Hydro firm to repay state $750 million

08/17/2013 12:00 AM

08/17/2013 8:33 AM

It was called "megawatt laundering," a scheme invented by Enron to maximize profits during the California energy crisis. On Friday, one of its most aggressive practitioners agreed to give the state a $750 million refund.

Powerex, a government-owned hydroelectricity supplier from British Columbia, cut a deal with California officials to settle years of litigation over alleged market manipulation. Out of all the price-gouging claims to emerge from the energy crisis of 2000-01, this is the single biggest refund.

Most of the money will go to ratepayers of Pacific Gas and Electric Co., Southern California Edison and San Diego Gas & Electric in the form of offsets on their bills. PG&E customers alone will get more than $300 million.

The deal with Powerex means California has recouped $4 billion in refunds from the crisis, or slightly less than half the amount state officials say energy traders gained by gaming the system. The state is still pursuing claims against more than a dozen companies, and it's likely "we can get another $1 billion from the remaining sellers," said Frank Lindh, general counsel at the state Public Utilities Commission.

For Powerex, the settlement removes a huge risk; the government-owned utility was facing claims totaling $3.2 billion from its actions during the energy crisis.

"This was a tough but necessary decision to protect taxpayers," said Bill Bennett, British Columbia's minister of energy and mines, in a news release. "We have learned that the U.S. court system can be unpredictable."

The settlement resolves all the claims against Powerex, and the seller didn't have to admit wrongdoing.

Despite the discount, Lindh said the deal was a "fair settlement for both sides." Allowing for appeals, he said, the case could have taken another decade to resolve.

California's energy crisis was the result of an electricity deregulation plan gone bad. PG&E and the other big investor-owned utilities were forced by law to sell most of their power plants – and then buy the bulk of their electricity on the spot market.

Power was cheap for a while, but prices exploded in mid-2000. By early 2001 there were rolling blackouts and PG&E was in Chapter 11 bankruptcy, bled dry by electricity purchases. The state Department of Water Resources temporarily took over power-buying chores for the big utilities, spending billions in a feverish attempt to keep the lights on.

During the crisis, Powerex officials portrayed themselves as good guys, delivering power to California in its time of need. They were sheepish about the big profits, saying much of the money was being put into rebates for British Columbia ratepayers and a health care initiative.

"We don't relish this," said Ken Peterson, Powerex's president at the time, in a 2001 interview with The Sacramento Bee in his Vancouver office.

But in lawsuits filed after the crisis was over, California officials said Powerex was a willing participant in various illegal ploys to game the market.

One of them was called "megawatt laundering" – or "Ricochet," as its inventors at Enron dubbed it.

In this scheme, according to California Attorney General Kamala Harris, traders from Powerex bought California electricity, shipped it to Canada – and then sold it back to California "at exorbitant prices."

Why pingpong the power around? Mainly to escape California's price ceilings, which applied to homegrown electricity. Power brought in from out of state wasn't subject to the price caps.

Megawatt laundering was "a particularly frequent and egregious manipulation," said the PUC's Lindh.

Under the settlement, which requires Federal Energy Regulatory Commission approval, Powerex will send California cash totaling $273 million. The seller will also release $477 million, including interest, being held by California in an escrow account for power that was delivered during the energy crisis.

Of the total payment, $162 million will go to the state water agency, to settle claims that it was gouged during the period when it was buying power.

The state had been wrangling with Powerex for the better part of a decade. Lindh said a big breakthrough came when a FERC administrative law judge issued a preliminary ruling in February, saying the state was likely owed a total of $1.6 billion by Powerex and other suppliers.

The judge found some 20,000 different violations of trading rules had taken place during the summer of 2000.

"Just about every single hour of that summer there were violations," Lindh said.

Friday's settlement represents the latest in a series of crackdowns on power-market manipulations in California. In July, power trader JPMorgan Chase & Co. agreed to pay $410 million to settle claims from trades made in 2010 and 2011. Of that, $124 million was refunded to California.

Call The Bee's Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.

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