Audiotape Is Called ‘Smoking Gun’ in California Utility Market-Rigging Probe

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The San Diego Union-Tribune

It’s been called the “Smoking Gun of the Month Club.”

Nearly once a month this year if not even more often fresh evidence has emerged of market rigging during the California electricity crisis.

So far, none has topped last week’s transcripts of the tape-recorded calls from a Williams Cos. executive conspiring to keep power plants shut during the state’s electricity shortages.

“I’m not surprised they did any of this,” said Douglas Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “But I’m surprised they let themselves be taped doing it.”

In fact, the evidence has reached a level where market rigging has become impossible for even the staunchest defenders of the electricity industry to ignore.

At the same time, changes in the federal regulatory and antitrust probes of the industry have raised hopes albeit modestly that California’s allegations of massive price gouging and its request for tens of billions in refunds or price reductions may get a better hearing.

At the Federal Energy Regulatory Commission, for example, a federal judge’s ruling has allowed the state to present evidence of market rigging in making its case for refunds for overcharges from the summer of 2000, when San Diego customers were hit with a tripling of power costs.

Until now, the FERC had blocked the presentation of market rigging evidence in the state’s refund cases, said Erik Saltmarsh, acting director of the Electricity Oversight Board, a state agency that represents the public in federal litigation and oversees the power grid.

Instead, the FERC sought only to compare prices paid by the state against what the commission judged to be reasonable power prices at the time, using such measures as industry indexes. But now the FERC mandated by federal law to ensure power prices are just and reasonable has been forced to concede the indexes themselves may have been manipulated, opening up the question of what was reasonable during those periods.

If California can prove federal rules have been violated, moreover, the FERC must order refunds from the summer of 2000, which it previously said fell outside its authority. That was the period when the power crisis hit hardest for customers of San Diego Gas & Electric.

Saltmarsh noted that the state is still barred from presenting market rigging evidence in seeking to overturn $40 billion in expensive long-term power contracts, signed at the height of the crisis. The state contends those agreements were rigged and is pressing to open that proceeding to evidence of market manipulation as well.

“We think FERC has been asking some very narrow questions,” said Saltmarsh.

Whether the environment for California’s cases at the FERC has changed or not, it is clear that the Williams tape transcripts last week got the attention of all.

Patrick Wood III, the FERC chairman who declines to comment specifically on cases before the commission, conceded the FERC should have handled the refund requests differently.

Wood said he was also surprised at the Williams tapes, which had been sealed by the FERC as part of a settlement with the company in 2001 over allegations that it withheld power during the crisis. That settlement included a payment by Williams of $8 million. The Wall Street Journal has reported that the company earned an additional $10 million from higher prices during a 15-day period around the time of the withholding.

Evidence of this sort won’t be sealed in the future, said Wood, who noted the agreement to seal the evidence came before his arrival at the FERC later in 2001.

“If there are settlements in the future, there will be no black boxes,” said Wood. “The public has a right to know how their representatives at this agency are dealing with (facts).”

Wood added that he was disappointed about industry misconduct but said he was reserving judgment about how large a factor it was in the California crisis until February, when the FERC completes its inquiries.

The FERC chairman said the commission is plowing ahead with deregulation efforts because it’s committed to ensuring that a California crisis doesn’t recur elsewhere.

Wood noted, for example, that FERC whose authority is limited to ordering refunds for overcharges has asked Congress for authority to assess penalties in the future.

But the Consumer Federation of America says evidence unearthed should be enough to halt deregulation.

“What we know about California is that at every point in the supply chain, there were actions taken to drive the price of electricity through the roof,” said Mark Cooper, director of research for the federation, a national coalition of consumer groups. Cooper noted that he earlier supported competition in the wholesale power business.

But now he questions the FERC for focusing more on designing new power market rules than in investigating what went wrong. Despite the new rules, FERC’s deregulation effort could leave consumers at the mercy of power industry gougers, he said.

“There is no reason to believe FERC can protect the public from the bank robbers,” said Cooper.

The Electric Power Supply Association, which represents generators and traders, by contrast, assigns a lesser role to industry misbehavior. Mark Stultz, vice president of public affairs, says recent revelations of illegal and unethical behavior have been “troubling” and have led to a crisis of confidence about the industry.

But Stultz insisted the California crisis was caused by a real supply shortage and a poor market design.

Nonetheless, he said the industry has moved “aggressively” to deal with any wrongdoing through voluntary guidelines.

“Any impropriety is too much and should be countered,” said Stultz. “The silver lining is that industry is taking steps to make things better.”

The level of misconduct surprised Terry Winter, chief executive of the California Independent System Operator, manager of the state electricity grid.

“What shocks me most of all is the dishonesty of it all,” said Winter, a 35-year veteran of the power industry.

Winter said the ISO mistakenly allowed too much secrecy, while more openness was needed. By his calculation, Californians should have paid no more than $28 billion for power in 2000 and 2001. But state electricity customers paid more than $54 billion.

While some of that was attributable to manipulative trading strategies, Winter said most of the overcharging was caused by suppliers withholding power to the state either through extending outages or simply refusing to offer it for sale.

Michael Aguirre, a San Diego attorney pressing class-action suits against suppliers for violating state law, said withholding power should be a fruitful target for federal antitrust prosecution.

“The most surprising recent event is that the United States attorney is finally trying to engage companies over the withholding of electricity,” said Aguirre, noting recent federal subpoenas.

Experts say California’s attempt to bring competition to the electricity market has cost consumers at least $30 billion. Heller believes the costs are as high as $70 billion.

Until the 1997 launch of deregulation, electricity industry profits and operations were tightly regulated by the California Public Utilities Commission.

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