California demands $1 billion from BC Hydro

Powerex subsidiary vows to fight claim it gouged state during power crisis

Scott Simpson
Vancouver Sun
11 Feb 2005

California's attorney-general slapped Powerex with a $1.06-billion Cdn lawsuit on Thursday, accusing the BC Hydro subsidiary of "massive gouging" and manipulating the state's troubled electricity market during an energy crisis in 2001.

"Powerex gamed the market, then gouged the state, taxpayers and ratepayers," California Attorney-General Bill Lockyer alleged in a press release announcing the $850 million US lawsuit.

"It created conditions that allowed it to hold California businesses and consumers hostage, and left the state no choice but to pay the ransom. We want that money back."

Spokesmen in Lockyer's office have for several years portrayed Powerex as a lesser player in a vast market gaming scheme led by disgraced power trading company Enron Corporation.

But the suit makes it clear that California has come to regard Powerex as "one of the largest, if not the largest" electricity supplier operating in the state during the crisis, and that Powerex "took an oppressive and unfair advantage of the distress caused by the California energy crisis."

"Powerex manipulated the California energy markets through Enron-style gaming and trading strategies," the suit alleged.

Powerex officials reacted with "outrage" Thursday, describing Lockyer's action as "legal blackmail" that ignores the vital role it played in meeting the state's desperate need for electricity during the crisis.

Lockyer filed the suit on behalf of the California Department of Water Resources, which bought electricity from Powerex on "thousands of occasions" in 2001.

The suit was filed in California superior court, with the water resource district arguing that the American court has jurisdiction over Powerex because Powerex is registered with the California secretary of state to conduct business in California.

The B.C. finance ministry in the past has taken note of potential liabilities associated with Powerex's profits in California, and it would fall to B.C. taxpayers to cover the cost of any judgment if it were to succeed.

In a prepared statement, Powerex said it was reviewing the lawsuit and "intends to respond vigorously to its allegations."

"It is frankly the height of bad faith for California to seek to [reneg] on its contracts and demand money back, when it still owes Powerex more than $280 million [US] for the power that was delivered during 2000-2001," Powerex vice-president Doug Little said in a news release.

"We responded to the entreaties of the California government in their time of need, and this suit proves that no good deed goes unpunished."

Powerex said that even though it was a net importer of electricity to B.C., it was able to purchase and deliver large quantities of electricity to California by drawing on the capability of the BC Hydro system.

"The U.S. Federal Energy Regulatory Commission [FERC] has thoroughly examined Powerex's conduct regarding sales to California, and has consistently rejected California's claims of market manipulation and other misconduct," Powerex said in the statement.

Powerex said FERC staff concluded in October 2003 that "Powerex was 'a valuable and reliable supplier' to California, and found no evidence whatever to support California's claims of market manipulation or price gouging."

"We believe that California grossly mismanaged its energy affairs prior to and during the crisis, which was largely self-inflicted," Little continued. "They failed to construct adequate generation, did not have adequate transmission in place and passed some of the worst energy statutes ever enacted. Now they seek to make Powerex a scapegoat to divert political attention away from their own ineptitude."

Nine U.S. companies trading electricity in California during the crisis have reached settlements with the state, rather than engage in court battles.

The combined value of the settlements is $3.38 billion US.

The most recent settlement was announced in January, with Mirant Corp. agreeing to pay $749 million US for resolution of California allegations that it was gouging during the crisis.

No specific instances of wrongdoing were cited in the suit, but the water resource district said Powerex was the only agency in the state that could provide large volumes of power on a "real-time" or short-notice basis -- due to BC Hydro's ability to open up its hydro dams as required -- and took undue advantage of the situation.

"Powerex was ... aware that no other energy marketers were able to supply [the water resource district] with large volumes of energy on a real-time basis. Powerex used this knowledge to demand exorbitant prices."

© The Vancouver Sun 2005

See also Hydro tied to power scheme from 05 Feb 2005.