The Federal Energy Regulatory Commission revealed Thursday a previously confidential report it completed before entering into a refund and consent agreement with Williams Energy Marketing and Trading Co. for its management of AES Corp. generating capacity last year. The settlement came after the Commission had issued a show cause order accusing the two companies of withholding generating capacity to drive up power prices in California (see Daily GPI, May 2, 2001).

The companies admitted no wrongdoing and the stipulation and consent agreement signed with FERC’s Market Oversight and Enforcement Section resolved all the issues in the show-cause order. The agreement included an $8 million refund to the CAISO by Williams and service requirements going forward.

The report, which surfaced Friday in response to a public-records lawsuit brought by The Wall Street Journal, is the non-public appendix to the consent agreement, which details, through transcripts of recorded telephone calls, how there may have been an attempt to withhold capacity from the market in order to pressure prices.

Specifically, the agreement required Williams to refund $8 million of the $10.85 million in additional revenues (after costs) that it received when two AES generation facilities, designated as reliability must-run (RMR) units, failed to provide immediate service to the CAISO during the April-May 2000 period. As a result, the CAISO was forced to call upon other non-RMR AES units for replacement service, and pay a much higher prices (near or at $750/MWh) for power to Williams.

FERC did not find that either Williams or AES abused their market power in California, and, as a result, it rejected a request by California regulators to impose penalties — over and above the refunds. The agreement did not end the “formal, non-public investigation” that the Commission ordered into any and all violations by the two companies — or their parents, subsidiary companies and affiliates — with respect to the operation, maintenance and sales of power from AES’ Alamitos and Huntington Beach generation plants in 2000 and 2001.

Ironically, the details of the investigation surfaced the same week the Justice Department antitrust division had closed its 18-month investigation into the power capacity agreement between Williams and AES, saying it would take no action. It also comes on the heels of Williams’ resolution of its long-term power contract dispute with California this week, a settlement that gives the state more control over its contracts and provides for up to $417 in separate payments by the energy company, as well as up to $1.4 billion in contract savings (see Daily GPI, Nov. 12).

Dispelling hyped reports in the Journal and Bloomberg, which made it appear to be a whole new investigation which could undermine Williams settlement last week with California, the company said it had showed the document to the state of California more than one year ago. Also, the company’s settlement with California, announced on Monday, does not provide an opportunity for termination based on the events described in the document.

A spokesman for California Gov. Gray Davis said Friday the state was reviewing the FERC documents, noting they are a “serious piece of information,” and provide the “gory details” about events in the California energy market. But contrary to prior reports, the spokesman said the state had no plans to pull out of its settlement with Williams. “Obviously we are pleased with the settlement,” but “we do want to take at look at the documents.”

“A lot of people were already aware that this document was out there and existed,” said Tom Dresslar, a Sacramento-based spokesperson for the state attorney general’s office, who noted that California is proceeding with its due-diligence of Williams, and has until Dec. 15 to complete that analysis, prior to making its global agreement effective. “It is not any great surprise.”

The incidents related to power from AES’ Alamitos and Huntington Beach generation facilities near Los Angeles and indicated a possible attempt to extend a repairs outage in order to ratchet up electricity prices in the state. Williams is the exclusive marketer for power from the two facilities under an agreement with Alexandria, VA-based AES.

The 10-page report shows the conversations between Williams and AES officials occurred during April and May 2000, just weeks before California was rocked by soaring power prices, shortages and rolling blackouts [IN06-3].

Williams turned over the taped conversations to FERC prior to the agency’s issuing the show cause order.

As revealed in the latest report, one of the more damaging telephone conversations occurred on April, 27, 2000. Rhonda Morgan, Williams’ outage coordinator, told AES that it wanted the outage at an Alamitos 4 unit (a RMR unit) extended “because the ISO was paying ‘a premium’ for the use of the non-RMR unit.” Specifically, she said, “that’s one reason it wouldn’t hurt Williams’ feelings if the outage ran long.”

Eric Pendergraft, an AES official, said he understood Williams’ message to be “that it might not be such a bad thing if it took us a little while longer to do our work.” Morgan responded with: “we’re not trying to talk [you] into doin’ it but it wouldn’t hurt, you know, we wouldn’t like, throw a fit if it [the outage] took any longer…I don’t want to do something underhanded, but if there’s work you can continue to do…”

In a statement, Williams said “this was an inappropriate conversation between two people who typically talked four or five times per day. Williams management learned of the conversation [from Morgan] and immediately took corrective action.”

Following the shutdown of AES’ Huntington Beach 2 unit on May 6, 2000, the CAISO hired an independent consultant, Black & Veatch, to conduct an on-site inspection of tunnels at the unit. The consultant found that “typical good utility practices should have prevented this type of problem,” and noted that AES’ rate of repair “would appear to fall outside of good utility practices.”

At about the same time, AES declared forced outages at four non-RMR units at Alamitos, and Williams chose not to sell output from the Alamitos’ operable fifth unit into the market. As a result, the CAISO was forced to call Alamitos fifth unit into service as a non-RMR unit at the maximum bid price. “On May 16, the day the ISO informed AES that the ISO would investigate this matter, Williams began selling Alamitos 5 into the market. By not selling Alamitos 5 into the market in the eight days prior to May 16, Williams received approximately $3.7 million through non-RMR dispatches.”

With respect to the shutdowns, including the Huntington Beach 2 unit, one Williams employee laughed, saying “That’s weird,” while an AES employee responded, “Yeah. They’re playing games,” according to the transcripts of the taped conversations in the FERC report.

The report further suggests that CAISO officials were aware AES was declaring outages even though there was nothing physically wrong with some of its generation facilities. Williams’ Morgan told the CAISO that AES shut down its Huntington Beach 2 plant because the company felt that the ISO’s compensation formula for nitrogen oxide (NOx) credits was insufficient, it noted.

“So take some of that money that you just raped us out of [on] Alamitos 4 and buy some damn credits,” an ISO coordinator said to Morgan. She laughed and said, “Good answer, man.,” according to transcripts of the taped conversations.

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