Energy Overcharge of $5.5 Billion Is Alleged
Wholesale electricity suppliers overcharged California by about $5.5 billion between May and last month, and that money should be refunded to the state’s taxpayers and financially strapped utilities, the state power grid operator said Wednesday.
Generators engaged in market manipulation and consistent patterns of bidding far above costs in the deregulated energy market, the California Independent System Operator found in a study of pricing data. The findings support the widespread belief that these suppliers reaped massive additional revenue by manipulating the market.
Spokesmen for the companies denied the accusation.
The study, prepared for a filing with federal regulators today, is central to Cal-ISO’s efforts to seek reimbursement for what it considers excessive charges by electricity suppliers during the state’s energy crisis.
“This might be the first time we told them the total impact and magnitude [of the overcharging],” said Anjali Sheffrin, Cal-ISO’s director of market analysis. “We think the entire amount deserves consideration for refunds.”
Using confidential bidding data on tens of thousands of electricity sales, Cal-ISO found that five companies that together supply about 30% of the power delivered to customers of the state’s investor-owned utilities engaged in two types of behavior that tended to push up prices:
* They effectively withheld supplies by bidding at excessive prices, even though they could have made some money selling more electricity.
* Less frequently, they had power generation available but did not bid at all.
The study concluded that energy suppliers commonly offered their electricity at twice their cost. For example, Sheffrin said, the average markup in August was 100% during peak hours.
A spokeswoman at the Federal Energy Regulatory Commission, which oversees wholesale electricity pricing across the country, declined to comment Wednesday, saying, “This is part of an ongoing proceeding.”
FERC member William L. Massey, who has considered previous commission actions on refunds to be inadequate, said it would be improper for him to comment on a report that has not yet been filed. But when told of the $5.5-billion total, Massey said: “That doesn’t shock me in any way.”
“Prices over the past 10 months in California have greatly exceeded the federal standards of just and reasonable prices, and I think they have exceeded the standards by possibly billions of dollars,” he said.
Cal-ISO, which oversees grid operations and an emergency energy market, previously detailed $550 million in alleged overcharges for December and January and asked FERC for refunds. But the commission has proposed refunds of only a tiny fraction of that amount.
The study covered five major in-state power suppliers--Reliant Energy, Dynegy, Williams/AES, Duke Energy and Mirant, formerly Southern Energy--plus 16 power importers, all of which deliver power to customers of Pacific Gas & Electric Co., Southern California Edison and San Diego Gas & Electric Co.
“All [21] overcharged, but some excessively and some by moderate amounts,” Sheffrin said.
Cal-ISO’s public filing will quantify the alleged overcharging by each company, but the companies will be identified only by a number. The code will be provided to FERC, Sheffrin said, and Cal-ISO lawyers will determine how much information about the companies will be made public.
State, U.S. Investigations
California electricity markets and the companies that buy and sell power in the state have been the subject of several investigations by state and federal authorities since wholesale electricity prices first skyrocketed in May.
Electricity suppliers have repeatedly denied manipulating the California market in any way, whether through above-cost bidding in spot markets or through physical withholding of electricity to drive up prices.
Reliant Energy is cooperating with FERC’s requests for more data and is confident the commission will conclude that prices charged by Reliant were justified, said Joe Bob Perkins, president of the Houston-based company.
Perkins also bitterly disputed charges that Reliant has shut down units so that it can earn bigger profits on the power sold by the remaining plants. These charges have been leveled against all of the power-plant owners in the state.
Reliant Vice President John Stout said Cal-ISO’s calculations typically don’t include such fixed costs as salaries, taxes and the interest on bonds they sold to finance their power plants, which they acquired under terms of the state’s landmark 1996 deregulation law.
In addition, he said, many high-priced power days have resulted from buyers bidding against each other for scarce supplies rather than sellers charging excessive amounts--like a house price being driven far above the listing price in a hot real estate market.
Williams Energy Services, a trading company that markets most of the power produced by plants owned by AES, also says it will be exonerated by FERC once the commission examines documentation being submitted, said Paula Hill-Collins, spokeswoman for the Tulsa, Okla., company.
“FERC has the obligation to investigate when these accusations are made,” Hill-Collins said. “This is just a process of justification, not necessarily proof of guilt.”
Williams/AES was recently ordered by FERC to prove that it did not take generating units out of service last year to drive up electricity prices, or refund $10.8 million to California utilities.
During the period studied, suppliers sold electricity in the California Power Exchange to Southern California Edison, PG&E; and San Diego Gas & Electric Co. and in a backup market for last-minute electricity operated by Cal-ISO. But sky-high prices plunged Edison and PG&E; deeply into debt, and most suppliers stopped selling to them in January, forcing the state Department of Water Resources to step in as the primary electricity buyer for the three big utilities’ 27 million customers.
The Cal-ISO study, first summarized at an energy conference last week at UC Berkeley but not otherwise publicized, concluded that the companies exercised so-called market power to pump up electricity prices.
Severin Borenstein, director of the Energy Institute at Berkeley, said Cal-ISO’s study is consistent with his research examining pricing practices in 2000.
“We found several billion dollars . . . in departures from competitive pricing,” he said. “When the market was tight this summer, they were able to push up prices, and they did.”
The early warning signs of electricity price spikes, the study found, appeared in May after two years of relatively stable prices of $30 to $40 per megawatt-hour under deregulation. Prices went up during the summer, dipped in September and October with lower demand, then took off in November and December as weather turned cold and the price of natural gas, which is used to generate much of the state’s electricity, reached record levels.
“There were plant outages, and demand and supply became close,” Sheffrin said. “Whatever price they bid had to be taken, and market power asserted itself.”
Cal-ISO found that $3 billion of the alleged overcharges occurred between May and November.
On Friday, federal regulators ordered six wholesale power suppliers to refund $55 million to California if they cannot justify prices charged in February. The refund was limited to power sold that month in excess of $430 per megawatt-hour during Stage 3 power alerts, when supplies are so tight that rolling blackouts are threatened. (One megawatt-hour is enough electricity to supply 750 typical homes for an hour.)
The previous week, FERC ordered 13 suppliers to justify or refund $69 million for power sold in January at prices above $273 per megawatt-hour.
Massey opposed the potential refunds as too low because they were limited to hours in which a Stage 3 power emergency was in place and because the benchmark price set for each month was too high--combining to exempt more than 70,000 transactions from scrutiny.
“We’re still looking for our lost wallet under the lamppost, which is Stage 3 alerts,” said Massey, one of three commissioners on the five-member board (two seats are vacant).
Generators “have been given the free and clear,” he said.
“These tinkling little refunds they have come out with recently are almost a joke,” said Cal-ISO board member Mike Florio, senior attorney at the Utility Reform Network.
Resisting Price Caps
Cal-ISO contends that the last 10 months have proved that generators can no longer be allowed to receive electricity prices that are dictated by what the market will bear.
“FERC granted market-based rate authority on each of these suppliers’ own showing that they could not manipulate prices, yet their actions have shown the contrary,” Sheffrin said. “We feel FERC needs to look at the premise of allowing these generators to continue selling at market-based rates.”
The commission is responsible for ensuring just and reasonable electricity rates. Although it has called California’s power market dysfunctional and vulnerable to manipulation, the agency has resisted setting firm price caps sought by California’s congressional delegation.
Chairman Curt L. Hebert Jr. strongly opposes caps, while Massey wants to use caps across the West as a “temporary timeout.”
Energy Secretary Spencer Abraham, in a New York news conference Wednesday, reiterated his opposition to electricity price caps as a way to cope with California’s energy crisis.
“If we put price caps in place, there will be more blackouts, and they’ll be worse,” Abraham said.
Cal-ISO is filing its market study as part of its comments on FERC staff recommendations on ways to thwart market manipulation. FERC’s proposal includes strict coordination of power plant outages by Cal-ISO with reporting of suspicious closures to FERC, and generator-by-generator bid caps tied to costs.
*
Reiterman reported from San Francisco, Rivera Brooks from Los Angeles. Times staff writer Thomas S. Mulligan in New York contributed to this story.
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Overcharges Alleged
This chart shows month by month the amount that 21 power-generating companies and importers are accused of over-charging in California.
Source: California Independent System Operator
