The Charlotte Observer
As California reeled toward blackouts early last year, Duke Energy Corp. raised its wholesale power prices, some nearly sixfold in just weeks.
On the first day of blackouts, Duke sought to sell the state power for $1,170 per megawatt hour, according to documents The Observer analyzed. Six weeks earlier, Duke offered the state power from the same plant at $200. Duke also raised prices from its other California plants.
The average Carolinas home uses one megawatt hour per month at a retail cost of $73.
With the price increases, Duke became one of the state’s most expensive bidders, according to state documents, which used codes to keep bidders’ identities secret. The Observer identified Duke‘s bids by deciphering those codes.
Critics say the price run-ups support earlier claims that California power producers, including Duke, manipulated the state’s electricity market for excessive gain. Generators deny the accusations.
“The bids are a very good indication of what generators believed the state was willing to pay,” said Christian Schreiber, an investigator for the California Senate committee probing the role generators played in last year’s power crisis. “In addition, it indicates the generators’ priority here was never to serve California in a time of need but to exploit California at its darkest hour.”
Charlotte-based Duke, one of California’s largest generators, denies it raised prices to take advantage of the state’s crisis.
Duke says it marked up its prices as much as 80 percent because the agency buying power for the state wasn’t paying its bills. Because of that credit risk, Duke says, it tried to sell all its California power to its other customers in the state. But, like other generators, Duke had to sell any available power to the agency when it was needed — usually when the state’s supply was very low.
Duke says it is still owed $266 million for power sold to the agency, the California Independent System Operator, or ISO.
“The fact that our prices went up was related to the (ISO’s) credit crisis, not the shortage of power,” said Duke spokeswoman Cathy Roche. “These (ISO) bids were a last resort after we tried desperately to sell the power to anyone that would pay us for it.”
The Observer also found bids that match sales that another generator has acknowledged making. That data show that Houston-based Reliant Energy Inc. may have offered the state power at an even higher price than Duke did.
The state reports do not show whether California actually bought power at the higher rates, only the prices at which Duke and other energy traders offered to sell it. But federal reports show the state did buy Duke‘s highest-priced power. And the bids — some soaring far above Duke‘s — provide the closest look yet inside the financial strain California faced as it sought power.
Critics, including lawmakers and lawyers, have decried the secrecy surrounding generators’ pricing. The Observer analysis is the first to match a generator with its full bid history. A new federal reporting system starting this month will provide more details on generators’ sales.
“The idea that people will be able to hide the truth indefinitely … is a gamble that will be lost,” said Michael Aguirre, a former federal prosecutor who has filed one of several lawsuits against generators. “They won’t be able to hide anymore.”
California’s crisis eased last summer as the state signed long-term power contracts and federal regulators capped prices. Plant fuel costs also dropped, new power plants increased supply, and conservation and unusually cool weather reduced demand.
This week, record temperatures pushed the state’s power reserve to the lowest level since last year, prompting calls for conservation. State officials say supplies are adequate. Even Wednesday’s breakdown of a large plant didn’t tip the state into crisis.
“It’s a sea change from last year,” said Steve Maviglio, a spokesman for Gov. Gray Davis.
But the industry remains haunted by the disaster that plunged a state into darkness, cost California tens of millions of dollars in higher power prices and derailed electric deregulation in many states, including the Carolinas.
The Federal Energy Regulatory Commission has intensified a broad probe of pricing and sales practices in the Western energy market. The commission also plans an August hearing on California’s request for nearly $9 billion in refunds from generators and traders.
The Observer analyzed public bid data from the ISO. The ISO operates transmission lines carrying about 75 percent of the state’s power. The agency’s job includes buying power to balance supply with demand. The ISO buys power in the volatile, last-minute spot market.
Nationwide, this spot market has seen price spikes, usually caused by weather extremes that drive up demand. The spikes are generally short-lived, but they weren’t in California. Prices shot up and remained high for months.
“Some of the increases in price could be explained through legitimate cost increases, but much of it couldn’t be,” said ISO spokesman Gregg Fishman. “That’s why we’re asking federal regulators to order refunds of $8.9 billion.”
The agency reports how much power its suppliers offer and at what prices. But ISO reports identify suppliers only by code.
The Observer deciphered the code for Duke by comparing ISO bid reports posted on its Web site with power-plant data, federal reports, a known sales price and company information. Citing its confidentiality rules, the ISO would not confirm or deny The Observer’s analysis. Duke did not dispute the finding.
Several bidders offered power at prices far higher than Duke‘s — as much as $9,999 per megawatt hour. The Observer could not decipher those bidders’ codes. The Observer also could not identify bids from Enron Corp., the failed Houston energy giant that has since been exposed as an architect of tactics to manipulate power markets.
On Jan. 17, 2001, the first day of blackouts, Duke sold the state power for $3,880. The Observer has previously identified that as California’s highest reported sales price.
The bid data shows that six days earlier, Duke offered power from the same plant at $1,512 per megawatt hour.
Duke says the increase does not constitute price gouging, one of critics’ chief allegations.
Duke and other generators say high prices for natural gas — the dominant fuel for California’s non-nuclear power plants — helped drive up power prices early in 2001. Duke also says its highest price reflected the cost of running one of its least-efficient units. And Duke feared the ISO wouldn’t pay.
The ISO buys power from generators such as Duke on behalf of the state’s three big utilities. California’s deregulation plan froze consumer rates, so utilities couldn’t recoup their higher wholesale power costs. That meant they couldn’t pay the ISO, and the ISO then couldn’t pay companies such as Duke.
“Our prices went up as it became increasingly clear we weren’t going to get paid,” Duke‘s Roche said. “Our prices only went up to the ISO.”
In California, Duke sells most of its power to customers such as municipal utilities, and other generators and traders. About 90 percent of that power is sold on long-term contracts that typically carry the lowest prices. The company has said its average California price in 2000 was $76 per megawatt hour. Last year, Duke says, its first-quarter average was $136; $145 in the second quarter.
“We’ve heard about it as a catch-all excuse for ripping off California consumers,” Davis spokesman Maviglio said of the credit surcharges. He also said that on the first day of blackouts, the state stepped in to buy power and back the ISO’s bills.
“When a state is on its knees, charging that kind of surcharge is pretty outrageous.”
The state didn’t actually start paying the ISO bills until December — nearly a year later — according to the agency making the payments. Duke‘s prices began dropping sharply in March, long before the payments began. Roche said that by then, the likelihood of getting paid was higher.
Frank Wolak, a Stanford University economics professor and chairman of the ISO’s market surveillance committee, also doesn’t accept the credit-risk argument.
“I’m not going to say it’s completely bogus, but it’s difficult to rationalize,” said Wolak, who blames federal regulators for not reining in generators as California’s crisis worsened. He likens the market conditions at the time to a riot.
“They all knew the television set was going to get stolen,” Wolak said. “The only question was who would steal it. That’s where you need the cop on the beat.”
In the Carolinas, Duke Energy’s Duke Power subsidiary is a traditional utility, owning and operating power plants and selling directly to residential and business customers. Duke Energy also owns power plants nationwide, but outside the Carolinas, the company is mostly a wholesaler.
Duke Energy entered the California market in 1998. The company spent $1.1 billion buying three plants, leasing a fourth and modernizing what is now the state’s largest power plant. The company plans to invest another $1.1 billion in California.
“We went in there to provide reliable power and earn a fair profit, and that’s what we’ve done,” Duke‘s Roche said.
Reliant paid about $280 million for five California plants in 1998. Last year, Gov. Davis vilified the company after revealing it charged the state as much as $1,900 for power in May.
On the May date when Reliant acknowledges it sold power at $1,900, the ISO lists only one generator bidding that amount. The Observer tracked the ID code for that bidder through other transactions.
In January, under that code, the documents show bids of as much as $5,000 as well as much lower prices.
In response to Observer questions, Reliant repeated previous admissions but would not confirm or deny the latest findings.
Reliant‘s average California sales price was $117.30 per megawatt hour last year and $88.70 in 2000, he said.
Wheatley said the $1,900 price and previously disclosed bids of $1,500 included a premium for operating plants with severe environmental restrictions. He said Reliant‘s unpaid ISO bills total $225 million.
“We’re proud of our record in California,” he said.
Stella Hopkins: (704) 358-5173 or [email protected]