BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 2000| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 445-6614 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: SB 2000 Author: Dunn (D), et al Amended: 8/22/02 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 SB 2000 Page 2 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. Senate Floor Amendments of 8/22/02 establish additional exemptions from liability for prohibited energy market conduct and add co-authors. Specifically, the amendments establish additional exemptions 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 exemptions are for: 1.Non-management employees working under the supervision or direction of another. 2.Qualifying facilities (small private generators selling power under contract to electric utilities). 3.On-site generation units which serve only on-site load. SB 2000 Page 3 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, (defined below) 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 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 SB 2000 Page 4 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 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 activities directly related to the exploration and production of petroleum and natural gas in California, or any person, firm, or corporation, including exploration and production on the Outer Continental Shelf offshore California. The bill specifies that the above does not apply to activities of a qualifying small power production SB 2000 Page 5 facility or a qualifying cogeneration facility within the meaning of Sections 201 and 210 of the federal Public Utility Regulatory Polices Act of 1978, paragraph (17) of Section 796 of, paragraph (18) of Section 796 of, and Section 824a-3 of, Title 16 of the United States Code, nor shall this section apply to other generation units installed, operated, and maintained at a customer site to serve that facility's load exclusively. 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 defines "person" to mean and includes a natural person, corporation, firm, partnership, joint stock company, association, or any other organization or entity of persons. "Person" does not include a nonmanagement employee working under the supervision or direction of another. This bill authorizes injunctive relief to prevent the unlawful conduct described above. According to a paper prepared by the Senate Judiciary 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 SB 2000 Page 6 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 SB 2000 Page 7 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) (Unable to reverify support and opposition at time of writing) 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 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 SB 2000 Page 8 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 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 SB 2000 Page 9 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." RJG:jk 8/25/02 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****