Energy Scheme Caught On Tape
Plant Was Urged To Withhold Power

By: Brandon Bailey

In the early days of California's electricity crisis, a manager for a major energy trading firm encouraged a power plant operator to deliberately shut down one of his generators - and then laughed about it later, according to recorded phone conversations quoted in a newly released federal report.

Phone recordings made in 2000 caught a manager for Oklahoma-based Williams Companies telling a Southern California power plant operator that "it wouldn't hurt Williams' feelings" if the generator stayed out of service, because Williams could make more money selling electricity to the state from another source.

Consumer advocates and state officials said Friday that the report is further evidence that energy traders had illegally manipulated the state's energy market - and that federal regulators didn't do enough to stop them. State and federal authorities are pursuing criminal investigations into the actions of Williams and other energy wholesalers.

Details of the Williams conversations are in a report compiled last year by the Federal Energy Regulatory Commission, which negotiated an $8 million settlement with Williams to resolve charges that the company deliberately withheld power from the market to create an artificial shortage and increase its profits. The report was sealed until this week.

"This is yet another smoking gun, proving that the power industry treated deregulation as a license to steal", charged Doug Heller of the non-profit Foundation for Taxpayer and Consumer Rights.

Officials at Williams and AES Inc., which owned several California power plants and sold their output to Williams, have consistently denied any wrongdoing.

"We do acknowledge the conversation was inappropriate, but it did not result in any improper actions", said a spokeswoman for Williams, adding that the manager involved had been "counseled" and is no longer with the company. Representatives for AES could not be reached for comment Friday.

Like the federal regulators who settled with Williams last year, state officials said they also knew of the contents of the report when they negotiated a recent settlement of their civil claims against Williams, which has been a leading energy supplier in the state's deregulated market.

For that reason, the officials said, the report is unlikely to affect the deal announced Monday, in which Williams agreed to restructure some of the state's long-term energy contracts and made other concessions worth an estimated $417 million.

Sealed Report

The federal commission released a summary of its findings last year when Williams agreed to refund $8 million without admitting guilt. But as part of that agreement, commissioners had agreed to keep the detailed report under wraps. It was unsealed this week after attorneys for the Wall Street Journal convinced a U.S. district judge that the public has a right to see the document under the federal Freedom of Information Act.

Critics said the report shows that federal regulators caught the two companies red-handed as they engaged in behavior that, at the height of the energy crisis, was widely suspected but considered difficult to prove.

Williams had an exclusive contract with AES to sell all the electricity produced at power plants AES owned in California. Williams also had a contract to sell power from certain units at a fixed rate when the state needed it.

But when two of those units were shut down for repairs in the spring of 2000, the state's grid operator was forced to buy power from other AES generators - and pay Williams at the spot-market price of $750 a megawatt hour, nearly 12 times the contract rate of $63.

Suspicious regulators were aided by the fact that Williams routinely taped telephone calls between its dispatchers and AES power plant personnel.

Offered 'a Break'

In April 2000, a Williams manager named Rhonda Morgan told an AES operator that it was OK to keep one of the generating units off line, even though the operator's contract normally imposed penalties when generators were out of service for too many hours.

Morgan told the operator that since the state was paying a premium for power from another unit, "it wouldn't hurt Williams' feelings if the outage ran long". She went on to say that Williams would give AES "a break" on its contractual obligation to keep the generator running.

"I understand. You don't have to talk anymore", responded AES employee Eric Pendergraft.

A few weeks later, the report says, AES took several other units out of service because it didn't want to pay for state pollution credits. But when state power officials said that wasn't a legitimate reason for a shutdown, AES then claimed the units needed repairs.

At the time, a state power grid official chided Morgan, saying that Williams and AES should have paid for pollution credits with the profits they made from the earlier shutdown. Morgan laughed, according to the FERC report, and agreed there was nothing wrong with the units.

While those units were shut down, the FERC report estimated that Williams reaped $11 million in profits by selling higher-priced power from other sources. State officials grumbled that the federal commission let Williams off too easily last year.