California is staring down the business end of a lawsuit that could jeopardize Gov. Gray Davis’ plan to provide long-term power to the energy-bereft state.
Faced with a major power crisis earlier this year, Davis negotiated a slew of long-term contracts with energy providers to guarantee electricity for the state. And while many argue the move saved the Golden State’s power industry, others contend it was not without its share of malfeasance and victims.
According to a claim filed last week by the United States Justice Foundation against various players in the energy deals, including Davis, “These contracts would and did foreseeably place additional financial burdens on all taxpayers within the State of California and had a disproportionate impact on senior citizens, the physically disabled and other disadvantaged Californians,” including companies forced to pay higher rates to the detriment of their businesses.
USJF plans to file a class-action lawsuit on behalf of these groups in particular and, in general, on behalf of any Californian who has financially suffered in the last six months because of the high-priced contracts.
“They’re ripping off California’s energy consumers,” USJF’s lead litigator Richard Ackerman told WorldNetDaily. “That’s the bottom line.”
First, said Ackerman, “They did it behind closed doors,” negotiating contracts with the power companies in secret. The agreements crafted in those closed-door sessions locked California taxpayers into long-term contracts, some up to 20 years, which USJF considers financially harmful. Ackerman also fingers various state-paid consultants and others involved in crafting the contracts for conflicts of interest, mainly due to stock ownership in the companies with which they were negotiating.
USFJ wants California to “to terminate the secretly negotiated … electricity contracts entered into by the State of California, to force the return of all funds paid pursuant to those contracts, and to force the return of consultant fees paid by the State of California to those who negotiated those contracts.”
Because California’s energy industry was only deregulated halfway, energy wholesalers could charge power companies like Pacific Gas & Electric whatever the market would bear, while PG&E and others – barred from passing on the added costs to customers because of rate caps set by the California Public Utilities Commission – were stuck absorbing the hit.
They couldn’t do it for long.
In dire financial straits and considered less than creditworthy, PG&E, Southern California Edison and San Diego Gas & Electric were forbidden by federal law to buy power. Providing energy to about a third of the state, not being able to purchase electricity is certainly a setback for business – so, into the breach bounded Davis, buying power on the open market to make up for the utilities’ shortfall.
Trouble was, as California Department of Water Resources Spokesman Oscar Hidalgo told WND, “The market was dominated by the generators. It was out of control. Runaway costs.”
Water Resources runs the state water project, the largest single energy user in California. Thus, accustomed to buying power in the open market, Water Resources was given charge of buying energy for California, making the Golden State the biggest power buyer in the West.
“When it comes right down to it, it’s a supply-and-demand issue,” explained Hidalgo. “We were demanding a lot more than the supply.”
As a result, the power providers could charge whatever they wanted, and since California was in the lurch trying to bail out the utilities, it was stuck without much bargaining power. The market would bear $250 a megawatt hour and more – sometimes much more – and the state’s representatives had a hard time haggling the price downward.
Then Davis got his silver bullet.
The Davis administration worked to “stabilize” California’s energy market by signing into law AB-1X, a bill allowing California to enter into contracts with electricity generators for “low-cost power contracts for up to 10 years,” according to the governor’s website.
“The only incentive [for the generators] is time,” explained Hidalgo. The market couldn’t sustain prices as high as $250 a megawatt hour, and generators knew it. But if they could lock in a rate for multiple years, they’d make money in the long run. “The long-term contracts gave California bargaining power.”
It also made a bad situation worse, according to USJF.
“They bought power way into the future and they bought at a set rate, at a set quantity,” said Ackerman. The average for all the contracts over the next 10 years is $70 per megawatt hour – compared with around $30 on the open market, which it was last week when USJF’s claim was filed.
“The long-term contracts were basically to ensure energy supply, with set costs, so we can budget into the future,” said Hidalgo. Overall costs are higher, he conceded, but the state viewed the added costs as an “insurance policy.” The contracts “gave us a safety net.”
According to Lance Izumi of the Pacific Research Institute, “Davis wanted to say that he’d guaranteed California’s power supply way into the future. And, yeah, he did – but well above market rates. He was guaranteeing to pick ratepayers’ pockets for the next 20 years.”
“Those contracts that Davis put together were incredibly ill-advised,” Izumi said in an interview with WND. “He was cautioned that any long-term contracts should not be for more than a few years. Instead he bought contracts for 10 to 20 years.”
“There is no way to predict what the market will be like in 10 years, let alone 20.” And whatever the market may be, Izumi pointed out the foolishness of assuming it would remain static. “The market conditions were going to change,” he said. “Eventually the market would right itself and the prices would come down.”
Instead of going with the market, Davis opted for what Izumi dubbed a “Soviet-style energy plan,” saying that “Davis failed to let the market work at the start and decided to have this huge government interventionist strategy, and it’s not surprising that the result is this huge government snafu.”
The snafu is especially apparent when measured in dollars.
“As of January 2001 we were at a 12-to-13 billion-dollar surplus, now we’re looking at $9 billion in debt. And it’s completely attributable to these contracts,” said Ackerman, “there’s no other expenditure that could account for these losses.”
“It’s a complete waste of tax dollars.”
The Davis administration disagrees.
“You couldn’t get to the $30-an-hour price [the going price on the market today] if you didn’t have the long-term contracts,” said Hidalgo, explaining that by offering the contracts the state was able to bargain prices down, creating a more competitive market.
“They are Monday-morning quarterbacks with crystal balls who were in favor of the contracts initially but now are saying they’re too high,” Davis spokesman Steve Maviglio told WorldNetDaily about those who want the contracts negated, explaining elsewhere that “the governor believes the contracts were crucial in getting us into an advantageous position this summer and preventing disruption and stabilizing prices.”
Whatever the governor’s belief, USJF contends the contract negotiations were not open to scrutiny or outside evaluation, as the negotiations were conducted in secret.
Involving state government officials, the California Power Exchange, the California Independent System Operator (both private nonprofit organizations) and utility companies such as Enron, Southern California Edison, PG&E, San Diego Gas & Electric and Calpine Energy, these meetings, charge USJF, violated the Bagley-Keene Open Meetings Act.
“Because of the impact on California’s consumers, the meetings of State agencies concerning the approval of power contracts should have been open to the public,” said USJF.
By law they should have been. AB-1X, which empowered the California Department of Water Resources to purchase power for the state, required the Davis administration to operate with full disclosure, according to a legislative aide for Assemblyman Tony Strickland, R-Thousand Oaks. Yet, said the aide, the negotiations were never meant to be public.
According to the brief filed in Strickland v. Davis by California Attorney General Bill Lockyer on behalf of the governor, “the requested information [the contracts] should remain confidential until CDWR’s authority under AB-1X to contract for the purchase of electrical power expires on January 1, 2003.”
In other words, there was to be no oversight to any power bought before January 2003 – after the next gubernatorial election. Indeed, it took a lawsuit by Strickland to force the Davis administration to publish the contracts.
In June, San Diego Superior Court Judge Linda B. Quinn ruled that Davis must make public all of the information pertaining to California’s power purchases: long-term contracts, invoices for spot-market electricity buys and some 7,200 hours of audio tapes of negotiations.
The information was in high demand, as parent companies for the Los Angeles Times, San Diego Union Tribune, San Jose Mercury News, Wall Street Journal, San Francisco Chronicle, Sacramento Bee, Orange County Register, along with the Associated Press and Bloomberg news agencies, also sued for the release of the documents.
“Like any negotiations, yes, they were carried on behind closed doors, until the deals were announced, but that’s par for the course for any contract,” said Maviglio, adding that the contracts had to be “kept secret to negotiate the best deal.” In an open market you can’t haggle the price down if everyone knows all the angles of the deal; it’s privileged information that gives leverage in negotiations.
But for Strickland, it boils down to a question of open government.
“I am disappointed that we had to go to court to compel Gov. Davis to be honest with the people of California about how much we are paying to keep the lights on,” said the assemblyman, who, after winning his case, made the contracts available online.
Worse than merely being cinched tight, negotiations also featured a number of representatives and consultants for the state who held ownership interests in, or were then in the employ of, the companies with whom they were negotiating, according to USJF.
The assertion is rebutted by the Davis administration. “There’s no finding of that by the FPPC [Fair Political Practices Commission],” said Maviglio, “and the traders that we discovered that had apparent conflicts were fired.”
Maybe not everyone. Maviglio, for instance, had $12,000 invested in one of the companies who would prosper from the deal, Calpine Energy, according to USJF.
When asked, Maviglio dismissed the Calpine stockownership as a “red herring.”
“Why are you raising it? It’s ridiculous. I also own Microsoft,” he said.
“Notwithstanding these crisis events,” says USJF, “Mr. Maviglio allegedly bought Calpine stock on or about June 20, 2001, in the midst of the power crisis. His interest was not disclosed until on or about September 30, 2001.”
“It was all publicly disclosed, according to law, and was found to have no conflict of interest by the FPPC,” said Maviglio. “In fact, the Calpine stock I voluntarily disclosed,” adding that he’s “not under investigation by anyone.”
“If these holier-than-thou types understood what this stock purchase was about, they wouldn’t question it,” he said.
USJF certainly believes it understands.
“If calling them on the carpet for getting us into contracts where we’re paying twice as much as the market rate is holier than thou, I’d rather stay holy,” said Ackerman in response. “The only people who benefit are the companies and the consultants that they have a conflict of interest with. They made bank, and taxpayers get stuck with the tab.”
Others targeted by USJF for alleged compromising relationships include Vikram Budhraja, a former executive and recent owner of Edison International and Dynergy stock, who did not sell his stock until starting consulting work for the state, and former Vice President Al Gore advisers Chris LeHane and Mark Fabiani, both of whom served as consultants to Southern California Edison while also representing California in the negotiations.
“These relationships created an explicit conflict of interest rendering the contracts voidable under California Business and Professions Code,” charges USJF. “Further, the cloak of secrecy put around the negotiations make the contracts voidable under the California Government Code.”
USJF hopes by voiding the contracts to save California taxpayers a huge sum of loot.
Buying power next year for Edison, PG&E and others is expected to cost the state about $21 billion, but customers will take only about a $12.6 billion hit to their energy bills, which means the state has to absorb the remainder. The state, according to Hidalgo, hopes to float $12.5 billion worth of 10-year bonds to cover the amount that’s not paid by energy customers.
But, Izumi warns, “Given that the economy is weakening, it’s not a sure thing that anyone will want to buy those bonds. The Legislative Analysts Office estimated at least 4 billion in debt next year.” Further, “Because of the economic slowdown and the September 11 attacks, revenue’s fallen off the cliff.” As such, Izumi anticipates much higher debt, and “with 10 billion in debt, investors might think, ‘Who wants to take a chance on California bonds?'”
One way the state aims to encourage bond purchases is to tag part of their payment on consumers’ energy bills, at a set rate. Such a deal would ensure that bondholders reap a bit of what they sowed every month. But, endangering the whole arrangement, the Public Utilities Commission, which is responsible for approving rates, has so far pooh-poohed the fees, saying that they are too high. Without the built-in payoff, selling the bonds won’t be easy.
“I don’t know how they’re going to go out to investors and sell these bonds,” said Ackerman. “Bottom line is that the California consumer is going to get stuck with the bill.”
If the bonds don’t move, explained Hidalgo, the excess dollars will get sucked out of the general fund – which most likely will lead to other programs being cut to make up the difference. Roads, schools and other budget expenditures could suffer.
When asked about negating the contracts as an answer to the financial debacle, Hidalgo confessed, “I think they are a little na?ve in terms of the solution.”
“If long-term contracts go away, the generators would definitely see some advantages in the spot market,” he said, concluding the prices would climb to the same lofty perch they held earlier in the year. “There is nothing in place if you take away the contracts.”
Ackerman concedes that Hidalgo might be right, that the prices may shoot up, but “If it’s all out in the open, and they’re jacking up the prices, at least the public will have a chance to analyze it. That’s the real issue; the public has been kept in the dark and haven’t had the opportunity to meaningfully participate in the process.”
Ackerman and others say that the reason California is subject to the high prices in the first place is that the state is at the mercy of out-of-state energy providers to make up the dearth created by the lack of power plant construction and the increase in energy consumption. Thus, the market was barred by regulation and legal strictures from answering the energy demands with more power plants early on, which would have helped prevent the crisis.
Couple that with a half-baked deregulation scheme that never really freed the market to work unhampered and the disaster was inevitable.
The one-sided energy restructuring “created market power for the out-of-state generators,” said Lynne Kiesling, director of economic policy for the Reason Public Policy Institute and senior lecturer of economics for Northwestern University.
And you can hardly blame them for high prices, she told WND. “The generators have a fiduciary responsibility to shareholders to maximize profits. If you create the opportunity for them to charge high prices, they’re going to do it. That’s their job.”
“It’s the political machinations that make it the issue so convoluted,” Kiesling explained. In the open market, “there are so many people acting on their own, it’s very, very difficult to manage that process. And if you try to, you’re going to get screwy results.”
“Market processes don’t bend to the will of Gov. Davis – or anyone for that matter.” Not that the governor isn’t giving it that old college try.
Davis has made sure that more plants will soon come online, but instead of completing the deregulation and freeing up utilities to pass on costs to consumers – a necessary step for any true market energy reforms – Davis’ contracts threaten to completely undo the effort to deregulate the California electricity market.
“By entering into set contracts, they effectively killed deregulation,” said Ackerman. “When people talk about the market, I don’t even know what the hell they’re talking about because there is no market for the next 20 years.”
“Now businesses are forced to stay inside the government system and buy their electricity at the government’s high price,” said Izumi. “Whatever limited market freedoms people had before all of this have now been eliminated.”
USJF sees its suit as a way of rolling back some of the financial harms caused by the long-term contracts.
“The rubber’s going to hit the asphalt on this one,” said Ackerman. “Some day they’ll have an answer. Were hoping that this lawsuit will force them to come clean.”