California Out to Fleece Powerex

California utilities are seeking more than $1 billion in compensation for astronomical rates the state paid for electricity in 2000. What else is new? California has been looking for a scapegoat for more than a decade.

The cat fight between California and B.C. over electricity charges during the state’s 2000 energy crisis hit a new low last week when a U.S. judge concluded that several brokers, including Powerex, Hydro’s exporting arm, overcharged California by manipulating the system.

This dispute has been going on for more than a decade, and will likely go on for another decade as B.C. plans to appeal the judge’s ruling. At stake is California’s argument that Powerex et al owe $1.6 billion in refunds and interest, versus Powerex’s claim that California still owes B.C. $280 million in unpaid power bills.

Lost in the current war of words—and California’s politicians would like it to stay lost—is the fact that the Wild West of astronomical electricity prices in 2000 was the direct result of California’s badly botched deregulation policy. The state’s utilities took a lot of criticism in the 1990s for signing long-term power contracts that had them paying significantly higher rates for electricity that could have been purchased more cheaply on the spot market. California made several changes as a result of this, all of which conspired to set up a perfect storm in 2000.

While power demand in the state was growing quickly because of escalating demand from Silicon Valley, generating capacity actually dropped from 55,000 megawatts to 52,000 megawatts. NIMBYism stopped any new proposals for power development.

That meant a growing need for power imports, but bottlenecks in the transmission and distribution network meant there was no easy route from power outside the state to get in.

California’s three utilities were prevented from signing long-term contracts with suppliers, forcing them to buy more and more power on the spot market. And the state capped the utilities’ ability to pass on increasing power costs to their customers. As the unregulated wholesale price started to climb, the utilities couldn’t recover their costs. Two of them went bankrupt after registering monumental debts.

Utilities experts warned California that they were creating a potential for disaster, but no one listened. When the disaster struck, there was Enron, in the thick of it, gaming the system using schemes called “Fatboy” and “Earthstar.” Now California’s politicians had the scapegoat they needed, and it was very simple for them to argue that if Enron was gaming the system, so was everyone else.

John Olson, now retired but at the time chief investment officer with Houston-based Sanders Morris Harris (now called Edelman Financial Services), was one of the first to smell a rat with Enron and its activities. But even he said you couldn’t attribute any more than 10-15 per cent of the price escalations to Enron’s shenanigans, that most of it was California’s self-inflicted wound.

But don’t tell that to California’s politicians and bureaucrats. They’ve got their scapegoats and they won’t let go. Let’s face it: the state teeters on the edge of bankruptcy half the time and it needs money. Picking someone else’s pocket? Well, that’s the American way these days.


Don Whiteley is a North Vancouver writer who specializes in natural resources.