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Regulators dispute energy firm contracts { June 26 2003 } Original Source Link: (May no longer be active)
http://www.latimes.com/business/la-fi-ferc26jun26,1,6621314.story?coll=la-home-headlineshttp://www.latimes.com/business/la-fi-ferc26jun26,1,6621314.story?coll=la-home-headlines
Regulators Press Energy Firms but Uphold Disputed Contracts
By Jonathan Peterson and Elizabeth Douglass
Times Staff Writers
June 26, 2003
WASHINGTON — Federal energy regulators on Wednesday ordered more than 60 power companies and utilities to show why they should not be forced to return profits allegedly gained through illegal manipulation of the California electricity market.
The action by the Federal Energy Regulatory Commission ratchets up the pressure on Dynegy Inc., Enron Corp., the Los Angeles Department of Water and Power and others previously accused of rigging the system and deepening California's 2000-01 energy crisis.
At the same time, the commission by a 2-1 vote said that California must honor $12 billion in long-term electricity contracts negotiated at the height of the energy turmoil. The decision, which was expected, means the state could be forced to pay now-lofty prices to some of the very companies accused of breaking the rules and harming the market.
"I guess people could go, 'Gosh, these are the same parties that show up in these other [market gaming] cases,' " acknowledged the commission's chairman, Patrick H. Wood III.
But Wood and fellow Republican Commissioner Nora Mead Brownell noted that there was no evidence that the market manipulation extended to the long-term contracts. They further argued that contracts should not be broken so easily, saying the certainty of such agreements is vital to a functioning marketplace.
In a dissent, Democratic commissioner William L. Massey took the side of California officials, arguing that the distortion of the short-term energy market created a "tainted environment" in which it was impossible to negotiate fair long-term deals.
"The market conditions in which these contracts were negotiated were completely unprecedented, absolutely extraordinary, utterly breathtaking," Massey said. He added that "it would defy logic" to conclude that such conditions did not push up the cost of long-term contracts.
Gov. Gray Davis scorned the commission's decision on long-term contracts as "preposterous" and vowed to appeal the decision in federal court.
"It's like a judge telling a bank robber who's stolen from 10 banks: 'If you promise not to steal anymore, you can keep the money from the first 10 banks,' " Davis said in an interview. "They're forcing us to keep a bad bargain that was made with a gun to our heads."
California's long-held claims of market gaming were given new credence March 26, when the FERC staff released an investigative report detailing widespread evidence of manipulation. At that time, the commission moved to order $3.3 billion in refunds to California and began disciplinary action against Reliant Resources Inc., BP Energy Co. and eight affiliates or subsidiaries of Enron Corp.
The commission expanded on that action Wednesday, when it ordered the 60-plus companies and utilities to demonstrate in formal hearings that they abided by the rules. Those found to have pursued strategies based on "deception or misrepresentation" may be asked to give up profits they made in California at the time, a figure that by one internal estimate could approach $100 million.
Also Wednesday, federal regulators said they would conduct a new investigation focusing on electricity bidding behavior in short-term markets from May 1, 2000, to October 2, 2000. Some agency staffers believe that the investigation might lead to big financial penalties. Significantly, investigators will consider market behavior before October 2000, a period in which California parties have long contended that marketplace abuses occurred.
Companies and municipal entities accused of manipulative behavior disputed the allegations Wednesday, with some expressing confidence they would be exonerated in a series of hearings before a FERC judge.
"We welcome this," said David Wiggs, general manager of the Los Angeles Department of Water and Power. "It's a time for us finally to get the information out."
The city of Glendale was among 10 utilities accused of helping Houston-based Enron to game the market. Documents released in March showed that the city quizzed its utility employees on "Fat Boy," a nickname for an Enron scheme to boost prices by creating the appearance of an energy shortage.
"We did not knowingly participate in any inappropriate Enron trading strategies," Steven Lins, Glendale's assistant city attorney, said Wednesday.
Separately, FERC on Wednesday stripped Enron Power Marketing and Enron Energy Services of their authority to sell electricity anywhere in the United States at market rates and revoked the authority of six Enron affiliates to sell natural gas.
The commission acted after its investigation found that Enron companies and affiliates gamed energy markets in the West and severely disrupted the industry in 2000 and 2001. Wood said the moves are intended to "reassure the nation's customers and the energy industry that the commission will not tolerate these market manipulations."
As a practical matter, it appears FERC's punishment will have little effect on Enron or its affiliates. The beleaguered energy firm, operating under bankruptcy protection, sold its energy trading business to UBS Warburg in early 2001 and does not intend to reenter that business.
Enron spokeswoman Karen Denne declined to comment, except to say the company is "cooperating with all investigations."
In some cases, companies Wednesday found themselves affected by more than one FERC order, with the results decidedly mixed. Dynegy, for example, holds a contract to supply about $500 million in power to the state through December 2004. The decision to sustain the contract was cheered by company spokesman David Byford, who said it should "encourage a more stable regulatory environment in California and future investments in the state's energy infrastructure."
But Dynegy was among those companies ordered to explain its actions during the energy crisis. "We stand by our record of running our plants as hard as possible during the shortages of 2000 and 2001," Byford said.
Wood expressed hope that the companies under investigation quickly will reach settlements with the agency, avoiding the prospect of dozens of trial-like proceedings that would further stretch out the disputes. Without such settlements, FERC could begin those proceedings in the coming weeks and months.
"We're interested in settlement so we can get some of the money flowing back" to California, Wood said.
Although the commission's decision on contracts was roundly decried by California officials, including Democratic Sens. Barbara Boxer and Dianne Feinstein, it was particularly unwelcome for Davis, who is the target of a recall campaign.
Polls suggest that public dissatisfaction with the way he handled the California energy crisis is among the factors in his low popularity ratings.
Critics say he erred by saddling the state with too many long-term contracts in 2001, only to see energy prices plummet months later.
Davis defended his actions Wednesday, saying the evidence now proves he was playing against a stacked deck.
"The federal government and the energy pirates were in cahoots to rip off Californians," he said, adding that he expects the state to prevail in the U.S. Court of Appeals.
"The courts have granted us relief before, and we're optimistic that they'll grant us relief again." he said.
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Copyright 2003 Los Angeles Times
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