GNS Special Report

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Gannett News Service

The deregulatory headaches that have afflicted California in restructuring its electricity supply have produced interesting questions:

Question: Why are Californians so angry with Texas?

Answer: While facing the prospect of picking up a $ 20 billion bailout tab in their state’s electricity crisis, many California taxpayers and utility ratepayers have come to realize that much of their expensive wholesale power comes from Texas. Under deregulation four year ago, California utilities sold most of their generating plants for a total $ 3.2 billion to eight outside energy companies, some from Texas. Now, some of those companies are making mammoth profits. The Foundation for Taxpayer and Consumer Rights in Santa Monica claims that those companies are gouging: “By manipulating the supply of electricity to create temporary shortages, they boosted wholesale prices far into the stratosphere.”

Q: How mammoth were the profits?

A: For instance, Reliant Energy, with $ 32 billion in assets and based in Houston, saw its stock price rise 89 percent in 2000, and its adjusted earnings go up 65 percent. (The company had predicted only 12 percent growth.) Reliant‘s earnings from its electric power generation alone rose from $ 7.9 billion in 1999 to $ 19.2 billion. Dynergy, another Houston-based energy company, which spent $ 356 million on California generating facilities, announced a $ 139 million profit for the first quarter of 2001 — almost double its profit for the same period a year ago.

Q: What do those companies say?

A: They both note that only some of the profits come from California sales, and claim that they did not manipulate the market. At the end of February, Reliant was still owed $ 358 million in California power sales dating from last October. Reliant chairman Steve Letbetter, in the company’s 2000 annual report, wrote that part of California’s problem is due “to stringent environmental regulations and local opposition to new plant construction,” and that “essentially no new generating capacity has been built in the state for more than a decade.”

Q: What else makes Californians irate?

A: Pacific Gas & Electric, which is $ 9 billion in debt and this month filed for bankruptcy protection, between 1997 and 2000 — when profits were pouring in — transferred $ 4.6 billion to its parent company, which had been set up specifically for deregulation. That money is safe from creditors. PG&E also in those years

bought back huge gobs of its own stock, boosting share values.

It also gave ample raises and bonuses to more than 6,000 employees just hours before declaring bankruptcy. None of these maneuvers is illegal.

Q: Are other states in trouble?

A: Utility forecasters expect power shortages in most Western states besides California this summer; and in New York City, where Mayor Rudolph Giuliani warned that a significant increase in supply is needed this summer or “we will have happen to us what happened in California.” New York City has not built a new power plant in 34 years, and the last one in the state was built in 1994.

Q: So what’s being done?

A: The New York Power Authority, after the state’s Public Service Commission identified an “urgent and compelling need” for 315 megawatts of additional generation before summer, is spending $ 510 million to rapidly install 10 small gas-turbine generators in the city, and one on Long Island.

Q: Will that be enough?

A: The Independent System Operator, which directs power flow on the New York grid system, believes that the projected shortfall will be 397 megawatts in the city. The authority’s gas-turbine generators will produce 407 megawatts. So, it should be barely enough.

Q: Are any other states in for trouble?

A: Ironically, Pennsylvania, the top-rated state in the opinion of some experts for its smooth 1999 transition to power deregulation, may face some problems — not in terms of supply, but in the area of competition. Jamie Wimberly, executive director of the Center for the Advancement of Energy Markets, a Washington think tank, says Pennsylvania ratepayers who took advantage when competing utilities rushed into the Keystone State to offer favorable consumer rates two years ago, “face a high prospect that they will be dumped back to the utility they came from. Those (utility firms) that tested the market found they couldn’t make that much money out of it, and then wanted out.”

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