California payback may fall billions short

Gov. Gray Davis wants $8.9 billion refunded from energy companies. But Bush regulators tell Salon they'll recommend just a fraction of that -- and Democrats are ready to cry foul.

Published July 11, 2002 11:32PM (EDT)

Now that President Bush has promised to hold corporations and CEOs accountable for corporate malfeasance, how will his appointees on the Federal Energy Regulatory Commission handle the thorny issue of $8.9 billion in refunds California says it is owed by energy companies that manipulated power prices in the state in 2000 and 2001?

According to one FERC commissioner, "the energy companies are going to get a slap on the wrist."

"I am not looking forward to breaking the news to Governor Gray Davis," one of the FERC's four commissioners told Salon. "We just can't justify granting California $9 billion in refunds. There's just not enough proof to support the claim."

Despite mounting evidence that shows how companies such as Enron, Reliant Energy, Dynegy Inc. and Williams Companies exploited loopholes in the state's flawed power market to inflate revenues, FERC is gearing up to release an eagerly anticipated report that says California is owed no more than $1.2 billion, according to two FERC commissioners and an administrative law judge working on the issue.

When called for comment, Sen. Dianne Feinstein, D-Calif., said the FERC has turned a blind eye on California for too long. "How much more evidence do they need?" Feinstein said. "California was ripped off."

Feinstein has sponsored legislation that would increase regulation of the multibillion-dollar market for such energy derivatives and give the Commodity Futures Trading Commission, which regulates the derivatives market, authority to ensure that energy markets were free from fraud and manipulation. The CFTC, however, is split on the need for such regulation. A similar measure was narrowly defeated as an amendment to the Senate energy bill. But many lawmakers said the collapse of Enron and increasing evidence of corporate wrongdoing have added urgency for congressional action to restore business and consumer confidence.

The FERC probe involved energy companies that sold power in California and 10 other Western states during 2000 and 2001. The companies filed sworn affidavits with the FERC, most of which said the corporations did not engage in manipulative trading practices. One FERC commissioner said most of the trading practices appear to be manipulative, but are entirely legal. But Congress is looking to give the FERC broad powers to impose civil and criminal penalties to deal with the issue of market manipulation in California.

The FERC commissioners, however, said their decision is also based on the possibility that forcing energy companies to refund billions of dollars could put some of the companies permanently out of business and wreak havoc on the already volatile energy market.

"Simply put, some of these companies, like Reliant, Williams and Dynegy, are facing a financial crisis," one FERC commissioner said. "They have to borrow money just to stay in business. How are they going to refund money that doesn't exist?"

The stocks and bonds of Williams, Reliant, Dynegy and at least a dozen other energy companies have been hammered since the collapse of Enron in December and continue to fall while new allegations surface almost daily about the companies' financial machinations.

Steve Fleishman, an energy analyst with Merill Lynch in New York, agrees that the energy companies' stocks are under pressure, and says that if a large refund were ordered by the FERC it could cause some of those corporations to collapse. "Clearly the energy merchants and independent power-producer companies are under severe financial stress and a large refund will certainly not help," Fleishman said. "On the other hand, we've also never seen the basis for a refund that's been alleged."

Recently, FERC released documents that showed how some of those companies engaged in manipulative trading practices in California that resulted in skyrocketing power prices and led the state's largest utility, Pacific Gas & Electric Co., to file for bankruptcy protection because it could no longer afford to buy power for its customers.

But now, according to an FERC commissioner, executives at Dynegy and Williams have taken the unprecedented step of handing over financial documents to the commission just to prove that their companies face a cash crunch. "I'm not an accountant but it doesn't take a genius to figure out that these guys don't have any money in their checking account," the FERC commissioner said.

And the FERC administrative law judge said the agency's decision was also based on a report released last month by the General Accounting Office that reports that California's electricity crisis was caused by demand outstripping supply, along with a downturn in the economy.

Representatives for the Williams, Reliant, Dynegy and Mirant companies would not comment for this story, citing the ongoing FERC investigation. But Democrats said the statements by the FERC commissioner prove their point that President Bush's close ties with big business -- specifically giants in the energy industry -- have had an impact on his administration's ability to make sound policy decisions.

Steven Maviglio, press secretary for Davis, said it would be "inconceivable" for the FERC to order a refund of anything less than the full $8.9 billion. "After the recent reports of market manipulation and collusion among generators, it is inconceivable to Governor Davis that FERC would give California anything short of the full $8.9 billion in refunds," Maviglio told Salon. "What it determines will be whether the agency does indeed have teeth or if it will revert to being a lapdog for the power industry."

Since Davis was elected governor in 1998, he has spent much of his time in office deflecting criticism of his handling of the state's energy crisis. His critics say he acted too late and spent too much time vilifying out-of-state energy companies and pointing fingers rather than taking proactive steps to deal with the issue.

The state spent $43 billion on electricity contracts at the height of the power crisis, but revelations about market manipulation by Enron and others led Davis to file a complaint at FERC to abrogate the deals.

And for Davis, in the middle of a reelection campaign, winning substantial refunds from FERC remains, for many reasons, an urgent priority.

By Jason Leopold

Jason Leopold is finishing a book on the California energy crisis.

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