time being. But $5 billion in "undercollections"--the difference between what the investor-owned utilities have paid for wholesale electricity this year and what they can charge consumers--looms overhead, worrying Wall Street.

"I have no idea what the FERC will say," said state Public Utilities Commission President Loretta Lynch, a Davis appointee who says she is as much in suspense as anyone. "But we are expecting a substantial order that would move the ball forward on repairing the wholesale market in California."

Consumer advocates and the state's major utilities would like to see FERC impose some sort of wholesale price controls--even gut the Power Exchange and the Independent System Operator because they are clearly not working as intended. "We expect some radical surgery," said Doug Kline, spokesman for Sempra Energy, the parent of San Diego Gas & Electric.

Some consumer groups would like to see FERC declare the wholesale rates collected by generators "unjust and unreasonable," legal code words that would open the gates to actions by the PUC or the Legislature to force the power companies to disgorge or refund excessive profit. Such an action, which would lead to litigation by the power companies, is considered unlikely.

Business interests, including the power generators that have reaped enormous profit from the dysfunctional market, are arguing to let free-market forces prevail because restrictive price caps would abort the market's evolution and possibly stifle construction of new power plants, which offer the best long-term solution to the state's predicament.

"We expect that the FERC will find that the high prices of this past summer are a result of supply-and-demand imbalance and market design defects on the retail and wholesale side, but that the market participants have been playing within the rules and that there has been no manipulation or gaming," said Brent Bailey, general counsel of Duke Energy North America of Houston, a major generation player in the California market.

Duke and others also strenuously oppose a solution proposed by the state's municipal utilities, notably the Los Angeles Department of Water and Power: that the industry in essence be re-regulated by imposing a system of cost-based rate controls, similar to how electricity rates were set before deregulation.

Such a move would lead to lawsuits filed by Duke and other power merchants alleging "confiscatory" actions by the state nullifying the value of hundreds of millions of dollars they have invested in California power plants. Bailey favors temporary price caps until the market regains its balance, as well as new tweaking of the power market to stir up competition.

Los Angeles DWP General Manager S. David Freeman, who has led calls for temporary imposition of cost-based rates, said California's failed deregulation experiment raises the possibility that electricity is intrinsically an "un-deregulatable" service.

"Three years ago, I thought it would work. Then we had a train wreck," he said. "I'm not committing heresy when I say that I think it may not work out."

Deregulation - October - 2000