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Date: Thu, 22 Mar 2001 09:38:53 -0600
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Subject: LA Times - Energy Overcharge of $5.5 Billion Is Alleged
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The California ISO has leaked to the press that it is filing a study at FERC 
today (presumably this will be part of the ISO's comments regarding FERC 
Staff's Market Mitigation and Monitoring Plan) that shows that five major 
in-state power suppliers -- Reliant Energy, Dynegy, Williams/AES, Duke Energy 
and Mirant (formerly Southern Energy) -- plus 16 power importers have 
overcharged for power.  The ISO's finger appears to be pointed primarily at 
the five major in-state generators


Thursday, March 22, 2001


Energy Overcharge of $5.5 Billion Is Alleged

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

By TIM REITERMAN and NANCY RIVERA BROOKS, Times Staff Writers

     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.

     Reliant Energy is cooperating with FERC's requests for more data and is 
confident the commission will conclude that prices charged by Reliant were 
justified, said Joe Bob Perkins, president of the Houston-based company.

     Perkins also bitterly disputed charges that Reliant has shut down units 
so that it can earn bigger profits on the power sold by the remaining plants. 
These charges have been leveled against all of the power-plant owners in the 
state.

     Reliant Vice President John Stout said Cal-ISO's calculations typically 
don't include such fixed costs as salaries, taxes and the interest on bonds 
they sold to finance their power plants, which they acquired under terms of 
the state's landmark 1996 deregulation law.

     In addition, he said, many high-priced power days have resulted from 
buyers bidding against each other for scarce supplies rather than sellers 
charging excessive amounts--like a house price being driven far above the 
listing price in a hot real estate market.

     Williams Energy Services, a trading company that markets most of the 
power produced by plants owned by AES, also says it will be exonerated by 
FERC once the commission examines documentation being submitted, said Paula 
Hill-Collins, spokeswoman for the Tulsa, Okla., company.

     "FERC has the obligation to investigate when these accusations are 
made," Hill-Collins said. "This is just a process of justification, not 
necessarily proof of guilt."

     Williams/AES was recently ordered by FERC to prove that it did not take 
generating units out of service last year to drive up electricity prices, or 
refund $10.8 million to California utilities.

     During the period studied, suppliers sold electricity in the California 
Power Exchange to Southern California Edison, PG&E and San Diego Gas & 
Electric Co. and in a backup market for last-minute electricity operated by 
Cal-ISO. But sky-high prices plunged Edison and PG&E deeply into debt, and 
most suppliers stopped selling to them in January, forcing the state 
Department of Water Resources to step in as the primary electricity buyer for 
the three big utilities' 27 million customers.

     The Cal-ISO study, first summarized at an energy conference last week at 
UC Berkeley but not otherwise publicized, concluded that the companies 
exercised so-called market power to pump up electricity prices.

     Severin Borenstein, director of the Energy Institute at Berkeley, said 
Cal-ISO's study is consistent with his research examining pricing practices 
in 2000.

     "We found several billion dollars . . . in departures from competitive 
pricing," he said. "When the market was tight this summer, they were able to 
push up prices, and they did."

     The early warning signs of electricity price spikes, the study found, 
appeared in May after two years of relatively stable prices of $30 to $40 per 
megawatt-hour under deregulation. Prices went up during the summer, dipped in 
September and October with lower demand, then took off in November and 
December as weather turned cold and the price of natural gas, which is used 
to generate much of the state's electricity, reached record levels.

     "There were plant outages, and demand and supply became close," Sheffrin 
said. "Whatever price they bid had to be taken, and market power asserted 
itself."

     Cal-ISO found that $3 billion of the alleged overcharges occurred 
between May and November.

     On Friday, federal regulators ordered six wholesale power suppliers to 
refund $55 million to California if they cannot justify prices charged in 
February. The refund was limited to power sold that month in excess of $430 
per megawatt-hour during Stage 3 power alerts, when supplies are so tight 
that rolling blackouts are threatened. (One megawatt-hour is enough 
electricity to supply 750 typical homes for an hour.)

     The previous week, FERC ordered 13 suppliers to justify or refund $69 
million for power sold in January at prices above $273 per megawatt-hour.

     Massey opposed the potential refunds as too low because they were 
limited to hours in which a Stage 3 power emergency was in place and because 
the benchmark price set for each month was too high--combining to exempt more 
than 70,000 transactions from scrutiny.

     "We're still looking for our lost wallet under the lamppost, which is 
Stage 3 alerts," said Massey, one of three commissioners on the five-member 
board (two seats are vacant).

     Generators "have been given the free and clear," he said.

     "These tinkling little refunds they have come out with recently are 
almost a joke," said Cal-ISO board member Mike Florio, senior attorney at the 
Utility Reform Network.

     Resisting Price Caps

     Cal-ISO contends that the last 10 months have proved that generators can 
no longer be allowed to receive electricity prices that are dictated by what 
the market will bear.

     "FERC granted market-based rate authority on each of these suppliers' 
own showing that they could not manipulate prices, yet their actions have 
shown the contrary," Sheffrin said. "We feel FERC needs to look at the 
premise of allowing these generators to continue selling at market-based 
rates."

     The commission is responsible for ensuring just and reasonable 
electricity rates. Although it has called California's power market 
dysfunctional and vulnerable to manipulation, the agency has resisted setting 
firm price caps sought by California's congressional delegation.

     Chairman Curt L. Hebert Jr. strongly opposes caps, while Massey wants to 
use caps across the West as a "temporary timeout."

     Energy Secretary Spencer Abraham, in a New York news conference 
Wednesday, reiterated his opposition to electricity price caps as a way to 
cope with California's energy crisis.

     "If we put price caps in place, there will be more blackouts, and 
they'll be worse," Abraham said.

     Cal-ISO is filing its market study as part of its comments on FERC staff 
recommendations on ways to thwart market manipulation. FERC's proposal 
includes strict coordination of power plant outages by Cal-ISO with reporting 
of suspicious closures to FERC, and generator-by-generator bid caps tied to 
costs.

---
     Reiterman reported from San Francisco, Rivera Brooks from Los Angeles. 
Times staff writer Thomas S. Mulligan in New York contributed to this story.




Copyright 2001 Los Angeles Times