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California and the West | THE CALIFORNIA ENERGY CRISIS

Energy Firms' Mixed Message Is Focus of Inquiry

Deregulation: Senate panel will investigate whether suppliers were being misleading when they promised lower rates for consumers while they were also predicting bigger profits for investors.


In the summer of 1999, a top official with a major player in California's power market testified during a congressional committee hearing in support of speeding up deregulation. Unleashing market forces, said the Dynegy Inc. executive, would ensure "maximum customer savings" and "low-cost power."

That same month, the Houston-based firm made a far different pitch to Wall Street: Deregulation and major swings in electricity prices would boost revenue and stock value. "We know how to take advantage of volatility spikes across the gas and power market," Chief Executive Officer Charles Watson declared in a publication targeting large investors. "The energy marketplace," he predicted, "will simply get more volatile."

Dynegy was not alone, a review of federal filings, company documents and public records shows. In the years since California's pioneering deregulation plan was approved, other major out-of-state energy suppliers were sending similar, seemingly contradictory signals to the public and stock buyers.

Now, those divergent messages--electricity prices will fall but corporate revenue and profits will climb--will be a key focus of a special state Senate committee charged with investigating the alleged manipulation in the power market.

"How you can tell your investors you're about to make a whole ton of money in the very short term, and tell the consumers of California you're about to get lower rates?" said Sen. Joe Dunn (D-Santa Ana), a former consumer attorney who is heading the legislative probe.

Investigations by the state attorney general and federal regulators are continuing, but remain largely secret.

The Senate panel could offer the most open and wide-ranging examination yet of alleged misconduct among power sellers. The bipartisan panel expects to begin requesting documents from power producers as early as today and begin hearings in a few weeks. Committee members stress that they are hoping the power companies will cooperate but are ready to issue subpoenas if necessary.

Suppliers Deny Misleading Public

The legislative probe comes as many state officials are moving aggressively to expose alleged market manipulation and overcharges totaling billions of dollars by the power suppliers.

"Somewhere along the line, there may be a skunk in the woodpile. And if there is, we need to find out about it," said K. Maurice Johannessen (R-Redding), the committee's ranking Republican.

Another panel member, Sen. Debra Bowen (D-Marina del Rey), noted that all companies try to maximize profits. "But [we want] to understand how the market was manipulated and how sellers took advantage of the market."

The power traders strongly deny acting improperly or sending misleading signals to the public.

"Hogwash," said Tom Williams, spokesman for North Carolina-based Duke Energy. Spokesmen for Dynegy said there was nothing inconsistent in the statements of their executives.

The companies maintain that California's problems stem from soaring electricity demand, lagging power plant construction and a faulty deregulation plan adopted by the Legislature in 1996. "You have a flawed structure there," said Dynegy spokesman John Sousa.

Sousa and executives of other power suppliers say their comments to the general public and to Wall Street are not contradictory because unfettered competition--not the California model--would have created opportunities to both make money and cut rates.

Still, regulators, lawmakers and ratepayer groups note that only half the promises made by the power dealers have been realized so far--their earnings and stock prices have risen at record rates as electricity prices have soared.

"The big lie was, while they were telling ratepayers to 'Trust us, we're going to lower your rates,' they were planning the entire time to raise the rates," said San Diego attorney Michael Aguirre, a former federal prosecutor who specialized in fraud cases. Aguirre is representing state ratepayers in a class-action lawsuit against the power companies.

Just last month, California's independent grid operator reported that many power sellers "used well-planned strategies to ensure maximum possible prices." Potential overcharges could total nearly $6.3 billion.

The Senate panel wants to track information that Dynegy and other generators were providing to the investment community in the 1990s as a possible way of determining whether they entered the California market with plans to run up electricity costs. Among many other things, the committee plans to seek internal projections of how the firms expected wholesale prices and profits to rise under deregulation.

Members also want to know how the suppliers expected to recoup billions in outlays for California power plants being unloaded by regulated utilities. Some of the purchases were far above book value, stunning analysts.

"What did they know that the rest of us didn't at the time they were purchasing those generations facilities?" asked Dunn. "They knew something."

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