Hydro back on California hook

By Scott Simpson
Vancouver Sun
Page D01
06-Oct-2004

The saga of the GSX Pipeline has been closely paralleled by the saga of BC Hydro's opportunistic overcharging for power sold into the California market during the winter of 2000/2001. Both are stories of financial mismanagement, and both have darker undertones of unstated agendas, manipulation. BC Hydro's Powerex is accused of doing in energy markets exactly what Enron was guilty of, and these activities were driven by the same senior execs in Hydro and government who were ramming through the GSX Pipeline project - part of a set of gas-fired Vancouver Island generation projects that would displace mainland power, freeing it up for sale into the hot California market. Hydro thought it was off the hook with the California issue. Not so, as Scott Simpson reports: "Hydro could lose as much as $280 million US." "But it could see its losses run far higher, if California has its way." What was that about a budget surplus, Mr. Collins?

Powerex has been found guilty once already on these overcharges and in 2002 was ordered to pay back to California US$279 million. (link). This was overturned on appeal.

The questionable relationship between Enron and Powerex goes back a number of years. The Canadian federal Competition Bureau busted the offices of both companies in Calgary in 2000, but didn't find the evidence they were looking for to bring charges of electricity bid-rigging. (link)

B.C. Hydro has suffered a "major setback" in its long-running legal battle with California over the state's energy crisis, and could be back on the hook for more than $750 million US in refund payments to the state.

The setback came in a recent ruling by a United States appeal court that gives California substantial new clout to pursue roughly $5 billion in refunds from electricity suppliers and traders, including Hydro's Powerex power-trading subsidiary.

That's in addition to about $3 billion that's already on the table.

The U.S. 9th Circuit Court of Appeal ruled that U.S. federal regulators were not tough enough in their dealings with Powerex and other trading companies in the wake of the 2000-2001 crisis.

It said the U.S. Federal Energy Regulatory Authority (FERC) acted "improperly" when it decided to let about 60 power- trading companies off the hook despite allegations that they broke rules established to prevent price gouging.

Based on earlier calculations by the B.C. finance ministry, Hydro's potential liabilities in connection with the crisis amount to about 10 per cent of the amount California is seeking.

Two years ago the ministry suggested B.C.'s liability could be as much as $1.3 billion Cdn -- although California has since scaled back its demands, and the Canadian dollar is relatively stronger than it was in 2002.

Hydro maintains that Powerex is innocent of any wrongdoing, but a spokesperson acknowledged that the decision could spell trouble for the British Columbia Crown corporation.

"An early review of the decision indicates to us a major setback for suppliers and a big win for California parties who've been demanding substantial refunds," Hydro media relations manager Elisha Moreno said on Tuesday.

"We were already cleared. We stand by our claim that we participated by the rules of the market, and FERC has already cleared us.

"As far as we are concerned we thought that this was a dead issue. We thought we had been cleared and we were happy because it validated what we had said all along."

Eleven months ago Hydro was celebrating a deal it worked out with FERC, absolving Hydro of any guilt in association with the crisis in exchange for a nominal $1.3-million Cdn "settlement fee."

Many other companies made similar deals and, like Hydro, used them to assert their innocence with respect to charges of gouging during a spectacular rise in energy prices during the bungled 2000-2001 start-up of California's open market for electricity.

However, California Attorney- General Bill Lockyer wasn't happy with the deals.

Last year he filed an attack on FERC in the 9th Circuit Court of Appeal-- the equivalent of the B.C. Court of Appeal.

He argued that FERC failed to exercise its duty to police the California energy market, and failed to punish traders for widespread violations of rules requiring them to keep track of individual power trades.

"With FERC abdicating its regulatory responsibility, California consumers were subjected to a variety of market machinations", bearing names such as Fat Boy and Death Star, that falsely inflated the price of electricity in the state, the court said.

FERC had argued to the court that the lack of paperwork was a mere technicality and that the energy regulatory agency lacked the authority to get tough with alleged violators.

However, the court brushed aside that claim.

"FERC misapprehends its legal authority in this context. In fact, FERC possesses broad remedial authority to address anti-competitive behavior," the court said.

However, the court did not recommend any refund amounts and sent that issue back for FERC to consider.

According to Moreno, FERC officials are still studying the judgment and have not indicated how they will deal with it.

One option is an appeal to the U.S. Supreme Court, another is to pursue a new round of settlements as California requires.

The state is already going to get some money from Hydro and other traders.

That's because FERC earlier ruled that California was entitled to some refunds on the grounds that electricity prices were unreasonably high, even if no wrongdoing had occurred.

FERC is expected to announce refunds based on that premise sometime this fall.

Hydro could lose as much as $280 million US in connection with that event.

But it could see its losses run far higher, if California has its way.

The ruling clears the way for more punitive refund orders and may also double the time frame in which violations were alleged to occur.

"It puts back on the table $2.8 billion in refunds that the federal regulators had taken off the table," said California attorney-general's office spokesman Tom Dresslar. "We believe the ruling also means we should be eligible to collect refunds of another $2.5 billion-$3 billion that FERC has said we're not eligible to collect."

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