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Published Wednesday, September 6, 2000, in the San Jose Mercury News

Energy firms strike pay dirt Probes:U.S., state look for gouging, but producers say low supply and global market are behind huge profits. BY JOHN WOOLFOLK Mercury News

A handful of energy companies have reaped huge profits while California electricity customers suffer blackout threats and higher bills this summer.

Power companies contend the profits result from simple supply and demand. State and federal investigators, however, are scrutinizing the windfall and threatening to recover any illegally obtained profits if allegations of price gouging and market manipulation are proven.

``Such high profits suggest that this group of companies benefited substantially from the summer's unprecedented wholesale electricity price run-up in California,'' said a recent special joint report by the California Public Utilities Commission and the Electricity Oversight Board.

Energy companies say that if they're making a killing in California, it's only because there aren't enough power plants in the state, a problem they're working to fix by building more of them.

``I can unequivocally tell you that Calpine is not trying to manipulate the market,'' said Bill Highlander, spokesman for San Jose's Calpine Corp.

The company, which generates 1.6 percent of the state's power, reported ``record earnings'' of $51.7 million for the quarter ending June 30, a 176 percent increase over the same period in 1999.

Highlander said energy prices will come down once new power plants like the Metcalf Energy Center that Calpine has proposed in San Jose's Coyote Valley are built.

Since June, wholesale prices for electrical power in California have risen an average of 270 percent over the same period last year, according to the joint report. That increase has added $1 billion to the cost of electricity.

During the week of June 14, when a power shortage forced rotating blackouts on nearly 100,000 Bay Area customers, the amount spent statewide on electricity -- $1.2 billion -- was 300 percent more than for the same week in 1999, the report said.

The two regulatory agencies found nothing to justify the stratospheric energy prices.

``The extent of the summer's wholesale price spikes cannot be explained by hot weather, increased natural gas prices or increases in demand,'' the report said.

Some California customers have felt the pinch of those prices.

San Diego Gas & Electric Co. ratepayers, the first in the state to pay market prices for power, have seen their bills double.

Freeze on PG&E rates

Bay Area customers are shielded for now from those costs. Under deregulation, rates for Pacific Gas & Electric Co. are frozen until 2002. But if the problem isn't fixed by then, PG&E customers also could see higher bills, the regulators warned.

As electricity prices soared, so did the profits of unregulated energy corporations, like Calpine, that now provide 40 percent of California's power.

Companies said their profits largely reflect activity outside California.

``California certainly hasn't been the whole story,'' said Reliant Energy spokeswoman Sandy Fruhman. ``Obviously, we did do well in California. We just had a good quarter all around.''

Reliant, based in Houston, reported a 76 percent increase in earnings last quarter.

AES Corp.'s California energy sales have been flat, said Executive Vice President J. Stuart Ryan. In a hedging move that led to some head-slapping this summer, the corporation leases its California power plants under a fixed-price contract.

``We don't benefit from prices going up, but we don't get hurt when they go down,'' Ryan said. ``In hindsight, we'd have been better off not to have done that arrangement.''

Still, the company's profits rose 56 percent over last year.

Calpine's Highlander said only a fraction of the company's power is available for sale on the ``spot market,'' where prices have soared. The rest, he said, is committed to fixed contracts with utilities and other buyers.

The regulators acknowledged that the profits of global energy corporations reflect more than California's market.

But the joint report concluded that ``enough evidence of questionable behavior exists'' to warrant investigations of the state's energy market and possible recovery of ``any illegally obtained profits.'' The Federal Energy Regulatory Commission and state Attorney General's Office have launched probes.

Energy companies say they have nothing to hide.

``We welcome these investigations,'' said Tom Williams, spokesman for Duke Energy, which is renovating power plants at Moss Landing and Morro Bay. ``We're convinced they will fully exonerate us.''

Some utilities gain

It isn't just power companies making a profit. Some municipal utilities with power plants have made tidy sums selling extra electricity to the state grid.

The Los Angeles Department of Water and Power made $140 million selling extra energy in the last fiscal year, up from $90 million the year before, General Manager David Freeman said. It made $5 million on just one day in June.

The revenue has helped pay down the department's debt, allowing it to offer a rate reduction to its customers in 2002, Freeman said.

``It just shows you that enterprise is where you find it,'' Freeman said.

Question mark for others

It's not clear whether other public agencies, which provide nearly a quarter of the state's power, also have seen a windfall. The Northern California Power Association, composed of 15 public utilities and irrigation districts including Palo Alto and Santa Clara, won't know for another month.

``We haven't sorted it all out,'' said Jim Whalen, the association's business manager.

Ironically, the utilities that have endured consumers' wrath this summer haven't benefited from the market.

San Diego Gas & Electric, which no longer generates power, saw a $6 million loss in the most recent quarter from the same quarter a year ago.

PG&E, which still owns a nuclear power plant and a vast network of dams, posted a 26 percent increase in earnings last quarter. But that's because regulators let PG&E increase the profit it collects from its frozen rates, officials said.

Both utilities' corporate parents have posted big profits, but they say it results from power trades outside California.

Regulators and utilities have complained that the state's restructured energy market invites price spikes. Transmission and sale of electricity are handled through two private agencies -- the Independent System Operator and the Power Exchange -- led by officials with ties to the energy industry.

Those agencies have denied wrongdoing but refuse to release market bidding information to state regulators, citing concerns about violating company trade secrets.

http://www.sjmercury.com/premium/front/docs/profits06.htm

-- Martin Thompson (mthom1927@aol.com), September 06, 2000

Answers

Sounds like the same old story. The politcians once more have found their patsy. It's those greedy, evil old oil and gas compaies again.

I sure wish they'd try looking in the mirror.

-- Billiver (billier@aol.com), September 06, 2000.

I don't think the power suppliers exactly have clean hands, but it is hard to determine who is to blame for all of this. I'm sure the politicians are at least part of it. But, overall, from all I've read here, it appears that just plain shortages of the raw materias are the primary culprit.

-- LillyLP (lillyLP@aol.com), September 07, 2000.