-----Original Message-----
From: 	Dasovich, Jeff  
Sent:	Wednesday, September 26, 2001 2:31 PM
To:	Kean, Steven J.; Shapiro, Richard; Steffes, James D.; Sanders, Richard B.; Denne, Karen; Palmer, Mark A. (PR); Mara, Susan; Kaufman, Paul; Belden, Tim
Subject:	Dunn and Davis Searching for a New Scapegoat

Probing the 'palace coup' 
Electricity: A panel focuses on price hikes and the actions of the ISO president. 
September 26, 2001 
By KIMBERLY KINDY
The Orange County Register 
SACRAMENTOA state Senate committee is set today to start serving 16 subpoenas on electricity producers and officials who manage California's energy grid to determine whether they acted in concert to manipulate energy prices. 
The investigative committee, headed by state Sen. Joe Dunn, D-Santa Ana, is focusing on a series of events last fall filled with enough Shakespearean plot twists and intrigue that it has earned a name around the Capitol: "the palace coup." 
Lawmakers and consumer groups allege that the events - directed by the man who heads the state's energy grid - fueled the California energy crisis, pushed the state into the power-buying business and helped make billions of dollars for power producers. 
The central question behind the palace coup is whether Terry Winter, the president of the Independent System Operator, acted alone when he took steps to remove key price caps designed to limit the amount power generators could charge. 
Winter defied his own board and Gov. Gray Davis when he filed a 50-page request to remove the caps, records and interviews show. 
"I don't know how these events could have taken place without some concerted effort," said Dunn. 
The subpoenas will force those involved, including Winter, to provide sworn testimony about the events to the committee, and to turn over e-mails, personal calendars and memos. 
Davis spokesman Steve Maviglio said the governor felt "betrayed" by the actions of Winter. 
"The governor believes it was the defining moment, when what was a mounting problem turned into an instant crisis," Maviglio said. 
Winter refused comment, referring all questions to the public relations office. ISO spokesman Gregg Fishman said Dunn's committee will find no criminal conduct. The decision was made by ISO upper management with one goal in mind: to keep the lights on. At the time, generators were refusing to sell power in California because of the price caps. 
"It was an emergency," Fishman said. 
"We had to take action.'' 
What became known as the palace coup began on Oct. 26 when ISO board members voted for severe restrictions on the amount of money electricity producers could charge for power. The restrictions would drive prices as low as $65 per megawatt - nearly 12 times below the $750 per megawatt limits of seven months earlier. 
"They (electricity generators) grinned and beared the $750 price cap, but this new plan by ISO was too much," said Dunn, whose committee has been investigating since March. 
"All hell broke loose.'' 
Records show that on Oct. 31, power generators and electricity traders filed letters with the Federal Energy Regulatory Commission, demanding that the new plan be killed. The letters, six in all, were sent within two hours of each other and represented dozens of power generators. 
"If not removed immediately, the (ISO) price cap will sow confusion in the market, threaten reliability and stifle new investment in generating capacity,'' read one letter written by Duke Energy Vice President William Hall III. 
Although there is nothing illegal about the generators acting together to lobby against price caps, Dunn believes the letters and other actions around the same time showed clear coordination among energy officials. He said the main aim of the subpoenas will be to determine whether collusion occurred to "fix" prices, which would violate federal trade laws. 
In the Oct. 31 letters, electricity producers told federal officials that if price caps weren't removed it would lead to a collapse of the energy market. 
The generators got their way. 
The next day, the federal commission killed the new pricing plan. What was left in place was a $250 price cap established five months earlier. 
Power producers then turned their attention toward killing that cap, saying they couldn't make a profit even under these constraints. 
They began to withhold power from California, and on Dec. 7 the ISO declared its first Stage 3 emergency and braced for blackouts, which were narrowly averted. 
What followed the next day is considered by the governor and Dunn to be the pivotal moment of the energy crisis. 
Winter, who in his position as president and chief operating officer of the ISO, submitted a 50-page emergency request, asking federal officials to abolish the $250 price cap. Final authority over lifting the cap rested with the federal government. 
Neither the ISO board, which had established the price cap, nor the governor learned of Winter's actions until the cap had been removed. In fact, the attorney who helped draft the emergency request, Charles Robinson, was in a meeting with representatives of the governor and ISO board members just hours before the filing was made. He didn't mention anything about it. 
"In retrospect, we should have told them,'' Robinson said. 
With the price caps gone, the generators filed paperwork with federal regulators justifying higher costs. 
"The ISO staff sat in a meeting with the governor's key energy advisers with poker faces, not saying a word about something that was going on at the exact same moment,'' Maviglio said. "It was beyond belief that they failed to mention something so significant. This action accelerated the utilities' move toward bankruptcy and forced the governor to move the state into the power-buying business." 
Prices for electricity jumped from an average of $249 a megawatt to $700 a megawatt within three days, ISO records show. 
Dunn believes the resulting overcharges for electricity exceeded $30 billion. 
Robinson said the filing - granted two hours after the request - helped rather than hurt Californians. Prices, he said, did not spike as a result. Instead they followed the skyrocketing price of natural gas - which is used to run power plants to generate electricity. 
Robinson said the emergency order allowed the ISO to secure refunds should overcharges for electricity be proven to federal officials. 
"We believe the action we took addressed a severe concern,'' Robinson said. "In our view, we did not believe we changed or made worse the financial situation. We felt we made it better because it introduced a process for review and refund." 
Jan Smutney-Jones, who was the ISO board chairman at the time and executive director of a group that represents power generators, said Winter did not consult him about eliminating the price cap. Smutney-Jones also said he was unaware of anyone in the power-generating community being consulted. 
"Terry did this by himself,'' said Smutney-Jones, executive director of the Independent Energy Producers. 
"He did what he thought had to be done at the time to keep the power flowing." 
The ISO board called an emergency meeting the next week demanding Winter explain his actions. Some board members pushed to have Winter removed, but there were concerns such action would lead to more chaos, the governor's spokesman Maviglio said. 
James J. Hoecker, the former Federal Energy Regulatory Commission chairman, defended making the December decision and also defended Winter. 
"They filed an emergency motion, and we were not about to let California go dark,'' Hoecker said. 
"They (ISO management) did what any independent system operator would do." 
What Dunn's committee hopes to learn is why all these events transpired. He believes memos and e-mails around the time of Winter's Dec. 8 actions should provide vital clues. 
"We don't know why he did what he did, but we are eager to find out," Dunn said. "Terry said he made that filing in the interest of Californians, but I find that argument has no basis in fact.''