Wednesday, April 11, 2001 |  Los Angeles   Times
 

                 Energy Cost Study Critical of Public Agencies Too

     Power: DWP is among three government-run producers cited as driving prices up. Spokesmen
      deny any market manipulation
By ROBERT J. LOPEZ, RICH CONNELL, Times Staff Writers
 

Government-owned utilities, including the Los Angeles Department of Water and Power,
were influential in driving wholesale electricity prices to levels that helped ignite California's
exploding energy crisis during the summer and fall, according to public and confidential records.

  For months, Gov. Gray Davis, legislators and consumer advocates have chiefly blamed a few
  private power companies for throwing the state into darkness and economic chaos.

But they are just part of the equation.
 
     A confidential document obtained by The Times names power providers that have allegedly
manipulated the electricity market. While the document does identify out-of-state merchants
criticized for gouging, it also discloses for the first time the extent to which public entities allegedly
 have maximized profits in the volatile spot market.

     The document--which decodes the identities of unnamed suppliers in a recent state
 study--singles out three government-run agencies as consistently trying to inflate prices. They
 are: the DWP, the federally owned Bonneville Power Administration in the Pacific Northwest and
  the trading arm of Canada's BC Hydro in British Columbia.

     Like a number of privately owned generators, these three producers offered power at a range
 of high prices and, sometimes, in large amounts when the state was most desperate. They also
  helped saddle California's three largest utilities with billions of dollars in debt--leading one,
  Pacific Gas & Electric, to seek bankruptcy protection last week.

       The study by the California Independent System Operator, or Cal-ISO, analyzed thousands of
 hours of bidding practices for 20 large suppliers in the spot, or "real-time," market from May to
 November. The study accounted for factors such as rising production costs, increased demand,
    periods of scarcity and profits that would be earned in a healthy, competitive market.

  Money earned above that was called excess profits. No entity--public or private--earned as much in alleged excess profits as British Columbia's Powerex, the state records show.

 "They were the most aggressive bidders," said Anjali Sheffrin, author of the coded study.

   "They had the most amount to bid and the most freedom to bid it in," said Sheffrin, who did not
 discuss any companies by name.   The Canadian agency reaped $176 million in alleged excessive profits--several times the  amount collected by all but one of the private generators. Second on the list was Atlanta-based Southern Co. Energy Marketing, now called Mirant, which collected nearly $97 million in alleged inflated earnings.

BC Hydro and Mirant--along with the DWP and other producers--say they played by the rules established under California's flawed deregulation plan and did not exploit the state's  troubles. But BC Hydro officials acknowledge that they did anticipate periods of severe power shortages and planned for them by letting their reservoirs rise overnight and then opening them to create hydroelectricity, which could be produced inexpensively but sold for a premium.

  "It was the marketplace that determined what the price of electricity would be at any given
  time," said BC Hydro spokesman Wayne Cousins. "We helped keep the lights on in California."

  And the rates low for their own customers. During the past year, BC Hydro has stashed
   hundreds of millions dollars in a "rainy day" account to ensure that it has among the lowest rates in
 North America.

Los Angeles' Department of Water and Power, although eighth on the list of alleged profiteers, was among those singled out for seeking high prices during periods of high demand that helped  inflate costs across the entire spot market, where emergency purchases are made.

     This, according to state documents, was accomplished by offering power at incrementally
  higher prices that would rise substantially with even modest increases in demand. The strategy
  also helped prop up prices, keeping them from falling.  The DWP's average hourly bid, or asking price, for electricity ultimately bought topped such  private sellers as Reliant Energy of Houston and Tulsa-based Williams Cos., two major players in the national energy market.

   In addition, the DWP submitted other bids at far higher prices that could pay off handsomely
 with even small bumps in demand, the report said, referring by code to DWP and four other
   suppliers. "The data shows they clearly exercised market power to inflate prices further at higher
      load conditions."

DWP General Manager S. David Freeman called the report's findings "outrageous," insisting that the utility never tried to inflate prices. "These charges go under the heading there is no good deed that goes unpunished in this state,"  Freeman said, noting that DWP power helped avert more blackouts across the state.

 He did acknowledge, however, that the agency has charged high prices for surplus power at
    the 11th hour but said that was only because it cost more to produce.

  "We have consistently charged [Cal-ISO] our cost, plus 15%," he said. "It's not as though
    we're up there peddling a bunch of power to jam it down their throats."
   Freeman said that when his staff reviewed the coded report, they never took it personally. "If
     you're innocent," he said, "you don't look at the criminal file."
 
Yet another public agency criticized for its behavior in California's deregulated market was the
 U.S. government's Bonneville Power Administration, a nonprofit agency that sells wholesale
    electricity produced at 29 federal dams in the Columbia-Snake River basin.
  Bonneville actually bid slightly lower than the DWP, records show, but reaped millions more in
 alleged excessive profits, apparently because it supplied greater amounts of power during the
  period studied. Bonneville was in the top five accused of taking excessive profits.
  Bonneville officials say some of its profits are used to pay back federal construction loans and
    fund an internationally recognized salmon recovery program.
 
 Stephen Oliver, a Bonneville vice president, said his agency did not act improperly and has
  asked Cal-ISO for detailed information on how it reached its conclusions. He said the grid
  operator often came to Bonneville pleading for last-minute electricity and offering to pay high
   prices.  "From our point of view, we bid what we had when we had it and we operated precisely within   the terms of their rules," Oliver said. 

Those rules--and the bidding practices criticized by Cal-ISO--so distorted the market that Aquila Power Corp. of Missouri, which tried to act responsibly, has bailed out.   It offered the lowest average hourly price of any supplier studied--slightly more than $8 per   megawatt-hour, compared to Mirant's $138, the highest.

But the spot market, as initially designed, made sure that all suppliers offering power received
 the highest price paid in any hour. The result: Aquila collected $171 an hour for power it was willing to sell at a single-digit price. "They weren't the culprits," said Cal-ISO's Sheffrin. "Someone else drove that up."

Aquila spokesman Al Butkus said the company pulled out of the California market because it
 was too unpredictable. Although the company made money, he said, it also could have lost
  because of possible downward swings.   "We looked at it and we didn't feel very comfortable with what we saw," he said.   The market has since been adjusted to prevent high bids from setting the price for everyone.   But Sheffrin said it hasn't made much difference because the overall prices are still excessive.  "We're saying the patient is sick," Sheffrin said of California's electricity market. "It needs help  [and] may die."