Reliant Debunks CA Power Largesse Myth

Calling the evidence "compelling," Reliant Energy Inc.'s first public financial disclosure of its California operations between October 2000 and May 2001 revealed last week that while its wholesale power net revenues equalled $570.9 million, expenses totaled $413.7 million, which made the $127 million gross profit equal to $41/MWh, closely paralleling prices for the past three years. Reliant noted that its operating margin was $38/MWh in 1998; $11/MWh in 1999; and $28/MWh in 2000.

"Operating costs and sales quantities are driving the revenues of gas-fired generators, not increases in operating margins," it reported in its Form 8-K, filed July 6 with the Securities and Exchange Commission. It said that between 1998 and 2001, the volume of its power sales in California climbed fourfold, while its fuel costs rose seven times and its operating margin rose slightly more than 10%.

Some Reliant investors called the move a good public relations effort, and expected that other marketers accused by California government officials of overcharging may follow with their California profit reports this week. California Gov. Gray Davis has accused Houston-based Reliant, along with fellow Houston marketer Dynegy Inc., Tulsa-based Williams Co. and Charlotte, NC-based Duke Energy Corp. of overcharging for power beginning late last year through the beginning of this year. All have denied the charges, but Reliant is the first to publicly release its earnings report specifically about its California profits.

Reliant President Joe Bob Perkins, who said the report was to also be delivered to the Federal Energy Regulatory Commission as part of its investigation of California's natural gas market, said he wanted to include company-specific information to be clear that California's power costs were not driven by increased profits for a few energy companies. "More importantly, we want it in the hands of certain politicians across the country."

Reliant's SEC filing, called "Myths Debunked: The Real Story of Wholesale Power Costs in California," detailed its reasons as to why it alleges that wholesale power costs increased; who collected the revenues; and what the impact was on operating margins of suppliers. The report was based on an earlier report, "Analysis of Increased Power Costs" released by the company in June, which detailed revenues, expenses and operating margins in California between April 7, 1998 through May 31, 2001.

"While the prices paid to gas-fired independent generators dominated political and media reports, California's single market-clearing price system was quietly paying gas-based prices -- thereby delivering immense windfalls -- to generators who bought no gas at all," reported Reliant in the SEC filing. "The real money stayed in California itself -- with California's own three big utilities, plus the Los Angeles Department of Water and Power (LADWP), who together collected more than half of the $27 billion power bill in 2000. Another 22% went to others who were buying little or no natural gas."

Through its analysis, Reliant reported that of the $27 billion in wholesale power costs in 2000, "more than half of the increase in wholesale power costs was paid to California's investor-owned utilities, San Diego Gas and Electric, Southern California Edison and Pacific Gas and Electric (the IOUs) and the publicly-owned LADWP. This analysis also undercuts statements made to the effect that the increase in wholesale power costs has represented a tremendous transfer of wealth to entities outside of California. To the contrary, analysis of available data would suggest that the majority of the wholesale power costs in 2000 were paid to California-based entities."

Reliant also blasted California critics who it said implied that there was an "alleged massive transfer of wealth" to Texas-based entities, calling it "implausible, since the largest outside supplier to California was the Canadian supplier, British Columbia Hydro, which together with numerous Western suppliers provided the majority of energy to California from outside the state, as documented by the California Independent System Operators's only report of alleged overcharges."

Reliant did not discount how natural gas prices skyrocketed during the alleged overcharging period, and instead, struck at those charges head on. "Indeed," it said, "wholesale power costs increased approximately fivefold over this period." However, the marketer noted that what is "typically ignored" is a "critical discussion of the factors" that resulted in higher costs, which included its "serious" supply and demand imbalance. A too-heavy reliance on hydropower, followed by drought conditions, hurt the state, along with a "dramatic reduction in imports" in 2000. The cost of natural gas skyrocketing was but one contributing factor, along with the state's "lack of infrastructure upgrades" to support the increased gas demand as the hydropower drought continued.

Increased revenues, Reliant noted, were not added to the independent generators' balance sheet. Its analysis showed that "more than half of the power revenues in 2000 flowed to the IOUs and LADWP...the IOUs have received not only a significant portion of the revenue...but enjoyed a disproportionately greater increase in profit margin, as their production costs are not linked to natural gas prices." Reliant estimates the IOUs and LADWP received more than 54% of the wholesale power revenues in 2000, and the "other parties," which include BC Hydro and Bonneville Power Administration received about 22% of last year's revenue.

Reliant called the State of California's claims that it owes "billions of dollars in refunds" absurd, instead suggesting that the "relevant refund period is less than $139 million." It said that total operating margin "only takes into account fuel expenses, emission costs and variable operations and maintenance costs, but does not provide for any return on and of capital, does not cover other fixed costs and does not reflect interest expenses or taxes for spot market transactions during the revenue refund period," highlighting "the absurd nature of refund claims that have been made to date."

Last week, Reliant's John Stout, who runs the company's California operations, revealed that the company already has offered to pay California $50 million in refunds as part of a general settlement of alleged overcharges. Stout said that the state miscalculated the actual cost of natural gas prices and did not calculate the related costs. California officials, he said, have demanded that Reliant refund the state $376 million for overcharges between October 2000 and February 2001, but the company calculated the $50 million refund offer for the longer period between October 2000 and May 2001. The refund offer was only to be made as part of a complete settlement with the state concerning future lawsuits and credit issues, Stout said.

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