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Los Angeles Times

California’s power crisis surged through the political and financial worlds Tuesday as a sharp jump in the profit outlook of major electricity generators supplying California renewed controversy over alleged price gouging on the eve of public hearings to hike consumer bills.

The forecast of higher profits, which helped trigger a stock market rally in the key energy sector, came while Gov. Gray Davis met with Federal Reserve Chairman Alan Greenspan in Washington.

The governor asked for the meeting last week to seek Greenspan’s advice on how to deal with a crisis that has put the state’s two largest utilities at risk–they say they have racked up $ 8 billion in uncollected energy debts and continue to warn of bankruptcy–while posing a wider threat to the state’s prosperity.

In a written statement afterward, Davis said that “deregulation of electricity has been a colossal failure so far.” The governor also met with U.S. Treasury Secretary Lawrence Summers.

In a later interview on PBS-TV’s “Nightly Business Report,” Davis said he will use his State of the State address on Jan. 8 to outline his plans and encourage efforts to generate power in California and ask residents to use less of it.

“I’m not going to let these generators making eight and nine hundred percent profits . . . unduly drive California to its knees.”

Without releasing precise results, Williams Cos., a producer and trader of electricity and natural gas, said Tuesday that its fourth-quarter profit will “substantially exceed” expectations. That contributed to the rally in energy stocks, as did cold weather and continued volatility in U.S. electricity markets.

The higher projections for Williams, of Tulsa, Okla., whose previous quarter saw a quadrupling in net income, comes at a politically sensitive time, provoking outraged consumer groups to call for legislative relief, perhaps in the form of a windfall profits tax.

“The generators are having a great year because obviously that $ 8 billion of losses aren’t just disappearing but have gone into the income statements of most of the generating companies,” said Barry Abramson, senior utilities analyst at UBS Warburg in New York. “It’s going from one pocket into a dozen other pockets.”

The California Public Utilities Commission will begin emergency public hearings today on possible electricity rate hikes. They were called after Wall Street debt-rating firms warned that Southern California Edison and Pacific Gas & Electric were headed toward insolvency unless the state raised consumer prices frozen by the landmark 1996 electricity deregulation law.

On Tuesday, Edison sued the Federal Energy Regulatory Commission, alleging that the panel failed in its responsibility to ensure that wholesale electricity is sold at “just and reasonable” rates.

According to the suit filed in Washington, D.C., the commission concluded earlier this month that the California electricity market was dysfunctional, but did not take action to help ease the burden.

Consumer advocates have little sympathy for the utilities or the companies that sell them power.

Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights, said generators’ rising profits show a “massive transfer of money from ratepayers into these companies’ pockets.” He described the upcoming PUC hearings as a “cover for a deal.”

“There is no need to bail out the utilities. They asked for a free market, so they should seek a free-market solution by borrowing more money or by declaring bankruptcy, not sticking customers with the cost of their noncompetitiveness,” he said.

Deregulation has failed to produce the cheaper wholesale rates as advertised. Just the opposite has occurred, with wholesale electricity costs skyrocketing because of unexpected growth in demand and shortages of generation capacity. The difference between frozen consumer rates and the sky-high wholesale costs has saddled the utilities with more than $ 8 billion in debt.

Wholesale electricity in the state has risen from an average of 3 cents per kilowatt-hour–roughly enough electricity to run a computer and modem for seven hours–in the first four months of 2000 to 18 cents in August. This month, long after the summer peak in demand, the average price is more than 25 cents for the same amount of electricity.

Strong profit growth is expected for most of the electricity generators and traders that sell in California’s power market. Stocks rallied Tuesday on those expectations, as well as the PUC‘s decision last week to move toward a rate increase for utilities–in effect providing generators with better certainty of getting paid.

Williams shares surged $ 4.56, or nearly 14%, to $ 37.44 in trading on the New York Stock Exchange. Also benefiting were energy wholesalers including Calpine, which rose $ 2.69 to $ 44.63. Dynegy jumped $ 3.75 to $ 56.63, Southern Co. rose 75 cents to $ 33.69, Duke Energy gained $ 2.63 to $ 87.13, and Enron rose $ 2.31 to $ 83.50.

Generators do not specify how much of their profits come from California operations, although most say that the state, as the largest single market, represents a significant share. The companies cited the summer spike in California energy prices in reporting generally higher third-quarter earnings in October.

Rep.-elect Susan Davis (D-San Diego) advised Williams and other power merchants to “hold down those profits,” because they will only increase consumer frustration with electricity deregulation.

“People who want to see open and competitive markets will see that consumers won’t go along because they are being gouged. They are unhappy about that and rightfully so,” said Davis, who will be sworn into Congress on Jan. 3.

Richard Fernandez, a spokesman for Duke Energy North America, a major generator in the state, defended his industry’s profits, describing the market as “basic supply and demand.”

After hearings today and Thursday, the PUC is expected Jan. 4 to vote to lift the current consumer rate freeze and boost bills, although it remained unclear Tuesday by how much. The utilities have argued for increases of at least 17%.

Public Utilities Commissioner Carl W. Wood said Tuesday that the agenda for the two days of hearings is still being finalized. But he promised that consumer groups and utilities will be given a chance to be heard. The hearings also will give panel members an opportunity to cross-examine utility executives about their claims of financial woe. Audits of Edison and PG&E are underway and are expected to be finished soon, Wood said.

Wood, an appointee of Gov. Davis, said: “We need to establish the actual financial condition of the companies.”

Chuck Griffin, a spokesman for Atlanta-based Southern Energy, owner of California power plants capable of lighting 3 million homes, said: “We have operated under the rules established out there for market operations. . . . There have been times those rules worked to our disadvantage and times when they worked to our advantage.”

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