California, energy, and foul play

By Mark Sappenfield

SAN FRANCISCO - Two years ago, as California stood on the brink of blackouts that would plunge it into darkness and debt, Gov. Gray Davis made a sensational accusation.

"There is no question in anyone's mind in California that the market here and the rules it operates by have been manipulated to generate obscene profits," he said.

Now, slowly and steadily, a half dozen investigations are turning up evidence to support his claim. The findings have provided some measure of vindication for the state, which has seen its complaints go largely ignored in Washington. Moreover, they have given the investigations - and California's appeal for billion-dollar refunds - fresh momentum.

To some, the evidence is a clear sign that fraud was widespread in the energy industry, and that it was a leading factor in the power crisis. Yet for many, the new revelations still fall short of a slam dunk. The question of whether industry schemes caused the crisis, or merely sharpened the edges, remains in doubt.

Still, the new reports have brought some measure of unanimity: It seems some cheating almost certainly occurred. The next few months will go a long way toward determining how significant it was.

"The story is still only partially told," says state Sen. Joseph Dunn, who is leading one of the investigations into energy companies' activities during the crisis. The investigations "are just picking up steam."

Among the developments:

* Last week, the Federal Energy Regulatory Commission (FERC) released a taped conversation that suggested two energy companies colluded to drive up prices by producing less energy. Speaking about a plant that was closed for maintenance, an official at Williams Co., which buys power to sell it to California distributors, told a plant employee that Williams "wanted the outage to run long." With this plant closed, Williams could sell power from other, more-expensive plants. The employee at the plant said, "I understand," and the plant stayed closed for another week.

* In September, a FERC judge ruled that El Paso Corp., which sells natural gas to California, illegally restricted supply. With many of California's power plants fueled by natural gas, a restriction would make it more expensive to produce power. El Paso has appealed.

* Last month, the chief trader for Enron's western power desk pleaded guilty to conspiracy to commit wire fraud. He has been associated with schemes dubbed "Death Star" and "Get Shorty" that manipulated the California market through bogus energy trades.

In California, the effort to reveal corporate fraud has been a crusade. In a state building in Sacramento, half of the 18th floor is filled with files for the California attorney general's investigation. Senator Dunn has essentially donated two staffers to his committee's probe.

To Dunn, Governor Davis's words two years ago are still gospel. He has no doubts that the energy crisis was a creation of corporate fraud.

He cites the Enron memos. He cites the plant closure, where Williams was forced to refund $8 million to California energy officials - though it didn't admit to foul play. And he points to an industry reporter, who testified before his committee last week, alleging that energy companies routinely falsified natural-gas reports, manipulating energy costs.

"Not all the games they played were illegal," says Dunn. "But some were."

Yet for many analysts, the picture is murkier. Some still believe a confluence of weather and economic conditions created the "perfect storm." Others suggest that California's plan to deregulate, by far the most free-market effort to date, had few checks and balances, blurring the line of what was legal.

"There was an Old West feeling," says Severin Borenstein of the University of California Energy Institute in Berkeley. "There were no rules, and [the energy industry] was just going to have a good time."

As a result, most of the accusations of fraud, experts widely agree, miss the point. False gas prices and phony power transfers might have gotten energy companies millions of dollars in shady profits, they say, but they didn't cause a system-wide meltdown. The issue, then, is whether companies conspired to artificially depress output over time to drive up prices.

The answer is still unclear. The Williams plant closing and El Paso ruling go to that point most directly. But critics say El Paso had reasons to ramp down - including a recent pipe failure - and suggest there's no evidence that the plant closing was anything other than an isolated incident.

For his part, Dunn thinks this is just the beginning. After two years, he says, investigators are finally starting to find what they are looking for: "We'll see more indictments in the coming months."

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