California Sentiments Still Boiling

WASHINGTON, DC -- - The mending process has begun. But it still has a long way to go. That is the sentiment following a Federal Energy Regulatory Commission report that points fingers at those that may have contributed to the spiraling electricity costs during the California energy crisis of 2000-2001.

Significant supply shortfalls and a fatally flawed market design combined to make a fertile environment for price manipulation in California, which caused short term electricity prices to skyrocket, FERC stated last week. It's all worked to impede confidence in electricity markets and to give pause to investors. FERC aims to infuse new capital into the energy sector through a variety of initiatives. “Very few issues in this proceeding have been resolved …,” says Sharon Bonelli, an analyst at Fitch Ratings in New York City, in a report titled FERC Western Showdown. “Investors face continued uncertainty.” After a 13-month investigation, FERC ordered Enron, Reliant Energy Services and BP Energy to show why their rights to sell power at market-based rates should not be revoked. BP and Reliant, in transactions identified in phone conversations and transcripts, appear to have manipulated electricity prices at Palo Verde, an important Arizona trading hub, the agency says. Meanwhile, FERC also ordered AES, Reliant, Williams, Dynegy, NRG, Mirant, BPA, Los Angeles Department of Water and Power, Idaho Power, Powerex and Enron to show why their prices from May-October 2000 did not constitute economic withholding or inflated bidding. If they are found to have withheld supply, these companies will be required to give up the profits. Finally, the FERC took action that it expects will increase the amount of refunds in connection with California's energy crisis. The total refund is expected to add another $1.5 billion to the $1.8 billion estimated last December by a FERC administrative law judge. Commissioners adopted a staff recommendation that uses a different set of gas prices when calculating refunds than what was used to determine the original finding. The FERC took no steps to nullify $20 billion in long-term contracts signed by the state of California during the height of the crisis. Two of three commissioners, however, indicated that they agreed with the agency's general counsel's office. That view holds that abrogating the deals would undermine all contracts generally—a view applauded by Fitch Ratings. One commissioner disagreed, saying that inflated short-term prices affected the long term deals into which the state entered. “The price gouging abounded,” says Commissioner William Massey. Taking Action The news has not deterred Reliant Resources. The company just announced that it has reached a deal to refinance $5.9 billion of existing bank credit with new facilities that mature in about four years. The new agreement, which also provides an additional $300 million line of credit, will require no mandatory principal payments prior to May 15, 2006, Reliant says. It adds that it has no significant near-term debt maturities now—a big relief as the company has said that the new financing had been critical to avoiding bankruptcy. Just after the FERC report was released on March 25, the company's stock sunk to about $2.25 a share. It now stands at about $4.00 a share. Sandra Fruhman, a Reliant spokeswoman, says that the transactions now questioned by the FERC were not authorized by the utility and that they violated the company's own trading procedures. That said, no evidence exists to show that the deals adversely affected prices. “We are still trying to clarify what the FERC action means and, of course, we will be filing a response and believe we can defend our right to sell at market-based rates.” If a company's market-based rates pricing authority is revoked, it may still file and sell power under cost-of-service tariffs, which is the cost of production plus an allowed return. That formula will still permit a utility to earn profits on their power sales, but it does constrain their pricing flexibility—preventing the opportunity to make additional profits when market prices exceed those allowed by regulators. The converse can also be true, according to Reliant. It says that if it had to sell at cost-plus under today's market conditions, it would not be hurt. “This year, cost-based rates would actually increase our earnings before interest and taxes,” says Fruhman. “That would not be true longer term, as market conditions recover.” Meanwhile, all companies named in FERC's report have vigorously denied any allegation of price manipulation. At the same time, FERC excluded Duke Energy from further investigation as it relates to the company's bids during the crisis. Duke, however, must still show that it didn't manipulate markets or be forced to give up “unjust” profits. The “blame game” should end, says Gary Ackerman, executive director of the Western Power Traders Forum. As soon it does, rational policies that ensure adequate supply must be implemented, he adds, noting that if it does not, similar crises could re-occur. “Whatever else the documentation shows, it has been well-established that the worst of California's wounds were self-inflicted,” says Ackerman. Settlements Pushed But others are calling on the Department of Justice to investigate fraud and anti-trust violations. Sen. Dianne Feinstein, D-Calif., urged Attorney General John Ashcroft to examine instances where documentation had been destroyed—actions that may prevent federal regulators from ever learning the full scope of price manipulation, she says. “The documents provide substantial evidence that energy companies engaged in well-established and coordinated strategies to deliberately withhold electric power and natural gas at critical moments during the Western Energy Crisis in a concerted effort to boost company profits,” Feinstein wrote to the attorney general. Feinstein released some examples, which were previously secret: Williams Cos. and AES Corp. shut down a plant from April 3-6, 2000 reportedly because of a boiler tube leak. Plant records show, according to Feinstein, that it was a planned shutdown and the leaks were an excuse; Dynegy Corp. shut down a plant from Aug. 30, 2000 to Sept. 3, 2000 for repairs. The repairs had already been done, says the report, implying the shut down was to force prices up; Mirant Corp. held one of its plants offline until Oct. 22, 2000 even though an external tube leak ended on Oct. 20, 2000. In a related incident, an email in July 2000 says, “Stick it to em!!” Another trader quipped about congestion strategies: “I mean it's just kind of loop-t-looping but it's making money … (laugh.)” Reliant failed to return one of its units to service for two days after repairs had been completed on Jan. 26, 2001 even though California was experiencing power shortfalls and, Duke delayed returning one of its units to service after repairs had been made in November 2000, despite power emergencies. Inadequate supply and a poorly designed regulatory structure all contributed to California's woes. But, the critics of power providers exclaim that such shortcomings do not provide justification for rigging the system. FERC's report tries to properly assign blame. In the end, each side must acknowledge their role in the crisis and work to settle their differences. It's the only way the industry can move forward.

“Very few issues in this proceeding have been resolved …,” says Sharon Bonelli, an analyst at Fitch Ratings in New York City, in a report titled FERC Western Showdown. “Investors face continued uncertainty.”

After a 13-month investigation, FERC ordered Enron, Reliant Energy Services and BP Energy to show why their rights to sell power at market-based rates should not be revoked. BP and Reliant, in transactions identified in phone conversations and transcripts, appear to have manipulated electricity prices at Palo Verde, an important Arizona trading hub, the agency says.

Meanwhile, FERC also ordered AES, Reliant, Williams, Dynegy, NRG, Mirant, BPA, Los Angeles Department of Water and Power, Idaho Power, Powerex and Enron to show why their prices from May-October 2000 did not constitute economic withholding or inflated bidding. If they are found to have withheld supply, these companies will be required to give up the profits.

Finally, the FERC took action that it expects will increase the amount of refunds in connection with California's energy crisis. The total refund is expected to add another $1.5 billion to the $1.8 billion estimated last December by a FERC administrative law judge. Commissioners adopted a staff recommendation that uses a different set of gas prices when calculating refunds than what was used to determine the original finding.

The FERC took no steps to nullify $20 billion in long-term contracts signed by the state of California during the height of the crisis. Two of three commissioners, however, indicated that they agreed with the agency's general counsel's office. That view holds that abrogating the deals would undermine all contracts generally—a view applauded by Fitch Ratings. One commissioner disagreed, saying that inflated short-term prices affected the long term deals into which the state entered.

“The price gouging abounded,” says Commissioner William Massey.

Taking Action The news has not deterred Reliant Resources. The company just announced that it has reached a deal to refinance $5.9 billion of existing bank credit with new facilities that mature in about four years. The new agreement, which also provides an additional $300 million line of credit, will require no mandatory principal payments prior to May 15, 2006, Reliant says. It adds that it has no significant near-term debt maturities now—a big relief as the company has said that the new financing had been critical to avoiding bankruptcy.

Just after the FERC report was released on March 25, the company's stock sunk to about $2.25 a share. It now stands at about $4.00 a share.

Sandra Fruhman, a Reliant spokeswoman, says that the transactions now questioned by the FERC were not authorized by the utility and that they violated the company's own trading procedures. That said, no evidence exists to show that the deals adversely affected prices. “We are still trying to clarify what the FERC action means and, of course, we will be filing a response and believe we can defend our right to sell at market-based rates.”

If a company's market-based rates pricing authority is revoked, it may still file and sell power under cost-of-service tariffs, which is the cost of production plus an allowed return. That formula will still permit a utility to earn profits on their power sales, but it does constrain their pricing flexibility—preventing the opportunity to make additional profits when market prices exceed those allowed by regulators.

The converse can also be true, according to Reliant. It says that if it had to sell at cost-plus under today's market conditions, it would not be hurt. “This year, cost-based rates would actually increase our earnings before interest and taxes,” says Fruhman. “That would not be true longer term, as market conditions recover.”

Meanwhile, all companies named in FERC's report have vigorously denied any allegation of price manipulation. At the same time, FERC excluded Duke Energy from further investigation as it relates to the company's bids during the crisis. Duke, however, must still show that it didn't manipulate markets or be forced to give up “unjust” profits.

The “blame game” should end, says Gary Ackerman, executive director of the Western Power Traders Forum. As soon it does, rational policies that ensure adequate supply must be implemented, he adds, noting that if it does not, similar crises could re-occur.

“Whatever else the documentation shows, it has been well-established that the worst of California's wounds were self-inflicted,” says Ackerman.

Settlements Pushed But others are calling on the Department of Justice to investigate fraud and anti-trust violations. Sen. Dianne Feinstein, D-Calif., urged Attorney General John Ashcroft to examine instances where documentation had been destroyed—actions that may prevent federal regulators from ever learning the full scope of price manipulation, she says.

“The documents provide substantial evidence that energy companies engaged in well-established and coordinated strategies to deliberately withhold electric power and natural gas at critical moments during the Western Energy Crisis in a concerted effort to boost company profits,” Feinstein wrote to the attorney general.

Feinstein released some examples, which were previously secret: