As another week passed without a settlement among state political, regulatory and energy stakeholders, California state officials continued to push on with investigations and proposed punitive legislative measures aimed at merchant generators and marketers that are accused of price-gouging in the state’s wholesale power and natural gas markets.

After months of investigation with no specific civil or criminal charges being leveled, California’s attorney general last week announced that a criminal grand jury will be convened in Sacramento in July as part of the state’s ongoing efforts “to get at the truth about energy pricing practices for electricity and natural gas.”

At the same time, a spokesperson for state Attorney General Bill Lockyer reiterated that “no conclusions have been reached” in the ongoing investigations and there are no timelines for ending the probes or announcing civil and criminal legal actions against the alleged market manipulators.

Separately last week, Gov. Gray Davis’s office released the transcript of an editorial briefing the governor conducted in San Francisco earlier in the month, revealing what has been apparent all along — namely, that the threat of legal action as a result of numerous investigations is a bargaining chip state officials want to use to get power and gas suppliers to take less for their supplies going forward and/or discount the millions of dollars owed them in unpaid wholesale electricity bills dating back to last year.

“When Duke met with some of my people they said they would be happy to reduce their claim for past debt if we dropped the investigations,” Davis told editors and reporters at the San Francisco Chronicle. “When that came to my attention I said, “We’re dropping nothing’. Our only remedy is to access the courts and make our case and demand relief. I am not closing the door to the courthouse.

“At some time soon, [the attorney general] will file a number of lawsuits, and they will be civil, for sure, and there may be some criminal lawsuits.”

The California Independent System Operator (Cal-ISO) filed emergency motions with FERC on June 8, seeking to terminate the Commission’s grant of market-based authority to Mirant/Southern Energy, Reliant, Dynegy and Duke unless it imposes a mitigation plan that “fully protects against the exercise of market power in California,” including refunds, plus interest, of charges exceeding cost-based rates going back to May 2000. The filings join similar actions filed earlier against Williams Energy and AES, after a federal court refused to act.

Also last week another proposed new law came out of committee in the state Assembly (AB X2 35) authorizing the newly created California Power Authority to “temporarily take control of (California-based) power generators charging exorbitant prices.”

Davis in his editorial briefing made the point that eventually he wants the state to back out of the power business even though he is advocating state ownership of power transmission lines and having the power authority build plants and transmission if the private sector fails to respond. He noted, however, that the “threat” of confiscating energy infrastructure was needed in his only negotiations toward an over-arching settlement.

“Seizing power plants has a lot of minuses associated with it,” Davis said. “I’m not ruling it out, however. I need the threat to induce halfway decent behavior from these robber barons who are stealing us blind.”

The governor went on to say that if these threats of dire action don’t eventually lead to a settlement, he will follow through on getting a windfall profits tax passed in the state legislature and in seizing energy assets of suppliers found to be gouging. A new state law passed earlier in the year placed criminal penalties on CEO’s and other company officials of firms convicted of gaming the market.

“It is time for the state to stop being the hapless victim of the out-of-state generators,” said Juan Vargas, a San Diego state legislator sponsoring the AB X2 35, the power authority plant seizure bill. “We must fight back and take control of the power generators until the market stabilizes.”

The proposed law would require the new state power authority to operate under eminent domain proceedings, for a period of 18-24 months, possession and use of property necessary for the generation of electricity. Owners would be compensated, under existing law, “at the reasonable rental value of their property” until the plants are returned to the private owners.

Meanwhile, Lockyer said the Sacramento grand jury would add further focus to the state’s “criminal probe to determine whether the California market was manipulated and profits taken illegally, and whether there was fraud against the public.” However, given the confidentiality of grand jury proceedings, Lockyer emphasized that comments from his office would be limited.

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