History will record two days in March 2001 as perhaps the bleakest point in California's energy crisis. On March 19, as Governor Gray Davis was negotiating long-term power contracts, dozens of managers working for power producers such as Dynegy, Reliant, and Duke informed shocked state officials that their generators were shutting down, either for unexpected repairs or because they had not recently been paid. As the morning progressed, roughly 7,000 megawatts -- enough power to light seven million homes -- vanished off the grid. And the afternoon was going to be a scorcher, activating air conditioners all across the Central Valley and Inland Empire.
As director of grid operations for the California Independent System Operator, Jim McIntosh was responsible for hustling up megawatts every single day from his switchboard in the baking heat of Folsom. But on that day, the well finally ran dry. Having no other choice, McIntosh declared a Stage 3 emergency, ordering utilities to begin a wave of rolling blackouts from Mexico to Oregon. And for 530,000 people in Northern and Central California, the traffic lights suddenly winked out, or elevators froze between floors. The next day was even worse, as unscheduled shutdowns claimed 8,237 megawatts -- plunging 438,000 Pacific Gas & Electric customers into blackouts. Virtually all of Emeryville lost power, as did portions of Oakland near Highway 13, Berkeley along Sacramento Street, Richmond near Hilltop Mall, and parts of Walnut Creek.
The blackouts finally ended, but the crisis was far from over. If California was going to get through the summer, it would need every drop of available juice. So state officials were livid when three weeks later Dynegy, a Houston-based power and natural gas company, suddenly threatened to withhold yet more electricity. In early April, Dynegy chief operations officer Stephen Bergstrom told San Diego Gas and Electric that he intended to shut down eighteen small power plants unless the System Operator guaranteed Dynegy payment of $224 per megawatt, a 583 percent increase over its market price the year before and five times what the company was then charging elsewhere. This would have taken 267 megawatts off the system, enough to light 267,000 homes.
The utility promptly leaked this bombshell to the press. "Given the energy crisis currently gripping our state, we are appalled that you would even consider such an action," SDG&E president Debra Reed wrote Dynegy. A spokesperson for Governor Gray Davis called the threat "outrageous and irresponsible," suggesting that California might seize Dynegy's generators. Although Dynegy eventually backed down, this may have been that dark season's most overt example of brinkmanship.
Davis ultimately stabilized the crisis by negotiating a series of long-term contracts with these very power companies -- but at a terrible price. State budget analysts believe the contracts will ultimately cost Californians $43 billion. Dynegy, however, had done very well for itself. By the end of 2001, the company reported $648 million in profit -- a 326 percent increase over 1999, the year before the crisis began.
Dynegy is one of a small cartel of energy companies that walked away from California's experiment in electricity deregulation with billions of dollars in public funds. But Dynegy was not the only company to cash in as a direct result of its actions. Dynegy has a partner located right here in the East Bay, whose relationship with Dynegy is so intimate that it may fairly be considered a clandestine beneficiary of the energy crisis. This partner is ChevronTexaco.
Six months ago, the oil giant and its nimble partner seemed poised to dominate the nation's energy industry. Today, Dynegy is master of nothing but its own gleaming offices. The company is reeling under a mountain of scandals, both real and perceived, and unless ChevronTexaco executives tread very carefully, Dynegy's liabilities could infect them and their bottom line.
California attorney general Bill Lockyer has filed suit against Dynegy, claiming that it defrauded the state by selling electricity it already had agreed to hold in reserve for emergencies. The Securities and Exchange Commission is investigating a complex natural gas transaction that may have artificially enhanced the company's cash flow and reduced its taxes. Enron has filed a $10 billion lawsuit against the company as a result of an aborted merger attempt. And two state complaints are still pending before the Federal Energy Regulatory Commission, as are a growing number of shareholder and class-action lawsuits.
Dynegy spokesperson Steve Stengel refused to comment on either Lockyer's lawsuit or the FERC complaints. "We've played by the rules and have responded to all the inquiries, and done all we can to keep our plants open in California to meet the needs of all Californians," he says. Stengel referred our questions about the SEC inquiry to the company's latest quarterly report, in which Dynegy said it has agreed to restate the transaction as financing activity and not at operational revenue.
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