This Houston-based natural gas company is accused of manipulating the energy
market in California by withholding capacity through its natural gas pipeline.
The pipeline is the largest single source of natural gas for California and
capable of providing up to one third of the state's needs for this commodity.
The supply and price of natural gas is especially important to California
because of the large number of power plants in the state that use gas to
produce electricity. The California Public Utilities Commission (CPUC) filed a
complaint with the Federal Energy Regulatory Commission (FERC) last
April accusing El Paso of trying to corner the natural gas market and
manipulate the price through its control of pipeline capacity.
After a contentious hearing at the end of May in which the FERC
administrative law judge questioned the veracity of a top El Paso executive, El
Paso's Chairman, William Wise, was called to testify about the issue. Last week
another El Paso executive confirmed that the company did not make all its
capacity available to potential customers. The complaint filed by the
California PUC and joined by PG&E and Southern California
Edison--California's largest utilities--could result in massive refunds to the
state and fines against El Paso. The judge's ruling is expected on June
30th. That ruling will be reviewed by the commissioners of the
On September 23, 2002, the FERC administrative law judge ruled that the El Paso Corporation had engaged in "the unlawful exercise of market power." It is the first ruling by a federal official concluding that there was widespread manipulation of the California energy market by suppliers. Judge Curtis L. Wagner determined that the El Paso had used only 79% of the capacity of its pipeline, which, he said, "shows a clear withholding of substantial capacity" which contributed to rising gas prices in the California. The decision will be reviewed by the FERC commissioners, and possibly a federal appeals court, if the commission upholds the ruling.
As part of the joint reporting effort with FRONTLINE, The New York Times revealed in May that Duke Energy was engaged in secret settlement negotiations with the California Governor's office. The Duke discussions with the governor's inner circle sought to end investigations and possible legal action concerning allegations that Duke overcharged for electricity in California. In return for the settlement, Duke would agree to "sharing pain," making an "appropriate payment" and "embracing the governor's political and public relations needs," according to documents prepared by Duke's lawyers.
Duke subsequently released some of the documents to the public and posted them on their web site.
In a March 23 letter to the Governor's office, Duke's attorneys wrote that Duke's average price for sales in California during 2000 was $77.47/megawatt hour and that the company, "by and large, was not a significant recipient of the exceptionally high prices" which occurred in the California markets after April, 2000. However, the Charlotte Observer and the San Francisco Chronicle subsequently reported that in January 2001, the company sold electric power to California at $3,880 per megawatt hour.
California officials say investigations of the energy generators, including Duke, are ongoing.
California Governor Gray Davis and the Federal Energy Regulatory
Commission (FERC) are engaged in a running war of words about the need for
price caps on wholesale electricity prices to help California's dire financial
situation. On May 29th, Davis raised the stakes by threatening to
sue the regulators in federal court if they fail to take action and implement
price caps soon. Davis says California will spend over $50 billion on
electricity this year. Some estimates run as high as $70 billion.
Also, the swing in control of the Senate from Republicans to Democrats raises
the probability, according to sources, that Senator Joseph Lieberman will soon
announce Senate hearings first called for by Democrat Dianne Feinstein of
California. The hearings would focus on the FERC and its enforcement record in
the electricity and natural gas markets. Spurred by another New York
Times/FRONTLINE story about the FERC and the lobbying of Enron Chairman Ken
Lay, the hearings are expected to look into the relationship of energy
suppliers, generators and marketers to the commission.
The steep price rises in the California electricity market spawned
investigations by the California Public Utilities Commission into the "ramping"
of power plants - the practice of manipulating the output of electricity plants
by stopping and starting production to create artificial shortages.
Investigators are looking into whether power generators game the system by
increasing and decreasing a plant's output to maximize profit instead of to fit
California's energy needs. The state PUC and the state attorney general are
also investigating a rash of plant "outages" that plagued California this past
winter. One economist for the state power authority, the ISO or Independent
System Operator, says the outages occurred at a rate five times the normal
pattern. Taking plants completely off-line is another alleged practice that was
used to keep prices high.
The energy companies mentioned in the outage and ramping reports, including
Duke, Reliant and Dynegy, vigorously deny the charges. They claim that the
energy crisis is forcing them to run their plants flat out, causing them to
skip scheduled maintenance on the plants and causing breakdowns, which in turn
is why the plants are sometimes offline. The California Attorney General and
PUC investigations have been supplemented by ongoing hearings in the state
legislature. For the first time, the FERC has also begun to take a more active
role in the investigation of possible manipulation of supply.
In March, the California Independent System Operator, or ISO, which operates
the state's power grid, charged in a report that power generators had
overcharged the state by $6.2 billion during the year 2000. Frank Wolak,
the Stanford economist who prepared the report, told FRONTLINE that the figure
is now in excess of $7 billion. The ISO used the estimates to try and spur
federal regulators to take some action against the generators, including
ordering refunds. The FERC responded by ordering the generators to
justify $126 million in alleged excess charges. So far the FERC has not
obtained any refunds. Last month there was an $8 million fine collected from
the Williams Company in settlement of allegations that they withheld electrical
In another twist, Governor Davis accused California's municipal utility
districts, which are basically city-owned power companies and operate
independently of the ISO, of charging as much or more for their excess
electricity as the out of state power generators. Davis says the municipal
utilities should provide the power they do not need for their citizens to the
state at cost, not at the premium the other power generators are charging. If
they refuse, he is threatening to seize their excess power. The municipal
utilities expressed shock and outrage at the threat and noted that Davis' chief
energy advisor is David Freeman, the former head of Los Angeles'
municipal utility. Private generators point out that the Los Angeles Department
of Water and Power, the federal government's Bonneville Power Administration
and Canada's B.C. Hydro have all been named by the FERC as among those
generators that overcharged California.
In March of this year, the Supreme Court agreed to hear a case involving a
division of Enron, Enron Power Marketing against the Federal Energy
Regulatory Commission (FERC). This case involves Enron's longtime goal of
opening up the interstate transmission grid--the high-powered electrical power
lines that criss-cross the country--to all parties. Enron claims the FERC has
regulatory control over the transmission grid, and therefore, the obligation to
force companies with regional control over some power lines to open them up to
competition. Enron believes the power grid should work like the interstate
highway system, and that FERC has the authority to regulate it. At the same
time the court agreed to resolve a competing case brought by the state PUCs
against the FERC and its order mandating that transmission lines should be part
of its policy of "open access."
The FERC Order 888 does not go far enough according to Enron. The current
chairman of FERC Curt Hebert does not believe that FERC has the
statutory authority to force states to provide "open access" to their
transmission lines and believes their participation in what are called
"regional transmission organizations" should be voluntary. Enron and the
presumptive new chairman of the FERC Pat Wood maintain the FERC already
has that authority.
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