A winner found north of border: Canadian firm cashes in on California ills

By Dale Kasler, Bee Staff Writer

(Published March 4, 2001)

VANCOUVER, British Columbia -- The room doesn't look like much: a bank of computer screens flickering quietly, a group of youthful-looking employees swapping jokes or finishing odd chores. The only noteworthy feature is the small electronic tote board in the middle of the room flashing the going rate in U.S. dollars -- $175 to $200 a megawatt hour -- for electricity in the Western United States.

Perched on the 14th floor of a downtown Vancouver office tower, the room is the nerve center of a phenomenally successful energy trading empire, a company that's raked in hundreds of millions of dollars by selling electricity to California and neighboring states in recent months.

The company is Powerex Corp., the wholesale trading arm of British Columbia's government-owned electric utility, BC Hydro. Thanks to Powerex's adroit, well-timed buying and selling of electricity, BC Hydro's profits have nearly tripled in the past nine months to about $862 million in U.S. dollars, from $303 million a year earlier.

The company expects to earn record profits for the fiscal year that ends March 31, and the results have surpassed everyone's expectations.

"I don't think we, more than anyone else in the marketplace, predicted what was going to happen in California," said Doug Little, vice president for trade policy and development at Powerex.

As California continues to grapple with a crisis that has brought rolling blackouts to its citizens and financial distress to its two leading utilities, politicians have leveled charges of profiteering at the companies that own most of California's generating plants, mostly a group of companies from Texas.

But big corporations aren't the only ones making good money in California. Government entities, including BC Hydro, the U.S. Bonneville Power Administration and the Los Angeles Department of Water and Power, have been among the biggest sellers to California's hyperinflated energy market, said a source with the California Power Exchange, the now- moribund entity that served as the main venue for buying and selling California electricity.

British Columbians say BC Hydro is merely doing what any company would do -- and is responsible for helping keep the lights on. "BC Hydro has been able to assist California ... sometimes at crucial times," said British Columbia Finance Minister Paul Ramsey.

California officials acknowledge BC Hydro's help; on at least one occasion in January a last-minute sale from Vancouver was critical to avoiding more blackouts. But at times the utility has scaled back its deliveries because of anxiety about getting paid.

"BC Hydro has been helpful in selling California power during this crisis," said Patrick Dorinson, a spokesman for the California Independent System Operator, which manages the state's power grid. "But like other generators, they have concerns about credit."

BC Hydro's roaring success is tinged with ironies. It is an exercise in raw, U.S.-style capitalism in a society where business is done on genteel terms and risk-taking is viewed with alarm. California's unfettered prices have generated a huge business windfall for a provincial government ruled by socialists, the New Democratic Party.

BC Hydro has pumped much of its profit into a "rate stabilization account," a sort of government-mandated rainy-day fund to keep electricity prices low in the future for its 1.6 million customers.

But much of the money is being spent. In an effort to stay afloat politically, the increasingly unpopular New Democrats are spreading some of BC Hydro's wealth among the general population. Millions of Canadian dollars are being poured into a health-care initiative. All British Columbians will be getting a $130 (U.S.) energy rebate in the form of credits on their electric bills. Poorer residents will get checks of as much as $65 (U.S.) per family as well.

The rebates -- and how they originated -- have generated pride in many here, who view it as a fair turnabout for the cascade of U.S. culture and products that constantly stream across the Canadian border.

"I like the fact that we're selling stuff to Americans," said Don Mortimer, a downtown office worker. "It's free trade."

BC Hydro officials have become somewhat skittish about discussing their sudden riches. Little said one-third of Powerex's megawatts of electricity have been sold to California, but he wouldn't discuss the prices or profits the trading company has earned from the state.

While the profits have been nice, "we don't relish this," insisted Ken Peterson, the bearded, grandfatherly Powerex president. "It's really gotten nasty."

California's electricity shortage has been a mixed blessing here. With California's natural gas-fired generating plants going into overdrive to stave off blackouts, British Columbians have been hit with the same kinds of gas rate increases as others in the West. "We're paying California prices for natural gas," said Ramsey, the finance minister.

BC Hydro also must wrestle with getting paid the $300 million owed to it by California's utilities. While it's willing to defer payments, it expects to get paid in full, said spokesman Wayne Cousins.

The descendant of a privately owned electric company, BC Hydro gets 90 percent of its electricity from a series of hydroelectric facilities on the Peace and Columbia rivers. Those plants generate enough low-cost power to provide British Columbians with some of the cheapest power in North America.

The utility doesn't have a vast surplus of power to sell, Cousins said. But its hydro plants provide the flexibility that's enabled Powerex -- founded in 1988 as a vehicle for buying power from small, independent producers -- to reap big trading profits.

The key is that, compared to other forms of electrical generation, hydro plants are fairly nimble. Given enough water, production can be cranked up or toned down to suit one's needs reasonably quickly.

Here's how that feeds into Powerex, according to a hypothetical example supplied by Cousins: It's 2 a.m. and a utility in Idaho has cheap, excess power to sell. BC Hydro buys it to supply its own customers' needs, enabling it to ease off on its production of hydro power.

Then, as peak time approaches later that morning and the prices are going up, it churns up the hydro production for sale to the Western United States.

"We call that time-shifting -- essentially buy low, sell high," Cousins said. "We have the ability to buy in Montana and sell to Arizona, or buy in Oregon and sell to California."

The company hasn't been any busier than in times past; the volume of electricity sold to outsiders is just 4 percent higher than a year ago. But prices have quadrupled on average, and so has Powerex's trading revenue.

Skyrocketing prices have sparked one formal inquiry into Powerex's bidding practices. Last spring, officials in the neighboring province, Alberta, which buys power from Powerex, accused that company and Enron Canada Corp., the Canadian arm of the Houston energy conglomerate, of collusion on electricity prices, driving up costs in Alberta's newly deregulated energy market.

While Enron and Powerex denied the accusation, their offices were raided by officials from the Canadian Competition Bureau, a federal agency. The two companies were later cleared of any wrongdoing, but the high prices continue to create some ill will between Alberta and British Columbia.

In California, some critics have accused wholesale power suppliers of deliberately withholding electricity in order to raise prices, something they acknowledge is legal. The suppliers have denied holding back power. "We play by the rules," Cousins said.

Meanwhile, the shortage of snow and rain that's plagued western Canada could make BC Hydro a net importer of electricity before long, raising the specter of higher prices across the province-- "the California curse," Peterson called it.

"We need calmer markets going into this summer," Little said. "A cooling-off period ... would be in everyone's interests."

In the meantime, though, British Columbians such as John Wocjik, an executive with a building-security company in downtown Vancouver, are enjoying the windfall -- and looking forward to their energy rebates.

"We're supposed to be seeing a rebate check soon," Wocjik said. "Thanks to California."

What happened last week

Gov. Gray Davis said the state is two weeks to a month away from completing all "legislative fixes" to its electricity crisis.

Calpine Corp. became the latest wholesaler to sign long-term supply contracts with the Department of Water Resources, agreeing to two deals totaling $8.3 billion. Last month, Calpine signed a deal worth $4.6 billion.

The parent corporation of Pacific Gas & Electric announced a $1 billion refinance that will enable it to pay shareholder dividends and other bills, but not the billions owed by the utility to generators.

What's ahead

The Davis administration will continue to negotiate to buy the transmission lines of three cash-strapped utilities: Southern California Edison, PG&E and San Diego Gas & Electric.

Quote of the week

"I see light at the end of the tunnel, and it's not a train."-- Gov. Gray Davis, during a luncheon speech before the California State Society.

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