Oklahoma company blamed for California problems

THE SUNDAY OKLAHOMAN

Anthony Spano doesn’t blame out-of-state energy companies, like Tulsa-based Williams Cos. Inc., for reaping huge profits on the electricity they sell in his home state of California.

Spano is a businessman himself. For three generations, his family has owned and operated the Red & White Market, a neighborhood grocery store two blocks from the beach in Oceanside, Calif. Spano has learned, from his father and his grandfather before him, how to support a family with small markups on products like toothpaste, cereal and soda pop.

He appreciates fully the importance of profits.

“It’s human nature to want to blame out-of-state companies for what’s happened here,” Spano said. “People want that target. But the energy producers saw deregulation for what it was – a wide open market for electricity. And they have done what good businesses do best. They have created profits.”

Spano is more understanding than many Californians. Williams’ critics – ranging from ordinary consumers to top state officials – have accused the company of unfair business practices at best, and illegal ones at worst. Williams is among several out-of-state companies facing consumer and taxpayer lawsuits, as well as state and federal investigations, alleging that the companies have manipulated California’s faulty electricity market to reap outlandish profits.

Last week, the Federal Energy Regulatory Commission announced that it will likely require Williams and other energy companies to refund up to $ 1 billion in energy profits to California – which is still only a fraction of what California claims it’s owed.

Meanwhile, Williams fiercely maintains its innocence. Likewise, industry experts tend to agree that Williams is guilty of little more than “shrewd business practices.” Even some large electricity consumers like Conoco – whose Montana plant has been rocked by the Western energy crisis – don’t immediately fault Williams.

“We celebrate brilliance,” said Susie King, governmental manager for Conoco in Oklahoma City. “And man, these guys were brilliant.”

For Williams, which entered the California energy market three years ago, that “brilliance” has paid off handsomely. Last year, Williams earned more than $ 1 billion from its energy trading operations alone – an 870 percent increase over the previous year’s numbers. The company’s phenomenal growth is reflected in the compensation of its chief executive, Keith Bailey, whose 2000 salary package of $ 7.05 million was 346 percent higher than his compensation from just one year earlier.

That pay hike has earned Bailey a “wanted poster” on the Web site for the Utility Consumers’ Action Network, one of several California consumer groups that see little to admire in companies like Williams.

“The public’s perception of these energy marketers and traders is one of the modern robber barons,” said Doug Heller, a consumer advocate at the Foundation for Taxpayer and Consumer Rights.

“These are the bandits who have soaked California, who have stolen billions of dollars from California without improving our energy service and, obviously, without providing affordable electricity.

“If there was real competition here, Darwin would have de-selected Williams…. The Williams Company has gouged California.”

Like many, Heller believes Williams owes California an explanation – and a lot of money – for what it’s allegedly done to the state. He contributes to a heated debate, raging across the country, about what went wrong in California and who, if anyone, should be made to pay.

The allegations

Ironically, Williams doesn’t even own the power plants that have thrown the company into California’s energy controversy.

Virginia-based AES Corp. bought the plants from a California utility when the state deregulated its electricity industry in the late 1990s. By 1998, AES had signed a contract that would result in more than $ 1 billion worth of power profits – for Williams.

Under the 20-year agreement, Williams essentially pays AES to convert natural gas into electricity, which Williams then markets. AES has lost money on this arrangement. Meanwhile, Williams stated in its most recent earnings report that revenue from energy marketing and trading soared by 322 percent during the first quarter of 2001, resulting in an additional $ 503 million in sales.

The company attributed this sharp incline to higher profit margins from gas and electricity services, which have benefited from “increased price volatility” in the marketplace.

Critics have attributed the surge to possible foul play.

They are accusing Williams of withholding power during critical shortages, driving prices to unprecedented levels. As one example, they point to December, when California first began experiencing Stage Three emergencies, the last stage before rolling blackouts begin. That period and others have been studied intensely by the Orange County Register, a major newspaper in southern California, which is a region that depends on Williams for one-third of its electricity.

On Dec. 4 – the day of California’s first Stage Three emergency and four other high-shortage days that month, AES generators throttled back production by at least one-quarter in early afternoon, the newspaper reported. The generators only kicked production back up, the newspaper found, after prices started to escalate.

Bailey said his company did nothing wrong. He explained that, because some AES plants are older and less efficient than others, they are the first to be knocked off-line in the normal course of events.

“The fact is,” Bailey said, “we went out of our way to produce all of the power the state indicated it needed – and we’re working very hard to continue to do that.”

This spring, Williams reportedly ordered AES to shut down two generating units completely. Both units are “must-run” units that, under a contract with the state, guarantee electricity at prices of no more than $ 63 per megawatt hour. When the units were out of service, the state was left to buy electricity from AES units with no must-run contracts – at $ 750 per megawatt, which was the price cap then and represented 12 times Williams’ cost, the newspaper reported.

Bailey said the California Independent System Operator approved the shutdowns, which were held for scheduled maintenance and then extended somewhat. He also said that AES – not Williams – determines when plants are closed for repairs.

“AES makes judgments about when plants are mechanically able to operate,” he said. “We’re responsible for selling power and doing business.”

However, an AES spokesman told the Orange County Register that AES is “at the beck and call” of Williams. Bailey admitted that Williams could order shutdowns for “market-driven reasons.”

In May, a San Diego attorney had filed a lawsuit on behalf of the lieutenant governor of California, as well as state taxpayers, accusing Williams and other out-of-state energy companies of several illegal activities. The lawsuit first charges Williams with exercising power over electricity prices, which is unlawful in California, said Michael Aguirre, the attorney handling the lawsuit.

“According to an analysis of bids,” Aguirre said, “Williams exercised that power 90 percent of the time.”

The lawsuit also claims that Williams coordinated its pricing activities with other gas-fired generator owners, thus violating antitrust laws. In June, AES confirmed in a filing with the Securities and Exchange Commission that both it and Williams are being targeted with an antitrust probe by the U.S. Department of Justice.

Bailey dismissed the validity of the claims against his company.

“These are obviously easy allegations to make – and they serve a political purpose,” he said. “But the reality is that they’re not true.”

Thus far, Williams has maintained its innocence on all charges lobbed against the company. In late April, however, Williams agreed to refund $ 8 million in electricity profits earned during the AES must-run outages. Williams is so far the only energy company to volunteer a refund. But the refund – which halted an investigation by the Federal Energy Regulatory Commission – came with the company’s denial of any wrongdoing.

Bailey said Williams offered the refund because it needed to focus on supplying California with energy instead of getting sidetracked by an issue that, “in the grand scheme of things, is small.” He said a more important issue for Williams is the money still owed the company by California. Since last fall, Bailey said, California has run up a $ 600 million unpaid bill for power already supplied by Williams.

Despite that debt, critics are sniffing at Williams’ refund offer. Top California officials, led by Gov. Gray Davis, claim Williams and other out-of-state energy companies owe the state about $ 9 billion. Besides Williams, four other major electricity suppliers – including Duke Energy, Dynegy Inc., Mirant Corp. and Reliant Energy Inc. – have been accused of seriously overcharging California for electricity.

Again, Bailey disputed the state’s allegations.

“They have constructed a pricing mechanism they think would have been appropriate,” he said. “But the reality is that wasn’t the pricing mechanism that was in place. Market-based prices were in place.

“What dictated the prices were market forces. And now, California is saying, ‘We don’t like the answer the market provided.'”

California particularly doesn’t like the profits Williams earned. Davis is claiming that Williams owes the state $ 861 million more than any other out-of-state energy company.

Experts weigh in

Deregulation experts generally agree that companies like Williams are not to blame for California’s chaos.

Ken Malloy, president of the Center for the Advancement of Energy Markets, has studied the California situation extensively. While he’s found the market there extremely flawed, he’s seen nothing to prove that energy companies are the culprits.

Malloy said that, at worst, Williams appears to be guilty of making “very shrewd business judgments” that are within the confines of the law.

“Yes, California created a market that allowed people to take advantage of it – and that’s not a good thing,” Malloy said. “But obviously, blaming the people who took advantage of a market opportunity is the wrong thing to do. You should fix your market and then allow a more effective market to operate.”

Malloy admitted up front that Williams holds a position on his board and has given the center money. But he also said that Williams – or any other energy company – should expect to be punished if it’s broken the law.

At the same time, Malloy said people should not assume that Williams’ refund offer signals any sign of guilt.

“There are lots of reasons why somebody settles a case,” he said. “The question of whether they believe they engaged in wrongdoing is, quite often, not very much a part of that calculation.”

Malloy has an ally in Cody Graves, a former chairman of the Oklahoma Corporation Commission who sits on the center’s board. Graves said he’s incapable of determining whether companies like Williams are guilty of “gaming” the California electricity market. But even without any gaming, he said, California electricity prices would have soared to unprecedented levels.

In competitive markets, supply and demand – which have been hugely imbalanced in California – determine prices, Graves said. And in truly competitive markets, companies sell products only at will, he said.

“How do you tell people, ‘We’re going to have competitive generation,’ then if somebody chooses not to sell, you slap them upside the head and say, ‘You can’t do that’?” Graves asked.

Stanford economist Frank Wolak said he has a problem with allegations that energy companies have manipulated the California electricity market. He said all firms attempt to manipulate their respective markets to maximize profits.

If there’s anything “a little shady” about Williams’ conduct, Wolak said, it appears to be limited to the controversy surrounding AES’s must-run generators. Withholding power from those units would be “on the border” of illegality, he said.

Wolak described Williams’ refund, associated with the AES shutdowns, as insufficient. He said the FERC must impose stiffer penalties that include both refunds and fines if it hopes to deter misbehavior.

“Williams is only doing what it’s incented to do,” Wolak said. “The FERC has to make that less profitable…. If the FERC continues to be a reluctant regulator, this will continue to happen again and again and again.”

For now, many Californians have lost faith that anyone – let alone the FERC – is really looking out for them. They call companies like Williams “crooks.” And some feel frustrated enough to rebel.

Benja Hartman, a single mother living in Oceanside on $ 15,000 a year – and fielding collection calls about her electric bills – is among them. Since deregulation, Hartman has seen her electric bill more than triple to $ 300 a month.

“This is really the kind of thing that wars are started over,” she said. “It’s time for a revolution.”

The ‘new’ California

Within her community in an older district of Oceanside, Hartman already has seen others lose their battles to overcome high energy costs.

A large florist down the street closed up shop when he could no longer power his electricity-hungry greenhouses. The neighborhood market, a corner fixture for decades, went out of business after its electric bill shot from $ 900 to $ 3,000 a month.

Meanwhile, even stores like Spano’s – which could survive a leap in utility costs – have been forced to raise prices. Local residents, as well as tourists stocking their rented kitchenettes, pay a few cents extra for everything from tuna to paper towels.

Alex Mann, chief executive of an Internet company called clicktime.com in San Francisco, is among the fortunate few who haven’t been directly impacted by high electricity bills. His business and apartment are rented, and utility costs for both were fixed before deregulation.

Still, Mann has hardly escaped the fallout from California’s energy crisis. If his Internet software company goes off-line for one day, he stands to lose a quarter of his client base. So he’s invested heavily in backup systems. The expense comes off his bottom line.

But even those systems fail to keep things like voice mail and electric door locks working. So Mann is always waiting with trepidation for the next blackout.

In the meantime, he’s keeping track of how much the energy crisis is costing his state. He’s bookmarked the online site for his local newspaper, which has a real-time counter of electricity costs. He’s also bookmarked the Web site for the California Independent System Operator, which publishes real-time data about the supply and demand of electricity.

The latter site is popular throughout California, Mann said.

“It’s become much like the weather report,” he said. “People look at the graph to find out just how ugly it’s going to be.”

Some inevitably blame companies like Williams for what they see. As the attorney representing California taxpayers, Aguirre said Williams has known finer hours in California.

“Right now, we’ve got a lot of Sooners out here, so Oklahoma’s reputation is excellent,” Aguirre said. “But I’m afraid Williams’ reputation could use a little improvement.

“They’re not exactly achieving their highest potential.”