LA Times Sunday, January 14, 2001

GENERATORS ACTED TO KEEP PRICES HIGHER, STUDIES SHOW

By STEVE BERRY, NICHOLAS RICCARDI, Times Staff Writers

Gov. Gray Davis calls them pirates, marauders, gougers and greedy profiteers--those out-of-state generators in the eye of California's electricity storm.

Although the governor's tough talk comes at a time when he is confronting his own political crisis, the question remains: Is he right about the electricity wholesalers who own California's power plants and have profited spectacularly off the state's deregulated market?

To date, no evidence has surfaced to substantiate the governor's provocative images of a smoke-filled-room conspiracy. But a review by The Times of a half-dozen studies on the price jolts does reveal a pattern of suspicious activity at crucial moments in the crisis, beginning last summer.

Government and private researchers, while differing at times, have similarly concluded that California's deregulated market, which was supposed to crackle with competition, has been toyed with in ways that have kept prices substantially higher than the cost of production.

Specifically, many cite a sharp increase in unscheduled plant shutdowns and unusual production cutbacks that dried up supply and helped push prices skyward--as much as fivefold, draining cash from the state's big utilities.

The generators, almost all of which are headquartered in the South and Southwest, say they have adhered strictly to the law and have not manipulated the market, either individually or in concert.

"Those charges have clouded the issue for the better part of the year 2000; they continue to cloud the issue," said Richard N. Wheatley, director of communications for Reliant Energy. "It's the buyers who drive up the price. . . . It's like a buying frenzy."

Southern Energy spokesman Chuck Griffin said: "This whole idea of us somehow withholding capacity is completely bogus," adding that his company ran its plants hard all summer when prices started escalating. "We run them until they break."

The studies released during the past six months were undertaken by diverse players in the energy arena, ranging from state and federal regulators to university scholars.

All were trying to figure out what was going wrong with the nation's most sweeping foray into electricity deregulation. The reports represent a mix of documentable facts and market analyses. Here is a synthesis what they found:

Skipping Maintenance

Like tuning up an old car before a big race, plant operators usually shut down many of their generators between January and April so they can run full throttle during the hot summer months.

This upkeep is especially important in California, where 82% of the generators are more than 30 years old. But last year, for reasons federal officials have yet to determine, preventive maintenance during these crucial months plunged nearly 40%.

Sudden Shutdowns

As Californians cranked up their air conditioning for the swelter of summer, plants unexpectedly began shutting down, depriving the state of crucial electrons. Lost wattage virtually quintupled in August compared with the year before.

Researchers for the Federal Energy Regulatory Commission said in a November report that the cuts could have been caused by equipment breakdowns in aging facilities. But they hinted at a darker scenario: The shutdowns were calculated to shrink the amount of power available, driving up the price.

The timing of the outages' end also seemed curious. The federal researchers noted that when prices climbed to more lucrative levels, some plants managed to come back to life. Investigators urged further study of the phenomenon.

Although the federal energy panel ultimately found that the market was artificially distorted, it was unable to determine the companies, agencies or individuals responsible.

Holding Back Power

In times of severe scarcity, the agency that oversees the state's power grid buys energy at premium prices to keep the lights on--a fact well known to savvy electricity marketers. The studies noted that these sellers can make windfall profits by strategically reining in their output and then cranking it up when the state is most vulnerable and desperate to buy.

Generating companies, which account for about a third of the power used in California, offer various explanations for the supply shortfall, including equipment troubles and complex environmental regulations. But an economist with the Massachusetts Institute of Technology and a San Francisco energy consultant concluded that those factors alone could not account for the precipitous drop in production.

In their study, the two researchers calculated that, in June, Southern California plants could have produced an extra 2,400 megawatts, enough to supply more than 2 million homes. Energy companies have criticized the study--funded by Southern California Edison, which has accused producers of price gouging--as relying on bad data.

But during that same month, an analysis by the state agency that oversees electricity distribution for California found that wholesale prices were nearly 200% above what they should have been in a market that was firing efficiently on all cylinders. The state researchers did not assign blame for that spike to any particular party.

Researchers do acknowledge that there are pressures beyond the control of the generators that have affected the electricity supply in California. Among them: No new major power plants have been built in the state in more than a decade, and a drought in the Pacific Northwest has curbed the importing of hydroelectric power to California.

Manipulating Exports

Even when California was desperate for power last summer, federal investigators found, generators in the state were selling some of their electricity to marketers elsewhere in the country. Those buyers could then sell back to California when the prices climbed because of the dwindling supply. In fact, more power was exported to other states from generation plants in California last year than in 1999.

Although this practice can drive up prices, according to federal regulators, there are no rules barring it, unless a pattern of such behavior can be proved.

The energy commission's voluminous report confirms one instance in which a marketer bought power from California, only to sell back to the state when the state was willing to pay more.

But other researchers, who do not have the federal government's ability to obtain energy trading data, cannot fully investigate this tactic for any patterns.

"The ownership of power can pass through many hands before it gets delivered into the [California] market, so it's hard for someone who doesn't have the ability to get information from individual generators and marketers," said MIT economist Paul Joskow, who co-wrote the Edison-funded study.

Under state law, the records of generators and others involved in marketing electricity can be kept confidential so competitors cannot gain an unfair advantage. This includes data on outages, how much energy is being generated, who buys it and at what price.

Only two groups of researchers--those representing the Federal Energy Regulatory Commission and the California Independent System Operator, the state's electric grid regulator--were given access to some confidential documents.

"It's hard to get some of the numbers because, in the unregulated world, they keep their books under lock and key," said Doug Heller of the Santa Monica-based Foundation for Taxpayer and Consumer Rights.

"In the old days we could find out how much a plant was generating and what it cost to produce the energy. Now, in this Wild West marketplace, you can't come anywhere near the relevant information."

Gov. Davis, in his State of the State address last week, vowed to get that information. He asked legislators for $4 million to help state Atty. Gen. Bill Lockyer track and snare power suppliers possibly involved in racketeering and price-fixing. The money would help Lockyer widen his current criminal probe and make broader use of his power to subpoena records.

"These generators may be acting within the law," Davis said. "But if they're illegally gaming or manipulating the market, the attorney general will track them down."

He has company.

Five government agencies are investigating the power shortage, ranging from the obscure state Electricity Oversight Board to the Federal Energy Regulatory Commission. Now, whenever a state power plant unexpectedly shuts down, California Public Utilities Commission inspectors are dispatched to see why. Federal inspectors are also spot-checking plants that have gone offline.

Some agencies have gotten more cooperation than others.

Just last week, one PUC investigator was kept waiting nearly nine hours because officials at a generating station in Long Beach would not admit him without a written explanation, according to the PUC's director of consumer services, Richard Clark.

The company that operates the plant, AES Corp., denies that anyone was kept outside, according to Aaron Thomas, an AES manager.

All this new intensity in trying to uncover potential wrongdoing may be for nothing.

Even some of the industry's sharpest critics acknowledge that the suppliers may be operating within the law.

"Just my looking at the data and seeing what I've seen, it's a tough case" to prove antitrust violations, said Stanford economist Frank Wolak.

The problem is that companies do not have to collude to skew the market, Wolak said. They could simply watch each other's behavior and react accordingly, increasing or reducing their supplies in unison without even speaking to each other.

That doesn't make it right, in Wolak's view.

In a December report written on the state's behalf, Wolak told federal investigators he could show them specific abuses of the market. He also called on the federal energy panel to order the energy suppliers to refund the abnormally high fees that Californians and utility companies have paid for power--a request so far denied.

The reality, say friends and foes of the industry, is that California has itself to blame for the crisis that deregulation has wrought.

"We set up a system that's easy to be gamed," said Matthew Freedman, an attorney with the Utility Reform Network in San Francisco. "These guys figured it out."

* * *

Times staff writer Nancy Vogel contributed to this story.

* 'GAMING' THE MARKET

Texas-based power suppliers say California needs to face economic realities. A19

 


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