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July - Duke Energy Employee Advocate

Deregulation - June, 2001 - Page 3

"It's always the smallest of men who would be tyrants" - Robert Bentham

U.S. Report Finds Flaws in Study of California Power Companies
New York Times - By JOSEPH KAHN - June 30, 2001

An investigative arm of Congress faulted federal regulators today for claiming that there was no evidence to support accusations that power companies manipulated California's electricity market.

The General Accounting Office reviewed a study by the Federal Energy Regulatory Commission issued in February. The energy agency found no evidence that companies withheld power to drive up prices.

Politicians in California and some economists have been asserting for months that power companies withheld available electrical generating capacity to create or worsen shortages. Generating companies had cited the energy agency's report to rebut those accusations.

The accounting office said the agency's work looked only at physical reasons for outages and did not explore the possibility that generating companies used bidding strategies to withhold supplies. Moreover, the office found that the study did not prove that cutoffs had occurred for unavoidable physical reasons.

"FERC's study was not thorough enough to support its overall conclusion that audited companies were not physically withholding electricity supply to influence prices," the accounting office said.

The office said that industry experts it consulted agreed it was "practically impossible" to determine whether cutoffs were justified merely by examining physical evidence because plants frequently ran with some physical problems.

The accounting office's study comes a week after three former employees of Duke Energy, a leading generator in California, told the State Legislature that the company shut production units to drive up prices.

The energy agency has an obligation under federal law to ensure "just and reasonable" electricity prices. It has found that electricity prices in California have not met that standard, but recently it began imposing price controls.

Some analysts have said they suspected generating companies kept generating units off-line, limiting competition and forcing California's grid operator to pay stratospheric prices to avoid blackouts. The accusations were supported by circumstantial evidence that showed supplies of electricity declining this year when compared with the year before.

Generating companies have said they are doing all they can to run aging power plants at full capacity to meet demand. They say they shut units only for routine maintenance.

The energy agency conducted inspections and telephone inquiries at several California generating plants. It found the cutoffs were justified.

Curt Hébert Jr., the energy agency's chairman, wrote a letter to the accounting office, saying he agreed with its "basic findings." But he said his agency's study was never intended to examine all accusations of withholding but only to explore whether price manipulation had occurred in the few cases that were examined.

Conventional Wisdom is Lost on Duke
The Charlotte Observer - By TOMMY TOMLINSON - June 29, 2001

You see it all the time in those black-and-white flicks on American Movie Classics. A starry-eyed teen packs his bags while Mama warns: Don't go to California. Nothing but trouble out there.

Duke Energy must not get cable.

Here in the Carolinas, Duke has it easy.

The company has been around more than 100 years, and we treat it like a rich old uncle.

Nobody squawks about its electric rates. Nobody much cares that Duke makes a mint off the land around the lakes it created.

But you know how it is in business today. Only a loser settles for steady profits year after year.

Winners grow. Winners attack. Winners go global. Winners claw for an edge.

A few years ago, California opened its electricity business to competition.

Power companies felt a tingle in their loins. California. All those people. All those hot tubs.

So in 1998, Duke paid half a billion dollars for three California power plants.

They have done a marvelous job of generating bad publicity.

California is in the midst of a brutal power shortage, and the state is ticked at everybody from Thomas Edison on down. But Duke is catching a double load of grief.

The company was caught briefly charging California $3,880 per megawatt hour - an amount of power that would cost the average Carolinas customer about $75.

And former workers at one of the power plants say Duke cut back production during shortages, on the theory that low supply + high demand = big profits.

Duke is fighting back hard. It says it charged the $3,880 rate partly because the state hasn't been paying its bills.

And it says it cut production on the orders of the agency that controls California's power grid.

People on both sides are getting hot, which is only natural when your air conditioner keeps getting browned out.

It's too early to tell who's right, or if anybody's right.

But in the old movies, this would be the point where Duke comes slinking home and Mama says: You never should have gone in the first place.

If personal life worked the same way the business world does, we'd all be polygamists. In business, one marriage is never enough.

Duke's reach into California isn't necessarily greed - or at least not its own greed. Wall Street punishes companies that don't grow fast enough. Every company that sells stock is scanning the sidewalk for a loose dollar.

A chance like California was too good to pass up.

One day, when there's no one left to merge with and no one left to lay off, maybe stable will count for something.

But there will always be people who let Hollywood get in their eyes.

You know how that story goes.

Most crawl back home with empty pockets.

And the ones who succeed end up doing things they're not proud of.

Five Generators Threatened with Contempt
San Francisco Chronicle - By Lynda Gledhill - June 28, 2001

A state Senate committee investigating allegations of electricity price gouging may vote today to hold five power generators in contempt for not complying with its subpoenas, according to the chairman.

Such a move would be the first contempt finding by a legislative committee in recent memory and is designed to apply more pressure to the generators. Another option the committee is considering is to find that the generators have not complied with the subpoenas but give them additional time before issuing a formal contempt ruling.

None of the documents requested by the committee had been received by late yesterday. The companies and the committee have been unable to come to terms over confidentiality of the documents.

"Their demands are extraordinarily broad," said Sen. Joe Dunn, chairman of the Senate special committee investigating market manipulation. "We are not willing to give blanket confidentiality."

Dunn said certain information -- such as trade secrets -- would be kept confidential…

If a legislative committee issues a contempt ruling, it then goes to the full Senate for action, said Legislative Counsel Bion Gregory. It is not clear what the Senate might do, but sending someone to jail is a possibility…

Dunn's committee requested documents from Duke, Dynegy, Williams, Mirant and Enron. An initial document request sent on April 5 was ignored, Dunn said. The subpoenas were issued June 11.

In addition to the Senate's investigation, Attorney General Bill Lockyer has said he will call a grand jury to investigate whether the companies have manipulated the California energy market.

This Senate committee also heard testimony last week from three former workers at a Duke plant in Chula Vista, who said they were ordered to ratchet up and down the plant's production and throw away replacement equipment in an apparent attempt to drive up electricity costs.

Power Shortage Not Real, Most Californians Say
L. A. Times - By JENIFER WARREN - June 28, 2001

The energy market was manipulated to boost sellers' profits, 86% say. Davis gets low marks but Bush fares even worse.

Despite disruptive blackouts and record increases in their utility bills, most Californians remain unconvinced that the state suffers from a shortage of energy, a Los Angeles Times poll has found.

Instead, more than five out of six Californians believe power companies have manipulated the electricity market to boost their profits, the poll shows.

And although nearly all respondents agree that the state's energy crisis is a serious problem, they express little faith that their leaders can solve it.

Nearly half of all Californians give Gov. Gray Davis low marks for his handling of the crisis, suggesting his efforts to stabilize power prices and lock up megawatts under long-term contracts have not wowed a wary public. In a February Times poll, by contrast, only 37% of Californians disapproved of the governor's stewardship.

"Why didn't he get on top of it sooner?" Lydia Salcido of La Puente, a counselor at a home for troubled girls, said in a follow-up interview. "If the henhouse door is open and you're losing your chickens, you don't wait until they're all gone to fix the door."

Californians are even less enamored with Washington's performance, however. When asked which politician is more ably responding to the energy mess, Davis wins hands down over President Bush, enjoying almost four times as much support.

Spawned by the state's failed experiment with deregulating its electricity market, the energy crisis has sucked billions out of the public treasury and dwarfed all other problems confronting California this year…

Duke Takes California Battle to Public
The Charlotte Observer - By PETER WALLSTEN - June 27, 2001

Duke Energy is fighting back against allegations of wrongdoing in its California operations, defending its reputation in newspaper ads and accusing federal regulators of mistakenly ordering refunds.

The Federal Energy Regulatory Commission singled out Duke last week for excessive electricity prices in California, saying the company's charge earlier this year of $3,880 per megawatt hour "can in no way be found to be just and reasonable."

"We will not tolerate abuse of market power and anticompetitive bidding," the commission said as part of its 48-page order setting price controls in California and the West. "Emblematic of those practices is the now well-publicized bid of $3,880/MWh by Duke Energy."

The commission went on to slap Duke for failing to disclose the price in its quarterly reports required by the FERC, and then ordered the company to submit a written plan by next week about how it intended to refund millions of dollars to the state for the sale.

But Duke officials now say the commission was wrong, and they plan to say that in their filing next week.

"We haven't been paid yet, so we're not going to refund it," said Tom Williams, a Duke spokesman. "The FERC is just mistaken."

Williams said the company had already been told to make refunds for that time period in an earlier FERC order. Those refunds - about $20 million for Duke - are pending.

All of the refunds could be on the table in private settlement negotiations occurring this week in Washington involving power generators, FERC and other market players.

Meanwhile, Duke responded Tuesday to allegations lodged last week by three former workers at a Southern California plant that the company deliberately decreased production during shortages to drive up profits.

The company purchased full-page ads in major California papers asserting that the workers did not understand the full plant operation.

Duke officials say the plant was ramped up and down at the order of the state's Independent System Operator, the agency that controls California's power grid, which monitors supply and demand.

"We wanted to be able to tell our side of the story, and we were having a difficult time doing that with the political atmosphere," said Cathy Roche, a Duke spokeswoman.

The workers testified Friday to a state Senate committee investigating allegations of price manipulation by Duke and other generators that moved into the state after deregulation.

On Tuesday, sources said, more workers and ex-workers for Duke and other companies were contacting the Senate committee to make similar accusations. A fourth former Duke employee came forward this week to confirm the stories, the Orange County Register reported Tuesday.

Last week, the FERC issued its report setting market-based controls as it faced sharp criticism from California Gov. Gray Davis and congressional Democrats who argue that the federal government failed to rein in the state's market.

The $3,880 price, first disclosed as part of a June 1 Charlotte Observer analysis of public records, was charged to the ISO. Duke's total sale to the ISO at $3,880 was 5,000 megawatt hours - $19.4 million. The sale represented less than 1 percent of the 10 million megawatt hours Duke sold in California during the first three months of the year.

The company justified the price, saying it was high because of a credit premium to make up for the state's poor payment record.

The ISO's failure to make payments was the subject of at least one lawsuit by Duke. In that suit, Duke claimed the ISO was violating federal law by forcing generators to sell electricity at essentially no cost by transmitting the electricity through the state's insolvent utilities. At the time, in early 2001, the ISO told Duke it would be paid 1.8 cents for every dollar of electricity sold.

Still, the charge represents the highest-known price for electricity in California since deregulation took effect in the late 1990s, and the price became the rallying cry for the FERC's biggest critics.

In its order, the FERC said Duke was wrong to charge such a high credit premium, and said the more reasonable price would be $273 per megawatt hour - still nearly 10 times the average price before deregulation.

Power Workers Supported
The Orange County Register - By KIMBERLY KINDY - June 26, 2001

A second wave of former power-plant workers stepped forward Monday to say they witnessed power merchants intentionally damage generators - including some in Orange County - a practice they believe led to price gouging of Californians.

The generating companies, Duke Energy and AES Corp., also denied the new round of allegations, made by a half-dozen workers who took their stories public or contacted legislators with offers to provide sworn testimony.

One of those speaking out Monday, a former manager at Duke's Chula Vista plant, told The Orange County Register that he supports the testimony of three former colleagues who Friday told a Senate committee that new parts at the plant were destroyed, routine maintenance was neglected and generators were unnecessarily throttled down.

Rick Connors said that unlike the three Chula Vista plant workers who testified earlier, he was offered continued employment by Duke and cannot be dismissed by the company as a terminated employee with an ax to grind.

"I listened to the entire hearing. I can tell you that everything they said was the truth; nothing they said was even a stretch,'' said Connors, who has decided to retire and become a card dealer instead of working for Duke, which took over the plant from San Diego Gas & Electric and laid off many of his experienced co-workers.

Connors and another new witness, Dan Davis, a former electrician at the AES-owned Huntington Beach plant, each on Monday said they saw maintenance schedules at their respective plants abandoned and generators constantly turned on and off, which damaged them.

"They learned that they would operate one generator and make more money than if they were operating three,'' said Connors.

Conners had worked at the plant 20 years before Duke took it over in 1998 and said he was familiar with generation levels before and after the takeover. Conners said that even though Duke dramatically cut back on how much it ran its generators in the first year, Duke executives boasted to employees at a company party that they had made as much money in their first year as SDG&E had made in the previous five.

Similarly, Davis said, the generators at the AES plant in Huntington Beach would be ramped down and quickly ramped up again.

He believes this wear and tear coupled with a lack of maintenance not only helped create an immediate scarcity in the market but also created an environment of constant breakdowns - which created further scarcity.

"At first I thought they were stupid,'' said Davis, who now works for the union representing plant workers. "I had been there 10 years and I was watching them destroy the plant. But then I saw how it made them money. Breakdowns made them money."

Both companies vigorously denied the allegations.

"Any talk of us intentionally breaking down equipment is ludicrous,'' said Ed Blackford, manager of the AES plant. "When our units break down, we lose money. We have commitments and if we can't produce that electricity, we have to go out into the market and buy it."

Duke spokesman Tom Williams said he is sure the workers saw changes in the way the plants were operated after deregulation - but said their conclusions of price-fixing and gouging are off base.

"It's highly offensive to us,'' said Williams. "They were seeing things from their own viewpoint and they don't see the full picture."

Duke took out a full page ad in today's Orange County Register and other newspapers that says the powering up and down was done at the order of the Independent System Operator, which manages the state's power grid. Williams acknowledged, however, that some of those orders were made by Duke itself, but couldn't say what percentage.

The advertisement doesn't address the allegation that equipment was intentionally mistreated or replacement parts scrapped, although Duke said earlier that the parts were obsolete and it was more cost-efficient to order parts as needed.

ISO spokeswoman Stephanie McCorkle said its orders to power suppliers to ramp generators up and down are confidential and she could not verify Williams' explanation. However, the ISO, she said, would give Duke orders to ramp up and down no more often than every 10 minutes.

A review of three days of logs obtained by the Register showed that on more than a dozen occasions, orders were given in two-, three- or four-minute intervals - the so-called dramatic "yo-yoing" of the generators that some legislators say indicates Duke was acting by itself.

Williams said the bottom line is that forced outages at the Chula Vista plant were done under Duke's control just 1.1 percent of the time, compared to 1.8 percent under SDG&E.

Those numbers, however, are disputed. Frank Wolak, a Stanford economics professor who oversees the ISO's market-surveillance committee, said the forced outage numbers have only been reliable for the past six months.

"There is no independent verification of these numbers until Jan. 1, 2000, until the governor required that they report this information every single day,'' Wolak said. "That information isn't any good."

Wolak also said the employees are correct about the destructive results of the constant ramping up and down, comparing it to the wear and tear on a car that travels through a succession of city traffic lights vs. a clear freeway.

The governor Monday stood by the three former Chula Vista workers who testified Friday, calling them "brave individuals."

"I am enormously proud of these people who would step forward, risk the harassment and retaliation these big energy companies are known for," Davis said just before having breakfast with the men.

Duke Energy 'Whistleblowers' Honored

Duke Energy 'Whistleblowers' Honored
The San Diego Channel 10 News - June 26, 2001

Three Testified That Duke Manipulated Market

Three former South Bay Power Plant workers who testified before a State Senate panel that Duke Energy is manipulating the energy market met with Gov. Gray Davis Monday.

The three workers first sent 10News reporter Mark Matthews photocopies of their logbooks in February. The books gave a minute-by-minute account of how Duke Energy operated the South Bay Plant. They showed that just minutes after a Stage 3 Power Alert was issued Duke Energy ordered their operators to turn down generators -- putting even less power onto the grid in a time when the ISO desperately needed more.

The three say Duke was adjusting its supply of energy based on the price that people would pay for it. When prices dropped, they claim, so did production.

According to the three the company ramped its supply of energy up and down so much that it caused wear and tear -- forcing the plant to shut down for maintenance in the middle of the ongoing energy shortage. Shortly after the 10News report aired, California Lt. Gov. Cruz Bustamante recruited the three to help with evidence for a class action lawsuit against what Bustamante calls "the Big Five energy cartel." Bustamante says the three are "the tip of the iceberg."

He says he hopes that their courage to step forward will inspire others in the industry to do the same. It was a sentiment echoed by Gov. Davis when he met the three is Sacramento Monday.

"I want to tell the children: Their fathers are heroes. They have undergone enormous risk to testify and I am honored they are with us today," Davis said.

Testimonies Point to Power Manipulation

Talks Open on Charges for Power in California
The Charlotte Observer - By Andrew LaMar - June 26, 2001

State governor meets with former Duke plant employees

State officials carried their quest for $8.9 billion in electricity refunds to a federally ordered settlement conference with generators – including Charlotte-based Duke Energy - Monday, and California’s governor met with three former Duke Energy employees who claim the utility told them to lower generator output to raise prices.

More than 150 representatives of state agencies and energy producers gathered in Washington, D. C., for the first of up to 15 days of closed-door talks led by Curtis Wagner, the chief judge for the Federal Energy Regulatory Commission. The agency has required the sessions to set the amount generators overcharged the state and must pay back.

Gov. Gary Davis has called for $8.9 billion to be repaid to California. The figure comes from a study conducted by the Independent System Operator, the agency that runs the state power grid, that claims that is the amount the state had been overcharged for wholesale electricity, either form private generators or municipal utility districts, since May 2000.

Meanwhile, the two newest members of the FERC, Pat Wood and Nora Brownell, visited Sacramento to meet with Davis. The governor said the two promised they would ensure competition in the state’s natural gas market.

Earlier in the day, Davis said he would talk with Wood and Brownell about natural gas, prospective refund for electricity charges and allegations made by three former employees of a Duke Energy power plant.

The employees, who testified at a Senate hearing on Friday, said Duke ordered them to throw out spare parts and lower output when California’s power supplies ran short in an apparent attempt to influence prices. Ed Edwards, Jimmy Olkjer and Glenn Johnson worked at Duke’s 706-megawatt South Bay plant in San Diego Count until April.

The company which said it billed the state a record-high $3,880 for a megawatt hour in January, has called the accusations “baseless.” Company officials said their orders to ramp up and down generation corresponded with the direction given by the ISO.

But at a Monday morning news conference with the three former employees, Davis said he and other state officials have long suspected generators engaged in such activity as part of a “concerted effort to suck every dime possible out of California.”

Davis said he was especially concerned about the employees’ claims, which were backed up by control-room logs, that Duke reduced power output when the state hit Stage 3 alerts.

Duke Energy Ties to Official Examined
The Charlotte Observer - By PETER WALLSTEN - June 24, 2001

Already under investigation for its business practices in California, Duke Energy now faces questions about its financial relationship with a public official.

Duke gave a consulting contract to an official who championed Duke's lease of a lucrative power plant on public land. David Malcolm, a member of the San Diego Port Commission, was later hired to help Duke build relations with local political leaders and to find other similar deals nationally.

A lawsuit questioning Malcolm's ethics, including his relationship with Duke, is yet another example of how authorities are scrutinizing the Charlotte company's behavior in California, where a power crisis has bred charges of price gouging.

The lawsuit doesn't accuse Duke of wrongdoing, and Duke denies the relationship was improper, but a consumer activist and other critics wonder if, by hiring Malcolm, Duke was attempting to buy influence.

Malcolm was a consultant to Duke even as he remained a member of the commission responsible for monitoring Duke's adherence to the lease on the bay-front power.

Duke contracted with Malcolm through a firm called Public Benefit Power, which records show Malcolm created in January 1999. That's less than three weeks after Duke and the port first announced their agreement.

Malcolm described himself as president of Public Benefit in a disclosure form and listed Duke as the sole client, paying him between $10,000 and $100,000 in 2000.

Malcolm has said he worked for Duke only after the deal, for South Bay Power Plant, was final.

Critics want to know more about Malcolm's relationship with Duke, when it began, what he earned, and whether there was a conflict of interest.

"It seems like he may have crossed the line," said Tony Miller, a Sacramento lawyer, activist and former California deputy secretary of state. He has filed a 48-count complaint in court accusing Malcolm of an array of ethics violations. "Whether he crossed the line, and by how much, is what we all want to know."

A California judge may rule Monday whether the lawsuit can proceed, which could require further disclosures from Malcolm and Duke officials.

Malcolm did not return telephone calls. Reached Friday in his San Diego business office, he hung up on a reporter.

Malcolm recently told a San Diego newspaper that there was no conflict of interest. In the spring of 2000, he denied he worked for Duke. He told the San Diego Union-Tribune: "Why would they be interested in hiring me? I don't know anything about electricity."

Duke officials decline to be specific about Malcolm's work.

"He was working in his capacity as a private citizen, not as a port commissioner," said Duke spokesman Tom Williams.

The contract was terminated in April.

"It never went anywhere," Duke's Williams said of Malcolm's arrangement to find deals elsewhere. "He didn't work actively on any other projects for Duke (besides the San Diego plant)."

Asked why Malcolm was paid for a business deal that never happened, Williams said the company does not discuss its relationships with consultants.

In May, some critics accused Duke of trying to influence California Gov. Gray Davis by offering to help Davis with his public relations and political needs in exchange for the state dropping lawsuits and investigations targeting Duke.

This past week, federal regulators ordered Duke to refund millions from several sales in January when it priced electricity as high as $3,880 per megawatt hour - the highest publicly known price thus far.

Last week, three former workers at the San Diego plant testified before a California Senate committee that Duke's traders, who buy and sell power on the spot market, ordered production decreases during shortages to drive up profits. Duke disagrees with the workers' interpretation of the facts, saying production was properly coordinated with the state.

Malcolm has been active in politics for two decades. His ethics as a port commissioner have drawn scrutiny before. In 1996, he was named vice president of an investment firm that won a contract with the port a year earlier with his vote, the San Diego Union-Tribune reported.

Malcolm was appointed to the port commission by the City Council of Chula Vista, the San Diego suburb where the plant is located. The commission consists of local government representatives.

"He was our contact person for the (port) staff and attorneys working on the deal," said David Chapman, the port's attorney. "That's fairly common, that you look to the commissioner in whose city the deal may be."

In 1998, the port purchased the plant from San Diego Gas & Electric Co. when state regulators forced divestiture in California's electricity market. The utility agreed to sell the plant if the port could, within 60 days, find a generator to operate it.

Negotiations failed with U.S. Generation, a subsidiary of Pacific Gas & Electric Co. Within days, Duke moved in, though neither the company nor port officials can recall how it happened.

Duke agreed to lease the plant for $115 million over about 10 years. Critics say Duke earned that much in revenues from the plant within months, an assertion Duke declines to confirm or deny.

The port did not solicit bids from other power generators. Chapman, the lawyer, said the port feared it would lose its 60-day window to strike a deal. San Diego Gas & Electric would have then auctioned the plant.

The port wanted to own the plant land so, ultimately, it could replace the plant with development on the bay-front real estate.

"They were as good to work with as any company I'd dealt with," Chapman said of Duke. "They were smart and aggressive, and we knew that they could get it done."

One e-mail indicates Malcolm was skeptical of U.S. Gen as a negotiating partner long before the breakdown that opened the door for Duke. Writing to a port staffer, Malcolm said U.S. Gen is good at "crying the blues" and urged negotiators to "keep our eye on the ball" as the company made increasing demands.

"(Malcolm) was the driving force behind the deal coming together. He definitely had the contacts," said Michael McDade, a former port commissioner.

Once Malcolm became a Duke consultant, port officials say, he recused himself from discussions about the plant.

That doesn't satisfy Mike Aguirre, a San Diego lawyer who represents California's lieutenant governor in a suit accusing Duke and other companies of manipulating the electricity market.

"The commission is still responsible for holding Duke's feet to the fire on that contract, and he's still on the commission," said Aguirre. "Doesn't the fact that he's there make it harder for the port to hold them accountable?"

The contract requires Duke to look for a new plant site, remove the existing plant and build a new one within the 10-year lease.

Critics say Duke is not doing enough to find a new site, and some activists have called on the port to revoke the contract.

Duke officials say they will fulfill their obligations.

Testimonies Point to Power Manipulation
The Orange County Register - By KIMBERLY KINDY - June 23, 2001

Davis calls account of ex-Duke Energy workers a potential 'smoking gun.'

Three former workers at a Duke Energy plant moved from obscurity into the national spotlight Friday as they became the first eyewitnesses to provide sworn testimony accusing a generator of unethical - and perhaps illegal - conduct in California's energy crisis.

Gov. Gray Davis called the men "heroes," and before the first witness even completed his testimony, he invited them and their families to have breakfast with him Monday.

"If these allegations are true, it might be the smoking gun we thought existed all along."

With 10 television crews and twice as many radio and print reporters recording one of the most dramatic Capitol hearings in recent history, the men spent six hours before a special Senate committee that is investigating whether price-fixing and collusion among generators either fueled or created the crisis.

The accounts of mechanics Ed Edwards and Glenn Johnson and control-room operator Jimmy Olkjer included accusations of equipment tampering at a Chula Vista plant in order to withhold production and drive up electricity prices.

The testimony drew an immediate response. A consortium of power generators labeled the hearing a "witch hunt" in a letter that reached committee chairman Sen. Joe Dunn, D-Santa Ana, even before the last witness had finished testifying. Dunn diverted briefly from the questioning to read the letter aloud and then dismissed the charge as "nonsense."

Duke spokesman Tom Williams said the former employees' testimony should be questioned because when Duke assembled its own team this spring, they were not hired. "It's absolutely absurd,'' Williams said of the allegations.

But Lt. Gov. Cruz Bustamente said he believes the accounts of the three men are solid. He believes that Duke perhaps didn't hire them because they were at the top of their pay scale, each of them working more than two decades in the business.

"I think they provide clear evidence of tampering at the facility,'' said Bustamente. "They have distinguished careers and service records and they are coming forward as good Californians."

The testimony of the three men recounted much of the same information they provided to The Orange County Register and CBS News on Thursday, but expanded it and added a few revelations.

Dunn believes the most important testimony focused on a series of control-room logs for three days in mid-January that show how frequently Duke ordered the "ramping up" and "ramping down" of their generators.

Johnson called it "yo-yoing" and said the charts on the generators that track production levels started looking like "cardiac monitors" after Duke took over the plant.

The significance of the constant ramping up and down is two-fold: It could be used as partial evidence to prove allegations that Duke manipulated its production levels to drive up prices. And it backs up testimony from the former employees that this behavior led to the erosion of good equipment, causing further breakdowns and outages that would affect supply.

Duke officials said most of this ramping up and down was on orders of the California Independent Systems Operator, which operates the state's power grid, but they could not quantify what percentage of the decisions were their own.

"This amount of ramping up and down is unusual,'' said Dunn. "There were decisions made in three-, four-, five- minute intervals. I don't think that kind of micromanagement comes from ISO."

The three men - whom Duke had inherited from former plant operator San Diego Gas & Electric - said they were shut out of decision- making that led to the powering down of generators. But after a while, they said, they were able to pick up on the longtime Duke employees' jargon and began to make their own interpretations for the company's motives behind powering down.

"They would say they were 'down for economics.' That was thrown around a lot,'' said Johnson, who added that he came to believe it was done deliberately to "reduce load to boast prices."

Again, Duke officials deny these allegations, saying they never powered down generators to "game" the market.

Sen. Steve Peace, D-El Cajon, said the testimony convinced him that Duke Energy is in violation of its lease with the San Diego Unified Port Authority, which owns the plant.

The lease, which Peace read from during the hearing, requires that Duke use "prudent utility practices" in its management of the plant - something that both Edwards and Johnson said was violated as routine maintenance was abandoned and generators fell into disrepair.

If found in violation of the lease - which the port authority is investigating - Duke presumably could lose control of the plant.

Williams said Duke has improved, rather than downgraded, the service record of the plant.

On Thursday, the employees said in interviews with the Register that they were ordered to fill Dumpsters with valuable new parts that were sold as scrap metal. The parts were later needed to perform repairs, and since they were not on hand, generators were not able to operate at full capacity.

Olkjer, the control-room operator, said he also noticed a correlation between Duke's decision to ramp down its generators and a precipitous rise in energy prices. He believes that the Duke was able to influence prices by withholding power.

"None of these allegations are true,'' said Williams. "Many of the parts were obsolete, so we did clear them out ... we did nothing unethical."

Dunn said the next committee hearing, in mid-July, will provide power generators with an opportunity to respond to allegations that they have price-gouged Californians. He said that so far, three months after asking for and then serving subpoenas for documents, the committee has received nothing from the generators.

"They have also refused to agree to a non-destruct order for documents. We want them to promise to not destroy documents, which could provide critical evidence, and they will not do it,'' Dunn said adding that the contempt charges are a possibility.

Dunn said if the committee finds evidence of criminal wrongdoing, it will hand it over to Attorney General Bill Lockyer. If it finds evidence of misconduct that shows the market is being wrongly manipulated, it will use that information to push for system reforms and refunds for overcharges.

After the hearing, the men said they were amazed and frightened by the media circus and by attention they received.

"I'm shocked,'' said Johnson, who Friday was also awarded a Medal of Valor by the California National Guard after a three-year delay because of administrative glitches. "I feel like my life is never going to be the same."

Former Workers Accuse Duke of Dimming Plant to Boost Prices

Former Workers Accuse Duke of Dimming Plant to Boost Prices
The Sacramento Bee - Associated Press - June 22, 2001

Former workers at Duke Energy's South Bay power plant accused the company Friday of shutting down production units there in what they called a scheme to drive up electricity prices.

Duke officials termed the charges "baseless."

The former workers told a legislative committee that officials at the San Diego-area plant ordered power units off-line for apparently unnecessary maintenance; destroyed parts that were needed for repairs; and manipulated the electricity it was feeding the statewide grid.

"This is the first smoking gun that's appeared -- whistleblowers," said Lt. Gov. Cruz Bustamante, who is sitting in with the committee. "That is called market manipulation, and that, in effect, ended up costing the ratepayers of California billions of dollars."

Legislators, regulators and prosecutors are investigating whether power generators illegally manipulated the power supply to drive prices to record levels, forcing the state to buy more than $8 billion worth of electricity since January for the state's three investor-owned utilities.

All three longtime San Diego Gas & Electric employees were laid off in April when Charlotte, N.C.-based Duke completed its two-year acquisition of the former SDG&E plant in Chula Vista.

Mechanics Glenn Johnson and Ed Edwards said they were ordered to shut down machinery for unneeded repairs, and to do so when they didn't have the necessary parts available to quickly repair the equipment. They said they were ordered to dispose of perfectly good parts that could have been used in those repairs.

"We were told when things were shut down that it was for 'economics,’ " Johnson testified. "Sometimes a unit would be 'down for economics' for two or three days."

Duke officials said the plant's performance belies the workers' accusations. They said Duke's four California plants produced 50 percent more electricity last year than in 1999 and are on a pace to improve that performance this year.

The company was so pleased with its unanticipated windfall from soaring energy prices that it threw two prime-rib-and-shrimp parties for the plant's employees, the workers said and Duke Vice President Bill Hall acknowledged.

"Duke Energy is not (price) gouging," Hall said after he was denied a chance to testify at Friday's hearing. "Duke does not collude with any other entity to drive market prices up."

Operating decisions were made based on market conditions, Hall said, but he denied illegal collusion or market manipulation that could drive state or federal regulators to step in.

"Depending on the amount of supply or demand, some of our units, which are in some cases not as efficient as others in the state, simply aren't economic to run," Hall said. "That's the market sending a signal, 'We have sufficient supply, we don't need your less-efficient, more costly units'."

Operators rapidly cycled the plant's electricity production "like a yo-yo -- up and down, up and down," former worker Johnson said, in a way that damaged equipment but maximized prices. He, Edwards and assistant control room operator Jimmy Olkjer backed their testimony with copies of control room logs Johnson smuggled out of the plant.

"Duke Energy Trading and Marketing was calling the shots -- that's where they made the money," Senate Energy Committee Chairwoman Debra Bowen, D-Marina del Rey, said after examining the logs.

Any fluctuations, Hall said, were ordered by the California Independent System Operator, which runs the state's power grid, or were needed to meet environmental standards.

Duke destroyed new parts, as the workers testified, Hall said, because they were obsolete or to cut the tax Duke paid on its parts inventory. But Edwards and Johnson said it cost the company more money to order replacement parts shipped in as needed, in addition to the cost of the lost production.

Duke often ran the plant's smallest, least-efficient turbine even at a cost of trucking in jet fuel from the Los Angeles area, they said. Hall countered by saying jet fuel was then cheaper than natural gas, which powered the plant's other four generators.

Its four California plants have had fewer forced outages than when the plants were operated by the state's utilities, Duke said, and perform more consistently than the industry average despite running hard during the power crisis that began a year ago.

"All of the spinning and excuse-making goes out the window at some point when you're confronted with the people actually running the machinery," said attorney Mike Aguirre, who is suing several power generators and convinced the workers to testify.

Duke supplies about 5 percent of California's electricity.

It confirmed earlier this month that it sold 5,000 megawatt hours of electricity in California for as much as $3,880 per megawatt hour in January -- double the rate recently cited by Gov. Gray Davis as an "obscene" example of price gouging. Company officials called the high price an aberration from the average $136 per megawatt hour it sold during the first three months of the year.

Ex-Duke Workers Say Repairs Curbed to Manipulate Output

Deregulation - June 2001 - Page 2