Attorney General Lockyer Brings Charges Against Four Major Power Companies for Unjustly Profiting in California's Energy Market

(SACRAMENTO) – Attorney General Bill Lockyer today filed complaints against four major wholesale power companies, alleging a flagrant violation of rules designed to ensure the safe and reliable operation of the high-voltage transmission system serving California and unjustly profiting by charging millions of dollars for emergency generating capacity that the companies never provided as promised.

The complaints against Dynegy, Mirant, Reliant, Williams and their various affiliates cite numerous violations of the state's Unfair Competition Act. The civil complaints filed in San Francisco Superior Court seek more than $150 million in penalties, restitution, disgorgement of all profits the companies earned as a result of their illegal conduct, and court-ordered protections against future misconduct. Dynegy and Reliant are based in Houston, TX; Mirant is based in Atlanta, GA; and Williams is based in Tulsa.

"These companies fattened their wallets at the expense of the safety and reliability of the transmission system serving Californians," Lockyer said. "They sold emergency generating capacity to the California Independent System Operator which is responsible for maintaining the western power grid, then turned around and sold the same power capacity into the lucrative spot market for wholesale electricity."

The complaints allege that, as a result of this misconduct, the companies were able to collect millions of dollars in payments for emergency generating capacity they never in fact provided and, at the same time, pocket a profit on the sale of the energy. In many instances, the generators were paid twice for the same generating capacity. First, they were paid for keeping the capacity available and unloaded as a reserve in case of an emergency. They were paid again when they unlawfully produced energy out of those reserves to sell into the real time market. All of those costs were ultimately passed on to California utilities and their customers.

"Reserves the ISO was counting on to keep the lights on in the event of a major plant or line outage were simply not there because they had already been sold. Compounding the harm, California utilities and their customers paid millions of dollars for those reserves, and got nothing in return," Lockyer said.

Lockyer noted that ISO has just proposed recovering some $49 million paid for energy reserves that were never provided between April 1998 and September 2000, which underscores the violations cited in the complaints filed today against the four wholesale power companies.

In order to maintain the safety and reliability of the transmission system, the ISO purchases emergency generating capacity (called "ancillary services") from wholesale power providers through various market auction processes. The ISO can then call on this energy in the event of an emergency, such as a major outage, or if needed to balance supply and demand on the system. Generators providing ancillary services are paid for keeping their capacity in reserve. In the event the ISO calls on the capacity, the generators also are paid for the energy provided.

When a company agrees to sell ancillary services capacity to the ISO, the capacity under ISO rules must be held in reserve, and not be used to generate power for sale into other markets. In addition, when the ISO calls on the capacity to provide power for the grid, the company must comply with ISO's instructions.

The complaints allege that Dynegy, Mirant, Reliant and Williams violated these requirements on thousands of occasions dating back to June 1998, seriously compromising the ability of the ISO to safely and reliably run the transmission grid. In particular, the companies chose to chase high prices in the real-time energy market with capacity previously committed to the ISO as reserves.

The complaint states that the four companies not only reaped ill-gotten gains by selling energy that was supposed to be held in reserve, their misconduct increased the overall market price for ancillary services by artificially inflating the demand. When the ISO began to realize that it could not count on companies keeping their capacity in reserve, it went out and bought more than it would have had to under normal conditions, further increasing the cost to California utilities and their ratepayers.

The ISO became aware of the problem as early as June of 1998, at which time it issued several notices to all power providers urging them to comply with their ancillary services obligations, and warning them that their failure to live up to their obligations was posing a serious threat to the safety and reliability of the grid.

"The industry thumbed its nose at the ISO," Lockyer said. "Unfortunately, the ISO did not have the personnel or the systems in place at the time to effectively enforce its rules, and the industry knew it could get away with it."

The complaints against the four energy companies were developed by the Attorney General's Energy Task Force with assistance from California Public Utilities Commission investigators. The complaints are the latest resulting from the Attorney General's investigation into potential illegal conduct by power companies and others during California's energy crisis. In January, the Attorney General charged Pacific Gas & Electric Corp. with illegal, unfair and fraudulent business practices that drove its California utility into bankruptcy after siphoning over $4 billion from the subsidiary and violated promises to the state to protect California ratepayers.