 California Lawsuits: Williams Deal Could Produce Cascading Effect - By Ken Silverstein Daily IssueAlert 11/15/2002 Free [News Item from The San Diego Union-Tribune] California officials announced they trimmed $1.4 billion from an agreement with one of the biggest companies accused of gouging consumers during the electricity crisis last year. The settlement with Williams Cos. Of Tulsa, Okla. reduces what had been a $4.3 billion supply contract and ends lawsuits by the attorney general and private attorneys alleging that Williams violated California law during the crisis. Analysis: The settlement between Williams Cos. and the state of California over withholding supplies and price gouging could spur other energy providers to talk shop. Negotiated deals, which do not imply guilt, might help facilitate an end to all state investigations and restore confidence in the market. Altogether, California seeks $9 billion from power producers and trading organizations that it says deliberately manipulated markets in 2000 and 2001. California's investigations are in addition to those of federal prosecutors in California that have just subpoenaed Mirant Corp., Dynegy Corp., Reliant Resources, AES Corp., Duke Energy and Williams. Subpoenas allow prosecutors to gather evidence but do not implicate any entity. Specifically, the accord reached Monday between Williams and California officials gives something to both sides without doing any further devastation. Gov. Gray Davis is not just able to claim he led an effort to renegotiate the state's third largest long-term power contract but that the discussions could create a cascading effect whereby others are eager to converse with the state. At the same time, Williams is able to put the entire legal morass associated with California state agencies behind it while still maintaining strong business ties to the state-a mammoth consumer of electricity. Of the 56 contracts signed in 2001, 13 of them have been renegotiated and the state says that it has saved $5 billion in process. Others that have come back to the table include Whitewater Energy, Calpeak, GWF, Colton Power and Pacific Gas & Electric Trading. Calpine, which held the largest contract, lopped $3 billion off a $10 billion agreement while eight other marketers that at one point participated now have expired contracts. Moving Forward Under California's system of deregulation, utilities were precluded from entering into long-term agreements and were thus forced to buy their power from short-term markets, which at the time had spiked to more than $1,000 a megawatt hour during peak usage. At the same time, the companies were prevented from passing that cost along to consumers, with the exception of San Diego Gas & Electric once it had recovered stranded costs. The most optimal solution in 2000 and 2001 was for the state to eventually enter into long-term power contracts with providers. Initially, the terms of those deals were considered favorable and well-below spot market values. But, prices subsequently fell and the state was stuck in high-priced contracts. The matter intensified when officials discovered the various ways that traders allegedly manipulated markets, all of which created a feeling among policy makers that those contracts had been based on “erroneous” information. Williams is the latest and one of the biggest to have entered into talks. It was accused of withholding power supplies and for charging the state for electricity in which it did not deliver. Its contract with California accounted for $4.3 billion of the $43 billion signed during the power crisis of 2000 and 2001. As part of the settlement, the state agreed to drop all criminal charges. In exchange, Williams will trim $1.4 billion from the original 10-year, $4.3 billion contract. It will also pay the state $150 million over eight years. About $15 million each of that cash settlement will go to Washington State and Oregon. Williams will also stay involved in the California market. It will give six electric-generating turbines worth $90 million each to the cities of San Francisco and San Diego. It has also consented to increase the maximum power supplies to the whole state through 2010 from 1,400 to 1,875 megawatts and provided more flexibility for California to determine when power is dispatched. It further has reached a long-term natural gas deal with the state to provide 1.2-1.8 million MMBTUs per month through 2010. The price of contracts will remain between $62.50 and $87 per megawatt hour. Much of the state's $1.4 billion in savings will come from scratching provisions that had required it to purchase power, even if it was not needed. While an improvement over previous contracts, consumer advocates say that ratepayers are unlikely to get a breather. Williams, on the other hand, says that the deal permits it to move forward and to devote its time to core businesses. “From a business perspective, we've been able to preserve the value we have for our long-term energy contracts with California,” says Steve Malcom, CEO of Williams. “And once the settlement goes into effect, it will improve our opportunity to sell or assign all or a portion of our California portfolio. “Our goal is reduce the financial risk and liquidity requirements related to our energy marketing and risk management business,” Malcom continues. “From a practical standpoint, the settlement ends numerous legal entanglements.” Optimal Outcome Other investigations into utilities' operations ensue and include those by the Federal Energy Regulatory Commission, the Commodities Futures Trading Commission and the Securities and Exchange Commission. The scrutiny now given the utility sector has made Wall Street wary and has subsequently hurt severely the stock prices and bond ratings of many companies. The latest request by the U.S. Attorney's Office in San Francisco seeks much of the same information as the state and federal government agencies examining the matter. The accusations include, among other things, withholding power supplies, creating phantom congestion along the transmission system and falsely inflating volumes—all of which was done in attempt to raise prices. All of the companies to be questioned have said they will oblige. Mirant's problems are mounting and are now the subject of numerous investigations in California. It is all made worse because last week it said that its profits were overstated by $41 million during the past four years and that it will re-audit its financial statements for 2000 and 2001. If the new look by accountants would trigger any defaults on its obligations to bondholders, the company said it could seek creditor protection or bankruptcy—a statement later retracted by Mirant. Prosecutors have thus far netted one player at the center of the alleged scandal to manipulate the California electric market. Timothy Belden, who ran Enron Corp.'s West Coast trading bureau, pled guilty to one count to commit wire fraud and has promised to cooperate fully with federal prosecutors. And California's attorney general has made it clear that the state intends to get Enron's top brass, including its former CEO, Ken Lay. “I would love to personally escort Lay to an 8-by-10 cell that he could share with a tattooed dude who says, 'Hi, my name is Spike, honey,'" says Attorney General Bill Lockyer, in an interview with the Wall Street Journal. Government investigators and prosecutors appear to be building their cases against alleged wrongdoers. That may be behind the rash of subpoenas just issued by U.S. attorneys in Northern California. Under any event, the confluence of the Williams settlement and the pick up in activity is likely to produce further settlements. The best outcome, overall, is that wrongful parties are properly penalized and that companies remain viable to not just deliver much-needed products and services to consumers but to also give a shot of confidence to investors. UtiliPoint's IssueAlerts are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2002. 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