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A viewpoint by Thomas D. Elias: Gas prices present test for generators

May 29, 2001

All winter, the power generators whose 700 percent price increases helped put one huge California utility into bankruptcy and milked almost $6 billion from the state's coffers claimed the cost of natural gas was one big reason for their actions.

There is no doubt that winter gas prices were way up — more than doubling the bills of many consumers. Wholesale prices of natural gas in California at times ranged above $1 per British thermal unit, about six times the level in most Eastern states, which get their gas largely from the same sources.

Credible charges of collusion among gas and pipeline companies are still flying, with investigations well under way at both the state and federal levels.

But now comes word from Pacific Gas & Electric Co. that natural gas prices are dropping. Consumer bills for April averaged about 42 percent lower than those for March, and costs for May should be even less.


Much of that decrease is seasonal, as gas use declines when the weather turns warmer. But some of the drop also stems from a decline in wholesale gas prices, PG&E reports.

If the wholesale price paid by PG&E has dropped, so has the price paid by power generators such as Duke Energy, Dynergy, Reliant Energy, Enron, Mirant, Southern Energy, AES, Calpine and the Williams Companies, even if some of them deny it. Although some of those companies are headquartered outside Texas, Oakland Mayor Jerry Brown, the former California governor, likes to lump them together under the label the "Texas power cartel."

Lt. Gov. Cruz Bustamante borrowed the tag when he charged five of the companies with "illegal and unfair price-fixing" in a lawsuit filed the other day. And even the Federal Energy Regulatory Commission — which resisted any form of price controls for many months — concluded this spring that the power producers have acted like a cartel at times, shutting down plants simultaneously to reduce the supply of electricity in California and drive prices up. FERC says those alleged illegal actions cost consumers $128 million; the California Independent System Operator puts the figure at about $6.5 billion.

Now comes a test for the power generators: If the price of gas has dropped and it was a major factor in pushing power prices up, will their charges for each megawatt they produce now fall?

All signs are they won't, for power has been scarce in May and promises to grow more so in the next three months, when demand reaches its peak. When supply is low, prices usually go up. So far, not a single power generator has promised anything like a price decrease in response to the drop in their costs occasioned by the lower natural gas costs.

Instead, all signs are they will merely pocket more millions in windfall profits and defy consumers and the state to try recovering anything through the courts.

Things have progressed beyond the point where the power-producing companies can maintain any credibility when they say they have not colluded to fix prices and manipulate the wholesale electricity market.

Any hope they could deny such charges went out the window when Duke Energy, the North Carolina-based company that now owns the huge former PG&E plants at Moss Landing and Morro Bay, offered to make an unspecified "appropriate payment" in return for an end to all the collusion lawsuits and investigations it faces.

Duke long insisted it has profiteered less than its alleged partners in price piracy, selling more than 80 percent of the output of its California plants directly into the state's power grid during the winter and spring. It still has not formally admitted any wrongdoing.

But its settlement offer, made in a once-secret letter to Gov. Gray Davis and quickly refused by him, amounts to a tacit admission that it overcharged California utilities and consumers by many millions of dollars.

If Duke's behavior has been better than the others', what does that say about them? For sure, there has been what Davis describes as "a massive transfer of wealth from the people of California to a few large companies in Texas."

But now each of the power companies has an opportunity to redeem itself, at least a bit. All they have to do to show they are well-intentioned and plan to heed the call Davis made the other day for them to be "good citizens" and "not rip us off" is lower their prices in response to their newly lowered costs.

It's a test. The smart bet is that most of these companies will not pass.

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