May 4, 2001

Lt. Gov. Cruz Bustamante Sues to Stem Energy Crisis, Accuses Energy Cartel of Illegal Price-Fixing

Sacramento — Lt. Governor Cruz M. Bustamante filed a civil lawsuit against a cartel of five out-of-state power generators, alleging they have systematically engaged in a price-fixing conspiracy to manipulate California's electricity market to "extract" unlawful profits that are draining the state's treasure.

The lawsuit, filed in Los Angeles Superior Court, was brought by Bustamante and Assemblywoman Barbara Matthews, D-Tracy, as private citizens on behalf of California's taxpayers. Named as the five core defendant companies are Dynegy Inc., Duke Energy, Mirant Inc., Reliant Energy Inc., and Williams Energy Services. Also named individually as defendants are the chief executive officers of each company.

The heart of Bustamante's 36-page complaint alleges that once the five energy generators gained strategic control over 19 gas-fired power plants in California, they engaged in unlawful trading practices to manipulate the market, eventually gaining unrestrained monopoly power to set electricity prices in California.

This capacity to have unchecked power over prices led to the exercise of market power that now has California spending $70 million per day, and $2 billion per month for electricity.

"A cartel of five out-of-state generators has been holding us hostage through a practice of illegal and unfair price-fixing," Bustamante said in announcing the lawsuit.

"Their unlawful behavior is costing the state billions of dollars, a cost that is being paid directly by the taxpayers of California," Bustamante added. "With this lawsuit, we are drawing the line in the sand. We are seeking to hold the generators accountable and to force them to reimburse the state."

Matthews said, "The energy crisis is not a problem of supply —it's a problem of manipulation of our supply by out-of-state generators. Generators withhold power, create artificial shortages, and play the `Great American Shell Game' at the public's expense. We will not tolerate this any longer —the shell game is over."

The suit alleges that the generators have violated the state's antitrust and California Business and Professions Code through anti-competitive, unlawful, fraudulent and unfair business practices.

Specifically, the suit alleges that the defendants have combined to: (1) create or carry out restrictions in trade or commerce: (2) limit or reduce the production of electricity; (3) increase the price of electricity; (4) prevent competition in the making and sale of electricity; and (5) illegally control the price of electricity to the public and consumers.

The suit seeks to recover billions of dollars in overcharges imposed on the California Department of Water Resources, which was forced to buy electricity from the defendants after they "gamed the market" to raise prices. In addition, the suit seeks an injunction to prohibit these companies from engaging further in the unlawful activity.

According to the suit, the energy producers pursued and implemented a strategy to manipulate California's deregulated energy market through trading practices, with the goal of boosting prices. The higher wholesale prices in turn would lead to higher profits and stock prices for the energy generators.

R. Steve Letbetter, chief executive of Reliant Energy, in a speech to industry insiders in February 2000, laid out the strategy as follows: "Our energy services strategy is to build a significant market presence in power generation in multiple regions of the country and then extract additional value from those assets through our trading and marketing operations."

In California, the energy generator cartel gained not only a significant market presence but a strategic one. During a roughly 20-month period ending in April 1999, the five members of the cartel had purchased a total of 19 gas-fired power plants in 11 California counties-- power plants that previously had been owned and operated by California utility companies before deregulation.

The defendants' ownership of these 19 power plants gave them control of critical supplies of California's electricity. Under deregulation, the power to turn on the plants' generators is held by executives in the five core defendant companies. These companies used their power over the generators to extract billions of dollars of unlawful overcharges.

Acting in concert, the energy generators proceeded to engage in a "withhold-and-bid" scheme designed to create false shortages of supply at crucial periods. Under the scheme, the suite alleges, the companies bid to sell power at a certain price, while withholding some power generation. That in turn forced the state to offer to buy power at a higher price to generate the necessary supply, the result being that all of the companies were paid at the last, highest bid price.

The suit notes that a recent study of Dynegy, Duke, Mirant, Reliant and Williams shows that 98% of their electricity spot sales were based upon the exercise of market power.

An August 1998 report by the California Power Exchange found that Dynegy, Duke, Reliant and Williams rarely bid to supply their entire generating capacity, always withholding some generation. Second, they often bid capacity at prices well above $30 per megawatt hour, substantially above the competitive price. In fact, some firms bid some of their capacity above $100 per megawatt hour during some hours.

Another way that the cartel exercised market power to drive up prices, the suit alleges, was to jam the electric transmission lines with excess electricity, thereby overtaxing the power grid, and then insisting on substantial payment to reduce generation.

The suit alleges that the cartel falsely represented to the California public that they intended to create a competitive marketplace that would benefit consumers with lower prices. "This conspiring cartel understands all too well that is had the power to set and command virtually any price it desires because it can squeeze supply, create a contrived shortage and then demand that we pay the price or the lights go out," Bustamante said. "It is no wonder that two years ago California consumers paid $7 billion for electricity and that we will pay an estimated $70 billion this year alone. We're going to put a stop to this unlawful raid on California's treasury."

Bustamante noted that in early 1997 then-Lt. Governor Gray Davis filed suit as a private citizen against tobacco companies. "At the time, many people didn't take that tobacco suit very seriously," Bustamante said. "But here we are four years later with a multibillion-dollars for health care services. With this lawsuit against the energy generators, I am following that precedent."

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