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Regulators ‘close to proving power manipulation’

The Associated Press
Friday June 01, 2001

SAN FRANCISCO — A year after California’s electricity price shocks began, regulators say they are close to proving how power wholesalers aggravated a crisis that so far has raised customer rates by $5.7 billion, saddled two utilities with $8.2 billion in losses and dumped a $13 billion bailout bill on taxpayers. 

California lawmakers and regulators are determined to recover some of that money from the power wholesalers who have cashed in on the crisis. 

Toward that end, the California Public Utilities Commission, Attorney General Bill Lockyer and the California Electricity Oversight Board are trying to prove out-of-state wholesalers illegally manipulated the market to create artificial supply shortages that have driven wholesale electricity prices as high as $1,900 per megawatt hour. 

Before California’s power woes began in June 2000, wholesale prices on the spot market rarely climbed above $150 per megawatt hour. 

California’s Legislature also has formed two special investigative committees to look into the allegations of market misconduct. And at least five suits, including one filed by San Francisco City Attorney Louise Renne, are seeking damages from power wholesalers on behalf of all Californians. 

At the very least, the investigators say they will show the wholesalers violated federal laws against “unjust and unreasonable” electricity prices. 

“I don’t think these are going to be very hard cases to make,” said Owen Clements, chief special litigator for San Francisco. “Even if they didn’t break the letter of the law, they clearly have violated the spirit of the law.” 

The investigators also suspect that the wholesalers have orchestrated a variety of more sinister abuses, possibly by colluding. Those allegations will be hard to prove, according to legal and energy experts. 

The power wholesalers say they have done nothing wrong, arguing that they are being turned into scapegoats by a 1996 deregulation law sculpted by California lawmakers and the two utilities, Pacific Gas and Electric and Southern California Edison, that have reported a combined $8.2 billion in losses since June 2000. 

Michael Aguirre, a San Diego attorney handling one of the private suits, fears California regulators and politicians are spending more time rattling cages than digging into the labyrinthine operations of the power wholesalers. 

“Investigations like this require a lot of hard work, not a lot of rhetoric,” Aguirre said. “So far, everyone seems to be talking loudly while carrying a small stick.” 

The PUC investigation appears to be the farthest along. 

With the help of former utility workers hired to assist in the investigation, the PUC has been poring through power plant documents in an effort to prove that some facilities shut down unnecessarily — sometimes at the direction of Houston energy traders monitoring the market over the Internet — to diminish supply and drive up prices. 

Once prices spiked, the plants ramped up production to reap big profits, under the theory being investigated by the PUC and Lockyer’s office. 

“I feel very confident that we are finding compelling evidence to prove our case,” said Gary Cohen, the PUC’s general counsel. 

Cohen said the PUC could file a civil suit against the wholesalers by the end of June. Lockyer expects to wrap up his investigation in late July, at the earliest. 

“The (wholesalers) say they are just playing the market the way that it was set up to operate, and to a certain degree, that’s true,” Cohen said. “We need to come up with a legal theory to show what they did was wrong.” 

Both the PUC and Lockyer also are investigating allegations that the power wholesalers used industry Web sites to accumulate sensitive supply and demand information in a possible violation of antitrust laws. 

To gain insight into the behind-the-scenes decisions made by wholesalers during the past year, Lockyer is offering multimillion dollar rewards to power plant workers and energy traders who provide the state with inside information that helps prove the power companies manipulated the market. 

Power wholesalers say regulators are way off base in their probes. Industry officials maintain that the plants, many of which are 30 to 40 years old, shut down for legitimate equipment repairs and maintenance. 

“No one in our industry cuts back on production so a competitor can make more money. It just doesn’t happen, at least not on planet Earth,” said Gary Ackerman, executive director of the Western Power Trading Forum, a Menlo Park trade group. 




Sick of what they call outrageous monthly gas bills, 12 Long Beach residents sued their city Thursday, saying officials violated the law by charging much more than neighboring Southern California Gas Co. 

The lawsuit, which seeks class-action status, claims $38 million in damages. It was filed in Los Angeles Superior Court. 

“A lot of people have experienced 600 percent rate increases here,” lead plaintiff John Donaldson, a 55-year-old retired executive, said. 

“To be fair, gas has gone up for everybody. Everyone is paying double what they did a year ago. But if you live in Long Beach, you are paying four to six times more than you did a year ago,” Donaldson said. 

The suit alleges that the city, which runs its own gas utility, began overcharging in December 2000. For the previous 20 years, the city had based its rates on Southern California Gas, a formula required by city law, the suit says. 

Long Beach City Attorney Robert E. Shannon blamed the high rates on the city’s suppliers, saying they charged “grossly inflated rates” that the city had no choice but to pass on to residents. 

“While the city of Long Beach recognizes and sympathizes with its natural gas consumers who were subjected to an outrageous rise in natural gas rates beginning in December 2000, the rate increase was due to an unlawful conspiracy by other parties to restrict the supply of gas purchased by the city,” Shannon said in a statement issued Thursday. 


He said the city sued those suppliers earlier this year and if it wins any damages it will pass them on to consumers. 

Attorney Virginia Keeny, who represents those suing Long Beach, complained that her clients have been trying for months to get relief from their City Council, only to be told to “wear warmer sweaters.” 

“It is outrageous and unfeeling, especially in light of the fact that may of the people who were coming to the City Council meetings were elderly and poor and were facing cutoff notices because of $500 gas bills,” she said. 

Those suing also say the city brought on the crisis itself by illegally spending money it was supposed to have kept in a reserve account to cover price increases. 

In the past 10 years, the city has transferred a total of $250 million from its gas department into its general fund, Donaldson said. But he wasn’t sure how much of that money might have been improperly moved. 

“There is nothing wrong with taking extra funds and putting them in the general fund,” he said. “There is something wrong with doing that at the expense of making sure the utility is being run responsibly.” 



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