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Bilking California for Billions

by JASON LEOPOLD

 

The sky-high electricity and natural gas prices in California between 2000 and 2001 that bankrupted the state’s largest utility and caused several days of rolling blackouts was the result of widespread manipulation by several Texas-based energy companies with close ties to President Bush, federal energy regulators ruled Wednesday.

The energy companies, Dynegy Inc., Reliant Resources, Enron Corporation, all of which contributed heavily to Bush’s presidential campaign, must now refund California billions of dollars in profits it reaped between January 2000 and June 2001. Other energy companies, including Mirant and Williams Companies, were also identified for taking of advantage of loopholes in California’s newly deregulated energy market to boost their profits and ordered to pay refunds.

In addition, FERC harshly criticized Reliant Resources for manipulating natural gas prices at the Southern California trading hub known as Topock. In FERC’s staff report to Congress, Reliant is accused of dominating the Southern California gas market, raising prices there and selling at the top of that market.

FERC commissioners also said they planned to strip the wholesale trading privileges of Enron, Reliant and a unit of BP PLC because of their manipulative trading activities during the energy crisis.

California’s electricity crisis wreaked havoc on consumers in the state between 2000 and 2001, resulted in four days of rolling blackouts, and forced the state’s largest utility, Pacific Gas & Electric, into bankruptcy. California was the first state in the nation to deregulate its power market in an effort to provide consumers with cheaper electricity and the opportunity to choose their own power provider. The results have since proved disastrous. The experiment has cost the state more than $30 billion.

But despite Wednesday’s favorable ruling for California, state officials said they aren’t celebrating. That’s because FERC is only ordering energy companies to refund California $3.3 billion. However, the state still owes about $3 billion to suppliers, meaning that California stands to receive about $300 million. Davis said the state wouldn’t take a penny less than $8.9 billion, the amount California claims it was overcharged as a result of the crisis.

Steve Maviglio, Davis’ press secretary, said California would appeal any ruling that fails to refund the state the full $8.9 billion.

Wednesday’s ruling, the culmination of FERC’s yearlong investigation into the dysfunctional Western energy markets, is a major blow to Bush and Vice President Dick Cheney both of whom publicly denied in the Spring of 2001 that energy companies such as Enron and Dynegy were acting like a cartel and withholding much-needed electricity supplies from the state in order to increase the wholesale price and their companies’ profits.

In May 2001, during the peak of California’s energy crisis, Gov. Gray Davis met with Bush at a Los Angeles hotel to ask for federal assistance, such as price caps, to rein in soaring energy prices. Bush refused, saying California legislators designed an electricity market that left too many regulatory restrictions in place and that’s what caused electricity prices in the state to skyrocket.

That same month, the PBS news program Frontline interviewed Cheney and he was asked whether energy companies were using manipulative tactics to cause electricity prices to spike in California.

“No,” Cheney said during the Frontline interview. “The problem you had in California was caused by a combination of things–an unwise regulatory scheme, because they didn’t really deregulate. Now they’re trapped from unwise regulatory schemes, plus not having addressed the supply side of the issue. They’ve obviously created major problems for themselves and bankrupted PG&E in the process.”

It should be noted, however, that a month before the Frontline interview and Bush’s meeting with Davis, Cheney, who chairs Bush’s energy task force, met with Ken Lay, Enron’s former chief executive, to discuss Bush’s National Energy Policy. Lay, whose company was the largest contributor to Bush’s presidential campaign, made some recommendations that benefited his company financially and Cheney included some of Lay’s suggestions in the energy policy. The energy policy was released in May 2001, a couple of weeks after the meeting between Bush and Davis and after Cheney’s Frontline interview.

Moreover, in March 2001, while the energy policy was being drafted, while Davis was accusing energy companies of withholding electricity supplies from the state and while Cheney was meeting with Lay and other heavyweights in the energy industry, Tulsa, Okla., based-Williams Companies entered into a confidential settlement with FERC agreeing to refund California $8 million in profits it reaped by deliberately shutting down one of its power plants in the state in the spring of 2000 to drive up the wholesale price of electricity in California.

The evidence, a transcript of a tape-recorded telephone conversation between an employee at Williams and an employee at a Southern California power plant operated by Williams, shows how the two conspired to jack up power prices and create an artificial electricity shortage by keeping the power plant out of service for two weeks.

Details of the settlement had been under seal by FERC for more than a year and were released in November after the Wall Street Journal sued the commission to obtain the full copy of its report. Similarly, FERC found that Reliant engaged in identical behavior around the same time as Williams and in February the commission ordered Reliant to pay California a $13.8 million settlement.

In a bit of poetic justice for the state, however, many of these energy companies are now struggling financially. Enron is bankrupt and Reliant, Dynegy and Williams, once the darlings of Wall Street, have seen their stocks plummet from a high of $70 in 2001 to just above $2 a share Wednesday.

Today’s Features

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JASON LEOPOLD is the former Los Angeles bureau chief of Dow Jones Newswires where he spent two years covering the energy crisis and the Enron bankruptcy. He just finished writing a book about the crisis, due out in December through Rowman & Littlefield. He can be reached at: jasonleopold@hotmail.com

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