Davis Turns Up the Heat on Supplier
After months of broadly vilifying California’s energy suppliers, Gov. Gray Davis has launched a new offensive, taking aim at a single firm: Houston-based Reliant Energy, whose executives believe the governor may be building a case to confiscate the company’s power plants.
Intensifying his assault, Davis on Wednesday called Reliant “obstructionist.” He warned that actions taken by Reliant and other independent generators this summer will determine whether he signs a windfall profits tax bill or, in the extreme, commandeers the electricity produced by a plant or seizes the facility itself.
“I’ve made clear to the generators that they can influence my decision,” Davis said in an interview. “We have a very tough summer ahead of us. We need their full cooperation. . . . I reserve the right to do what is in the state’s best interest. I think it is fair to say that Reliant is not off to a good start.”
Earlier in the day, after signing a bill creating a power authority in California, the governor warned electricity suppliers: “If they don’t want to see their plants seized, they should make sure their plants are up and running this summer.”
The increasingly hostile barbs have grabbed Reliant’s attention. Some executives believe they are being set up by the administration--for what, they’re not sure. But the company is reviewing contingency plans, ranging from what plant operators should do if their facilities are picketed and who they should call if state officials show up unannounced.
“We would hope,” Reliant spokesman Richard Wheatley said, “that draconian measures and political rhetoric and finger-pointing would not be pursued. But there is a history of confiscatory actions, including seizure of power contracts with other companies.”
Earlier this year, Davis used his emergency authority to seize long-term power contracts that Southern California Edison and Pacific Gas & Electric had signed with power sellers. Those contracts were about to be auctioned by California’s power market to reimburse generators owed money by the hobbled utilities.
By seizing the contracts--estimated to be worth nearly $1 billion--Davis was able to ensure that power would be sold to California at relatively low prices, rather than resold on the costlier spot market. Under his emergency authority, Davis could use the same tactic to seize power plants, or the power produced by the facilities.
But such an act would pose huge risks. Perhaps most troublesome, other private companies might react by pulling investments out of California or, in the case of out-of-state generators, stop sales here.
Still, as the power crisis worsens and public frustration grows, calls for the governor to seize power plants have become more intense.
“Sooner or later,” Senate President Pro Tem John Burton said Wednesday, “we’ve got to let these buccaneers know that we’re not going to tolerate what they’re doing to us. The only thing these exploiters would understand is possibly a little counterterrorism.”
Reliant got involved in California’s deregulated market in 1998, buying five power plants from Edison for $292 million. Combined, the plants are capable of supplying 3,700 megawatts of electricity, enough to serve 2.8 million homes.
In the first quarter of 2001, Reliant’s wholesale energy sales increased by 171%, producing income of $216 million, compared to a loss of $22 million for the same period last year.
Reliant is not alone in making huge money off California’s deregulation debacle. Also profiting have been Duke Energy, Williams Cos., Mirant Corp. and Dynegy Inc.--all based outside California.
In the past, Davis has used an assortment of inflammatory terms to broad-brush the generators. He recently called them “the biggest snakes on the planet Earth.”
But Reliant in particular has drawn the governor’s wrath for allegedly being more recalcitrant than the others in working with the administration.
“They just want to bleed us dry,” Davis said in his interview with The Times. “I’m not saying they’re unique in that capacity. But they are uniquely obstructionist.”
Davis said that, among other things, Reliant has opposed court and federal orders that it sell power to the state and recently refused to forgive a portion of the hundreds of millions of dollars it is owed by California’s utilities.
Reliant also informed Davis that it is asking higher prices in part because it added a credit charge, essentially questioning the state’s credit-worthiness.
Last Thursday, the governor decided to go public--to “name names,” in the words of his chief political strategist, Garry South.
“The reason these generators have gotten away with murder is because people in California don’t know who they are,” South said. “They aren’t household names. . . . People are not familiar with their names, their logo, or what they do.”
Breaching confidentiality surrounding the state’s power purchases, Davis announced at a press conference that the state paid $2,000 per megawatt-hour to avert blackouts last week, and named Reliant as the seller.
The price--actually $1,900 per megawatt-hour--was five times recent market prices.
The governor continued his attack on ABC’s Sunday morning news show, “This Week.” He again cited the amount Reliant had charged but this time put a partisan spin on it.
“That is obscene,” Davis said of the price. “No one can defend that. The company is named Reliant. It’s in Texas. It’s a big buddy of President Bush and Vice President Cheney, and they can’t just sit back there and say, ‘Hey, it ain’t our problem.’ ”
Reliant is a major political player nationally, particularly in the Republican Party, giving more than $250,000 to various national GOP committees last year. Steve Letbetter, Reliant’s chief executive, was one of President Bush’s so-called “pioneers”--donors who committed that they would raise at least $100,000 for his presidential campaign.
Like most independent power generators, Reliant has become a more significant player in Sacramento, contributing $52,900 to state lawmakers last year--including $10,000 to Davis last May--and spending $106,000 on lobbying, plus $40,000 so far this year.
Reliant spokesman Wheatley said that despite the governor’s invective, his company is committed to seeking solutions to California’s problems and that it has “operated legally and ethically.”
“Regardless of what happens,” Wheatley said, “we’re going to make every effort to keep our contacts with the state on a high plane, despite the political rhetoric, despite the name-calling and despite all the allegations that have been made.”
In fact, Reliant executives wonder whether the state is playing fairly itself, possibly paying the record $1,900 a megawatt hour to give the governor ammunition against the company.
Reliant Vice President John Stout said he never expected the state to pay that amount. He said the company bid exceptionally high in the hopes that it would not have to run one of its so-called peaker plants, which the company uses for reserve power.
Reliant prefers to use it as a backup in case one of its main power plants breaks down. That allows the company to avoid buying high-priced replacement power on the open market in order to fulfill its obligations to the agency that manages most of California’s transmission grid.
But grid operators at the California Independent System Operator concluded that they needed extra power to stabilize the grid and avoid blackouts, and state power buyers agreed to pay Reliant’s asking price.
Stout questions whether that was the lowest bid available or whether it was deliberately chosen.
Oscar Hidalgo, spokesman for the power-buying branch of the state Department of Water Resources, said there was nothing political about the purchase.
“It was a split-second decision made on the real-time market to fill some voids we were having in our power supply at the time,” Hidalgo said. “The intent was very clear: to keep the lights on.”
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Reliant Power and Profit
In 1998, deregulation forced Southern California Edison to auction four major power plants and a smaller “peaker” plant. Reliant Energy bought them for $292 million. These plants are capable of serving 2.8 million homes. The company’s wholesale energy division’s earnings jumped 600% between the summer of 1999 and 2000, from $43 million to $319 million. Of those additional earnings, $100 million came from California.
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Reliant wholesale energy group’s* operating income
1st Qtr. 2000: -$22 million
1st Qtr. 2001: $216 million
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* The wholesale energy group includes power plants in California.
Source: Reliant Energy
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