Scott Simpson
Vancouver Sun
04 Mar 2003
California lawsuit demands return of $7.5 billion US
California Attorney-General Bill Lockyer claims electricity suppliers, including B.C. Hydro's Powerex, made huge profits by rigging prices.
A B.C. Hydro subsidiary manipulated power sales in California in 2000 and 2001 to reap windfall profits, the state's attorney-general charged Monday.
The actions of Powerex and other power suppliers ensured electricity prices in those years in California were double what they should have been, even in a competitive market, California claims.
"We've got a lot of stuff on Powerex," said Tom Dressler, speaking for California Attorney-General Bill Lockyer. "Powerex, our evidence shows, was engaged in a lot of the Enron-type games."
On Monday, California officially submitted evidence to the U.S. Federal Energy Regulatory Commission that state representatives say shows power suppliers, including Powerex, manipulated markets as power prices soared.
The commission, in November, gave the state 100 days to present proof of its claims that more than $7.5 billion US in profits should be refunded.
That deadline expired Monday.
Powerex denies any wrongdoing, saying it merely took advantage of weaknesses in a newly deregulated California market.
California officials have previously said they believe Powerex participated in market manipulation, but Monday's accusations are the most direct attacks levelled to date.
The state also names in the filing with FERC Williams Cos., Hydro's partner in a proposal to build a natural gas pipeline from Washington state across the Strait of Georgia to Vancouver Island.
The state says Williams deliberately shut power plants in California to create scarcity and earn higher profits.
Dressler of California said Powerex engaged in at least three schemes, or games, which gained notoriety last summer when they turned up in memos released by Enron Corp. Enron filed for bankruptcy in December, 2001. Dressler said the state found other companies engaged in Enron 'games' known as Fat Boy, Death Star and Riccochet.
In Fat Boy, suppliers intentionally submitted false electricity load schedules to the state's power grid operators to increase scarcity and prices for the next day's market, then profited by selling electricity at the artificially higher prices.
"Not only did Enron engage in that, but numerous other market participants including Powerex engaged in Fat Boy gaming," Dressler said.
In Riccochet electricity was 'laundered' by moving it out of California where internal prices were capped, then shipping it back in at higher prices unconstrained by the caps as if it were being generated outside the state.
"Under Riccochet, our evidence shows that Powerex was involved in those strategies," Dressler said.
In Death Star, the participants created false congestion on the California electricity grid, then charged the state's grid operator exorbitant prices to relieve the phoney congestion.
"Powerex, our evidence shows, participated in that game," Dressler said.
Powerex was also implicated in a scheme where it teamed up with a public utility run by the city of Los Angeles to create confusion in the market to boost prices and split the profits.
"Powerex and Los Angeles Department of Water and Power had what we consider an improper power sharing agreement," Dressler said. "Our evidence (also) shows that Powerex exported California power into Canada during times when our ISO (independent system, or electricity grid, operator) was operating under emergency conditions. We believe that export probably violated Powerex's export licence."
Dressler said California will petition FERC to lift a protective order which makes all of its evidence secret, saying the public has a right to know the details of the situation.
"We think the public has a right to know, and that there is no justification in terms of commercially sensitive type information because it's all old. It's old plant operating stuff that has no value to these guys any more."
In preparing for Monday's filing California took sworn statements from four Powerex employees, president Ken Peterson; top trader Murray Margolis; and portfolio managers Tom Bechard and Ali Yazdi.
Margolis was the third most highly paid Hydro employee in 2001, when electricity prices were skyrocketing. He earned $371,994 in salary and bonuses.
Powerex is filing to FERC what it calls "compelling evidence that it participated by the rules of the California energy markets and helped keep the lights on in California when California was in crisis."
Hydro's Doug Little said in a news release that, far from causing problems, Powerex was "instrumental in helping to keep the lights on in California during the crisis."
"Our trade activities with California were within the rules," Little said.
He said that a "Perfect Storm" of supply and demand forces in Western North American energy markets pushed prices up, with faulty market design and "poor policy response" by the state of California exacerbating the situation.
"Trading strategies being complained of by California had, at most, a marginal impact on prices -- as California's own studies have found -- compared to the impact of market fundamentals," Little said.
"We are confident that we participated by the market rules and expect the evidence we, and likely others, provide will bear out our contention that the Perfect Storm of basic market forces, California market design flaws and poor policy decisions were the cause of California's energy problems."
The companies have until March 20 to reply to the charges.
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