Posted at 9:34 p.m. PDT Thursday, October 26, 2000

Scrutiny starts as California energy companies report record profits BY JOHN WOOLFOLK

Mercury News

As Calpine Corp. and other energy firms in California's deregulated electricity market announced record profits this week, they face growing scrutiny from authorities who threaten to seize the windfall if allegations of market manipulation are proven.

San Jose's Calpine reported record third-quarter net income Thursday of $147 million, a 242-percent increase over the same quarter last year, and far more than the company's entire 1999 net income of $99 million.

``This exceeds any past quarter hands-down,'' said Rick Barraza, Calpine's vice president of investor relations. ``It was truly an excellent quarter.''

At least two other firms reported gains of more than 300 percent. But the profits came during a summer of blackouts and soaring bills, prompting several federal and state investigations into alleged anti-competitive behavior by energy firms. Authorities have threatened to seek refunds of any excessive profits.

Answers may come by next Wednesday, when the Federal Energy Regulatory Commission plans to disclose the results of its two-month investigation into California's energy market.

The California Public Utilities Commission and the state attorney general's office also are investigating, but have not indicated when they will release their findings.

Market experts, however, give slim odds that authorities will recover the cash.

``I think there's almost no chance we're going to get any of the money back,'' said Severin Borenstein, director of the University of California Energy Institute and professor at the Haas School of Business.

``I don't think they're going to find any evidence that these guys did anything illegal,'' Borenstein said. ``The market just didn't work very well. You can't say, `We didn't like that outcome, give it back.' What you can do is go forward and change the way things work.''

Energy firms say they have nothing to hide. If they made a killing here, they say, it's only because there aren't enough power plants to meet demand -- something they're working to fix by building more of them.

``We were pricing according to market rules and market conditions,'' said Chuck Griffin, spokesman for Atlanta-based Southern Energy, Inc., a recent spinoff of Southern Company and a top player in the California market. ``There's a great need for additional generation out there.''

Other energy company officials say their profits reflect strong markets nationally and internationally, not just in California.

Duke Energy spokesman Paul Mason said earnings for his corporation, which operates the Moss Landing power plant and is a major player in the state, reflect strong performance on both coasts.

``It would be misleading to suggest that the majority of earnings were due to trading and marketing activities in California,'' Mason said.

Still, Calpine's Barraza said ``California by far was our best market this quarter.''

But spokesman Bill Highlander said those gains didn't come from the ``spot market'' where prices soared this summer. Instead, most of Calpine's power is sold in long-term contracts on the ``forward market.''

The state's major utilities have been clamoring for relief, pressing regulators for a refund of more than $5 billion in debt they say they've accumulated from buying electricity for more than they can bill ratepayers.

In a complaint filed this week with the California Public Utilities Commission, Southern California Edison Co. urged the agency to ``join the California utilities in aggressively seeking refunds of the outrageously high wholesale energy prices that are being charged in the California electric markets.''

Earlier this summer in a special report to the governor, the state utilities commission and Electricity Oversight Board said they found nothing to justify the summer's high energy prices.

Yet proving illegal market behavior may be difficult. Authorities would not say which companies they are looking at, but said some have balked at disclosing deals, citing trade secrets.

``We sent a ton of subpoenas,'' said Loretta Lynch, chairwoman of the utilities commission. ``We are experiencing significant resistance from some energy companies.''

The power market also is enormously complex. Some companies lease their power plants to energy marketing firms, and power contracts can change hands several times between generator and buyer.

And energy firms are just part of the picture, accounting for about 40 percent of the state's electricity generation.

About a fourth of the power is produced by municipal utilities. Some of them made profits while others lost money this year, said Jerry Jordan, executive director of the California Municipal Utilities Association.

California also imports a fourth of its power from dams and utilities outside the state, some of which also have profited from the market. The Public Service Company of New Mexico, for instance, more than doubled net earnings compared to last year.

And even if some energy firms ``gamed'' the market, waiting to sell until they could get the best prices, authorities still would have to find collusion for the behavior to be illegal, Borenstein said.

``Firms are allowed to exercise market power,'' Borenstein said. ``It's not terribly competitive behavior, but it doesn't break the law. What's illegal is if they start talking to one another about it.''

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-- Martin Thompson (mthom1927@aol.com), October 28, 2000