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Energy attorneys are at the eye of the electrical storm in California. The crisis involving the state’s power supply has led to a flurry of litigation by consumers and utility companies. It’s also sparked investigations by state and federal agencies and intense negotiations among the various stakeholders over how to cope with power shortages and skyrocketing costs. This activity has meant a flood of work for attorneys. “I’ve never been this busy, except when I’ve been in trial,” said Marie Fiala, a partner at Heller Ehrman White & McAuliffe, who represents San Francisco-based Pacific Gas & Electric Co. “Things are changing very fast. What we’re dealing with are true emergencies.” While California’s Public Utilities Commission opened hearings on the energy crunch Wednesday, Gov. Gray Davis was in Washington D.C., to meet with President Bill Clinton. On Tuesday, Davis met with Federal Reserve Chairman Alan Greenspan and U.S. Treasury Secretary Lawrence Summers about the economic implications of the electricity crisis. Two of California’s three investor-owned utilities — PG&E and Southern California Edison Co. — recently filed suit against members of the state Public Utilities Commission demanding the right to pass on billions of dollars in electricity costs to consumers. On the consumer side, two class actions were filed in federal court in San Diego against electricity suppliers. The suits claim that the suppliers manipulated the wholesale market causing consumers to be overcharged billions of dollars. In addition to these court battles, attorneys are assisting various entities in negotiations with the Federal Energy Regulatory Commission and the California Public Utilities Commission on how to resolve the crisis. Lawyers are also helping utilities push for an end to the freeze on retail rates as well as caps on wholesale electricity prices and retroactive refunds from generators. For their part, the electricity generators oppose price caps and contend that additional power plants are needed to resolve the current crisis. The FERC, CPUC and the California attorney general’s office also have launched separate investigations to determine the reason for electricity shortages and dramatic price hikes. “The future of the state’s economy is dependent on finding a solution to the problem,” Fiala said. DEREGULATION DIFFICULTIES Consumer groups and attorneys representing utility companies attribute skyrocketing energy costs primarily to the deregulation of the California energy market, which went into effect in March 1998. Legislation mandating deregulation, AB 1890, required the state’s three investor-owned utilities — PG&E, Southern California Edison and San Diego Gas & Electric — to auction off their electricity generating plants. The law further specified that the utilities must sell all of their generation to, and buy all their energy from, the California Power Exchange, which sets daily prices for power. This market structure, attorneys for the utility companies say, is what caused the current emergency. “There was a belief that if utilities sold generators to a third party and set up an auction to buy the power back, competitive forces would keep prices low,” said Stan Berman, a partner in San Francisco-based Heller Ehrman’s Seattle office. But he said demand for electricity grew as industry blossomed and more people moved into the region. At the same time, he said, new power plants were not constructed. Once generators “figured out they could charge whatever they wanted and buyers had to buy, that was the end of the story,” Berman said. Berman, who was an assistant general counsel with the Federal Energy Regulatory Commission before joining Heller last year, says he believes that regulation is needed to limit how much generators can charge. While the FERC has not considered setting price caps, it has introduced stopgap measures to address the crisis, including eliminating the requirement that utilities sell and buy electricity through the power exchange. In an effort to recoup the difference between what they pay for electricity and what they charge customers — which PG&E estimates is currently $4.6 billion — PG&E and Southern California Edison filed suits in San Francisco and Los Angeles federal court, respectively. They seek a court order permitting them to boost retail rates to recover the losses they’ve incurred from the wholesale price hikes. Since then, PG&E requested a 17 percent rate increase for residential customers, but the CPUC has countered with a proposal for a 10 percent hike. Under the deregulation law, retail rates are frozen until March 2002 or earlier if utilities recover so-called stranded costs — money they invested in plants and other facilities before deregulation. A competitive transition charge is included in residential bills to cover this cost. Fiala said the CPUC told PG&E and Edison that they would not be permitted to recover the costs they’ve incurred while the rate freeze was in effect. PG&E is paying “25 to 30 cents per kilowatt hour wholesale but is only able to collect 5 cents per kilowatt hour,” Fiala said. “As a matter of fairness,” she added, referring to utility companies and their shareholders, “one subset of the public should not be subsidizing California power consumption.” The state’s third investor-owned utility, San Diego Gas & Electric, paid off its stranded costs this summer. When the wholesale price of electricity went up, it passed the costs on to consumers. Residents of San Diego saw their bills triple or quadruple. In response, two class actions were filed in San Diego Superior Court last month seeking to obtain more than $1 billion in consumer refunds. Going to court “is a sledgehammer solution,” said Leonard Simon, partner in the San Diego office of Milberg Weiss Bershad Hynes & Lerach. Plaintiffs are saying, ” ‘Give us our money back.’ ” Simon is lead attorney in one of the class actions, Hendricks v. Dynergy Power Marketing Inc., 758565. Plaintiffs in a similar class action, Gordon v. Reliant Energy Inc., 758487, claim they were overcharged $4 billion. James Krause, of San Diego’s Krause & Kalfayan, who is representing the plaintiffs, said electricity producers appear to have received confidential information on a real-time basis in order to manipulate the market. But attorneys for the electricity generators say the current pricing levels are justified. They say the current crisis is due to energy supply problems and reliance on the spot market. “Demand has grown and resources have not kept pace; that’s the fundamental problem,” said Norman Pedersen, a partner in the Los Angeles office of Jones, Day, Reavis & Pogue and counsel to several generators, including Williams Energy Services Co. Utilities and consumer groups contend that the huge spike in wholesale electricity rates is unjustified. Last December “we were paying approximately $35 per megawatt hour, which translates to 3.5 cents per kilowatt hour,” said Southern California Edison spokesperson Steven Conroy. The company is now paying as much as $1,400 per megawatt hour, which would be equal to about $1.40 per kilowatt hour. “Is that a reasonable amount of profit to be made?” Conroy said. “I don’t think so.” Fiala added that generators have been making profits of 300 percent to 500 percent beyond their historic levels. Houston-based Reliant Energy reported a 642 percent jump in operating income from its domestic wholesale energy business this year. During the third quarter, income totaled $319 million, compared with $43 million in the same period last year. Terry Houlihan, a partner at McCutchen, Doyle, Brown & Enersen who represents Reliant, argued that the electricity price was set by the market, not the generators. “Market-set prices are inherently fair, he said. “That’s the whole basis of our economic system.” As to utility company requests to cap wholesale prices, Houlihan said such a measure would discourage investment in new plants, which are necessary to solve the supply problem. Whatever action is taken in the immediate future, energy attorneys are likely to remain busy. “Unless the FERC or the court steps in,” Heller Ehrman’s Berman said, the crisis “will keep going.” Law.com staff and wire reports contributed to this article.

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