San Diego Union-Tribune

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March 15, 2001 

2 firms accused of closing plants to inflate prices

By Toby Eckert 
COPLEY NEWS SERVICE 

WASHINGTON -- Federal regulators said yesterday they have indications that two companies may have shut down power plants in California to inflate electricity prices.

Regulators gave the companies 20 days to prove otherwise or be forced to refund more than $10.8 million.

The Federal Energy Regulatory Commission said a preliminary investigation by its staff "raised serious questions" about whether Williams Energy Market & Trading Co. and AES Southland Inc. violated federal law when they agreed to take two Orange County generating units off line for several weeks last April and May.

The companies said they were confident they could prove the shutdowns
were justified.

Gov. Gray Davis and other California officials have been alleging for months that power companies are manipulating the state's deregulated wholesale power market to inflate prices. In fact, the state Senate announced yesterday that it will begin to investigate the price issue next month.

Even though the Orange County plant shutdowns investigated by FERC
occurred before the height of the power crisis, the federal findings are sure to fuel suspicions.

FERC said it would launch an investigation into operation, maintenance and sales at the plants during other periods in 2000 and 2001.

The release of the findings appeared to be another indication that FERC is assuming a more aggressive posture after being criticized for its slow response to the power crisis.

Last week, the commission said it might order power suppliers to rebate $69 million in overcharges for January, though some critics consider the amount too low.

"FERC is beginning to show some backbone, finally," Sen. Dianne Feinstein, D-Calif., said in a statement issued by her office after FERC announced the findings of the Orange County investigation.

The generating units -- known as Alamitos 4 and Huntington Beach 2 -- were designated, under a FERC order, to provide power to the California Independent System Operator during emergencies, at a cost far below the market price for electricity then.

Because they were shut down, the ISO had to pay the companies market prices for the power it needed -- about $750 per megawatt hour, compared to the $63 per megawatt hour it might otherwise have paid, FERC said.

AES owns and operates the plants, while Williams sells the power. 

The investigation indicated that the units were shut down from April 25 to
May 11 "for reasons that were not directly related to the necessary and timely maintenance" of the units.

Evidence uncovered during the investigation "suggests that Williams took
action to extend the outage at Alamitos and to make Huntington Beach 2
unavailable for pretextual reasons. The information also suggests that AES declared outages at these plants and maintained Huntington 2 in a manner that was inconsistent with good utility practice."

For the summer

Ken Woodcock, a senior vice president at Arlington, Va.-based AES Corp., said the units were shut down so they would be "ready to run for the summer," when electricity use in California peaks.

"We're comfortable that the decisions we made regarding outages in the
spring of last year will be held up as prudent under any level of investigation," he said.

Bill Hobbs, president of Tulsa, Okla.-based Williams Energy Marketing & Trading, issued a statement saying, "Once all the facts are on the table, we are confident it will be clear that Williams conducts business legally, within the terms of our contracts and tariff obligations."

If the companies can't justify the unit shutdowns, one or both would have to refund $10.28 million, plus $575,226 in interest.

Williams would also have to ensure that a plant is available to supply the ISO with emergency power under rates previously negotiated.

The commission also said it would release in five days confidential information gathered during the investigation unless AES and Williams can justify why it should be kept secret.

In Sacramento, the state Senate said yesterday that a select committee will begin investigating possible price manipulation by generators in the wholesale electricity market.

The first hearing will be early next month.

Market manipulation?

"Questions are mounting that market manipulation by power generators is a significant factor in the energy problems California has faced," said Senate President Pro Tempore John Burton, D-San Francisco.

While California's energy use only increased 4 percent, Burton said, the
wholesale price of electricity increased 328 percent and generator profits rose an average of 508 percent.

In other action yesterday, FERC approved a series of measures aimed at
increasing power production in California and other Western states. They
include:

Expediting approval of natural gas pipeline capacity expansions and licensing of hydroelectric projects.

Requiring the California ISO and other transmission managers in the region to prepare a list of short-term power grid improvements.

Extending for the rest of the year a temporary waiver of operating and
efficiency standards for nontraditional power producers, including
co-generation plants.

Allowing wholesale and retail power buyers to resell electricity they save
through conservation measures.

FERC Chairman Curtis Hebert said the steps were intended to "squeeze
every megawatt out of California that is possible."

But Commissioner William Massey criticized the order for "ignoring the
elephant in the living room," and said FERC needed to take more aggressive action to mitigate soaring power prices in the region.

Hebert and Commissioner Linda Key Breathitt have resisted calls for price controls.

Staff writer Ed Mendel contributed to this report.