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March 2003

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Ripping Off California

By Jason Leopold
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March 2003
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O ne of the most damning pieces of evidence in the federal government’s investigation into California’s energy crisis emerged recently that proves beyond a shadow of a doubt that energy firms took part in a year-long scheme to boost the price of electricity in the state by withholding much-needed power from consumers.

This latest smoking gun puts to rest, once and for all, the debate about what caused California’s energy crisis. But, the Federal Energy Regulatory Commission has punished the wrongdoing with a mere slap on the wrist and consumers are still paying record prices for electricity. The nation’s energy markets are in dire need of a massive overhaul to ensure other states are not victimized like California. Already, Texas and Arizona have filed complaints with FERC that they too are beginning to see evidence of manipulation by energy companies. But the Republican- dominated FERC, whose chair was appointed by President Bush, is dragging its feet on the issue. Meanwhile, the price of natural gas and electricity has reached record highs, which adds further stress to the nation’s already troubled economy.

This latest smoking gun in the ongoing investigation into California’s energy crisis, a transcript of a conversation between a trader and a power plant operator at Houston-based Reliant Energy in which the two discuss shutting down some of the company’s power plants in California between June 20 and 22, 2000 to create an artificial shortage so the price of power would skyrocket, was released by the FERC in January 2003. The tactic worked. It caused power prices to reach “unjust and unreasonable” levels in California, which under the Federal Energy Policy Act is illegal.

We “started out Monday losing $3 million…. So, then we decided as a group that we were going to make it back up, so we turned like about almost every power plant off. It worked. Prices went back up. Made back about $4 million, actually more than that, $5 million,” the Reliant trader says in a tape-recorded conversation on June 23, 2000.

 Reliant cut a deal with FERC, agreeing to refund California $13.8 million to settle the issue and will not be penalized under federal laws. State Senator Debra Bowen, (D-Redondo Beach), said the settlement does not go far enough. Energy corporations such as Reliant, Duke, Williams, and Enron have said publicly over the past two years that they have acted “properly” and have laid all of the blame on California’s crisis on the shoulders of state lawmakers. We now know these corporations have been lying. There are likely dozens of other smoking guns to be found that show the same type of behavior during the peak of the energy crisis, said Robert McCullough, an energy consultant based in Portland who has been assisting California in its investigation.

“The one thing that isn’t conceivably believable is that [Reliant] only withheld two days,” Mc- Cullough said.

Shutting down power plants in California to boost wholesale prices is not a new issue. Last year, “CBS News” reported that Williams Companies engaged in identical behavior around the same time as Reliant. The evidence, also a transcript of a recorded conversation between a Williams trader and a power plant operator in California, showed the two conspiring to shut down a power plant for two weeks to boost electricity prices and Williams profits. FERC kept the evidence under wraps for a year and cut a secret deal with Williams to refund California $8 million it obtained through the scam without admitting any guilt.

FERC released the transcripts last November after the Wall Street Journal sued the commission to obtain a full copy of its report. Had this evidence been released 21 months ago, pre-Enron, it would have helped California’s case. But it wouldn’t have jibed with Bush’s energy policy, which was made public in May 2001. Around the same time, President Bush was in California and met with Gov. Gray Davis about the state’s energy crisis. Bush told Davis he would do nothing to help the state.

A few weeks before the meeting between Bush and Davis, Vice President Dick Cheney, who chairs Bush’s energy task force, was interviewed by PBS’s “Frontline” for a special series on California’s energy crisis. During the interview, Cheney flat-out denied that energy companies ripped off California.

“The problem you had in California was caused by a combination of things—an unwise regulatory scheme, because they didn’t really deregulate,” Cheney said in the May 17 “Frontline” interview. “Now they’re trapped from unwise regulatory schemes, plus not having addressed the supply side of the issue. They’ve obviously created major problems for themselves and bankrupted PG&E in the process.”

When asked whether it was possible that energy companies were behaving like a “cartel” and if some of the high power prices in California could be the result of manipulation, Cheney responded with a resounding “no.”

It’s highly unlikely that Bush, Cheney, and members of the energy task force were kept in the dark about the Williams scam, especially since the findings of the investigation by FERC took place around the same time the policy was being drafted. According to evidence obtained by Congress- person Henry Waxman (D-California) earlier this year, the energy task force “considered and abandoned plans to address California’s energy problems in its report.”

California’s electricity crisis wreaked havoc on consumers in the state between 2000 and 2001, resulted in four days of rolling blackouts, and forced the state’s largest utility, Pacific Gas & Electric, into bankruptcy. California was the first state in the nation to deregulate its power market in an effort to provide consumers with cheaper electricity and the opportunity to choose their own power provider. The results have since proved disastrous. The experiment has cost the state more than $30 billion.

 For nearly three years, California officials have pleaded with FERC commissioners, President Bush, and Vice President Dick Cheney to provide the state with some relief from soaring wholesale power prices and investigate energy companies, including Enron, Williams Companies, and Reliant, for allegedly manipulating the market.

Bush and Cheney responded personally to California Gov. Gray Davis’s cries for help in May 2001 by saying the crisis was the result of California’s poorly designed power market, which left some regulatory restrictions in place. Although that is partially true, it’s now become apparent that energy companies bear most of the blame.

It wasn’t until Enron collapsed in October 2001 and evidence of the company’s manipulative trading tactics emerged that FERC began to take a look at the company’s role in California’s electricity crisis. Since then, memos written by former Enron traders were uncovered, with colorful names like “Fat Boy” and “Death Star,” that contained the blueprint for ripping off California.

Enron’s top trader on the West Coast, Timothy Belden, the mastermind behind the scheme, pleaded guilty in December to conspiracy to commit wire fraud and has agreed to cooperate with federal investigators who are still trying to get to the bottom of the crisis.

California is demanding that FERC order the energy company’s to refund the state $8.9 billion for overcharging the state for electricity during its year long energy crisis. FERC is expected to wrap up its investigation in March and decide whether the state is entitled to the refunds. But an administrative law judge for the agency released a preliminary decision in December that says California is due no more than $1.2 billion in refunds because the state still owes the energy companies $1.8 billion in unpaid power bills.

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