Power down, profit up

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Power down, profit up

Data show Tulsa firm had Southern California plants curb output, boosting prices.

June 17, 2001

By CHRIS KNAP and RONALD CAMPBELL The Orange County Register


An Oklahoma energy trading company controlled supply from three crucial Southern California power plants, keeping electricity prices high and helping the company earn more than $1 billion in profit since October, records and interviews show.

Tulsa-based Williams is one of a half-dozen energy companies accused in lawsuits and regulatory filings of manipulating power supplies to increase prices, leaving California consumers to face soaring energy costs and the threat of blackouts. But unlike generators such as Duke, Reliant, Mirant and Dynegy, Williams owns no power plants in California.

Williams has signed a 20-year deal with Arlington, Va.-based AES Corp. to provide the natural-gas fuel and sell the resulting power from plants in Huntington Beach, Long Beach and Redondo Beach.

Federal smokestack-output logs, state power-grid records and federal regulatory filings analyzed by the Register show that Williams realized higher profit by:

Ordering AES to throttle back during periods of shortage, then spinning up again when desperate grid operators agreed to pay more.

Offering a financial incentive to AES operators to extend maintenance outages at critical generators -- allowing Williams to sell power from other units at premium prices.

Selling power generated at the three plants at up to 12 times the cost of production.

The AES plants, fixtures along the California coast since they were built by Southern California Edison 40 years ago, are crucial to the local power supply. But today their throttles are controlled from Tulsa.

"Williams makes the decisions as to whether units are online or offline," said Ed Blackford, manager of AES Huntington Beach. "We are at their beck and call. We power up, power down and meet their requested schedule. Whether that's as a result of the ISO (grid operators calling) or their marketing, we don't know."

Tim Thuston, a manager at Williams Energy Services, acknowledged that the company sold power at "many times" cost, ran AES plants at less than full power during some shortages, and discussed financial incentives with plant operators.

Thuston said the company always stayed within the bounds of the law and never withheld power when the state was in crisis.

"We certainly didn't come to this market intending to break even. But we are not playing games, trying to be dishonest, or trying to trick people. Yes, we have a bidding strategy. But the idea that, at a critical hour, we are not making power available, that is not the case."

Market experts for the state's power grid, the Independent System Operator, disagree, saying the high prices at which Williams frequently offered its power constituted "economic withholding." That is, while technically offering the power for sale, high prices guaranteed that AES would not be called - until blackouts were imminent and grid operators grew desperate.

State officials allege that coordination of outages between Williams and AES went to the very edge of lawbreaking - if not over it.

In April, the company agreed to refund $8 million in profit to halt a federal investigation into those alleged violations of the Federal Power Act. Williams is the only out-of-state power company that has refunded profit to California.


The Federal Energy Regulatory Commission has ordered Williams to justify or refund another $30 million in profit earned during emergency periods - the most of any California power supplier. In a recent Securities and Exchange Commission filing, the company said it has calculated that it will probably have to give back at least $11 million of that profit.

Williams, the nation's biggest natural-gas distributor, controls about 4,000 megawatts of power in California, less than 10 percent of the power produced in the state. But the AES plants generate about one-third of the Southern California power not tied up in commitments to serve local customers - enough for Williams to set market prices, according to ISO economists.

Williams says it has far less control of the regional market because more than 75 percent of its capacity is committed to long-term contracts.

Either way, there's no dispute that Williams' profits are rising.

The company earned $1.01 billion in profit from energy trading last year, up 870 percent from the previous year. More than half of that came in the final quarter, when energy trading brought in $510 million in profit, a 1,200 percent increase from the previous year. In the first quarter of 2001, energy trading profit was $485 million, up 520 percent.

Those profits were earned nationwide, but California, where 30 percent of Williams' power supply is generated, contributed substantially to the bottom line.


One clue as to how Williams was able to boost profit is contained in Environmental Protection Agency output records.

The smokestack monitors were intended to track pollution but also show power output from all generating stations except AES' emergency power units.

In August, during summer's peak demand, the company's production during peak hours was relatively constant, according to a Register analysis of the EPA computer records. At that time the state was hurting for power, and companies could sell all the electricity they produced.

December was different.

Power consumption was down, but the state was still in a power emergency. Fuel costs were up, and generators were rebelling against a $250- per-megawatt price cap.

Power was so short that on Dec. 7 grid operators declared California's first Stage Three emergency. Power reserves had dropped below 1.5 percent, and the blackouts Californians had long feared were imminent. The state was saved only when dam operators shut off their electric water pumps.

On that day, on Christmas Eve, and at least four other December days when power was short, the total output from AES generators was throttled back at least one-quarter shortly after noon.

The output logs and ISO records show that as prices increased on these six days, AES plants turned the power back up.

On four of the 10 December days that were analyzed, AES' output was steadier, with only a slight dip or none at all.

ISO operators said a slight decline at midday could be easily explained. But throttling back by one-quarter or more at midday is a typical - and legal - tactic used by generators to create a shortage and boost power prices, according to market experts.

"The thing to remember here is that ISO market rules effectively give these generators the ability to operate however they like," said Frank Wolak, a Stanford economist who sits on the ISO's Market Surveillance Committee.

"If they don't like the price they see, they have the ability to say, 'Fine, I don't want to run. I'm not gonna supply any more energy.' " Williams officials said there could be many reasons why the output was down.

"I wouldn't try to refute that (output data show) that AES was not always operating at full power. But there were times our units weren't running at full throttle because power couldn't be moved to Northern California," Thuston said.

ISO officials said their power orders are confidential, preventing them from commenting directly on Williams' role. But ISO Lead System Operator Jim McIntosh said, "We did need the power on those particular days ... 3 p.m. is a peak period."

Documents filed with FERC show that the ISO was begging for power in this period - but generators were saying no.

"Several generation owners have indicated that they are only willing to comply with the ISO's dispatch instructions if they can receive payments well in excess of $250 (per megawatt)," ISO Managing Director James Detmers told FERC on Dec. 8.


State power-grid records show that outages at the AES plants began to increase sharply in May 2000, just as power prices began to climb.

From July to September, the state's peak power-use period, generation lost because of outages for scheduled maintenance increased 3,200 percent, compared with the previous year. Forced outages, caused by unexpected breakdowns, increased 500 percent.

AES' Blackford said there were more breakdowns as older units began to be run at full throttle. In addition, he said, some AES units were shut down at year's end because they ran out of air- pollution credits.

Some critics are skeptical. "This is a market where you can make a lot of money when you don't produce power," said San Francisco economist Ed Kahn of the Analysis Group, who is studying price manipulation in the California power market. Documents filed with FERC concerning a 10-day period in April and May 2000 show just how effective this technique can be.

The case involves two generating units that the ISO considered critical. The state calls them "must run" units. Williams was paid a monthly fee to keep those generators available and agreed to provide power at just over cost. At that time, those costs were about $63 a megawatt if the generators were kept at idle, about $35 a megawatt at full power, according to FERC and ISO documents and interviews.

AES faxed Williams a notice in early April 2000 saying that it needed to take one of those units down for five days to repair a boiler-tube leak. The ISO agreed.

The leak was repaired in two days, and the unit was ready for service.

Daily tapes of activity on Williams' trading floor, obtained by FERC investigators, showed that a Williams employee told AES the company preferred the unit out of service - and offered to waive the penalties that AES normally incurs when its generators can't run.


AES kept that unit out of service for 10 days. During that period the ISO had to call on other AES units for power. Williams sold power from a neighboring generator at the Alamitos station for $750 per megawatt, at least 12 times Williams' cost.

During this period, ISO economists calculate that the fair market price for power was about $34 per megawatt. AES' bid of $750, which was then the price cap, was way above market, ISO officials said. But the ISO needed AES to keep Orange County supplied with power.

"In the real-time market they never would have been (selected). Bid prices were in the $30s and low $40s," said ISO economist Eric Hildebrandt.

During this same period, AES twice told the state it needed to shut down the Huntington Beach "must run" unit - first because of pollution problems and then because the plant's circulation tunnels were clogged with mussel shells. That was a problem Southern California Edison had addressed by simply heating the water in the tunnels. But the ISO recognized the outage, and AES shut down the unit.

Again, the ISO was forced to turn to other AES units for power, ultimately paying Williams about $10.8 million more than if the "must run" units had operated. But Williams never paid AES the incentive it had suggested, FERC concluded.

Early this year, FERC demanded that Williams and AES explain why the coordination of the timing and length of the outages didn't violate the federal law governing power sales and Williams' contracts with the ISO.

The case was settled April 30 when Williams agreed to refund $8 million to the California ISO and to replace lost power.

"That payment is not an indication of any wrongdoing," Williams' Thuston said. "There was nothing illegal that took place. There was no value exchanged. We are confident that if we had pursued this the whole way we would have been vindicated."

State officials disagree.

"It is undisputed that Williams has leveraged and perpetuated a dysfunctional market while reaping unpre ce dented profits," state Attor ney General Bill Lockyer said recently in a filing asking federal regulators to revoke Williams' right to charge whatever the market will bear.

Gov. Gray Davis released details of nearly $43 billion worth of state long-term energy contracts Friday showing California is locked into what are likely to be higher-than-market prices for the next decade.

The pacts require the state to pay an average of about 8 cents per kilowatt-hour over the next five years.

California power regulators approved elements of Davis' financial rescue plan for Southern California Edison. The proposal remains stalled in the Legislature.

House Republicans rejected a Democratic effort to impose federal price caps on electricity prices in the West amid an intensifying partisan divide over energy.

California Attorney General Bill Lockyer said he plans to convene a grand jury next month to investigate charges that electricity producers illegally manipulated the state's energy market.

Southern California Edison agreed to pay small power generators part of what it owes them to ease the bankruptcy threat the utility is facing and ensure Californians a critical source of power through the summer.

State Senate President Pro Tem John Burton, D-San Francisco, introduced a bill to provide battery backups for traffic signals at critical intersections throughout the state in hopes of preventing potentially deadly accidents during rolling blackouts.

Davis used his emergency powers to let natural-gas- fired plants operate at maximum levels this summer even if they exceed air-pollution standards. This week: The Federal Energy Regulatory Commission is scheduled to meet in Washington on Monday to consider a plan to put its price controls into effect seven days a week, 24 hours a day. Currently the controls only require generators to justify excessive charges during periods of power emergencies.

Source: Register reports


-- Martin Thompson (mthom1927@aol.com), June 17, 2001


So many of these inter-company deals are concluded with a wink and a nod, rather than putting anything in writing which could be suboeneaed, that gouging is almost impossible to prove....but, the effort always seems to be made.

-- R2D2 (r2d2@earthend.com), June 17, 2001.

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