Energy Firms' Mixed Message Is Focus of Inquiry 

Deregulation: Senate panel will investigate whether suppliers were being 
misleading when they promised lower rates for consumers while they were also 
predicting bigger profits for investors. 

By ROBERT J. LOPEZ and RICH CONNELL, Times Staff Writers 

In the summer of 1999, a top official with a major player in California's 
power market testified during a congressional committee hearing in support of 
speeding up deregulation. Unleashing market forces, said the Dynegy Inc. 
executive, would ensure "maximum customer savings" and "low-cost power." 
That same month, the Houston-based firm made a far different pitch to Wall 
Street: Deregulation and major swings in electricity prices would boost 
revenue and stock value. "We know how to take advantage of volatility spikes 
across the gas and power market," Chief Executive Officer Charles Watson 
declared in a publication targeting large investors. "The energy 
marketplace," he predicted, "will simply get more volatile." 
Dynegy was not alone, a review of federal filings, company documents and 
public records shows. In the years since California's pioneering deregulation 
plan was approved, other major out-of-state energy suppliers were sending 
similar, seemingly contradictory signals to the public and stock buyers.
Now, those divergent messages--electricity prices will fall but corporate 
revenue and profits will climb--will be a key focus of a special state Senate 
committee charged with investigating the alleged manipulation in the power 
market.
"How you can tell your investors you're about to make a whole ton of money in 
the very short term, and tell the consumers of California you're about to get 
lower rates?" said Sen. Joe Dunn (D-Santa Ana), a former consumer attorney 
who is heading the legislative probe. 
Investigations by the state attorney general and federal regulators are 
continuing, but remain largely secret.
The Senate panel could offer the most open and wide-ranging examination yet 
of alleged misconduct among power sellers. The bipartisan panel expects to 
begin requesting documents from power producers as early as today and begin 
hearings in a few weeks. Committee members stress that they are hoping the 
power companies will cooperate but are ready to issue subpoenas if necessary.

Suppliers Deny Misleading Public
The legislative probe comes as many state officials are moving aggressively 
to expose alleged market manipulation and overcharges totaling billions of 
dollars by the power suppliers.
"Somewhere along the line, there may be a skunk in the woodpile. And if there 
is, we need to find out about it," said K. Maurice Johannessen (R-Redding), 
the committee's ranking Republican.
Another panel member, Sen. Debra Bowen (D-Marina del Rey), noted that all 
companies try to maximize profits. "But [we want] to understand how the 
market was manipulated and how sellers took advantage of the market."
The power traders strongly deny acting improperly or sending misleading 
signals to the public.
"Hogwash," said Tom Williams, spokesman for North Carolina-based Duke Energy. 
Spokesmen for Dynegy said there was nothing inconsistent in the statements of 
their executives.
The companies maintain that California's problems stem from soaring 
electricity demand, lagging power plant construction and a faulty 
deregulation plan adopted by the Legislature in 1996. "You have a flawed 
structure there," said Dynegy spokesman John Sousa.
Sousa and executives of other power suppliers say their comments to the 
general public and to Wall Street are not contradictory because unfettered 
competition--not the California model--would have created opportunities to 
both make money and cut rates.
Still, regulators, lawmakers and ratepayer groups note that only half the 
promises made by the power dealers have been realized so far--their earnings 
and stock prices have risen at record rates as electricity prices have soared.
"The big lie was, while they were telling ratepayers to 'Trust us, we're 
going to lower your rates,' they were planning the entire time to raise the 
rates," said San Diego attorney Michael Aguirre, a former federal prosecutor 
who specialized in fraud cases. Aguirre is representing state ratepayers in a 
class-action lawsuit against the power companies.
Just last month, California's independent grid operator reported that many 
power sellers "used well-planned strategies to ensure maximum possible 
prices." Potential overcharges could total nearly $6.3 billion. 
The Senate panel wants to track information that Dynegy and other generators 
were providing to the investment community in the 1990s as a possible way of 
determining whether they entered the California market with plans to run up 
electricity costs. Among many other things, the committee plans to seek 
internal projections of how the firms expected wholesale prices and profits 
to rise under deregulation. 
Members also want to know how the suppliers expected to recoup billions in 
outlays for California power plants being unloaded by regulated utilities. 
Some of the purchases were far above book value, stunning analysts.
"What did they know that the rest of us didn't at the time they were 
purchasing those generations facilities?" asked Dunn. "They knew something."
One thing the power wholesalers say they did know was that tight power 
supplies in California would probably boost prices, at least for a time.
"They were going anywhere where they thought energy [use] would spike 
upward," recalled market analyst Joan Goodman, who was familiar with company 
pitches. "California was one of those places because it didn't have 
sufficient [power] plants."
Duke Energy projected that prices would rise after 2000, although the company 
says it did not foresee the huge increases that occurred, according to 
spokesman Williams.
However, when the company sealed one of the first packages of power plant 
purchases in the state in 1997, Chief Executive Officer Richard Priory said 
in a press release it would "deliver greater value" to California customers.
The publicity spin was similar when Edison's sprawling beachfront power plant 
in El Segundo changed hands the following year. "Consumers in California will 
begin to benefit from more competitively priced electricity and more vibrant 
economy," announced Craig Mataczynski, vice president of Minneapolis-based 
NRG Corp., a partner in the purchase with Dynegy.

Big Growth Was Predicted
Utilities reaping profits from plant sales also trumpeted the consumer 
windfall theme. Electricity rates would drop 20% by 2001, Pacific Gas & 
Electric's top executive, Robert Glynn, said in early 1998. "There is no 
product bought on a daily basis that has such a predictable downward price 
trajectory into the future."
But to its Wall Street audience, the power suppliers emphasized climbing 
revenues.
Atlanta-based Southern Co., now Mirant, told investors in 1999 that its plan 
to buy plants and market power had brought the company to the "doorstep of 
significant growth opportunities."
"We believe our strategies will result in the best shareholder return 
available," Bill Dahlberg, then-chief executive officer, said shortly after 
buying three California plants.
Mirant spokeswoman Jamie Stephenson said assurances given the public and 
assumptions directed to Wall Street were "just a different way of delivering 
the same message." The firm was saying it would be "reliable to shareholders 
and reliable to consumers."
Now, with rolling blackouts and record electricity bill increases, federal 
and state authorities are alleging that large energy suppliers played the 
power market too hard.
Last month, the Federal Energy Regulatory Commission said it found evidence 
of $124 million in "unjust and unreasonable" charges during the severest 
periods of electricity shortage. The commission, often criticized for being 
too lenient on private power companies, ordered the firms to refund the money 
or further justify the charges.
Some firms are contesting the findings, saying the prices they charged were 
justified. 
Investigators and regulators have faced a vexing challenge trying to unravel 
the complex financial workings of the large power traders. The companies 
closely guard information, and some recently refused to comply with subpoenas 
from the state Public Utilities Commission, which is also probing the power 
market.
Whether the Senate investigating committee will have the resources and 
tenacity to get much further remains to be seen. But Democrats and 
Republicans alike insist they are serious about untangling how the power 
market went haywire.
"I haven't seen that much smoke where there hasn't been a fire," Dunn said. 

Copyright 2001 Los Angeles Times