BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 2000|
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THIRD READING
Bill No: SB 2000
Author: Dunn (D)
Amended: 6/25/02
Vote: 21
SENATE JUDICIARY COMMITTEE : 5-2, 4/23/02
AYES: Escutia, Kuehl, O'Connell, Peace, Sher
NOES: Ackerman, Haynes
SENATE ENERGY, U.&C. COMMITTEE : 5-0, 5/21/02
AYES: Bowen, Alarcon, Dunn, Sher, Speier
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
SUBJECT : Electric power and natural gas: unlawful
practices
SOURCE : Author
DIGEST : This bill prohibits, with specified exemptions,
any person engaged in the business of generating, selling,
distributing, transferring, marketing, or trading
electricity or natural gas from engaging in or knowingly
facilitating specified conduct. This bill provides that a
person found in violation of these provisions would be
required to disgorge the profits from the unlawful conduct,
and would be liable for, among other things, three times
the amount of the disgorgement and attorney fees. The bill
requires that actions for relief under these provisions be
brought in a court of competent jurisdiction by the
Attorney General or by another person, as specified.
CONTINUED
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Senate Floor Amendments of 6/25/02 establish two categories
of conduct which would be exempt from liability for 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. The exempt categories are:
1. Conduct which is authorized under the Public Utilities
Code and authorized by the CPUC, i.e. electricity and
natural gas transactions of CPUC-regulated utilities,
including sales of electricity by qualifying facilities
pursuant to a contract with a utility.
2. Conduct by any oil or natural gas producer located, and
operating exclusively, in California.
The first amendment was taken to address concerns expressed
by Pacific Gas and Electric, Sempra Energy, and Southern
California Edison.
The second amendment, exempting instate natural gas
companies, was taken by the author to address concerns
raised by those entities.
ANALYSIS : 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 provides that a person engaged in the business of
generating, selling, distributing, transferring, marketing,
or trading electricity or natural gas may not engage in
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
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electric or natural gas system reliability, unless the
conduct is covered by rules, tariffs, or an agreement of an
electrical corporation or gas corporation that is
authorized under the Public Utilities Code and has been
approved by the Public Utilities Commission. Conduct to
which this section applies, includes, but is not limited
to:
1.The physical withholding of electricity from 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.
3.The acquiring, using, or disseminating of electric system
reliability information.
4.The using or providing of false or misleading
information.
5.The creating, prolonging, or using of shortages or
outages.
6.The refusing of any lawful dispatch order of any
transmission system operator to generate electricity.
7.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 or result in congestion
counterflow payment, or compensation to reduce
congestion.
8.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.
9.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
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electricity to a market not subject to a price cap.
10.The misrepresentation of the availability or supply of
electricity or natural gas.
11.The misrepresentation of the reason or reasons for
electricity generating facility closures, outages, or
maintenance.
12. The selling, distributing, transferring, marketing, or
trading of electricity or natural gas between
subsidiaries of the same company.
13. 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.
The bill provides that the above provisions do not apply to
any company located in California that is engaged
exclusively in the exploration and production of petroleum
and natural gas in California, as defined in Section 211111
of the North American Industry Classification System.
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.
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
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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
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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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 6/26/02)
California Public Interest Research Group
Congress of California Seniors
Lieutenant Governor Cruz M. Bustamante
Office of Ratepayer Advocates
Utility Consumers' Action Network
The Utility Reform Network
OPPOSITION : (Verified 6/26/02)
California Chamber of Commerce
California Cogeneration Council
California Independent Petroleum Association
California Manufacturers & Technology Association
California Municipal Utilities Association
California Natural Gas Producers Association
City of Riverside
Dynegy
Imperial Irrigation District
Independent Energy Producers Association
Modesto Irrigation District
Questar Southern Trails Pipeline
Riverside Public Utilities
Sempra Energy
Sacramento Municipal Utility District
Southern California Public Power Authority
Western States Petroleum Association
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ARGUMENTS IN SUPPORT : 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, 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.
ARGUMENTS IN OPPOSITION : 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
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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.
Sempra Energy agrees that, "SB 2000 would prohibit the
'physical withholding' of electricity from any electricity
market. The bill fails to recognize that the withholding
of power is at times essential. For instance,
hydroelectric generation is dispatched based on a number of
factors in order to optimize its use for environmental
reasons. In addition, generators are often faced with
shutdowns and withholding of power in order to comply with
emission standards, address public safety issues, and
maintain facilities and infrastructure. SB 2000 fails to
distinguish between those acts that could be considered
market manipulation and acts that are conducted to address
operational issues such as environmental, safety, and plant
maintenance.
"SB 2000 also prohibits the 'economic withholding" of
electricity by submitting bids above a 'reasonable price'
in order to increase prices. A reasonable price is not and
cannot be defined by this bill. Electricity prices in a
competitive market change frequently depending on market
conditions. More importantly, any attempt to manufacture a
'reasonable price', such as the short-term marginal cost of
power, amounts to price regulation and thus would be
preempted by FERC jurisdiction. There is not any way for a
market participant to know that they are in violation of
this provision. Moreover, there are no allowances in the
bill for the fact that some supply costs more to create
than other supply. The implication is that if the cost of
the less efficient supply is 'above a reasonable price',
then a supplier is compelled by this provision to bid below
its cost."
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RJG:jk 6/26/02 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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