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.