Attorney General Lockyer Files Lawsuit Against Powerex For Gouging Agency During Energy Crisis

(SACRAMENTO) – Attorney General Bill Lockyer today filed a lawsuit against the Canadian energy company PowerEx, seeking restitution and damages for massive gouging of the state agency that bought power on behalf of ratepayers at the height of the California Energy Crisis.

"PowerEx gamed the market, then gouged the state, taxpayers and ratepayers," said Lockyer. "It created conditions that allowed it to hold California businesses and consumers hostage, and left the state no choice but to pay the ransom. We want that money back."

Filed on behalf of the California Department of Water Resources (CDWR) in Sacramento County Superior Court, the lawsuit alleges PowerEx helped manipulate the market to inflate prices and create phony supply shortages. PowerEx then overcharged CDWR when the agency was forced to buy energy directly from the company to balance the electricity grid and avoid blackouts, according to the complaint.

CDWR bought energy from PowerEx in so-called "out of market" (OOM) transactions on thousands of occasions from January 17, 2001 through December 31, 2001, the complaint alleges. From January 17, 2001 through June 20, 2001, when prices in OOM transactions were uncapped, PowerEx overcharged CDWR about $850 million on purchases that totaled $1 billion, according to Lockyer's office and CDWR.

After former Governor Gray Davis in January 2001 declared a state of emergency related to the energy crisis, legislation was enacted that charged CDWR with buying electricity to ensure a stable supply for California homes and businesses. Subsequently, the state's electricity grid operator, the California Independent System Operator (ISO), called on CDWR to buy energy when needed to maintain grid reliability or avoid blackouts. On many occasions, CDWR was forced to buy more than 1,000 megawatts of energy.

"Through duress and undue influence, PowerEx took an oppressive and unfair advantage of the distress created by the California Energy Crisis and the necessities which compelled (CDWR) to procure sufficient energy to avoid blackouts," the complaint alleges. "As a result of PowerEx's exercise of duress and undue influence at the time the transactions with (CDWR) were made, (CDWR's) agreements to the terms of the transactions were not real, mutual or free. Moreover, the transactions are contrary to the public policy and public interest of the State of California."

The complaint lays out how PowerEx gouged CDWR:

Starting in January 2001, PowerEx and other companies refused to supply energy to California through ISO and the other entity created to run a wholesale electricity market, the California Power Exchange (PX). Additionally, PowerEx and the other marketers also refused to negotiate OOM transactions with ISO. Instead, PowerEx insisted on dealing directly with CDWR in OMM transactions. Why? Because under bizarre rules set by the Federal Energy Regulatory Commission (FERC), dealing out of market directly with CDWR left PowerEx freer to charge whatever price it wanted.

When ISO turned to CDWR in dire straights, PowerEx, with its access to extensive hydroelectric energy, often was the only company able to provide CDWR the large amounts of power ISO demanded. Having already unlawfully manipulated the market, PowerEx then went on a gouging spree in its OOM transactions with CDWR.
"PowerEx was ... aware that no other energy marketers were able to supply (CDWR) with large volumes of energy on a real-time basis and that PowerEx was (CDWR's) only option in its efforts to help the ISO maintain grid reliability and avoid blackouts during the Energy Crisis," the complaint alleges. "PowerEx used this knowledge to demand exorbitant prices and impose onerous transaction terms for the energy it supplied to (CDWR). In doing so, PowerEx unfairly extracted millions of dollars from (CDWR)."

In the lawsuit, CDWR seeks to rescind all transactions with PowerEx from January 17, 2001 through December 31, 2001 because they resulted from duress and undue influence by PowerEx. On the same grounds, the complaint asks the court to declare all the transactions void and unenforceable. As financial remedy, the complaint seeks compensatory damages and restitution of all monetary benefits unjustly received by PowerEx from CDWR.

The lawsuit comes on the heels of testimony submitted last week by Lockyer, CDWR and other California parties that provided new evidence of how PowerEx colluded with Enron to perfect market manipulation schemes in Canada before setting its sights on California. The California parties first submitted evidence about PowerEx market misconduct to FERC in 2003.

The contract recission lawsuit is the second filed by California officials against PowerEx. Lockyer on December 22, 2004 filed a lawsuit alleging PowerEx violated California's commodities fraud law by engaging in Enron-devised market manipulation tactics such as Death Star, Fat Boy, Get Shorty and Ricochet.