'Proof' of energy scam

State officials point to new evidence power firms sought to rip off California

Mark Martin
Chronicle Sacramento Bureau
03 Mar 2003

Sacramento -- California officials said Sunday they have proof that 85 percent of the state's energy costs during the 18-month power crisis were influenced by illegal market behavior by dozens of power providers.

A 1,000-page report to be filed today with federal regulators accuses the traders -- including some of the nation's largest power companies and the utility run by the city of Los Angeles -- of darkening power plants, using illegal energy trading schemes and conspiring together to drive up electricity prices and rip off consumers.

In a final push for refunds, Gov. Gray Davis, Attorney General Bill Lockyer and state regulators also allege that some companies destroyed documents to hide unscrupulous business practices that led to at least $7.5 billion in excess costs that California ratepayers are still paying for.

The report to be filed with the Federal Energy Regulatory Commission sets up a showdown this month in which the commission is expected to sort out who owes what to whom -- and by extension, who is to blame -- for the California energy crisis of 2000-2001.

"We finally have put together thousands of documents that make a very strong case," Davis said. "The massive coverup by the generators is unraveling.

The evidence of market manipulation is so overwhelming even the FERC can't hide from it."

Public Utilities Commissioner Loretta Lynch listed various wrongdoings, then ticked off companies allegedly involved.

She said Reliant Resources, Williams/AES, Dynegy, Mirant Corp. and Duke Energy all deliberately shut power plants they ran in California in order to create scarcity and earn higher profits.

She said Sempra Energy, Mirant, Dynegy, Reliant, Williams and Canadian- based PowerEx all used a trading strategy similar to an Enron scheme called "Fat Boy," in which the companies knowingly submitted false data to the state's power grid operators.

Officials said for-profit power companies teamed up with utilities run by cities like Los Angeles, Glendale and Redding to game the state's markets and split profits.

Lawyers culled through thousands of internal company documents, listened to hundreds of hours of tape-recorded conversations among traders and deposed energy executives to build their case.

"The whole market was co-opted against the consumer," said Erik Saltmarsh, acting director of the state's Energy Oversight Board.

UNPRECEDENTED ACCESS

The unprecedented access given to a SWAT team of California lawyers was granted by FERC, which gave California a special, 103-day discovery period to prove market manipulation.

Most of what the state said it has shown in its report are long-standing accusations.

But for the first time, lawyers said they had also uncovered evidence suggesting power companies had disposed of documents as investigations into the energy crisis began.

Officials with several power companies denied wrongdoing, and said they will have much more to say when their companies file rebuttals to the state report. Those are due March 20.

Patrick Dorinson, a spokesman for Atlanta-based Mirant, adamantly denied his company had done anything unseemly during the crisis. A spokesman for Duke noted the state in the past had accused generators of withholding power but has never provided substantial proof.

And the executive director of a trade group for energy producers said power companies were looking forward to a full debate at FERC over the state's accusations.

"We welcome the opportunity to finally air out all this in a public forum," said Jan Smutny-Jones of the Independent Energy Producers.

California lawyers say their report outlines two major ways in which power companies gamed the state's energy markets: through complicated trading schemes that involved collusion and deception, and by simply withholding power from a market in which electricity supply was already scarce.

The Enron memos released last year outlined dozens of strategies that the company used to earn money in California. Most of the other power firms that did business in California have denied using the same business plan.

'RICOCHET' AND 'DEATH STAR'

But lawyers for the state said they can now prove otherwise.

An Enron scheme called "Ricochet," also known as megawatt laundering, involved companies sending power outside California, then selling it back into the state to avoid price caps.

Another Enron strategy, dubbed "Death Star" by Enron employees, also was prevalent, according to Saltmarsh. That game involved creating congestion on transmission lines. Companies were then paid to relieve that congestion by the state power grid operator.

Both strategies were used by numerous companies, the state alleges after reviewing trading data.

While clever trading games did drive up prices, Saltmarsh and other lawyers said the biggest gouging came through a much simpler method: power generators turned off power plants to create artificial shortages.

Saltmarsh and Vickie Whitney, a deputy prosecutor with the attorney general's office, said the state had proof that generators told the state that power plants were down for maintenance problems when plant logs show there were no problems. Other times, companies refused to bid available power into the market.

Whitney said the state could show that on at least 20 occasions and accounting for about 350 hours, generators shut plants for no apparent reason during periods when power grid officials signaled the market that they were dangerously short on power.

Companies used a information service, based in Houston, that allowed them to know when power plants were down so they could capitalize on shortages and essentially collude to create planned scarcity, the lawyers also said.

Part of the report may prove somewhat embarrassing to Davis.

Municipal utilities such as the Los Angeles Department of Water and Power, which creates its own energy and is not a part of the state's power grid, are accused of teaming with power companies on trading schemes that created confusion for power grid operators.

For much of the energy crisis, LADWP was run by S. David Freeman, who became one of the governor's closet energy advisers and now earns $220,000 a year heading a state energy agency. Davis appointed Freeman to the job.

Steve Maviglio, Davis' press secretary, said the governor would review the complete report before commenting on whether Freeman should be held accountable for LADWP's actions. Freeman has said he did not allow the department to gouge the state, and lawyers on Sunday said they had no indication Freeman was involved or knew of strategies the department used to make money in California.

E-mail Mark Martin at markmartin@sfchronicle.com