Features

LOS ANGELES — The six companies that bought power plants in California when the state deregulated its utilities have seen profits rise dramatically this year, according to the companies’ third-quarter statements. 

The companies’ income for July, August and September, when wholesale prices were rising and utility companies began accumulating debt to pay for energy, rose from 37 percent at Houston-based Reliant Energy Inc. to more than 221 percent at Minneapolis-based NRG Energy Inc. 

A seventh non-utility company that operates power plants in California but didn’t buy any from the major utilities saw profits rise 243 percent in the third quarter. 

Together, the companies account for nearly 40 percent of the power generated within California, according to the California Energy Commission. 

The financial documents provide a glimpse of how lucrative the state’s fledgling and much troubled deregulated electricity market has become for the companies supplying the power. 

Critics of deregulation say the soaring profits are proof of how the process has veered wildly out of control – benefiting a handful of power companies at the expense of ratepayers and utility companies. 

“It looks obscene,” said Michael Shames, executive director of the San Diego-based Utility Consumers Action Network. 

San Diego Gas and Electric was the first utility in the state to sell off its assets under deregulation, exempting the utility from a rate freeze. Customers saw their bills double and triple earlier this year. 

Power companies said they are not to blame and instead said the state of failing to make accurate predictions about the enormous demand for electricity and the supply problems when it deregulated. 

“We are being vilified as the ones who are causing all of the problems in California,” said Dynegy senior vice president Lynn Lednicky. “Rather than trying to deal with the volume of electricity in California, people are trying to attack the price end of the equation.” 

Energy wholesalers said their profits are due to operations in California and elsewhere across the nation and can be attributed mostly to decreased supply and increased demand. 

Reliant Energy officials said about a third of the company’s third-quarter net income came from California. However, they said the main producer was the company’s mid-Atlantic operations, which accounted for more than half of its income. 

The company acquired five California power plants from Southern California Edison in 1998 for $280 million. 

“It has proved to be a good acquisition for us,” Reliant spokesman Richard Wheatley said. “It is definitely a stepping stone to build our business.” 

Officials with Houston-based Dynegy, which operates plants throughout the United States, said the California market has been lucrative this year but said they couldn’t break down income by region. 

Dynegy joined forces with another company to buy four power plants in Southern California for $570 million. The new holdings account for 16 percent of Dynegy’s national portfolio. 

The largest segment of the company’s power plants, about 30 percent, are in the Midwest. 

California’s energy market was a good financial opportunity for those willing to take the risk, Lednicky said. 

“With a brand new market, there is a great deal of uncertainty,” he said. “Some companies like to be the first one in the door. There were clear indications there was going to be a great deal of liquidity there.” 

When the state shifted to a deregulated market, out-of-state wholesalers began bidding for power plants required to be put up for sale by utilities. 

Some companies paid as much as 2 1/2 times a plant’s market value, indicating how lucrative executives believed the market to be. 

“We saw there was going to be a substantial need for power in California,” said Tom Williams, director of public affairs for the western operations of Duke Energy Inc. “We have been very pleased with our returns.” 

The Charlotte, N.C.-based company saw its third-quarter net income rise 74 percent compared to the same period a year ago, according to company financial statements. 

Other profit spikes were just as spectacular. Arlington, Va.-based AES Inc., for example, saw its third-quarter income rise 131 percent, from $58 million to $134 million. 

The state’s deregulation plan, which took effect four years ago, was supposed to lower prices for consumers through competition. So far, however, it has led to higher energy prices, put residents on alert for rolling blackouts and prompted bankruptcy warnings from utilities. 

California’s two largest utilities, Southern California Edison and Pacific Gas and Electric, are operating under state-imposed rate freezes as they move toward deregulation. They say they have lost about $6 billion because of wholesalers’ prices and want to pass along the rate increases to their customers. 

Wholesale energy prices are averaging $330 per megawatt hour so far this month, 11 times higher than December 1999. 

On Friday, federal regulators ordered an overhaul of California’s electricity market, setting a price cap on wholesale rates in an attempt to control rising prices and curtail supply shortages. 

The temporary order will allow utility companies to keep the power they generate rather than selling it on the open market.