BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Martha M. Escutia, Chair
2001-2002 Regular Session
SB 2000 S
Senator Dunn B
As Introduced
Hearing Date: April 23, 2002 2
Civil Code 0
GWW:cjt 0
0
SUBJECT
Unlawful Electric Power and Natural Gas Pricing
DESCRIPTION
This bill would make it unlawful for any person engaged in
the business of generating, selling, distributing,
transferring, or marketing electricity or natural gas to
possess and exercise market power. The exercise of market
power would be defined as charging prices above the
competitive benchmark. A violator would be liable for
disgorgement of excess profits, treble damages, costs of
suit and attorneys' fees. The bill would create a
rebuttable presumption affecting the burden of proof that
market power was exercised in any case in which prices
above the competitive benchmark were charged.
The bill would also permit an action for specific or
injunctive relief and would authorize the court to make any
order necessary to enjoin any unlawful conduct or proposed
unlawful conduct, or to restore a person's money or
property. In addition, the court would be required to
disgorge any profits from the unlawful conduct and
establish a fluid recovery fund for the return of the
funds.
BACKGROUND
In the winter of 2000 through the summer of 2001, wholesale
electricity prices reached all-time highs. Even though
consumption only increased 4% from 1999 to 2000, energy
(more)
SB 2000 (Dunn)
Page 2
costs rose almost $20 billion dollars. In May 2001, the
state, at one point, paid $1,900 per megawatt hour (mwh),
far more than the average $58/mwh in May 2000.
According to a March 2001 study prepared by Eric
Hildebrandt of the California Independent Systems Operator
(ISO), "Further Analyses of the Exercise and Costs Impacts
of Market Power in the California Wholesale Energy Market,"
the average wholesale costs for 1 mwh of electricity, not
cost of production, rose from $23/mwh in April 1998, to
$25/mwh in April 1999, to $31/mwh in April 2000, and then
to $58/mwh in May, to $147/mwh in June, to $167/mwh in
Aug., to $156/mwh in Nov., to $395/mwh in Dec., $307/mwh in
Jan. 2001, and $361/mwh in February 2001.
In his study, he concluded that about 31% of wholesale
energy costs over the 12- month period ending with Feb.
2001 can be attributed to the exercise of market power.
His study also stated that the exercise of market power was
not limited to hours when a shortage of operating reserves
requires the Cal ISO to declare a System Emergency (Stage
3). Of the $6.8 billion in additional costs, about 80% of
it were incurred in non-emergency hours. Over half of
these additional costs were incurred when no system alert
was in effect. (In other words, the exercise of market
power operated to raise prices at all levels of delivery.)
He repeated his unfortunately prescient forecast of
November 2000 in which he stated that "the exercise of
significant market power can be expected to continue - if
not worsen - over the next two years absent action to more
effectively mitigate system-wide market power."
CHANGES TO EXISTING LAW
Existing law prohibits anti-competitive behavior under the
Cartwright Antitrust Act (Business and Professions Code
Section 16700 et.seq.) and prohibits acts of unfair trade
practices and unfair competition under Business and
Professions Code Sections 17000 et. seq., and 17200
et.seq., respectively. Remedies and penalties for a
violation of the Cartwright Act include injunctive relief
as well as treble damages and the assessment of attorneys'
fees and costs in a civil action. Remedies and penalties
for a violation of Section 17000 or 17200 include
injunctive relief and damages or restitution and/or civil
SB 2000 (Dunn)
Page 3
penalties.
This bill would prohibit any person engaged in the business
of generating, selling, distributing, transferring, or
marketing electricity or natural gas from possessing and
exercising market power, as defined. A violator would be
required to disgorge the profits from that unlawful
conduct, and be liable for treble damages, as measured by
the amount of disgorgement, and attorneys' fees and costs
This bill would also make the possession and exercise of
market power subject to an action for specific or
injunctive relief. Any person who engages in, has engaged
in, or proposes to engage in any unlawful conduct may be
enjoined and the court would be authorized to make any
order necessary to prevent a person's use or employment of
unlawful market power or to restore a person's interest in
money or property. The bill would require the court to
disgorge any profits from the unlawful conduct and to
establish a fluid recovery account for the return of the
funds.
The bill would permit an action under the bill to be
brought by the Attorney General or by a person acting on
its own behalf, its members, or the general public. In any
such action, there would be a rebuttable presumption that
market power was exercised in any case in which prices
above the competitive benchmark were charged.
The bill would define the key terms "competitive
benchmark," "exercise of market power," and "market power."
COMMENT
1.Stated need for bill
According to the author's office, SB 2000 "is necessary
for the purpose of controlling certain market conduct
described as market power, which was one of the many
causes of California's energy crisis. While market power
is a foundational block in proving antitrust behavior, it
is unclear whether it applies under California's unfair
business practices. This bill clarifies that the
possession and exercise of market power in California's
electricity and natural gas markets is, in fact,
SB 2000 (Dunn)
Page 4
illegal."
With warnings from energy distributors that California
still faces the potential of future blackouts due to
insufficient supply, proponents of SB 2000 argue that
adoption of this measure is critically needed to prevent
energy sellers and traders from again gaming the market
to drive up California's energy prices in order to
maximize their profits.
Proponents assert that California's unfortunate and
expensive experience with energy sellers and traders
using their market power to drive up prices to collect
exorbitant profits, is ample evidence of the need for
this bill, and that SB 2000 is urgently needed as a
defense to new acts of market manipulation.
2.Proposed work in progress
The author candidly admits that SB 2000 is a "work in
progress." Key terms may need fine-tuning or narrowing
(see Comments 3 and 4). The rebuttable presumption,
intended as one affecting the burden of proof, is also
very controversial. (See Comment 5.)
3. Key definitions
"Market power" would mean the ability to profitably
maintain prices above competitive levels for a period of
time. As used in the bill, a person may also possess
market power with respect to significant competitive
dimensions other than price such as quality, service, or
innovation.
"Exercise of market power" would mean charging prices
above the competitive benchmark.
"Competitive benchmark" for assessing market power would
be determined as the short-run marginal costs of the
highest cost unit needed to meet demand.
According to the author's staff, these definitions are
derived from various works that analyzed the
dysfunctional electricity market in California and
concluded that high prices were caused by the possession
and exercise of market power by various players in the
SB 2000 (Dunn)
Page 5
California energy market. See, particularly, "Further
Analysis of the Exercise and Costs Impacts of Market
Power in California's Wholesale Energy Market," Eric
Hildebrandt, Ph.D., Department of Market Analysis, CA
Independent System Operator, March 2001, page 5.
As noted above, some of the definitions may need
fine-tuning or narrowing. For example, the definition of
market power depends in turn on the undefined phrase of
"above competitive levels for a short period of time."
Opponents contend that this and other definitions are
seriously flawed. See next comment, below.
4. Opposition to proposal
Opponents write that SB 2000 would establish a flawed
market power test and would infringe upon the
responsibilities of the Federal Energy Regulatory
Commission (FERC) to exercise exclusive jurisdiction over
wholesale electricity ratemaking. Sempra Energy argues
that SB 2000's definition of market power is flawed and
ambiguous, and may therefore have a chilling effect upon
the provision of power in the state. It argues that
regulators now identify market power as existing when an
entity has the ability to increase prices above a
competitive level, for a sustained period of time in the
relevant product and geographic market. Sempra argues
that under SB 2000, any price above the competitive
benchmark price for a short unspecified period of time
would be presumed to be an unlawful exercise of market
power. It writes: "Simply because price in a volatile
market are at times above a competitive benchmark does
not in itself indicate that market power has been
exercised. In competitive markets, prices often go above
the marginal costs for reasons (such as scarcity) other
than market power."
Opponents thus argue that SB 2000's flawed definition of
market power will inappropriately catch innocent
violators, and would discourage many distributors from
entering the California market. Rather than help to ease
the energy crisis, opponents say, the bill would impose
additional risk and threaten the future of investment in
energy generating facilities.
SB 2000 (Dunn)
Page 6
The Western States Petroleum Association (WSPA)
specifically argues that the proposed definition of
"competitive benchmark" would impose a pricing mechanism
on cogeneration and Qualifying Facilities (QFs) that is
in direct violation of the Federal Public Utility
Regulatory Policies (PURPA). WSPA argues that under
federal law, QFs are entitled to receive an incentive
price for their power -- the QF is to be paid what the
utility would have charged to secure power to serve
incremental load absent the availability of the QF's,
commonly termed "avoided costs." WSPA contends that SB
2000's application to QF's is preempted by PURPA, and
that, on a policy level, it would have a chilling effect
on capital investment and on efficient and needed
generation supply. To avoid a federal conflict, WSPA
argues that QF's should be exempted from the bill.
Pacific Gas & Electric Company argues that it and other
utilities regulated by the California Public Utilities
Commission (CPUC) should be exempt because they are not
able to exercise market power to set prices as
unregulated firms may.
Finally, opponents argue that SB 2000 is pre-empted by
the Federal Power Act which delegates to FERC, the
exclusive responsibility for setting prices. The author
responds that his bill only seeks to control conduct,
which is not pre-empted by FERC
5. Proposed rebuttable presumption affecting the burden of
proof
Proposed Section 1833.1(b), on page 2, line 20, would
create a rebuttable presumption that market power was
exercised in any case in which prices above the
competitive benchmark were charged. The measure does not
specify whether this presumption is one affecting the
burden of proof or one affecting the burden of producing
evidencing evidence.
According to the author's staff, the intent to affect the
burden of proof. Under Evidence Code Section 605, a
presumption affecting the burden of proof is a
presumption that is established to implement some public
policy other than, or in addition to, the policy to
SB 2000 (Dunn)
Page 7
facilitate the determination of the particular action in
which the presumption is applied.
In SB 2000, proponents argue that public policy supports
the shifting of the burden when, as here, recent events
have shown that power generators and sellers have
exercised market power to increase energy prices to
California, and where, as here, a threshold showing is
made as to the harm suffered by a plaintiff. As in the
case under the common law doctrine of res ipsa loquitur,
the defendant is in the best position and has the best
access to the evidence to disprove his liability.
Proponents also argue that particularly in an arena in
which at least one major energy trader suspected of
market manipulation has not been hesitant to shred its
documents, leaving the burden on the injured party would
dull any threat of enforcement for a violation of the
law.
Opponents argue that establishing a rebuttable
presumption that market power was exercised any time a
price above short run marginal costs was assessed is the
pastiche of textbook economic babble. Too many variables
account for why one generator's price may be higher than
other generators; inefficient production facilities is
just one legitimate reason. SB 2000's imposition of such
a burden on a legitimate generator or distributor to
disprove his exercise of market power would impose
liability unfairly and would result in discouraging
sellers and generators from entering the California
market. Indeed, there may be cases in which a generator
running on demand is legitimately charging a price above
the competitive benchmark, perhaps because of
extraordinarily high production costs for that cycle due
to loss of emissions credits. In that case, the
generator will not be able to rebutt the presumption and
would face treble damages and attorneys' fees.
6. Establishment of fluid recovery fund for disbursement of
recovered funds
Under proposed Section 1883.3(b), the activities of any
person who engages, has engaged, or proposes to engage in
any unlawful conduct may be enjoined and the court may
SB 2000 (Dunn)
Page 8
make any order or judgment, including the appointment of
a receiver, as may be necessary to prevent the person's
unlawful conduct or practice, or as may be necessary to
restore to a person's money or property. The bill would
further require the court to order disgorgement of the
revenue from the unlawful act or practice, and to
establish a fluid recovery fund for the return of the
funds.
This provision is intended to specifically provide for
the use of a fluid recovery fund in all cases in which
disgorgement is ordered. Without this express
authorization, there may be some doubt where this
mechanism could be used in all cases. See, e.g., Kraus
v. Trinity Management Services, Inc. (2000) 23 Cal.4th
116.
(The use of a fluid recovery fund is necessary only when
a defendant is ordered to disgorge proceeds but has not
paid out the funds to all the persons who are owed the
monies. Instead of allowing the wrongdoing defendant to
keep the profits that had been ordered disgorged when a
person to whom it is owed cannot be found, the monies are
instead paid over to a fund for distribution as
determined by the court.)
7. Technical amendment needed
On page 2, beginning line 39, strike out "(i)." It is
unnecessary and improper
usage.
Support: Lt. Governor Bustamante; TURN; Office of
Ratepayer Advocates,
CPUC; Congress of California Seniors
Opposition: California Independent Petroleum Association;
Dynergy; Independent Energy Producers; Pacific
Gas & Electric Company; Sempra Energy; Western
States Petroleum Association;
HISTORY
SB 2000 (Dunn)
Page 9
Source: Author
Related Pending Legislation: None Known
Prior Legislation: None Known
**************