BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
SB 2000 - Dunn Hearing Date: May
21, 2002 S
As Amended: May 14, 2002 FISCAL B
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DESCRIPTION
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 penalties.
This bill prohibits persons engaged in the business of generating,
selling, distributing, transferring, marketing, or trading
electricity or natural gas from engaging in the following 17
specified practices to increase prices:
1. Physical withholding
2. Economic withholding
3. Using reliability information
4. Using or providing false or misleading information
5. Creating, prolonging or using shortages or outages
6. Selling to another state to reduce supply
7. Refusing transmission operator dispatch orders
8. Scheduling with the intent to create congestion or false
impression of congestion
9. Intentionally over-scheduling to receive payments for
reducing congestion
10. Selling in another control
area and repurchasing in original control area to avoid market
rules
11. Withholding from a market with
a price cap to sell into a market without a price cap
12. Misrepresenting availability
13. Misrepresenting supply
14. Misrepresenting the reason for
generation outages
15. Selling between subsidiaries
of the same company
16. Creating an artificial
increase in natural gas demand
17. Any other strategies, acts, or
conduct resulting in pricing above the "reasonable price" in a
"fair and competitive market."
This bill requires persons violating the above provisions to
disgorge the increment charged above the "reasonable price" in a
"fair and competitive market," and makes violators liable for treble
damages, the costs of a civil action brought to recover those
damages, and attorneys' fees.
This bill authorizes injunctive relief to prevent the unlawful
conduct described above.
BACKGROUND
The Federal Energy Regulatory Commission (FERC) permits power sales
at market-based rates if the seller and its affiliates do not have,
or have adequately mitigated, market power in generation and
transmission and cannot erect other barriers to entry. The majority
of wholesale power transactions are conducted pursuant to
market-based rate authority.
Under its original "hub and spoke" analysis, if an entity had a
market share of 20% or less of installed and uncommitted generation
in a defined geographic market, the entity would not be considered
to possess market power. With regard to transmission, an entity
could demonstrate the requisite absence or mitigation of market
power if it had an approved open-access transmission tariff.
Despite well-known regional and local transmission constraints in
California, the entire Independent System Operator (ISO) control
area has been considered a single market for purposes of FERC's
market power analysis.
In an order issued November 20, 2001, FERC announced a new
generation market power screen and mitigation policy aimed at
preventing the exercise of market power in energy markets. The new
policy was adopted on an interim basis while FERC reviews new
methods to analyze market power.
In the November 20 order, FERC noted that its historic hub and spoke
analysis worked relatively well when markets were essentially
vertical monopolies trading on the margin, with retail loads only
partially exposed to the market. FERC concluded that the hub and
spoke analysis no longer adequately protects electric customers
against generation market power and adopted a Supply Margin
Assessment (SMA) screen to be used pending completion of a
rulemaking addressing electric markets and market power.
The new screening mechanism changes the hub and spoke analysis in
two ways. First, it considers transmission constraints in
determining the geographic market. This feature allows the analysis
to more accurately determine what supply can reach buyers to compete
with the entity seeking market-based rate authority. Second, in
determining the size that triggers generation market power concerns,
the new screening method establishes a threshold based on whether an
applicant is "pivotal" in the market, i.e., if at least some of the
entity's capacity must be used to meet the market's peak demand.
FERC explained that an entity will be considered a pivotal supplier
if its capacity exceeds the market's surplus of capacity above peak
demand (the market's supply margin). A supplier would fail the test
if the amount of its capacity exceeds the market's supply margin.
The new screen, therefore, is intended to prevent a supplier from
withholding supplies in the market in order to raise prices during
periods of peak demand.
FERC has postponed implementation of the SMA screen and exempted
suppliers within an ISO or Regional Transmission Organization (RTO).
While several suppliers in the California ISO would likely fail the
SMA screen, according to FERC, ISOs and RTOs already have procedures
in place to prevent the exercise of market power. Consequently, the
SMA screen will not be applied to sellers in the California ISO.
Once a seller has been permitted to sell at market-based rates, FERC
has no regular system to monitor transactions and ensure charges are
"just and reasonable," as required by the Federal Power Act. FERC
has taken the liberty of presuming that wholesale power transactions
conducted pursuant to market-based rate authority are "just and
reasonable" until proven otherwise.
According to a paper prepared by this committee for an April 29,
1999 hearing:
Addressing market power issues is essential to successfully
developing a competitive market for electricity generation
and related services in California. Market power can be
exercised when market participants, through consolidation
or collusion, control enough of a given market that they
are able to strategically influence prices for their own
benefit. The early experience with a competitive
electricity market indicates that at times of peak demand,
a few large participants may have sufficient leverage to
manipulate the market and control prices?
?The natural cure for market power abuse is robust
competition. Lacking robust competition, market power abuse
can potentially be deterred or mitigated through regulatory
disincentives, although sophisticated participants who are
clever in their exercise of market power may be able to
avoid clear evidence of abuse.
Recent revelations of trading practices employed in California by
Enron, among others, confirm the existence and use of misleading and
manipulative tactics intended to increase energy prices and
manufacture false transmission congestion, supply scarcity and
trading revenues.
Among the practices detailed in the Enron memoranda:
"Death Star" - Scheduling energy for transmission opposite of the
prevailing direction in order to collect payments for then relieving
the congestion created. According to the memoranda, "the net effect
of these transactions is that Enron gets paid for moving energy to
relieve congestion without actually moving any energy or relieving
any congestion."
"Get Shorty" - "Shorting" ancillary services, i.e. selling the
commitment to provide ancillary services day-ahead, then canceling
the commitment in the real-time market and buying replacement
ancillary services at a lower price. In this scheme, the scheduler
never had the ancillary services it sold day-ahead. The scheme
relied on reporting a false source of ancillary services.
"Inc-ing" - Scheduling generation which is known to be in excess of
what is required to meet the scheduling coordinator's load, in order
to receive payment for the excess generation in the real-time
market.
"Ricochet" - Purchasing energy day-ahead in California, selling it
to an entity in another state, buying it back, plus a fee, from the
out-of-state entity, and selling it in the real-time market to avoid
price mitigation or competition. According to the memoranda, "it is
clear that Enron's intent under this strategy is solely to arbitrage
the spread between the PX and the ISO, and not to serve load or meet
contractual obligations." This strategy is also commonly known as
"megawatt laundering."
"Wheel Out" - Scheduling transmission on a transmission inter-tie
that is completely constrained and therefore unable to accept
additional transmission, in order to collect a congestion payment,
with no intention of actually delivering energy via that inter-tie.
COMMENTS
1.Shocking behavior? The practices described above may be
indicative of inherent defects of market-based electricity service
that may be impossible to prevent. Market participants with
private capital on the line can be clever and opportunistic. If
they don't succeed in creating a market structure that advantages
them, they'll likely either find a way around it or abandon it.
Neither outcome is conducive to producing enduring consumer
benefits, such as reasonable prices or reliable service.
Trying to resist these tendencies by regulating market behavior
and mitigating the damage caused by misbehavior (e.g. establishing
civil liability as this bill does) may be less "efficient" and
more expensive for consumers than traditional utility regulation.
That has certainly been the experience in this state, where the
market-based structure has failed consumers. These failures have
long since eclipsed inefficiencies inherent in cost-of-service
utility regulation.
2.What is the "reasonable price?" The level of liability imposed
for unlawful conduct under this bill hinges on a court's
determination of the "reasonable price" in a "fair and competitive
market." While a judge or jury certainly could make such a
determination based on evidence presented at trial, market
participants may have some difficulty determining their liability
risk on a day-to-day basis outside the courtroom.
FERC's presumption that wholesale power transactions conducted
pursuant to market-based rate authority are "just and reasonable"
has obscured its obligations to clearly define just and reasonable
rates and ensure such rates are observed without exception. This
policy has destroyed the notion of a known standard for the
reasonableness of prices in wholesale energy markets.
Benchmarks that reflect the daily market price of electricity are
limited. Most electricity is now sold at regulated rates or
through fixed-price contracts. What limited daily electricity
market there is lacks the confidence of many customers that it is
fair, competitive, and will yield reasonable prices.
3.Does the bill cast the net too wide? This bill describes a
variety of supplier tactics that could be described as
anti-competitive or manipulative behavior, but may cast the net
too wide to include legitimate market behavior. For example:
The bill prohibits refusing dispatch orders from any
transmission system operator (such as the ISO) regardless of
whether the operator is otherwise entitled to dispatch that
generator or whether such conduct resulted, or was intended to
result, in increased prices.
Selling electricity in another state which results "in a
reduction of supply to increase the price" is prohibited. This
provision may apply to commonly accepted practices of exporting
surplus power to neighboring states and could violate the U.S.
Constitution's Commerce Clause.
Any conduct that results in prices above the reasonable
price for electricity or natural gas in a fair and competitive
market is prohibited. This would include each of the other
unlawful practices described in the bill, and more - any act
that resulted in a price above the reasonable price, regardless
of intent or significance.
As a practical matter, plaintiffs seeking damages under this bill
would be unlikely to pursue insignificant acts, since the damages
would also be insignificant, but these provisions appear broader
than necessary or desirable to remedy market manipulation which is
harmful to consumers.
The author and the committee may wish to consider whether this
bill should be amended to clarify that the conduct described is
unlawful if it results, or is intended to result, in a significant
or sustained increase in electricity or natural gas prices or a
significant or sustained decrease in electric or natural gas
system reliability. A draft of suggested clarifying and technical
amendments is attached.
POSITIONS
Sponsor:
Author
Support:
California Public Interest Research Group
Congress of California Seniors
Lieutenant Governor Cruz M. Bustamante
Office of Ratepayer Advocates
Utility Consumers' Action Network
Oppose:
California Chamber of Commerce
California Cogeneration Council
California Independent Petroleum Association
California Manufacturers & Technology Association
California Municipal Utilities Association
City of Riverside
Dynegy
Imperial Irrigation District
Independent Energy Producers Association
Modesto Irrigation District
Pacific Gas and Electric Company
Questar Southern Trails Pipeline
Riverside Public Utilities
Sempra Energy
Sacramento Municipal Utility District
Western States Petroleum Association
Lawrence Lingbloom
SB 2000 Analysis
Hearing Date: May 21, 2002
SB 2000 Suggested Amendments (May 14, 2002 version)
TITLE 3.6. UNLAWFUL ELECTRIC POWER AND NATURAL GAS PRACTICES
1883. (a) For purposes of this chapter title , "person" means and
includes a natural person, corporation, firm, partnership, joint
stock company, association, or other organization or entity of
persons.
(b) A person engaged in the business of generating, selling,
distributing, transferring, marketing, or trading electricity or
natural gas may not engage in any of the following unlawful acts or
practices conduct which results, or is intended to result, in a
significant or sustained increase in electricity or natural gas
prices or a significant or sustained decrease in electric or natural
gas system reliability, including, but not limited to :
(1) The physical withholding of electricity from the generation,
sale, distribution, transfer, marketing, or trading of electricity,
resulting in increased electricity prices or the creation of a
scarcity of supply in any electricity market.
(2) The economic withholding of electricity by submitting bids
above the reasonable price for that electricity in a fair and
competitive market , resulting in any bid not being accepted so as to
force an increase in electricity prices or create a scarcity of
supply in any electricity market .
(3) The acquiring, using, or disseminating of electric system
reliability information in connection with the generation, sale,
distribution, transfer, marketing, or trading of electricity,
resulting in increased electricity prices by the manipulation of the
generation, sale, distribution, transfer, marketing, or trading of
electricity .
(4) The using or providing of false or misleading information in
connection with the generation, sale, distribution, transfer,
marketing, or trading of electricity, resulting in increased
electricity prices .
(5) The creating, prolonging, or using of shortages or outages to
increase the price of electricity .
( 6) The selling, distributing, transferring, marketing, or
trading of electricity in any other state, resulting in a reduction
of supply to increase the price of electricity.
(7) The refusing of any lawful dispatch order of any transmission
system operator to generate electricity.
(8) The scheduling of electricity into the electricity
transmission system with the intent or knowledge that the schedule
will create congestion or the false impression of congestion in that
system .
(9) The overscheduling of electricity generation into the
electricity transmission system with the intent of knowledge that
the actual load will be lower and system , result in congestion
counterflow payment, or compensation to reduce congestion.
(10) The selling, distributing, transferring, marketing, or
trading of electricity to any person in any other control area with
the intent or knowledge that a similar amount of electricity will be
repurchased in the original control area for the purpose of avoiding
applicable market rules.
(11) The intentional or knowing withholding of electricity from
any market subject to a price cap with the intent to sell,
distribute, transfer, market, or trade the electricity to a market
not subject to a price cap.
(12) The misrepresentation of the availability or supply of
electricity or natural gas.
(13) The misrepresentation of the supply of electricity or
natural gas.
(14) The misrepresentation of the reason or reasons for
electricity generating facility closures, outages, or maintenance.
(15) The selling, distributing, transferring, marketing, or
trading of electricity or natural gas between subsidiaries of the
same company , resulting in increased electricity or natural gas
prices .
(16) The creation of an artificial increase in demand for natural
gas, or refusal to sell natural gas, in order to raise the market
price or cause any of the prohibited conduct set forth in this
subdivision.
(17) The engaging in strategies, acts, or conduct in the sale,
distribution, transfer, marketing, or trading of electricity or
natural gas, that results in prices above the reasonable price for
that electricity or natural gas in a fair and competitive market.
(c) A person may not knowingly facilitate conduct prohibited by
subdivision (b).
1883.1. A person who violates Section 1883 shall, in addition
to other damages, be required to disgorge the profits of that
unlawful conduct. As used in this section, "disgorgement" shall be
measured by the difference in the actual price charged for the
electricity or natural gas in the course of the unlawful conduct and
the reasonable price for that electricity or natural gas in a fair
and competitive market. In addition, a person found to be in
violation of Section 1883 shall be liable for three times the amount
of damages sustained, as measured by the amount of disgorgement,
because of the act or acts of that person. A person found to be in
violation of Section 1883 shall also be liable for the costs of a
civil action brought to recover those damages and attorney fees.
1883.2. (a) Specific or preventive relief may be granted to
enforce a penalty, forfeiture, or penal law in any case of a
violation of Section 1883.
(b) A person who engages, has engaged, or proposes to engage in
any of the conduct set forth in Section 1883, may be enjoined in any
court of competent jurisdiction. The court may make these orders or
judgments, including the appointment of a receiver, as may be
necessary to prevent the use or employment by a person of a practice
or conduct set forth in Section 1883, or as may be necessary to
restore to a person in interest money or property. The court shall
order the disgorgement of the revenue from the use or employment of
any act or practice prohibited by Section 1883, and shall establish
a fluid recovery fund for the return of the funds.
1883.3. Actions for relief pursuant to this chapter shall be
prosecuted exclusively in a court of competent jurisdiction by the
Attorney General, or by a person acting for the interests of itself,
its members, or the general public.
1883.4. Unless otherwise expressly provided, the remedies or
penalties provided by this section are cumulative to each other and
to the remedies or penalties available under all other laws of this
state.