Low on Energy; Will the administration bail out puttering power producers?

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Institute for Public Affairs – In These Times

LOS ANGELES — With several key players in the energy industry facing a financial meltdown, federal energy regulators and members of the Bush administration have been meeting behind closed doors to discuss emergency measures should some of these companies be forced into bankruptcy.

As stock prices plunge at corporations such as Williams Companies and Dynegy, two of the largest wholesale power producers in the country, Energy Secretary Spencer Abraham and Pat Wood, chairman of the Federal Energy Regulatory Commission (FERC), are concerned that power prices could skyrocket, jeopardizing their scheme to deregulate wholesale power markets nationwide.

Since the collapse of Enron last December, the entire energy sector has come under scrutiny. FERC has been investigating Williams and Dynegy, as well as many of their rivals, for market manipulation: The companies are alleged to have created artificial electricity shortages in order to boost wholesale power prices in California. But in a recent report to Congress on California price-fixing, FERC singled out Enron for blame — a move critics charge ignores industry-wide deception.

A year ago, the major players in the energy industry were reporting record profits in the billions and undertaking extraordinary expansion plans to build power plants across the United States. And back in December, Dynegy made a $ 5 billion bid to purchase Enron. Now Dynegy itself is on the brink of bankruptcy, with its stock plummeting to less than $ 1 a share on the New York Stock
Exchange. “I’m surprised how these companies could get into a deep financial crisis so quickly given all they made last year, particularly in California,” says Severin Borenstein, head of the University of California Energy Institute.

The Securities and Exchange Commission is asking the same question. Still, some energy experts now want Congress to step in and make sure the country does not fall victim to the same sort of energy crisis that rocked California in 2000 and 2001.

“Government action is . . . needed to improve the investment climate in electric generation infrastructure,” Lawrence Makovic of Cambridge Energy Research Associates told a Senate committee in July. “Some regional power markets that still need additional supply are relying on companies at the brink of bankruptcy to deliver the generation infrastructure needed to maintain reliability in the years to come.”

There has been talk in Washington about a federal bailout of energy companies should Wall Street refuse to loan them money. Enron had asked the Bush administration for the same favor last year, when the company controlled the largest share of trading in the power and natural gas market.

But most analysts say a bailout is unlikely in the current political climate. “This is an issue the power sector has to work out on its own,” says Paul Patterson, an independent energy analyst. “It’s understandable that the government is concerned, and they should be. But this is not an issue where public safety and health are being threatened. What regulators should do is make sure these companies abide by accounting rules and provide transparency for shareholders.”

Yet consumer groups fear the Bush administration’s close ties to the energy industry will result in some type of federal intervention, even though the financial problems these companies face are of their own making. “With [his] close ties to the energy industry, in conjunction with the public distrust of Enron and its ilk,” says Doug Heller of the Foundation for Taxpayer and Consumer Rights, “Bush should think twice about dealing with this industry behind closed doors.”

While unwilling to discuss what action, if any, the administration will take to stabilize the energy sector, a growing fear of nationwide blackouts has resonated with lawmakers and regulators in Washington. “The investments are simply not being made,” says Sen. Frank Murkowski (R-Alaska). “It’s a bleak picture.”

FERC chairman Wood testified before a Senate committee in late July that credit downgrades and declining shareholder value within the energy sector “bring us to a very critical place on the future of infrastructure investment in this country.”

Wood says these problems could keep energy companies from building new power plants and transmission grids to ensure adequate electricity supplies. On August 14, Wood met in Houston with representatives from about 30 energy companies to discuss the current state of the industry. Representatives who
attended the meeting were unwilling to discuss the substance of the talks.

Borenstein says that despite the fear in Washington, even if Williams and Dynegy wind up in bankruptcy, power will still be produced. But their decline is a major setback for the Bush administration’s deregulation efforts. “It will be more difficult to force states to open up their markets to competition,” Borenstein says. “But I am not sure if there will be any reliability problems.”

To Heller, this is just one more example of deregulation’s failure. He points to California, the demise of Enron and now a financial crisis in the energy industry as examples. “The financial maelstrom in the industry is the result of deep corruption and fraud,” Heller says. “The energy industry is not just Enron and then a bunch of innocent bystanders.”

Consumer Watchdog
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