Please see the following articles:

Sac Bee, Mon, 7/30:  Dan Walters: Who will pay for power -- and how much --
back on front burner
Sac Bee, Mon, 7/30: Power grab: Before you sign, get facts  (Editorial)
Sac Bee, Mon, 7/30: Huge PG&E bankruptcy case creates many conflicts of
interest
SD Union, Mon, 7/30: Customers' huge 'debt' to SDG&E called sham
SD Union, Mon, 7/30: State refund may be under $4 billion
SD Union, Sun, 7/29: Energy crisis has workers shedding coats, ties
SD Union, Sat, 7/28: Five state energy consultants fired for conflicts of
interest
SD Union, Sat, 7/28: Deals with private firms spark growth of Mexico's energy
empire
LA Times, Sun, 7/29: Huge Fees, Many Conflicts In PG&E Case
LA Times, Sat, 7/28:  'Invention' Fueling Only Cries of Fraud
SF Chron, Mon, 7/30: Federal energy order leaves California with $4 billion
less in power refunds
SF Chron, Mon, 7/30: Texas inches toward power deregulation as pilot program
goes into effect Tuesday
SF Chron, Sun, 7/29: Energy crisis gives juice to new trend: power plants on
American Indian reservations
SF Chron, Sun, 7/29: Federal order limits potential state refunds by $3
billion
SF Chron, Sun, 7/29: Gas suppliers accuse El Paso pipeline firm of
constricting flow to drive up prices
SF Chron, Sun, 7/29: News briefs on the California power crisis
SF Chron, Sun, 7/29:  Power consultant firings called 'tip of iceberg'
Secretary of state says disclosure list should be expanded
Mercury News, Mon, 7/30: Federal order limits potential California refunds by
$3 billion
Mercury News, Mon, 7/30: Huge PG&E bankruptcy case creates many conflicts of
interest
Mercury News, Mon, 7/30: PG&E and Santa Cruz couple in power struggle
LA Times, Mon, 7/30: Business; Financial Desk
Sempra Unit Pulls in Profit, and Scrutiny Energy: The trading arm, which has
come under increasing criticism, raked in $310 million in the last 18 months
WSJ, Mon, 7/30: State of California Lets Go 5 Consultants Tied to Energy Firms
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Dan Walters: Who will pay for power -- and how much -- back on front burner

(Published July 30, 2001)
From its onset a year ago, California's energy crisis has always encompassed
two aspects -- price and supply.
In the real world of energy distribution, the two are intimately connected.
Prices will rise when supplies are constricted and fall during periods of
abundance. Rising prices, meanwhile, will have a major effect on demand,
which directly relates to supply.
California's politicians, from Gov. Gray Davis downward, have tended to treat
the two as distinct factors. The question that's hovered over the crisis,
although rarely voiced publicly, is whether the rate-paying and voting public
would be less tolerant of price spikes or power interruptions.
When the crisis first surfaced in San Diego last summer, Davis and the
Legislature saw it almost purely as a matter of price. San Diegans' power
bills were spiking as their local utility adjusted rates to meet its
wholesale power costs, and the Capitol responded with an expedient scheme
that rolled back retail prices, but did nothing about the wholesale costs.
The utility began amassing debts to cover the rate-cost gap and within a few
weeks, other utilities -- their rates frozen by law -- began running up even
larger debts that eventually surpassed $13 billion.
By early this year, however, the threat of power blackouts assumed a greater
political importance, and when the utilities had their credit cut off because
of their huge debts, Davis and the Legislature began running up their own
multibillion-dollar debts to keep the lights burning. For most of this year,
supply was the chief political focus, but so far, the threat of blackouts
appears to have eased. Conservation awareness, higher power bills and
unusually cool weather in much of the state have kept demand below supply
limits, although August and September could still pose a threat.
With supply worries muted, price is once again becoming the chief political
focus in several interwoven fronts. Who will pay for the $20 billion-plus in
debts run up by the utilities and the state? Who'll cover the costs of the
state's $43 billion (at least) in contracts for future supplies? Will the
rate increases already approved by the state Public Utilities Commission this
year be sufficient to cover all needs for revenue? Or is someone playing a
game of "hide the pea"?
There are multiple claimants for the revenue stream, and each faction is
claiming, in effect, that its share of the money can be covered under
existing rates, implicitly pointing the finger at some other claimant if, in
fact, rates must be raised.
One example of the complex conflict over money surfaced last week, when the
Davis administration declared its "revenue requirement" for past and future
power purchases can be covered without another rate increase. But when the
details were released a day later, the numbers had been changed -- a change
the administration says does not alter its conclusions -- and critics
emerged.
The chief naysayer is Pacific Gas and Electric Co., the state's largest
utility, which took itself into bankruptcy court last spring. PG&E issued a
blistering analysis of the state's report, citing "missing data,
discrepancies and conflicting claims." And the utility demanded a full
hearing on both the state's numbers and its intent that all future costs be
passed on to ratepayers automatically, without PUC review.
PG&E officials are talking about challenging the state's revenue report not
only before the PUC, but before the Office of Administrative Law, which
governs regulations issued by state agencies, and perhaps in the courts. If
unresolved, the conflict could hold up the sale of the state's long-stalled,
$13.4 billion bond issue to cover its power-purchase debts and thus create a
state cash-flow squeeze.
Underlying the confrontation is PG&E's suspicion that the state, by skimming
its share off the top of the revenue stream, is insulating Davis from
political fallout and setting up utilities to take the blame for future rate
increases.
Could crass politics be driving the state's power-pricing strategy? Heaven
forbid.

The Bee's Dan Walters can be reached at (916) 321-1195 or dwalters@sacbee.com
<mailto:dwalters@sacbee.com>.

Power grab: Before you sign, get facts
By Robert A. Masullo
Bee Time & Money Writer
(Published July 30, 2001)
The large newspaper advertisement sounded enticing: "Last year natural gas
rates soared 350%. This year you can lock in a rate that will soar 0% ...
With guaranteed pricing from the NewPower Co., Californians can avoid such
increases this winter."
Exactly what is NewPower, a recently formed gas and electric supplier based
in Purchase, N.Y., offering?
Two deals, says company spokeswoman Terri Cohen.
In the first, a customer agrees to buy natural gas from NewPower for two
years and the company will guarantee a monthly price of 80 cents a therm, the
unit used for measuring natural gas for billing purposes.
In the second, a customer agrees to buy natural gas from NewPower for two
years and the company guarantees a therm rate of 40 cents from June through
August and 83 cents from September through May.
In both cases, a monthly service charge of $2.99 is tacked on, and customers
will pay a $50 penalty if they break the contract before two years is up.
Are the NewPower offers good deals? Perhaps. It depends on what happens in
the natural gas market.
Last winter, nationwide shortages in the natural gas supply caused prices to
shoot up to around $2 a therm. When consumers opened their winter heating
bills, they were shocked.
But prices have been dropping considerably since then. Per therm rates were
78 cents in May, 60 cents in early July, and 40 cents just a few days ago.
During the course of a year, the highest prices for natural gas are always in
winter, when usage is great, and lowest in summer, when usage is minimal.
According to Pacific Gas & Electric, the traditional supplier of natural gas
in the area, natural gas prices usually average around 70 cents a therm in
winter and 30 cents a therm in summer.
So if natural gas rates go back to what they were last winter, then
NewPower's offers may be excellent deals. But if rates go down, they may be
poor choices.
It's up to the consumer, then, to make an educated guess about which way
rates will go. But new drilling for natural gas could indicate that supply
will be plentiful in the coming years.
Dan Jacobson is the legislative advocate for the California Public Interest
Research Group, a consumer organization. He's skeptical of NewPower's offers.
"It sounds to me like (NewPower's) main aim is to get consumers to commit to
a long-term contract," he says. "That's something I would always advise
caution on. Long-term contracts -- for natural gas or anything else -- are
fraught with danger.
"It's possible, of course, that natural gas prices will go back to what they
were last winter. But that seems highly unlikely. What I've been hearing,
instead, is that there will be a glut of natural gas next year. Then prices
would be lower and NewPower's deal would be a very bad one, indeed."
Claudia Chandler, assistant executive director of the California Energy
Comission, the state's primary energy policy and planning agency, said much
the same. "Storage is up," she says, "and we believe there will ample
supplies of natural gas this fall and winter."
Unlike NewPower, PG&E sets its natural gas prices according to market prices,
which fluctuate daily. PG&E spokeswoman Staci Homrig says PG&E encourages
people "to shop around for the for the best price."
NewPower is able to make these offers because of deregulation of the energy
industry. Deregulation allows NewPower -- and other companies -- to compete
with firms that own the natural gas delivery systems, such as PG&E. Prior to
deregulation, delivery system companies were the only suppliers of natural
gas.
Of course, deregulation in California is a controversial issue, with many
blaming it for the current electricity crisis. As far as natural gas goes,
deregulation permits the old gas-and-electric companies, such as PG&E, to
continue as the sole owner of the delivery systems -- pipes, meters and
related hardware. But now they have competition supplying the gas.
NewPower is closely allied with Enron Corp., the Texas energy giant, which
owns about 40 percent of the company, according Cohen, the NewPower
spokeswoman.
Currently, only three companies -- PG&E, NewPower, and ACN Energy Inc. of
Farmington Hills, Mich., which offers natural gas at market rates -- are
supplying natural gas to this area. More companies, however, can be expected
to follow.

The Bee's Robert A. Masullo can be reached at (916) 321-1118 or
bmasullo@sacbee.com <mailto:bmasullo@sacbee.com>.

Huge PG&E bankruptcy case creates many conflicts of interest
SAN FRANCISCO (AP) -- The third largest bankruptcy in U.S. history is also
becoming the most complex. As Pacific Gas and Electric Co. wades through its
pile of debts, many of the legal and financial teams representing the utility
and its creditors often run into conflicts of interest.
Since PG&E is so large and far reaching, it may be difficult to find firms
and businesses that are not somehow associated with the utility. In addition,
many large accounting and legal agencies are getting involved because of
their expertise in bankruptcy cases.
"Very few people have the expertise for high-profile, high-stakes
bankruptcies, so you have a small pool from which to draw representation, and
that's where . . . potential conflicts come up," Nancy B. Rapoport, a
University of Houston law professor who's a bankruptcy ethics expert, told
the Los Angeles Times.
Since the utility filed for Chapter 11 protection in April, its lead counsel,
Howard, Rice, Nemerovski, Canady, Falk & Rabkin already has racked up $2.65
million in the first two months of the case. Last year, that same firm
reported earning $1.9 million from PG&E.
The total court-approved amount in the filing could reach at least $470
million, said Lynn LoPucki, UCLA law professor and expert on bankruptcy
practice.
"The bigger the case, the bigger the fees," LoPucki told the Times, calling
the bankruptcy "one of the most complex cases ever."
PG&E's bankruptcy ranks third behind Texaco Inc. and Financial Corp. of
America when comparing assets -- PG&E reportedly has $31.5 billion in assets.
And about a dozen companies are in line for contracts to work for PG&E or the
committee representing the company's creditors. Experts say the potential for
ethical dilemmas to occur already exists based on the firms approved by the
case's Judge Dennis Montali.
For example, the utility's primary law firm also represents banking interests
linked to nearly $1 billion in debts. PG&E's accounting firm also has worked
for more than 80 companies involved in the bankruptcy case, including some
creditors.
Experts say the multitude of conflicts surrounding the case could allow
professional firms to alter outcomes to benefit certain companies while
hurting PG&E.
"By traditional conflict standards, the large firms could not participate in
the cases," LoPucki said. "There has been a huge shift in what is acceptable.
It is more lenient. A firm is allowed to represent clients today where they
would not have been allowed 20 years ago."
Some firms have submitted disclaimers describing the ties and in some cases
have said there are so many connections with various involved companies, they
may not even be aware of them all. While other have created "ethical walls"
within their companies or have asked clients to sign waivers releasing the
professionals from conflicts of interest.
Accounting firm PricewaterhouseCoopers, which works for PG&E and its parent
corporation PG&E Corp., agreed to build an "ethical wall" in order to also
serve as accountant and financial adviser for the committee representing
PG&E's creditors. Judge Montali approved the hiring of the accounting firm
despite objections from Linda Ekstrom Stanley, the U.S. trustee assigned to
guard against abuses and money-making schemes that can occur during
bankruptcy proceedings.
Her office has involved itself several times, objecting to everything from
excessive fees to conflicts.
But some say it would be impossible for PG&E's bankruptcy proceedings to move
forward if every conflict were closely examined.
"It would be horrendous," said Daniel Bogart, a law professor at Chapman
University. "There are conflicts that matter and those that don't. The
parties have to reach a level of comfort quickly."

Customers' huge 'debt' to SDG&E called sham

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By Craig D. Rose  UNION-TRIBUNE STAFF WRITER  July 30, 2001  San Diego's
largest consumer group says the dreaded "balancing account" -- a debt of $750
million that ratepayers allegedly owe SDG&E -- is a bookkeeping illusion
bordering on fraud, and in reality the utility owes its customers money.  In
a filing late last week with state regulators, the Utility Consumers' Action
Network joined other consumer advocates in arguing that San Diego Gas &
Electric Co. and parent company Sempra Energy created a bogus debt by not
reporting key profits and by withholding an assortment of overcharges that
should be rebated to consumers.  When the profits, overcharges and penalties
are appropriately applied against the $750 million claim, UCAN says,
consumers would owe less than $50 million. And much or all of that would be
offset by SDG&E's share of refunds expected to be ordered by federal
regulators.
The consumer group said the balancing account is "fiction, if not a fraud,"
that the state appears to have accepted.  UCAN was joined in the filing by
The Utility Reform Network and Aglet Consumer Alliance, which are based in
Northern California. The groups made the allegations in opposition to a plan
proposed last month by Sempra and Gov. Gray Davis that purports to clear the
alleged $750 million debt.  SDG&E disagreed with the consumer groups'
position. A company official said the agreement between Sempra and Davis is
balanced, and the alternative could be a lengthy court fight.  The matter is
scheduled to go before the California Public Utilities Commission, perhaps as
early as Thursday.  UCAN argues that SDG&E's claim of making a $319 million
contribution toward resolving the debt is "misleading and fallacious."
Instead of making any contributions, UCAN says, SDG&E and Sempra stand to
reap billions in profits from the proposal to clear the debt, and from
agreements to sell power lines and electricity to the state.  Fears of a
balancing account and potential balloon payment have hung over local utility
ratepayers since last fall, when SDG&E said it began to incur losses by
paying more for electricity than it was allowed to collect from customers
under a state-imposed cap.  Electricity customers could have faced payment of
the debt as early as next year.  Last month, Davis, flanked by state Sens.
Steve Peace and Dede Alpert, as well as Sempra officials, announced an
agreement he said would eliminate the debt without raising rates. At the same
time, the governor and the company announced a plan for the state to purchase
SDG&E's power lines for $1.2 billion but said that was a separate proposal,
unrelated to the debt plan.  UCAN claims there is a relationship, saying the
purchase is another excessive payment to the utility. The consumer group is
urging the Public Utilities Commission to consider the proposed settlement
with Sempra in the context of both the transmission line deal and a contract
under which Sempra will sell 1,900 megawatts of electricity to California
over the next decade.  UCAN also is concerned that SDG&E's profit from the
power line sale would not be shared with customers. The utility, which the
state continues to regulate, has shared past gains with its customers.  At
the heart of the groups' filing, however, is the allegation that SDG&E has
not accounted for what UCAN estimates is $450 million in profits the utility
will earn from two key electricity purchase contracts. Those gains alone
would offset 60 percent of the losses SDG&E claims to have suffered from
buying electricity.  The Public Utilities Commission ruled this year that
profits from these contracts belong to the utility's customers, not its
shareholders.  For months during the power crisis, SDG&E described itself as
a middleman and said it earned nothing from the sale of electricity to
customers. Under the state's deregulation plan that went into effect in 1998,
the company's profit-making business was supposed to be restricted to the
delivery of electricity, not the purchase and sale of the commodity.
Nonetheless, SDG&E has gone to court seeking to overturn the PUC decision and
take possession of the profits earned from selling electricity. As part of
the settlement with the state, SDG&E would be awarded ownership of the power
contracts but would agree to refund $219 million.  But SDG&E would earn $120
million by selling power to the state from these deals during the second half
of this year. So UCAN argues that SDG&E's $219 million concession is
effectively reduced to less than half that sum.  Sempra also has a separate
long-term contract to sell electricity to the state. UCAN says that deal also
is overpriced.  SDG&E defended its agreement with the state and said the
prospect of lengthy litigation over the profits from power contracts should
be considered in assessing the overall agreement.  "We have a strong case in
court," said Edwin Guiles, chairman of SDG&E. "And this overall balanced
solution is a better way to deal with it rather than fight it out in court."
Guiles also said SDG&E is forgoing $100 million by agreeing to a complex
provision to provide power at regulated rates from the San Onofre Nuclear
Generation Station, instead of whatever rates the market would allow. SDG&E
is a part owner of the nuclear plant.  The consumer group says SDG&E has not
refunded to customers an assortment of overcharges and overcollections
totaling $154 million.  UCAN added that under the governor's plan $133
million of the debt claimed by Sempra is not eliminated but would be paid off
by consumers through their monthly bills.

State refund may be under $4 billion

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By Karen Gaudette  ASSOCIATED PRESS  July 30, 2001  CALIFORNIA'S POWER
CRISIS   SAN FRANCISCO -- A closer reading of last week's order from federal
energy regulators shows California will receive refunds for overpriced
electricity, but the amount could be slashed to just under $4 billion -- less
than half of what the state requested.  Gov. Gray Davis plans to appeal the
Federal Energy Regulatory Commission decision today, state officials said
yesterday afternoon. Refunds could help prevent the state from raising
electric rates to cover its power-buying costs, which are now beyond $8
billion.  "We found a number of disturbing things that lead us to believe
FERC may not be so pro-refund as they want Californians to believe," said
Nancy McFadden, an adviser to Davis.  For months, Davis and other state
officials have asked the FERC to find electricity prices charged since May
2000 to be unjust and unreasonable -- prices which climbed 10 times higher
than past years.  The state stands to lose a portion of the billions it has
spent buying electricity for Pacific Gas and Electric Co. customers and two
other financially ailing utilities. Power companies maintain they did not
work together to drive up power prices to unreasonable levels.  FERC's
40-page decision confirms the commission will only order refunds for power
bought since October 2000, rather than May 2000. That means $2 billion less
than the state, utilities and others could receive, McFadden said. State
officials had hoped to receive as much as $9 billion in refunds.  FERC also
said it will not issue refunds for power the state Department of Water
Resources bought directly from power companies. FERC only will recognize
purchases through the state's now-defunct power market or from the manager of
the state's power grid.  But the DWR bought most of its megawatts directly
from power companies after a FERC ruling in December abolished the Power
Exchange, the state's key entity that bought and sold power.  The Independent
System Operator, keeper of the state's grid, then began adding a surcharge on
big purchases, McFadden said. That stripped $3 billion more off the potential
refund amount.  All told, the most the state could expect to get back would
be roughly $3.9 billion, said Barry Goode, a legal secretary to Davis. And
despite the overcharges, some of that money has to pay power companies for
past power deliveries at a price FERC determines is just and reasonable.  A
call to FERC for comment was not immediately returned yesterday afternoon.
FERC has ordered an evidentiary hearing, to be completed within 60 days, to
determine the size of the refund from providers of wholesale power.

Energy crisis has workers shedding coats, ties

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By Jeff McDonald  UNION-TRIBUNE STAFF WRITER  July 29, 2001  With summer
temperatures in full swing and office thermostats stuck in the high 70s,
something had to give. And the clear losers this fashion season are neckties,
sport coats and the dread of career women everywhere: pantyhose.  Stodgy
bankers, stiff politicians and even utility company executives have rewritten
their dress codes in recent weeks to make employees more comfortable while
the bean counters shave expenses by turning off the air conditioning.  "We
have definitely taken more of a business-casual attitude because of the
increased temperatures in the office," said Joanne Licausi of Wells Fargo
Bank, which last month extended "dress-down Fridays" through the workweek.
Like their counterparts at hundreds of big companies, from San Francisco to
San Diego, Wells Fargo officials have taken numerous steps to lower electric
bills.  They've installed motion sensors in buildings so lights shut off
automatically when no one is using an office. Computers, printers and copy
machines also are turned off when not in use.  Yet the most dramatic shift in
the hunt for energy savings came by hiking thermostats to 76 degrees -- a
couple of points below temperatures in offices at Sempra Energy and San Diego
City Hall, among others, but still on the warm side. While the summer weather
has not been stifling so far, it's the temperature inside that matters when
you're counting kilowatts.  "You still see a number of individuals in a coat
and tie, but at least now they have the option," Licausi said.  The folks who
deliver electricity to 1.2 million San Diego area homes and businesses also
uncoiled their collars as their indoor climates were pushed to 78 degrees.
"We try to practice what we preach, so we've cut consumption by 20 percent in
all of our buildings," said Laura Farmer, a spokeswoman for San Diego Gas and
Electric Co.'s parent company, Sempra Energy. "But, boy, does it get hot."
Even though they approve of the relaxed dress standard, not all higher-ups
have embraced the policy firsthand.  Sempra media director "Doug Kline still
wears a suit every day, but you see many more golf shirts, short-sleeve
shirts," according to Farmer. "It's not as buttoned up as it used to be."
Things are nearly as loose at San Diego City Hall, where politicians last
month adopted a four-page Summer Energy Action Plan intended to slow reeling
electric meters and save taxpayer money.  Thousands of workers there are
invited "to wear cooler, casual attire throughout the week" as thermostats
were ratcheted up to 78 -- frequently hotter than the temperature outdoors.
"The women here, we tend to dress a little less formally," said Elena
Cristiano, press secretary to Mayor Dick Murphy. "Our shoulders will show;
it's still dressy but it's considered to be relaxed."  In Chula Vista,
officials have been on the conservation bandwagon since 1993, upgrading the
heating and cooling systems and retrofitting lights, among other measures.
The temperature inside City Hall is set at a relatively mild 74 degrees, but
workers are nonetheless encouraged to ditch the formal business wear.  "If I
tried 78 in my work area, it would be unbearable," said Willie Gater, the
Chula Vista environmental resource manager. "I have a plate glass window at
my desk."  Steven Bucky has been monitoring business fashion trends for
years. Director of professional training at the California School of
Professional Psychology in Mira Mesa, Bucky said energy-conservation measures
have prompted employers to be more sensitive to the needs of workers.  "We
understand it's warmer, less comfortable, so we need to be more flexible," he
said. "If people are trying to save money, obviously something has to go with
the dress."  Besides, Bucky added, consumers these days are more likely to
favor substance over style. "I don't want to go to an attorney because he or
she is wearing a three-piece suit; I want to go to the best lawyer I can
find."  Pamela Shank, an Escondido personal shopper who makes her living
advising people on what to wear, has noticed leanings toward casual work
clothes among clients for several years, what with more firms observing
dress-down Fridays and the 1990s run of Internet startups, which helped set a
new standard in informal wear.  "Companies are trying to give more of a
benefit to people," she said. "It gets so boring to have to wear a suit and
tie or a proper dress every day."  For men seeking that subtle but
well-groomed look, Shank suggests Izod and Polo cotton shirts with open
necks, Dockers-style khakis with leather belts and, perhaps, tassled loafers.
She also likes the blue jeans-and-Oxford shirt look with a sport coat
accompaniment, but cautions that denim remains taboo at many workplaces.
Women have more choices in how to dress to impress while maintaining maximum
comfort in heated environs, said Shank, who counts dress slacks, skirts and
light pantsuits among her collection of comfort clothes.  "We can dress
casual so easily," she said. "We can put anything together."  Very few
workers at the California Department of Transportation office in Old Town
employ the services of a personal shopper. Yet most are pleased with the new,
less-rigid dress code in their corner of the state bureaucracy, which is
under governor's orders to reduce power consumption.  "Everybody's been very
supportive, thankful for a little leniency to try and stay comfortable and
productive," said Tom Nipper, a Caltrans spokesman who now saves his neckties
for special occasions.  "I'm not wearing one today, but I do have one," he
said of the traditional neckwear. "If I do a TV interview, I put it on."

Five state energy consultants fired for conflicts of interest

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ASSOCIATED PRESS  July 28, 2001  LOS ANGELES ) Five state energy consultants
were fired for conflicts of interest because they helped California buy power
from a company in which they owned stock, officials said.  The consultants
owned shares of Calpine Corp., a San Jose-based power generator that has been
awarded about $13 billion in state contracts to supply electricity for up to
20 years. The state bought more than $14 million worth of electricity from
Calpine in the first quarter of this year, records showed.  The consultants
owned anywhere from a few thousand dollars to more than $100,000 worth of
Calpine stock, according to records cited Saturday by the Los Angeles Times.
"We did not want them making governmental decisions and holding these
stocks," Barry Goode, legal affairs secretary to Gov. Gray Davis, said
Friday.  Consultant William F. Mead, who was fired on Thursday, said he
bought most of his Calpine shares 2
 years ago for $12,000. The value has
soared because of stock splits.  "I came up here, away from home, living in a
hotel room, trying to keep the lights on, trying to get the state through a
crisis and now I get a finger pointed at me as if I'm some sort of criminal,"
he told the Times. "I guess it's just politics and we're the pawns."  The
Davis administration hired more than 50 consultants and advisers this year as
it struggles to deal with the state's electricity crunch.  On July 18, the
administration told consultants buying energy for the state to sell their
stock holdings in energy companies immediately or quit their jobs. Nine
divested.  Another consultant quit four days earlier after disclosing she had
purchased Calpine stock in February.  Another person, a state lawyer, was
shifted to a non-energy related job, said Davis spokesman Steve Maviglio.
Davis is looking for more cases of conflict of interest among his
energy-buying staff after Saturday's firings, his aide told the Orange County
Register. The governor has begun an internal review focusing on whether
state-hired energy buyers made deals with companies in which they had a
significant financial interest.  Bill Wood, the chief counsel for Secretary
of State Bill Jones, said other potential conflicts could affect at least
some of the $43 billion worth of power contracts that have been signed by the
state in the past six months with private power generators.  Under pressure
from Jones, a Republican who hopes to challenge Democrat Davis for
re-election next year, the administration has moved to obtain statements of
economic interest from most of the energy consultants.  Last week, Jones
called for a federal Securities and Exchange Commission investigation of
stock purchases by state energy consultants.

Deals with private firms spark growth of Mexico's energy empire

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By Diane Lindquist  UNION-TRIBUNE STAFF WRITER  July 28, 2001  ROSARITO BEACH
-- At the modern new power plant next to the Pacific Ocean here, it takes
just two operators at sleek computer consoles to run a facility that can send
electricity throughout Baja California, into Sonora and -- in energy
emergencies -- into Southern California.  The plant, part of the Presidente
Ju?rez complex at this resort city 15 miles south of the U.S. border, has
been operating since July 5.  Alstom Power, a Swiss global energy firm, built
the project in an arrangement that allows private companies to take part in
an energy sector previously restricted to the Mexican Federal Electricity
Commission, or CFE.  Mexican President Vicente Fox says he would like more
development firms involved in the country's energy endeavors, but he needs
the national Congress' approval.  For now, the current arrangement is
Mexico's best solution to meeting the cash-strapped nation's growing power
needs. Most of the 3,246 megawatts being added this year to the national
electricity system result from similar private construction arrangements.
"This new plant marks an advance in the scheme of financing CFE projects,"
Jos, Miguel Olea, the agency's deputy construction di rector for the plant,
said during a tour Thursday.  "It puts us in a position to better serve our
clients and maintain a reasonable margin of reserve to keep up with the
constant growth the border area has experienced in recent years," he said.
Under Alstom's contract, the company built the Rosarito plant and will lease
it for 15 years, then transfer it to the government. CFE is the sole
operator, however, whether the facility's ownership is under Alstom or the
agency.  As a result, the new plant, called Rosarito III, is among the most
modern in Mexico. The combined-cycle facility is fired by natural gas, making
it cleaner, more efficient and less costly to operate than plants of previous
generations.  Only the tops of the plant's two red-banded chimneys are
visible from the main highway through Rosarito Beach.  The plant is made up
of two units, each of which produces 244 megawatts. A megawatt is enough to
power 750 to 1,000 homes in the United States.  Turbines and condensers are
in separate buildings. The electricity moves through pipes that penetrate the
top of each building and extend to a tower, where the power is sent out on
transmission lines.  Outside each main building is a structure of stainless
steel pipes and tanks that uses ocean water to cool the operation.  While the
Swiss company was building the plant, the electricity agency converted the
fuel source of its two existing facilities -- Rosarito I built in 1963, and
Rosarito II built in 1991 -- so that now all are fired by natural gas.  The
conversion has transformed one of the state's worst sources of air pollution.
With the use of natural gas, sulfur dioxide emissions have been eliminated
and nitrogen oxide emissions have been lowered.  Sempra Energy International,
a subsidiary of San Diego-based Sempra Energy, built the natural gas pipeline
to Presidente Ju?rez under a government contract with terms similar to those
under which Alstom built the plant.  InterGen, another global power
generation firm, plans to construct two plants near Mexicali under the same
build-lease-transfer system.  In contrast, Sempra will own a plant it is
building near Mexicali outright because the electricity will be exported
north of the border.  There are no limits on the number of similar plants
that can be developed in Baja California for the export market, Mexican
Energy Secretary Ernesto Martens has said.  The Rosarito III plant adds 488
megawatts to the amount Presidente Ju?rez produces, increasing the total to
1,328.  That's a 24.7 percent boost to Baja California's overall capacity,
Olea said.  About 652,000 homes and 78,000 businesses and industries in
Tijuana, Mexicali, Ensenada, Tecate and Rosarito Beach in Baja California and
San Luis R?o Colorado in Sonora will receive electricity from the Presidente
Ju?rez complex.  "The new plant should cover the region's current demand and
high future growth with a adequate reserve through 2004," Olea said.
InterGen and Sempra are expected to start operating their plants in 2003.
The Rosarito plant will supply California consumers when needed, said Ram?n
Fern?ndez, the agency's resident manager of projects, but Baja California and
Sonora needs must be met first.  "CFE has always considered opportunities to
export to and support California as part of the Baja California regional
market," he said.  Prices charged to California consumers will be set by
market conditions, he said.  Exports are limited by the 408-megawatt capacity
of the two cross-border transmission lines, Fern?ndez said, but the agency
expects the capacity to be expanded to 2,400 megawatts by next year.  Diane
Lindquist's e-mail address is diane.lindquist@uniontrib.com
<MAILTO:diane.lindquist@uniontrib.com>. Her voice mail is (619) 542-4579.

Huge Fees, Many Conflicts In PG&E Case
Bankruptcy: The sheer size of the professional firms involved and the vast
reach of the utility make entanglements almost inevitable.
By TIM REITERMAN
TIMES STAFF WRITER

July 29 2001

SAN FRANCISCO -- When a big bankruptcy case comes along, so does the
bankruptcy gang.

After PG&E Corp.'s Pacific Gas & Electric Co. filed for protection from
creditors in April, major law firms and other high-priced professionals
queued up and began billing.

PG&E's lead counsel already has charged $2.65 million in the first two months
of a case that some experts say could stretch into years. A financial advisor
asked for as much as $350,000 a month and once considered seeking a "success
fee" of $20 million if the company's reorganization panned out. A financial
consultant of the PG&E creditors committee has proposed a $1.5-million fee
for six months' work. The PG&E case offers an extraordinary view of an arcane
field usually outside the limelight.

Total court-approved fees in the bankruptcy filing--the third-largest in U.S.
history--could amount to at least $470 million, said UCLA law professor Lynn
LoPucki, a leading expert on bankruptcy practice.

"The bigger the case, the bigger the fees," he said. But even that figure,
LoPucki said, could go higher because of the regulatory and public policy
issues involved in the case, which he described as "one of the most complex
cases ever."

Along with those huge fees come complex potential conflicts. Ethical problems
have long haunted the bankruptcy field, despite repeated efforts at reforms
that have followed scandals involving prominent firms. Though the PG&E
bankruptcy case is in its earliest stages, entanglements that experts say
could present ethical issues already have arisen as several prominent firms
were approved by the bankruptcy judge:

* PG&E's main law firm also represents banking interests that are tied to one
of the utility's biggest debts, a nearly $1-billion credit arrangement.

* PG&E's accounting firm has done unrelated work for more than 80 companies
involved in the PG&E bankruptcy case, including some of the utility's
creditors.

* The law firm for the official committee of PG&E creditors represents a
$400-million Arizona power project being developed by an arm of PG&E's parent
company.

* The accounting firm for the committee does work for PG&E and its parent
company, a corporate relationship being examined by the state's utility
regulator.

For shareholders or creditors of a company in bankruptcy proceedings,
conflicts can create serious problems. The complex legal and accounting
issues that arise in a bankruptcy case provide numerous opportunities for
professional firms to alter outcomes in ways that benefit a favored company
and harm the client relying on their advice.

Experts say the sheer size of today's professional firms and the vast reach
of PG&E, whose business activities touch virtually every sector of
California, make conflicts almost inevitable.

"Very few people have the expertise for high-profile, high-stakes
bankruptcies, so you have a small pool from which to draw representation, and
that's where . . . potential conflicts come up," said Nancy B. Rapoport, a
University of Houston law professor and a leading bankruptcy ethics expert.

"Today," LoPucki said, "it's not a question of whether there's a conflict,
it's how big it is."

Dozens of Firms Vying for Contracts

The bankruptcy case of PG&E, with a reported $31.5 billion in assets, is big,
indeed. Only two cases from the late 1980s, Texaco Inc. and Financial Corp.
of America, surpass it when measured by the dollar value of the assets at
stake.

Records show that about a dozen firms are in line for lucrative contracts
with either PG&E or the official committee representing thousands of the
utility's unsecured creditors. So are dozens of other firms that have
continuing legal work for the company.

All will be paid from the PG&E bankruptcy estate, if Judge Dennis Montali
approves their employment.

To become eligible for legal, accounting and consulting work, each firm must
convince the judge that it is qualified to do the job and does not have
unmanageable conflicts of interest.

Many firms in the PG&E case have worked with one another or represent parties
with a financial interest in the outcome, such as lenders and creditors, in
matters outside the case.

With the limited number of bankruptcy specialists, "naturally you have
lawyers and others working both sides of the fence," said Mary Josephine
Newborn Wiggins, professor at the University of San Diego School of Law.
"There are bound to be some situations where it gets sticky."

Time and again, firms acknowledged in disclaimers filed with Bankruptcy Court
that they have so many ties to other companies that they may not have
unearthed all connections and potential conflicts. Some addressed potential
conflicts by erecting "ethical walls" within their own firms or having
clients sign waivers that absolve the professionals of conflicts of interest.

Experts say ethical walls amount to honor systems with no outside monitoring
and that waivers sometimes are granted without the client's full
understanding of the potential conflicts.

They also point out that not all connections between adversarial interests
constitute conflicts, and not all conflicts are serious enough to disqualify
a firm from a case.

The fact that so many issues arise in cases of this magnitude has meant that
the bankruptcy system is forced to make accommodations for big firms with
overlapping clients.

"By traditional conflict standards, the large firms could not participate in
the cases," LoPucki said. "There has been a huge shift in what is acceptable.
It is more lenient. A firm is allowed to represent [clients] today where they
would not have been allowed 20 years ago."

'Ethical Walls' Used to Avoid Conflicts

The complexity of the entanglements--and the manner in which the system has
adapted to them--can be seen in the roles played in the PG&E case by two of
the nation's largest accounting firms, Deloitte & Touche and
PricewaterhouseCoopers, and one of its most prominent law firms, Milbank,
Tweed, Hadley & McCloy.

When PG&E proposed hiring Deloitte & Touche for a base fee of $855,000 and an
hourly rate of $450 to $650 for partners, the U.S. trustee in the case, Linda
Ekstrom Stanley, objected.

The U.S. trustees office is an arm of the Department of Justice that Congress
created in 1978 to help combat what critics derisively dubbed bankruptcy
rings. The trustees administer bankruptcy cases and are instructed to guard
against abuses and profiteering by professionals.

So far in the PG&E case, Stanley's office has weighed in against the
appointments of several major companies, voicing objections ranging from
excessive fees to conflicts. Her office succeeded in preventing the creditors
committee from hiring a public relations firm, and it won a tentative ruling
that would prevent PG&E from indemnifying a financial consulting firm against
negligence claims arising from its work.

The investment banking firm, Dresdener, Kleinwort & Wasserstein, has stopped
working for PG&E because of the lack of indemnification. PG&E is hunting for
a new financial consultant.

In the case of Deloitte & Touche, Stanley's office seized on the company's
disclosure that it had worked not only for PG&E but also for its parent
company and for another subsidiary, PG&E National Energy Group. The
accounting firm had performed $14.4 million in work last year for the three
PG&E entities.

The trustee said that work posed a potential conflict because the California
Public Utilities Commission was reviewing PG&E's controversial transfers of
funds to its parent company.

Deloitte & Touche argued successfully that its relationships with three PG&E
entities did not compromise the company's ability to fairly represent PG&E in
the bankruptcy.

In the interest of full disclosure, Deloitte & Touche reported it formerly
employed a daughter of Judge Montali. The firm also said it employs the wife
of another bankruptcy judge in San Francisco. She logged fewer than 50 hours
of tax consulting work last year for PG&E's parent, the firm said.

Ethics experts said such personal connections generally would not be enough
to prompt a judge to disqualify a firm. "It's obviously an interesting
relationship," Rapoport said. "It comes down to . . . how much of an
appearance of too much closeness he wants to put up with."

Issues involving the second accounting firm, PricewaterhouseCoopers, arose
when the committee representing PG&E's creditors proposed hiring the firm as
its accountant and financial advisor. Stanley's office objected that the
firm, like Deloitte & Touche, works for PG&E and its parent.

"Professionals . . . must have no conflict of interest . . . and owe
undivided loyalty to the creditors committee," the trustees office said.

"It is not beyond imagining that [PG&E and its parent] could influence
[PricewaterhouseCoopers] through these continuing relationships, the promise
of future engagements and other intangibles," the trustee said in one filing.

PricewaterhouseCoopers said it would build an ethical wall within the firm to
avoid problems or other dicey situations in which PG&E, its parent or
affiliates are adversaries. The judge approved the hiring.

Rapoport said such ethical walls do not necessarily prevent improper
communications within firms. "I don't think you can rely on an honor system
or an internalized moral compass. That is why we have rules in the first
place," she said.

As its legal counsel, the PG&E creditors committee received permission to
hire Milbank. The law firm disclosed that it represented some of PG&E's
creditors in matters unrelated to the bankruptcy. The firm also represents a
$400-million Arizona power plant project being developed by a subsidiary of
PG&E Corp.'s National Energy Group.

Some bankruptcy experts said there was a potential for conflict, but the firm
said the connection was tangential.

In addition, the firm worked for the California Power Exchange, the
now-bankrupt entity that under California's deregulation plan served as the
state's energy marketplace. Milbank resigned that post several weeks before
the Power Exchange filed its own bankruptcy petition in March. The
resignation, Milbank said, was "due to certain potential conflicts with
creditors" of the exchange.

One of Milbank's clients is Enron Corp., which, using other counsel, sued the
Power Exchange, trying to get back collateral held by the exchange to ensure
power deliveries.

Enron now sits on the PG&E creditors committee represented by Milbank.
Another of PG&E's creditors is the Power Exchange, which is seeking nearly $2
billion for energy companies that sold electricity to the utility but were
not paid. Records show Milbank has filed a claim of about $373,000 against
the exchange for legal work.

George Sladoje, president and chief executive of the Power Exchange, said he
was shocked when Milbank, its longtime counsel, quit. "It was very difficult
to find [new] counsel," he said. "There were conflicts all over the place"
among law firms because so many did legal work for PG&E and Southern
California Edison.

Ed Feo, managing partner of Milbank's Los Angeles office, said the company
did its best to avoid conflicts in both bankruptcy cases--by dropping
representation of a client in one and fully disclosing its connections in the
other.

As for Milbank's role in the PG&E case, Rapoport said that representing
creditors and a creditors committee is "OK as long as their interests do not
diverge."

However, she said, "Bankruptcy is like the Chinese game of Go. Moves have
ramifications 20 steps later."

Disclosure Often Is Safest Legal Course

As a practical matter, the safest course legally in a bankruptcy case is to
try to disclose every connection and let the judge decide whether to allow a
firm to participate.

"Disclosure cures a multitude of ills," said Lawrence Gottesman, chairman of
the bankruptcy practice at Brown, Raysman, Millstein, Felder & Steiner in New
York City. By contrast, he said, "the penalty for working with an undisclosed
conflict can be severe."

Milbank learned that three years ago, when John G. Gellene, once a lawyer
with the firm, was sentenced to 15 months in prison and fined $15,000 for
failing to disclose during a bankruptcy case that he also was working for a
creditor in separate litigation. Before the sentencing, the firm had returned
$1.9 million in legal fees and fired Gellene.

To ferret out potential conflicts, firms rely heavily on the computer. Those
involved in the PG&E case, for example, usually checked their computerized
client lists against the biggest 100 PG&E creditors and other players, such
as other professional firms, the trustee's staff and the judge.

Even then, there are limits. The computerized checks did not touch tens of
thousands of smaller PG&E creditors. And the firms themselves commonly issue
disclaimers, saying they might not have turned up all their potential
conflicts.

If a law firm finds it has a troubling conflict, it also can seek a conflict
waiver from its existing client, which essentially gives the firm permission
to pursue dual representation.

PG&E's lead counsel, Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
reported receiving $1.9 million from the company in the year before the
Chapter 11 filing and it billed $2.65 million in fees and expenses for the
two months after that.

Among the firm's potential conflicts was its representation of an affiliate
of Bank of America Corp. The bank participates in a revolving credit
agreement that allows PG&E to borrow up to $1 billion. PG&E listed Bank of
America as the agent for a $938-million claim.

The law firm said its relationship with the Bank of America affiliate was
"sufficiently attenuated" that it did not need a conflict of interest waiver
from its client. But the firm sought and received conflict waivers from a
second bank and the affiliate of a third bank involved in the credit
agreement.

There was no objection by the trustees office, and the judge approved hiring
the firm. "We see if [a firm has] a disqualifying connection and, if not, we
let it go," said Stanley, the U.S. trustee.

Indeed, if every potential conflict were examined closely, some say, the
bankruptcy system would grind to a halt.

"It would be horrendous," said Daniel Bogart, a law professor at Chapman
University. "There are conflicts that matter and those that don't. The
parties have to reach a level of comfort quickly."
Copyright 2001, Los Angeles Times <http://www.latimes.com>

'Invention' Fueling Only Cries of Fraud
Energy: Tribe promised riches from power plant using secret technology
suspects it's been had. Firm's founder, a felon, denies allegations.
By BETTINA BOXALL
TIMES STAFF WRITER

July 28 2001

BISHOP, Calif. -- It would be difficult to write a better spoof of the energy
frenzy than the tale that has been unfolding here on a small Indian
reservation.

There is the pony-tailed convicted felon who came to this remote Eastern
Sierra town with bodyguards, secrecy agreements and plans for a power plant
that would reap millions in annual profits for the local tribe, require no
fuel and produce no pollution.

There was the prototype: two boxes connected to a car chassis suspended off
the ground. When a switch was flipped, the tires turned. There were the
company code names for employees: Falcon, Caesar, Cleopatra.

But it's not a spoof. It's the story of QSFG Research and Development Inc. of
North Las Vegas and founder Michael J. Marshall, who has left a trail of
angry investors, laid-off employees and allegations of fraud from Nevada to
Hawaii.

Marshall is a silver-haired 47-year-old who boasts, in language grandiose to
the point of parody, that he has invented a new technology that will power
everything from cars to electricity plants and transform the energy industry.

Centuries from now, he declared at a groundbreaking here, "They will be
looking back at us, this day right here. We are initiating the start. We are
lighting the match."

He sold company shares at $25,000 a pop, signed a contract to build a
250-megawatt power station on the Bishop Paiute reservation and promised
investors an energy empire.

In a brief telephone interview Friday, Marshall dismissed all the doubts and
allegations.

"I don't care what you write because the truth is the truth. I'm only two
weeks away from having a prototype showing I can run power stations. It does
work. It does run," insisted Marshall.

"Where the Past Ends and the World's Future Begins," proclaims the brightly
lettered sign on his now-closed office-warehouse in a North Las Vegas
industrial park.

It is a phrase he used before, in New York state, where Marshall spent 2 1/2
years in prison for fraud and larceny. According to Cortland County files,
the case involved $25,000 he took from an elderly man to patent an
invention--apparently a "fuel-less generator" for cars.

After his release from prison in 1998, Marshall wound up in Las Vegas, where
he incorporated QSFG last year. He started off with plans to outfit cars and
trucks with his technology. When California's energy crisis hit, he switched
to power plants, becoming one of many offering unusual solutions to the
state's electricity problem.

"We're certainly hearing a lot more schemes. Not all of them are
unreasonable," said Rich Ferguson, research director at the nonprofit Center
for Energy Efficiency and Renewable Technologies in Sacramento. "This
particular thing sounds like a violation of fundamental physical law, so it's
a little hard to take seriously."

Site at Reservation Has Legal Advantages

Last spring, QSFG sent letters to Las Vegas casinos and Native American
tribes in California and Nevada, pitching "a groundbreaking advanced
electromagnetic technology" with which the firm could build new energy plants
and retrofit existing ones.

Marshall, who wears a long braid or ponytail, said he was part Cherokee. But
his interest in tribal land extended beyond any Native American ties. The
reservations are self-governing, QSFG representatives noted, potentially
eliminating local and state red tape and speeding up the approval process.

A few tribes responded, including Bishop and nearby Benton. Marshall and his
entourage paid them a visit in May.

"He reminded me of a used-car salesman," recalled Joseph Saulque, vice
chairman of the Benton Paiute tribe. "He talked real fast. He sounded quite
intelligent and up on what he was talking about. But he refused to let
anybody see what he was talking about. He refused to let us see his alleged
engine."

The Benton tribe didn't pursue the matter. But the larger Bishop reservation
found Marshall's story too tempting to resist: the tribe could make as much
as $15 million a year in exchange for letting QSFG build a nonpolluting power
plant on three acres of their land.

QSFG signed a contract with the Bishop tribe May 31; the groundbreaking was
in early June. Shaded from the high desert sun by a large blue-and-white
tent, Marshall and a parade of his employees took the microphone like
evangelists.

This was the technology of the new millennium, they told a small gathering.
It was an historic moment akin to the Wright brothers and their first flight.

"There's what you call closet inventors--I'm one of them," Marshall said.

None of the speakers detailed exactly how the energy plant would work. There
was mention of rotary power, north polarity and an electromagnetic engine.

All along, Marshall insisted his invention was a carefully guarded secret--so
valuable that he required bodyguards.

Pressed, he would show people his prototype: a car chassis with a steering
column and four wheels. In place of the engine were two boxes that he refused
to open. He would jack the chassis off the ground, flip a switch and the
wheels would turn.

It wasn't much. But apparently it was enough to convince those who wanted to
believe Marshall's engine could be the next big thing, as well as their
ticket to millions.

"This man is a very good and fast talker . . . you believe him," said Juanita
Ikeda, a former accountant for QSFG. "He was able to get everyone's greed to
work against them."

Ikeda, who quit the company in June, says she is the one who discovered
Marshall's New York conviction and made sure the Bishop tribe heard about it
after the groundbreaking.

Calling the episode "a very embarrassing learning experience," Bishop tribal
council chairman Monty Bengochia said the tribal development corporation
"doesn't anticipate following through with the QSFG agreement."

Marshall laid off his staff early this month. According to the Nevada labor
commissioner's office, 16 claims for back wages totaling more than $100,000
have been filed against QSFG by former workers.

In Hawaii, the state Department of Commerce and Consumer Affairs is
investigating a fraud complaint against Marshall and QSFG by investor Michael
H. Wong Sr.

A government engineer who lives in Hawaii, Wong bought a $25,000 share in
QSFG after hearing about the company from a friend in Las Vegas.

Marshall's invention sounded plausible to Wong. "If this guy has it and wants
to bring it out to the world I was all for it," he said.

But after Marshall canceled several public debuts of his technology, failed
to pay any dividends and showed Wong nothing more than a car chassis, he
doesn't believe he has an invention. "He does not have anything at all," Wong
said.

His Las Vegas friend, Michael Kauffman, is similarly disenchanted. "This was
my first investment. It was very stupid," lamented Kauffman. "It's a wash.
I'm not getting my money back."

Kauffman says he has complained to the Las Vegas office of the FBI, which
declined to comment on whether it is investigating.

Former Employees Tell of Ploys

Marshall insists that Wong is furious at him because he won't reveal his
technology secrets. "The money went into the corporation, not into my
pocket," he said. "As far as me scamming--that is not true."

Many of QSFG's employees and some of the investors knew each other before
their involvement with the company. They fell into line with Marshall like
dominoes.

Kauffman heard about Marshall from his roommate, Alesa Beck, who worked in a
video store Marshall patronized. Marshall gave her an office job in the
company. When he was looking for "spokesmodels" to promote QSFG, she referred
him to friends who worked in Vegas as strippers. He hired them.

Kauffman told his sister, Teresa Romero of San Diego, about Marshall's
invention and she bought $25,000 in stock. Wong told his son about the
company and his son went to work for Marshall. A network of acquaintances
followed, including a Southern Nevada community college professor of criminal
justice who was hired as head of security and later made CEO.

Sitting in the restaurant of a downtown Las Vegas casino recently, Kauffman
and five ex-employees described an operation sustained by alluring promises.

Marshall hired them at handsome salaries, paid them in the beginning and then
erratically. He once insisted a solar flare had interrupted the computer
transfer of payroll funds. He told them if they would hang on, they'd make a
fortune.

He assigned code names to the staff--he was Caesar and a young woman he
identified as his wife was Cleopatra. He made them sign nondisclosure
agreements and claimed he had been nominated for the Nobel Prize.

Ikeda and others say Marshall wanted to create the impression of a healthy
business when members of the Bishop tribe visited the QSFG offices. But the
phones had been cut off and there was very little office equipment. So, the
ex-staffers say, they were instructed to bring in their own personal
computers. They spoke in mock conversations on phones that didn't work.

Marshall gave investors binders of material outlining ambitious corporate
plans to employ thousands and build a string of plants to manufacture auto
converter kits for his fuel-less engine.

The binders included a November 2000 letter from the Texas governor's office,
signed by George W. Bush. "We would be happy to welcome you to Texas," Bush
wrote.

It was a generic form letter sent to companies inquiring about setting up
business in the Lone Star State, but it lent an air of legitimacy to QSFG,
especially when energy prices were skyrocketing.

"The letter from Gov. Bush. It just all made sense," Romero said.
Copyright 2001, Los Angeles Times <http://www.latimes.com>

Federal energy order leaves California with $4 billion less in power refunds
KAREN GAUDETTE, Associated Press Writer
Monday, July 30, 2001
,2001 Associated Press
URL:
<http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/07/30/natio
nal0557EDT0472.DTL>
(07-30) 02:57 PDT SAN FRANCISCO (AP) --
California will receive refunds for overpriced electricity, but not as much
as it had asked for.
A closer reading of last week's order from federal energy regulators shows
the amount the state will receive could be slashed to just under $4 billion
-- less than half what the state requested.
Gov. Gray Davis plans to appeal the Federal Energy Regulatory Commission
decision Monday, state officials said. Refunds could help prevent the state
from raising electric rates to cover its power buying costs, which are now
beyond $8 billion.
"We found a number of disturbing things that lead us to believe FERC may not
be so pro-refund as they want Californians to believe," said Nancy McFadden,
an adviser to Davis.
For months, Davis and other state officials have asked the commission to rule
electricity prices charged since May 2000 to be unjust and unreasonable --
prices which climbed 10 times higher than past years.
The state stands to lose a portion of the billions it has spent buying
electricity for Pacific Gas and Electric Co. customers and two other
financially ailing utilities. Power companies maintain they did not work
together to drive up power prices to unreasonable levels.
The commission's 40-page decision confirms it will only order refunds for
power bought since October 2000, rather than May 2000. That means $2 billion
less than the state, utilities and others could hope to receive, McFadden
said.
In addition, the commission also said it will not issue refunds for power the
state Department of Water Resources bought directly from power companies.
FERC only will recognize purchases through the state's now-defunct power
market or from the manager of the state's power grid.
That stripped another $3 billion off the potential refund amount, reducing
the refund by a total of $5 billion. State officials had hoped to receive up
to $9 billion in refunds.
A call to FERC for comment was not immediately returned Sunday.
The commission has ordered an evidentiary hearing, to be completed within 60
days, to determine the size of the refund from providers of wholesale power.

Texas inches toward power deregulation as pilot program goes into effect
Tuesday
NATALIE GOTT, Associated Press Writer
Monday, July 30, 2001
,2001 Associated Press
URL:
<http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/07/30/natio
nal0614EDT0475.DTL>
(07-30) 03:14 PDT AUSTIN, Texas (AP) --
After several delays, the entrance of Texas into the deregulated electricity
market is set to begin Tuesday.
Under a pilot program, officials of the state's electrical grid will begin
switching some customers to new power providers at 12:01 a.m. Tuesday.
The Legislature created the pilot program to give power companies several
months to test their systems before full-scale deregulation, which is
scheduled to begin Jan. 1 in most of the state.
Industry officials have promised that deregulation will be smoother in Texas
than in California, where it has been blamed for rolling blackouts and
skyrocketing utility rates. They say the recent construction of several new
power plants in Texas will help the state avoid supply shortfalls that have
plagued California.
The Electric Reliability Council of Texas, which manages the state's grid,
gave the go-ahead for the pilot program last week.
Deregulation allows customers to choose their power provider much like they
select a long-distance telephone carrier. Under the Texas pilot program, up
to 5 percent of electric customers can switch power companies.
The pilot program is getting under way nearly two months after its first
scheduled start date of June 1. Numerous delays were caused by computer
problems.
While the delays were unfortunate, "we think waiting until all the systems
are ready will let us provide good customer service," said Eleanor Scott,
spokeswoman for Austin-based Green Mountain Energy.

Energy crisis gives juice to new trend: power plants on American Indian
reservations
MICHELLE DeARMOND, Associated Press Writer
Sunday, July 29, 2001
,2001 Associated Press
URL:
<http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/07/29/natio
nal1352EDT0473.DTL>
(07-29) 22:08 PDT LOS ANGELES (AP) --
On an American Indian reservation along the Colorado River, a power company
and a tribe are blazing a trail in the battle to boost energy supplies.
The Fort Mojave tribe joined forces with the Calpine Corp. to build the first
power plant on tribal land to generate electricity for the wholesale market.
The plant is expected to become a model for tribes and energy companies
looking for lucrative, fast-tracked projects.
"I think it could be a brilliant idea. You could short-circuit all of these
delays that have beset other projects," said Craig Goodman, president of the
National Energy Marketers Association.
Federal and tribal governments control whether such plants are built,
allowing energy companies to bypass state and local regulations that often
slow projects, and to avoid lawsuits by residents.
"You don't get stopped by local folks going to their local courts to stop the
project," said Ross O. Swimmer, a Tulsa, Okla., attorney who brokers deals
between tribes and energy companies.
The South Point Energy Center at Fort Mojave is owned and run by Calpine on
land the firm leases from the tribe. The $300 million plant went into
operation last month and can provide energy for 540,000 households in
Arizona, California and Nevada. The reservation occupies parts of all three
states.
Tribal involvement in the power industry is picking up momentum throughout
the West as tribes search for ways to make money off undeveloped land and
power companies learn about the tax breaks and other incentives of building
on reservations. Projects are under consideration in California, Montana,
Nevada and Oregon.
The trend is gaining the greatest momentum in California, where the energy
crisis has prompted rolling blackouts and skyrocketing utility bills.
At least a third of California's more than 100 tribes are exploring ways to
build their own plants with help from investors, or to lease land to energy
companies. Some of the power would be for the tribe's own use, some for sale
on the wholesale market.
Congress is considering legislation that would encourage energy development
on tribal land by allocating money for power projects. And California
lawmakers are considering legislation to help expedite projects and establish
purchasing contracts between the state and tribes.
San Jose-based Calpine also has major projects in the works on the Moapa
Paiute reservation near Las Vegas and on the Torres-Martinez reservation in
southeastern California. Both proposals are still in the federal permitting
process.
"The Indian tribes, by and large they're poor and they're looking for
economic development companies to come on board and develop economic
interests," said John Rocchio, Calpine's senior vice president of business
development.
Supporters believe power plants can attract other businesses while giving a
tribe capital for other enterprises.
"When you consider how big it is for a tribe that has basically had no
economic development to have as its first economic development project a
non-gaming project -- it's really magnificent," said Bobbi Fletcher, project
coordinator for the Torres-Martinez tribe.
The Torres-Martinez tribe is one of California's poorest, with more than 600
members and virtually no revenue. Tribal members hope to get better housing
through power plant revenues and improve their quality of life, which for
some could mean running water and reliable power.
The incentives for power companies extend beyond affordable lease costs and
reduced red tape.
Businesses on tribal land get tax write-offs in the early years and see more
cash flow sooner, Swimmer said. There also are tax credits for companies that
employ American Indians, and exemptions from some local and state taxes.
Some energy executives dispute suggestions that the federal permitting
process for plants on tribal land is faster and less bureaucratic. They say
the real motivation is the location.
"They have holdings that are very close to major transmission and major gas
lines -- two of the most important things that a company is looking for when
we're siting a project," said Kent Robertson, a Calpine spokesman.
,2001 Associated Press

Federal order limits potential state refunds by $3 billion
KAREN GAUDETTE, Associated Press Writer
Sunday, July 29, 2001
,2001 Associated Press
URL:
<http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/07/29/state
1921EDT0655.DTL>
(07-29) 23:39 PDT SAN FRANCISCO (AP) --
California will receive refunds for overpriced electricity, but not as much
as it had asked for.
A closer reading of last week's order from federal energy regulators shows
the amount the state will receive could be slashed to just under $4 billion
-- less than half of what the state requested.
Gov. Gray Davis plans to appeal the Federal Energy Regulatory Commission
decision Monday, state officials said Sunday afternoon. Refunds could help
prevent the state from raising electric rates to cover its power buying
costs, which are now beyond $8 billion.
"We found a number of disturbing things that lead us to believe FERC may not
be so pro-refund as they want Californians to believe," said Nancy McFadden,
an adviser to Davis.
For months, Davis and other state officials have asked the FERC to find
electricity prices charged since May 2000 to be unjust and unreasonable --
prices which climbed 10 times higher than past years.
The state stands to lose a portion of the billions it has spent buying
electricity for Pacific Gas and Electric Co. customers and two other
financially ailing utilities. Power companies maintain they did not work
together to drive up power prices to unreasonable levels.
The FERC's 40-page decision confirms the commission will only order refunds
for power bought since October 2000, rather than May 2000. That means $2
billion less than the state, utilities and others could hope to receive,
McFadden said.
In addition, the FERC also said it will not issue refunds for power the state
Department of Water Resources bought directly from power companies. FERC only
will recognize purchases through the state's now-defunct power market or from
the manager of the state's power grid.
That stripped another $3 billion off the potential refund amount, reducing
the refund by a total of $5 billion.
The DWR bought most of its megawatts directly from power companies after a
FERC ruling in December abolished the Power Exchange, the state's key entity
that bought and sold power. The Independent System Operator, keeper of the
state's grid, then began adding a surcharge on big purchases, McFadden said.
All told, the most the state could expect to get back would be roughly $3.9
billion, said Barry Goode, a legal secretary to Davis. And despite the
overcharges, some of that money has to pay power companies for past power
deliveries at a price FERC determines is just and reasonable.
State officials had hoped to receive up to $9 billion in refunds.
A call to FERC for comment was not immediately returned Sunday afternoon.
The FERC has ordered an evidentiary hearing, to be completed within 60 days,
to determine the size of the refund from providers of wholesale power.

Gas suppliers accuse El Paso pipeline firm of constricting flow to drive up
prices
Bernadette Tansey, Chronicle Staff Writer <mailto:btansey@sfchronicle.com>
Sunday, July 29, 2001
,2001 San Francisco Chronicle </chronicle/info/copyright>
URL:
<http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/07/29/
MN206471.DTL>
The Texas energy company already accused by state officials of manipulating
the natural gas market now faces new allegations by fellow industry players
that last winter it systematically starved the state of necessary fuel in
order to drive up consumer prices and boost profits.
Formerly tight-lipped shippers that lease space on the pipeline El Paso Corp.
runs from the gas fields of the Southwest to Southern California are blaming
El Paso for California's energy price explosion. And a lawyer for one group
of pipeline customers is urging fellow shippers to unite against El Paso as a
"common enemy" that is strangling traffic in natural gas to preserve its
bottom line.
The new accusations came as a result of evidence presented at a hearing
before a federal regulatory judge in May. El Paso Corp., which has been
targeted by state regulators, utilities and legislators convinced it helped
cause California's disastrous season of soaring energy costs, had hoped that
the hearing would lay all suspicions to rest.
Instead, the hearing has given rise to a fresh round of grievances -- not
only from state officials, but also from industry heavyweights.
Major shippers say that while heating bills soared and California's gas
prices were the highest in the nation last winter, they were willing but
unable to get more gas into the state because El Paso curtailed their
deliveries -- even though they held contracts for pipeline space.
'CAUSED ENORMOUS HARM'
"Shippers are losing multimillions of dollars," the suppliers said in a July
13 complaint to federal regulators. "These problems also have contributed to
artificially high gas prices . . . which have caused enormous harm to both
gas and electric markets throughout the West."
El Paso officials declined to give detailed responses to the new complaints
while they are pending before the Federal Energy Regulatory Commission.
"We all here at El Paso feel very confident that the facts will demonstrate
that we have abided by the terms of our contracts," company spokesman Mel
Scott said.
El Paso runs the biggest interstate pipeline system serving California,
accounting for about half the capacity to the state. The federal hearings
held in Washington, D.C., on May 14 concerned accusations by state regulators
and utilities, described in detail in a May 13 article in The Chronicle, that
the company had rigged a contract in early 2000 to award a huge block of
pipeline space to its own gas-sales affiliate.
The affiliate, El Paso Merchant Energy, then left half its share of the
pipeline idle and raised barriers to other shippers who could have paid for
the excess space, according to the complaint.
The result: Gas supplies shrank and prices in California soared to as much as
10 times the national average, costing the state an extra $3.7 billion for
gas and electricity in 2000 and early 2001, according to consultants for
Southern California Edison, which joined in the complaint.
El Paso Corp. has called the claims against its affiliate unfounded. The
company says the price rise was caused by dry weather that forced
hydroelectric plants to cut back, pushing up demand for power from natural
gas- fired plants. It also says supplies were squeezed because of inadequate
pipeline networks within California.
RELIEF COULDN'T GET THROUGH
The latest accusations against El Paso concern a larger chunk of pipeline
space -- about two-thirds of its capacity -- that the company did not lease
to its affiliate.
A group of major energy firms that bought rights to that pipeline space from
El Paso say they have been unable to get extra supplies through to California
-- an influx that could have lowered prices during the big crunch last winter
-- because El Paso rationed service to them.
Those shippers, including Amoco Production Co., BP Energy Co. and Burlington
Resources Oil & Gas Co., complained to the FERC this month that El Paso
oversold its pipeline space, then failed to deliver what it promised. Instead
of using the remaining one-third of the pipeline to meet those obligations,
the gas firms complain, El Paso sold that block to its own affiliate and
reaped a windfall at their expense.
"El Paso and its marketing affiliate, El Paso Merchant, have been unjustly
enriched by this situation," the complaint says.
According to the gas suppliers' complaint, El Paso officials testified in the
Washington hearings that the company could not ship all the gas it promised
to California because of growing demand from Arizona, Nevada and New Mexico.
The major shippers to California, joined by the state's utilities and the
Public Utilities Commission, say El Paso is accommodating a dramatic increase
in demand by Southwestern customers while skimping on gas to California.
Gas suppliers in Sun Belt states say they're entitled to all the gas they
need under their own El Paso contracts. But the California shippers want the
FERC to set limits on how much gas customers in other states can draw from
the pipeline.
BREACH OF PROMISE ALLEGED
Joel Greene, a lawyer who represents a group of gas firms and utilities east
of California, including Arizona Electric Power Cooperative Inc., Public
Service Co. of New Mexico, Salt River Project and the Southern Union Gas Co.,
said the warring shippers should stop quibbling with each other and focus on
El Paso, which he described as the "common enemy" that has broken faith with
all of them.
Greene said El Paso breached a promise to all the shippers, who collectively
saved the company from ruin in 1996 when El Paso had a glut of capacity it
couldn't sell. Shippers on both sides of the state border agreed to pay
higher rates through 2006 to cover the pipeline's operating costs. In
exchange, Greene said, El Paso promised to expand its network if necessary to
meet demand.
Greene said El Paso was warned in 1999 that gas demand was catching up with
supply, but that the company failed to invest in new pipelines. El Paso would
not have gotten more revenue for the new construction because its rates were
frozen under the 1996 settlement, according to the complaint the shippers
filed with the federal commission.
"If you're El Paso, why go out of your way to build if you can't recover
until 2006?" Greene said.
El Paso recently filed plans with the FERC for a new pipeline that would help
meet the needs of shippers to California. Suppliers on both sides of the
state border want the FERC to require El Paso to use all future expansions to
fulfill its existing contracts before it takes on any new customers.
The FERC still is not finished with the first complaint against El Paso --
the one accusing the company of awarding pipeline space to its own affiliate,
which then, allegedly, withheld it from the market.
SUBPOENAS THREATENED
El Paso executives, including company President William Wise, will face
another round of questioning as a second phase of hearings begins Thursday
before Curtis Wagner Jr., the commission's chief administrative law judge.
Wagner threatened to subpoena Wise in May, complaining he was "getting the
runaround" from other executives.
Harvey Morris, an attorney for the PUC who is arguing the state's case
against El Paso, said evidence that emerged in the last round of hearings
strengthened the state's demand that the federal government order El Paso to
refund as much as $200 million in profits -- though he added, "It'll never
make California whole."
Morris is preparing briefs claiming El Paso's pipeline affiliate reduced
pressure on the system to further worsen the scarcity of gas flowing to
California, at the same time its gas-sales arm was withholding pipeline
capacity from competing shippers.
Once gas prices started to peak in November, Morris claims, the pipeline
restored the lost pressure -- and El Paso Merchant Energy used all its
capacity to reap the profits.
"This wasn't just El Paso Merchant Energy exercising market power," Morris
said. "It was the pipeline company itself exercising market power."
E-mail Bernadette Tansey at btansey@sfchronicle.com
<mailto:btansey@sfchronicle.com>.
,2001 San Francisco Chronicle </chronicle/info/copyright> Page A - 1

News briefs on the California power crisis
The Associated Press
Sunday, July 29, 2001
,2001 Associated Press
URL:
<http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/07/29/state
2004EDT0671.DTL>
(07-29) 17:04 PDT SAN FRANCISCO (AP) --
Residents of Potrero Hill are intensifying their fight against Mirant
Corporation's plan to build a 540-megawatt power plant in their neighborhood.
The Atlanta-based company wants to expand an aging 210-megawatt plant and
three 52-megawatt peaker units on a site at 23rd and Illinois streets where a
small power plant occupies 27-acres.
But residents say a bigger plant would have an adverse impact on public
health and the environment.
A lawsuit was filed against Mirant in federal court last month for alleged
air-pollution violations at the peaker facilities it now has on Potrero Hill.
Residents and environmental activists are considering more lawsuits and using
the ballot box as a way to oppose the expansion of the power plant.
Mark Harrer, Mirant's project director, dismissed opposition as NIMBYism,
"not-in-my-back-yard" negativity.
But whether or not the power plant is augmented depends on the Independent
System Operator.
"The controlling agency is the Independent System Operator, and the ISO has
conditions," Edward Smeloff, the city's top power-policy official, said. "One
is enough in-city capacity and the other is additional capacity from the
South Bay. It's conceivable you'd have a new plant on Potrero Hill."

SANTA CLARA, Calif. (AP) -- More than ten families living about 20 miles from
Livermore near the Santa Clara County border are setting the example of homes
who generate all their own power.
These families live in a remote stretch of Mines Road where PG&E has no
reach.
The Westbrooks, one of the families in the no-power zone, built their house
so it would be completely energy-efficient. The couple spent about $30,000 to
install their off-grid system but didn't have to deal with the red tape
associated with connecting to the PG&E grid.
Photovoltaic systems like the Westbrook's are becoming increasingly popular
as energy costs rise and more homeowners turn to clean, renewable energy
sources.
The Westbrooks buy propane in large amounts to save money. They use about
2,000 gallons per year at about $5.50 per day. The cost to run their off-grid
system to supply electricity to their three bedroom house is negligible.
Greg Gahagan, board member of the California Solar Energy Industries
Association in Napa, told the Contra Costa Times his organization is seeing
increased interest in solar because of several incentives available to
businesses and homeowners.
But most customers have to wait a few months before they can get panels.
There is a backlog in production of solar panels because of the great demand,
Gahagan said.
,2001 Associated Press

Power consultant firings called 'tip of iceberg'
Secretary of state says disclosure list should be expanded
Bernadette Tansey, Kelly St. John, Chronicle Staff Writers
<mailto:btansey@sfchronicle.com>
Sunday, July 29, 2001
,2001 San Francisco Chronicle </chronicle/info/copyright>
URL:
<http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/07/29/
MN15752.DTL>
Calling the dismissal of five Davis administration energy consultants who
disclosed ownership of power company stocks "just the tip of the iceberg,"
Secretary of State Bill Jones continued yesterday to attack potential
conflicts of interest in the state's electricity-buying program.
"These few firings don't resolve the issue at all," said Jones, a Republican
who may challenge Davis in the next gubernatorial race.
Jones said the list of advisers required to file financial disclosures should
be expanded and the issue further investigated by state Attorney General Bill
Lockyer and by the state Fair Political Practices Commission.
Davis spokesman Steve Maviglio said yesterday that financial statements have
been submitted by all 42 contractors required to do so under state law. All
of the traders who held stock in energy companies met a deadline last week to
sell their shares, and the few whose disclosures raised questions have been
let go, he said.
"The governor's office is now involved in making sure (traders) meet the
highest ethical standards," Maviglio said.
Five energy traders who helped negotiate state spot market purchases or
long-term power contracts were dismissed and a sixth left state service for
another job after the Davis administration reviewed their financial
statements last week, Maviglio said yesterday.
Susan Weber, chief counsel for the state Department of Water Resources, which
began buying power in January for state utilities swamped with debt, has also
been reassigned because the Davis administration was dissatisfied with her
handling of the ethics issue.
"Despite being under a tremendous burden, it's no excuse for not following
the law," Maviglio said.
He said the state water department sought guidance in April from the attorney
general's office and the Fair Political Practices Commission on which of the
energy contractors, who were swiftly hired to help keep the lights on in
California, were required to submit financial statements. The department did
not act quickly enough to order the disclosures once it received that advice,
Maviglio said.
Four of the dismissed traders owned stock in Calpine Corp., based in San
Jose: William F. Mead, Herman Leung, Constantine Louie and Peggy Chen. A
fifth,
Bernard Barretto, owned stock in Enron.
Calpine sold the state power worth $14 million early this year and signed a
significant share of the $43 billion in long-term contracts later secured by
the state. A higher-ranking consultant, Richard Ferreira, disclosed that he
owned up to $10,000 in Calpine stock.
Concerns ranging from the timing of the stock purchases and the adequacy of
the financial statements led to termination of the five traders, Maviglio
said.
"They were close to the line," he said. "We thought that was inappropriate."
Reached by phone at his home in Duarte (Los Angeles County) yesterday, Mead
said state officials never told him owning energy stock was a problem until
they abruptly asked him to sell the stock earlier this month. He complied
immediately.
Mead, hired in February as a trader on the spot market, bought 800 shares of
Calpine in 1999 and watched them soar to a value of more than $100,000 today.
"I feel like, honestly, there was no conflict of interest," said the 55-
year-old engineer, who noted that Calpine does not sell power in the spot
market where he was trading. "I was never put in a position to make a
decision on Calpine."
"We're ultimately pawns in a political game," Mead said.
Jones said Davis is still exempting 21 advisers involved in the power
purchasing effort from filing financial disclosures. He wants Davis' two Wall
Street advisers, Joseph Fichera and Michael Hoffman, to fill out the forms.
But Maviglio said Fichera and Hoffman have nothing to do with power
purchases, serving only as consultants in the pending issue of $12.5 billion
in bonds to reimburse the state for its power purchases.
E-mail Bernadette Tansey at btansey@sfchronicle.com
<mailto:btansey@sfchronicle.com> and Kelly St. John at
kstjohn@sfchronicle.com <mailto:kstjohn@sfchronicle.com>.
,2001 San Francisco Chronicle </chronicle/info/copyright> Page A - 15

Federal order limits potential California refunds by $3 billion
Posted at 11:13 p.m. PDT Sunday, July 29, 2001
BY KAREN GAUDETTE

Associated Press Writer

SAN FRANCISCO (AP) -- A closer reading of last week's order from federal
energy regulators shows California will receive refunds for overpriced
electricity, but the amount could be slashed to just under $4 billion -- less
than half of what the state requested.
Gov. Gray Davis plans to appeal the Federal Energy Regulatory Commission
decision Monday, state officials said Sunday afternoon. Refunds could help
prevent the state from raising electric rates to cover its power buying
costs, which are now beyond $8 billion.
``We found a number of disturbing things that lead us to believe FERC may not
be so pro-refund as they want Californians to believe,'' said Nancy McFadden,
an adviser to Davis.
For months, Davis and other state officials have asked the FERC to find
electricity prices charged since May 2000 to be unjust and unreasonable --
prices which climbed 10 times higher than past years.
The state stands to lose a portion of the billions it has spent buying
electricity for Pacific Gas and Electric Co. customers and two other
financially ailing utilities. Power companies maintain they did not work
together to drive up power prices to unreasonable levels.
The FERC's 40-page decision confirms the commission will only order refunds
for power bought since October 2000, rather than May 2000. That means $2
billion less than the state, utilities and others could hope to receive,
McFadden said.
In addition, the FERC also said it will not issue refunds for power the state
Department of Water Resources bought directly from power companies. FERC only
will recognize purchases through the state's now-defunct power market or from
the manager of the state's power grid.
That stripped another $3 billion off the potential refund amount, reducing
the refund by a total of $5 billion.
The DWR bought most of its megawatts directly from power companies after a
FERC ruling in December abolished the Power Exchange, the state's key entity
that bought and sold power. The Independent System Operator, keeper of the
state's grid, then began adding a surcharge on big purchases, McFadden said.
All told, the most the state could expect to get back would be roughly $3.9
billion, said Barry Goode, a legal secretary to Davis. And despite the
overcharges, some of that money has to pay power companies for past power
deliveries at a price FERC determines is just and reasonable.
State officials had hoped to receive up to $9 billion in refunds.
A call to FERC for comment was not immediately returned Sunday afternoon.
The FERC has ordered an evidentiary hearing, to be completed within 60 days,
to determine the size of the refund from providers of wholesale power.

Huge PG&E bankruptcy case creates many conflicts of interest
Posted at 11:08 p.m. PDT Sunday, July 29, 2001
SAN FRANCISCO (AP) -- The third largest bankruptcy in U.S. history is also
becoming the most complex. As Pacific Gas and Electric Co. wades through its
pile of debts, many of the legal and financial teams representing the utility
and its creditors often run into conflicts of interest.
Since PG&E is so large and far reaching, it may be difficult to find firms
and businesses that are not somehow associated with the utility. In addition,
many large accounting and legal agencies are getting involved because of
their expertise in bankruptcy cases.
``Very few people have the expertise for high-profile, high-stakes
bankruptcies, so you have a small pool from which to draw representation, and
that's where . . . potential conflicts come up,'' Nancy B. Rapoport, a
University of Houston law professor who's a bankruptcy ethics expert, told
the Los Angeles Times.
Since the utility filed for Chapter 11 protection in April, its lead counsel,
Howard, Rice, Nemerovski, Canady, Falk & Rabkin already has racked up $2.65
million in the first two months of the case. Last year, that same firm
reported earning $1.9 million from PG&E.
The total court-approved amount in the filing could reach at least $470
million, said Lynn LoPucki, UCLA law professor and expert on bankruptcy
practice.
``The bigger the case, the bigger the fees,'' LoPucki told the Times, calling
the bankruptcy ``one of the most complex cases ever.''
PG&E's bankruptcy ranks third behind Texaco Inc. and Financial Corp. of
America when comparing assets -- PG&E reportedly has $31.5 billion in assets.
And about a dozen companies are in line for contracts to work for PG&E or the
committee representing the company's creditors. Experts say the potential for
ethical dilemmas to occur already exists based on the firms approved by the
case's Judge Dennis Montali.
For example, the utility's primary law firm also represents banking interests
linked to nearly $1 billion in debts. PG&E's accounting firm also has worked
for more than 80 companies involved in the bankruptcy case, including some
creditors.
Experts say the multitude of conflicts surrounding the case could allow
professional firms to alter outcomes to benefit certain companies while
hurting PG&E.
``By traditional conflict standards, the large firms could not participate in
the cases,'' LoPucki said. ``There has been a huge shift in what is
acceptable. It is more lenient. A firm is allowed to represent clients today
where they would not have been allowed 20 years ago.''
Some firms have submitted disclaimers describing the ties and in some cases
have said there are so many connections with various involved companies, they
may not even be aware of them all. While other have created ``ethical walls''
within their companies or have asked clients to sign waivers releasing the
professionals from conflicts of interest.
Accounting firm PricewaterhouseCoopers, which works for PG&E and its parent
corporation PG&E Corp., agreed to build an ``ethical wall'' in order to also
serve as accountant and financial adviser for the committee representing
PG&E's creditors. Judge Montali approved the hiring of the accounting firm
despite objections from Linda Ekstrom Stanley, the U.S. trustee assigned to
guard against abuses and money-making schemes that can occur during
bankruptcy proceedings.
Her office has involved itself several times, objecting to everything from
excessive fees to conflicts.
But some say it would be impossible for PG&E's bankruptcy proceedings to move
forward if every conflict were closely examined.
``It would be horrendous,'' said Daniel Bogart, a law professor at Chapman
University. ``There are conflicts that matter and those that don't. The
parties have to reach a level of comfort quickly.''

PG&E and Santa Cruz couple in power struggle
Posted at 9:45 p.m. PDT Sunday, July 29, 2001
BY CHUCK CARROLL

Mercury News

Ken Adelman, who owns one of the most powerful solar electric systems in
California, has had it with PG&E.
The utility wants Adelman and his wife, Gabrielle, to pay about $600,000 to
upgrade the power lines and other equipment in their rural Santa Cruz
Mountains neighborhood so their 31-kilowatt system doesn't overload the power
grid.
``That's more than I paid for my house,'' said Ken Adelman, a retired tech
millionaire who spent about $400,000 this spring for the photovoltaic system
with enough juice for about a dozen homes. They intend to feed their excess
energy back to PG&E for credit to ``zero-out'' their utility bill.
The state has been so hungry for new power sources it is offering rebates to
solar buyers who hook up to the grid. But the Adelmans can't get their
$138,317 rebate until PG&E allows them to go on line.
So, after months of wrangling for the right to connect to the grid, Adelman
flipped the switch himself last week -- with nobody's permission.
``I'm sitting here watching my meter run backward,'' said Adelman, who said
he sent about 10 kilowatts back onto the grid for a 20-minute test that
proved his system was safe. ``PG&E is taking out all the guns. And so am I.''
Pacific Gas & Electric was not amused. Spokesman John Nelson said the company
didn't know about Adelman's test, but he should have called PG&E so it could
inspect the system before he put any power on the grid. The state's Public
Utilities Commission requires that, Nelson said.
Not only did Adelman's test violate those requirements, it ``possibly created
a safety threat to himself, PG&E workers and his neighbors,'' Nelson said.
Fight continues
Their fight over power continues. The Adelmans filed a complaint this month
with state regulators -- starting a process that could wind up being a test
case for small, independent power generators.
They want the PUC to order PG&E to hook up their system at no charge and to
refund about $500 a month for the electricity they've bought since June 1 to
power their 4,200-square-foot home -- with its pool, hot tub, Internet
servers and four electric cars in the garage.
The Adelmans say a new state law says they shouldn't have to pay a cent to
hook to the grid.
For years, the utilities have been required to allow solar systems of up to
10 kilowatts to connect to the grid for free, and get credit for the power
they put online. But in April, lawmakers eager to encourage new sources of
power raised the limit by 100 times -- to 1 megawatt. Adelman's system is one
of the first to take advantage of the new law.
But PG&E is plugged in to a different state rule.
Nelson said the utility is bound by a document known as ``Rule 21.'' That
rule requires the Adelmans -- not ratepayers -- to pay for any upgrades to
the power system to safely handle the amount of power they want to add to the
grid at the end of a circuit that wasn't built for such a load, Nelson said.
When state lawmakers changed the law to accommodate new power generators in
April, it didn't automatically change Rule 21, said PUC regulatory analyst
Valerie Beck, without taking sides in the dispute.
Rule must be changed
``There's nothing that can be done until Rule 21 is changed,'' Nelson said.
Connecting solar and wind systems to the grid -- known as ``net metering'' --
allows owners to get credit on their utility bills for power they feed back.
The Adelmans don't need all 31 kilowatts of electricity their system could
produce. And generating all that power off the grid wouldn't make economic
sense, because they would have to use their batteries every night and wear
them out too fast, Adelman said.
PG&E says the main problem with the Adelmans' new system is that it's so big
and so remote -- at the end of a power circuit about two miles from the
center of tiny Corralitos.
The Adelmans, both electrical engineers who each made millions selling their
start-ups to Cisco Systems and Nokia, said PG&E's estimate of $450,000 for
upgrades and $150,000 in federal taxes is far too much.
Ken Adelman agrees the transformer on the utility pole outside his house
probably needs to be replaced for a few thousand dollars. He said he'd be
happy to pay that, even though he's convinced the law says he shouldn't.
Regulators and solar industry experts say they haven't heard of a utility
trying to charge a solar operator a connection fee anywhere near $600,000.
But the law is new, and the Adelman dispute could be a test as more people
with wind and solar systems try to get connected.
``The law stands firmly on his side,'' said Bill Brooks, a consultant to the
state Energy Commission who helped draft the law. ``It's certainly not worth
it for PG&E to fight this.''
Law was changed
This spring, actor Clint Eastwood lobbied lawmakers to change the law so
renewable energy generators larger than 10 kilowatts, like his Tehama Golf
Club in Carmel -- a system about the same size as Adelman's -- would be able
to hook up to the grid and sell back their surplus energy. In Eastwood's
case, the hookup fee wasn't an issue, said Carmel developer Michael Waxer,
who headed up the project. The golf course is in a developed area with power
lines that can easily handle Eastwood's surplus power.
The state is watching PG&E and other utilities closely to see how well they
cooperate with small independent power producers, said engineer Tony Mazy,
with the PUC's Office of Ratepayer Advocate.
These producers, he said, represent ``a very real threat to alter the
fundamental architecture of the electrical distribution system'' under which
utilities have thrived.

Contact Chuck Carroll at ccarroll@sjmercury.com
<mailto:ccarroll@sjmercury.com> or (650) 688-7598.

Business; Financial Desk
Sempra Unit Pulls in Profit, and Scrutiny Energy: The trading arm, which has
come under increasing criticism, raked in $310 million in the last 18 months.
DAVAN MAHARAJ

07/30/2001
Los Angeles Times
Home Edition
Page C-1
Copyright 2001 / The Times Mirror Company
While the state's two largest utilities, Pacific Gas & Electric Co. and
Southern California Edison Co., are struggling for survival, the parent of
San Diego Gas & Electric Co. is racking up record profit from the state's
energy crisis, thanks in part to a subsidiary that buys and sells energy on
the wholesale market.
In the last 18 months, Sempra Energy's trading subsidiary has raked in $310
million in profit. That's $120 million more than the sum Sempra paid for the
trading outfit 3 1/2 years ago. And analysts expect profit to climb higher as
the trading arm continues to take advantage of volatile energy markets in
California and across the United States.
The trading activities of San Diego-based Sempra are drawing increasing
scrutiny from regulators and consumer watchdogs who question why the state is
doling out attractive energy contracts to a company that already is flush
with cash. Records recently revealed that a Sempra power generator sold all
its capacity at attractive prices over an extended period to the California
Department of Water Resources, which has been procuring power for the state's
largest utilities.
"Sempra has become like the multimillionaire that refuses to tip," said
Michael Shames, executive director of the Utility Consumers' Action Network
in San Diego. "There seems to be a fundamental violation of the principle of
fairness whereby Sempra's trading arm is hugely profitable at the expense of
consumers."
Sempra insists its trading business is a worldwide operation that deals in
not just electricity but oil, gas and other commodities. Only a small portion
of the trading unit's profit comes from California and the Western region,
said company spokesman Doug Kline.
State records revealed this month that Sempra Energy Trading--and several
other wholesale electricity merchants--charged California some of the highest
prices for electricity during the first three months of the year. Sempra
officials say they were only procuring power for the state when supplies were
critically low, but critics want Sempra to refund the alleged overcharges.
Separately, Sempra is battling lawsuits that it conspired with several gas
and pipeline companies to eliminate competition, drive up natural gas prices
and discourage the construction of electricity generating plants in
California .
Sempra's activities have come under scrutiny because critics say its trading
subsidiary was influential in driving wholesale electricity prices to levels
that helped ignite California 's energy crisis. These high prices helped
saddle its own SDG&E, PG&E and Edison with billions of dollars in debt.
PG&E and Edison also have energy-trading businesses, though they are not as
lucrative as Sempra's.
California 's 1996 deregulation law created a competitive marketplace where
more than 100 energy traders now buy and sell electricity . Energy traders
serve as middlemen, buying power from generators and reselling them to
utilities and commercial power users. Some middlemen are connected to firms
that own power plants, but others are speculators, such as Morgan Stanley
Capital Group.
Traders may buy a block of electricity a day, month or year ahead of time and
resell it to another broker, a city or a utility. In California 's energy
crisis, a single electron might be traded a dozen times before it reaches a
ratepayer's home.
Sempra acquired a trading unit when it bought American International Group
Inc. for $190 million in 1997. Sempra Energy Trading earned $13 million in
1998 and $19 million the next year.
As the energy crisis exploded, Sempra Energy Trading's profit soared to $155
million in 2000. For the first two quarters of this year, the trading unit
has accounted for $155 million in profit.
Critics say Sempra can maximize profit for its trading arm--and various other
business units--by knowing the direction of the market.
For example, if executives in Sempra's trading arm know that its sister
subsidiary, Southern California Gas Co., is planning to buy large supplies of
gas for storage, they could structure their trades to take advantage of
anticipated higher prices, consumer watchdog groups say.
"What you have is a back-room, cottage industry for information whereby
affiliates and generators of the same holding company secretly trade in a
market that they have been able to manipulate to exact exorbitant profits at
the expense of those customers who don't have access to that information,"
Shames said. "It's classic insider trading for which people like Michael
Milken served time in jail, and yet these holding companies get to build
palaces."
Sempra and its subsidiaries have denied allegations of insider trading and
insist that all of the company's activities have been legal. Strict Public
Utilities Commission rules prohibit Sempra from sharing information among its
business units, said Chairman and Chief Executive Stephen L. Baum.
Baum, however, acknowledged that it isn't "particularly healthy" for Sempra's
trading arm to sell electricity in the California market, where purchases by
the state are eventually billed to SDG&E ratepayers.
"I don't like being embarrassed to announce earnings in some of my business
units of Sempra because people are suffering in San Diego in the electricity
crisis," Baum said. "That's not a healthy corporate situation."
Baum has hinted that the parent company might decide to spin off Sempra
Energy Trading or other business units to create shareholder value and avoid
perceived conflicts of interest.
For now, the parent company is contesting allegations that Sempra's business
units are cashing in on insider knowledge.
In a recent filing with the state Public Utilities Commission, a group of
primarily municipal generators detailed how the Gas Co. may have acted to
drive up the price of gas for customers so it could rake in additional
profit.
In mid-2000, the gas utility paid $16.5 million for option contracts that
entitled it to buy gas at the end of the year. The contracts gave the Gas Co.
an incentive to buy "abnormally high" volumes of gas at the California border
during the winter months, said Norman Pedersen, an attorney for the Southern
California Generation Coalition.
High border purchases by the Gas Co. drove up border prices, Pedersen said,
allowing the utility to take in $70 million from the deal.
The Gas Co. has vigorously denied that the $70-million gain was related to
California border transactions.
"Customers were not only protected by, but directly benefited from [our] . .
. options programs," the utility's lawyers said in a response filed with the
PUC.
Under a state incentive program that rewards utilities for keeping costs
down, the Gas Co. is required to split savings--such as the $70
million--50-50 with ratepayers whenever the company's gas costs fall slightly
below market levels. Because the Gas Co. has consistently beaten the market,
those savings have multiplied nearly tenfold during the state's power crisis.
Pedersen's clients, which include the Los Angeles Department of Water and
Power, want the PUC to reconsider the incentive program, saying that it "may
have contributed to recently disproportionately high border prices" and
higher gas costs.
Last month, the Gas Co. told the PUC it would accept only $30 million of the
$106 million it was due under the state incentive program. In return the
state must agree to continue the incentive program, according to the Gas Co.
proposal.
Analysts who follow Sempra's stock, which is trading near its 52-week high,
said Sempra is being unfairly targeted for being successful.
Merrill Lynch energy analyst Donato Eassey said Sempra moved more quickly
than PG&E and Edison to take advantage of the state's law that deregulated
California 's energy market and invested the proceeds in trading and other
profitable operations.
"There is nothing illegal about making profits," said Eassey, who recently
upgraded Sempra's stock to "buy." "People in California need to pay the damn
bill and shut up."

State of California
Lets Go 5 Consultants
Tied to Energy Firms

07/30/2001
The Wall Street Journal
Page A4
(Copyright (c) 2001, Dow Jones & Company, Inc.)
SACRAMENTO, Calif. -- The California state government has stopped using five
consultants in its giant electricity -buying operation because of
conflict-of-interest concerns stemming from the individuals' stock ownership
in big energy companies doing business with the state.
The conflicts-of-interest issue arose recently after the stockholdings
appeared on state-mandated financial disclosure forms filed by some of the 58
electricity -related consultants hired by the administration of Gov. Gray
Davis. The consultants worked in a range of capacities, including negotiating
power-purchase deals with energy suppliers and helping to arrange for
electricity deliveries.
Steve Maviglio, the governor's press secretary, said 11 of 42 people filing
financial disclosure forms said they owned energy company stocks or had other
financial interests in such firms. When the issue arose, the state demanded
that the individuals sell their stock. All did, Mr. Maviglio said.