Reports of Fraud Taint Deregulation of Power Industry

Rising reports of fraud in California’s new free market for electricity have triggered a series of investigations and prompted an admission by the head of the California Public Utilities Commission that it bungled the process of screening prospective power companies.

The investigations center on possible misleading tactics by some of the electricity sales agents who have plied the state in recent months, acting on behalf of companies that critics say often are ill-prepared to provide the cheap power they promise.

Under power deregulation, set to begin March 31, electricity marketers promise lower rates for electricity by buying and selling power on an open market, then arranging for the electricity to be delivered on an independently operated power grid over the same lines used now. Most customers of these new power providers are expected to be big businesses, at least initially.

(Customers of municipal utilities such as the Los Angeles Department of Water and Power will not be allowed to choose their electricity providers for another year or more.)

Many would-be power marketers are large, established corporations such as Enron Corp. of Houston and marketing subsidiaries of major utilities such as Edison International and Pacific Gas & Electric.

But almost anybody who is not a criminal can register with the state to become a power marketer. Corporations need not prove their financial stability or provide a bond, but are required only to fill out an application form and pay a $100 fee.

“There’s kind of been a joke going around that 25 cents and two box tops get you in,” said Wilson Lewis, acting supervisor of the PUC’s enforcement branch. He called that “somewhat of an exaggeration.”

PUC President Richard A. Bilas acknowledged Thursday that the agency has made mistakes setting up the system by which companies register to sell electricity. He said the agency has instituted new rules and will increase its scrutiny of these firms, which now number nearly 300.

“We will better scrutinize people when they apply and we will go back and scrutinize those that have already applied,” Bilas said.

But state Sen. Steve Peace (D-El Cajon), co-author of California’s electricity deregulation legislation, said he is not yet satisfied that the PUC is being aggressive enough in protecting electricity customers, from large businesses to individual consumers.

“I can’t imagine the PUC could have set out to do a worse job if they had tried to,” Peace said.

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The specter of fraud threatens to undermine the credibility of the state’s landmark power deregulation program before the switch is even turned on. Already, the original Jan. 1 starting date had to be delayed three months because of computer problems.

The stakes are high, both for consumers and for legitimate power providers seeking a piece of California’s $20-billion electricity market.

“We don’t like [fraud] because it gives the good, solid, well-managed companies like New Energy Ventures a bad name,” said Lew Phelps, a spokesman for New Energy, a Los Angeles-based power marketer. “In the short run, if people don’t trust that it’s an honest market, it’s not going to work very well.”

California is the farthest along of 15 states embarked on power deregulation, and its undertaking is the most ambitious and complex. The Legislature acted in 1996 in a bid to introduce competition to a system that has produced electric rates 30% to 50% higher than the national average.

Officials say it was inevitable that unscrupulous operators would be attracted by the opening of such a vast market. Telephone deregulation in the 1980s was also accompanied by fraudulent marketing schemes.

Only one company has been charged to date. The PUC is holding a hearing today to decide whether to revoke the registration of Boston-Finney Inc., a Pennsylvania company that was sued Jan. 27 by California Atty. Gen. Dan Lungren for allegedly running an illegal pyramid scheme to sell electricity distributorships.

Via its Web site, Boston-Finney declined comment on the charges.

“We learned a very important lesson with the Boston-Finney issue, that we have not been as diligent as we should be at the front end,” the PUC’s Bilas said.

The PUC, which does conduct criminal background checks of applicants, has now instituted a minimum 30-day waiting period before applicants can be registered, Bilas said.

Boston-Finney is not the only potential electricity provider being investigated by the PUC and the attorney general’s office, although representatives would not detail which companies are being probed.

“There are a lot of companies that seem to be making outrageous claims and we’re trying to keep up with them as best we can,” said Al Shelden, supervising deputy attorney general in the consumer law division. “There are other investigations.”

Peace wants the PUC to investigate the financial strength of potential electricity providers and to create definitions of common terms that marketers use, such as “free electricity” and “green energy.”

“It never occurred to me that they would actually credential people without first developing regulations” mandating, among other things, a company’s ability to provide electricity to customers, Peace said.

The company that sparked the dispute, Boston-Finney, is a multilevel marketing firm run by a man identified as Christopher S. Mee, who state regulators say is 19 years old. The company is accused of targeting not consumers, but distributors it recruits and charges a stiff fee.

Boston-Finney, based in Harrisburg, Pa., claims to have signed up more than 3,800 distributors in California, charging them a $295 fee and promising commissions based on the number of other account executives each recruits, according to Lungren’s office.

Lungren’s lawsuit says Boston-Finney made misleading promises to lure account executives and to persuade electricity customers to switch to Boston-Finney. The complaint accuses Boston-Finney of operating an “endless chain” or “pyramid” marketing scheme in which early investors make money only by recruiting more investors, without actually selling any electricity.

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The suit seeks $1.5 million in penalties and restitution and an injunction to stop the company from claiming that it can save customers about 20% off average market rates and that account executives can earn large sums by easily recruiting more account executives and electricity customers.

Boston-Finney’s phones are answered by an answering machine that prompts callers to leave a message because of the overwhelming volume of calls the company is receiving. No Boston-Finney official returned a reporter’s call.

On its home page on the World Wide Web, Boston-Finney has posted a notice that it “cannot comment on the investigation while it is in progress and we are looking to clear up these issues with the attorney general.”

Nicolette Toussaint, media director for the Utility Reform Network, said the San Francisco consumer advocacy group has been gathering anecdotal stories of suspect electricity claims, including those from aggressive multilevel marketing operations and promises of so-called “green” energy that may not actually be from environmentally approved sources.

“Consumers are very vulnerable,” Toussaint said.