BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Martha M. Escutia, Chair
2003-2004 Regular Session
SB 173 S
Senator Dunn B
As Amended April 22, 2003
Hearing Date: April 29, 2003 1
Business & Professions Code 7
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SUBJECT
Energy Pricing: Unfair Competition Penalties
DESCRIPTION
This bill would increase the penalty assessed under the
Unfair Competition Law (UCL) for fraudulent reporting of
information to energy price index publishers.
The bill also would reduce the Public Utilities
Commission's reliance on price indexes to establish certain
energy prices, in response to reports that these indexes
have been manipulated and tainted by fraudulent
information.
BACKGROUND
In November of 2002, the Senate Select Committee to
Investigate Price Manipulation of the Wholesale Energy
Market, as part of its investigation into the state's
energy crisis, heard testimony about the manipulation of
the published index prices of natural gas. The testimony
indicated that traders "routinely reported false
information" to index publishers about the volume and price
of natural gas they traded, and that false reporting had a
profound effect on the reliability and accuracy of the
published price index.
SB 173 has been introduced in response to the perceived
unreliability of energy price indexes, in order to give the
Public Utilities Commission the flexibility to use other
(more)
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means in its rate-making procedures. The specific
alternatives proposed by the bill have been substantively
reviewed by the Senate Energy, Utilities, and
Communications Committee.
The bill is now before the Senate Judiciary Committee for
review of an additional provision that would (1) clarify
that false reporting to index publishers constitutes unfair
competition, and (2) increase the financial penalty for
false reporting.
CHANGES TO EXISTING LAW
1. Existing law , the Unfair Competition Law (UCL),
prohibits unfair competition, including any unlawful,
unfair, or fraudulent business act or practice. [Bus. &
Profs. Code Sec. 17200 et seq .]
Existing law further provides that, in any action brought
by a public prosecutor for violation of this chapter, the
prosecutor may seek a civil penalty not to exceed $2,500
for each violation. [Bus. & Profs. Code Sec. 17206.]
This bill would provide that making a false statement or
report for use in an energy price index is unfair
competition subject to prosecution under this chapter,
and that this provision does not constitute a change in,
but is declaratory of, existing law.
This bill further would provide that, notwithstanding the
maximum civil penalty of $2,500 in Section 17206, any
person who makes, has made, or proposes to make a false
statement or report for use in a gas price index pursuant
to Section 390 of the Public Utilities Code (described
below), shall be liable for a civil penalty not to exceed
$25,000 for each violation.
2. Existing law gives the Public Utilities Commission
(PUC) regulatory authority over public utilities, and
allows the PUC to fix just and reasonable rates and
charges for electricity. [Pub. Util. Code Sec. 701 et
seq .]
Existing law provides a methodology, using published
price indexes for natural gas, for setting the price paid
by a public utility electrical corporation for
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electricity generated by a nonutility, small power
producer or "qualifying cogeneration facility" (QF).
[Pub. Util. Code Sec. 390 et seq .]
This bill would require the PUC to establish standards
for the reliability and verification of gas price
indexes, and to use only gas price indexes determined by
the PUC to be reliable and verified.
This bill further would provide that, if the PUC
determines that no reliable and verifiable gas price
index exists, the PUC shall establish and adjust the
prices paid to QFs by a public utility electrical
corporation in an equitable manner, consistent with the
requirements of the federal Public Utility Regulatory
Policies Act of 1978.
COMMENT
1. Stated need for legislation
Since the Senate hearings on energy price manipulation
last November, federal indictments have been issued
against a natural gas trader for false reports, and a
number of index publishers are under federal
investigation. The threat of liability for false
reporting has caused many companies to stop reporting
trade information to index publishers altogether, further
reducing the reliability of the indexes, which require
volume reporting to present an accurate picture of the
marketplace.
According to the author, reliable and trustworthy price
indexes ultimately will require federal regulations
providing audit and enforcement capabilities to ensure
accurate reporting. This bill would provide that
California's Public Utilities Commission may rely on
other means than published index prices in its
rate-making proceedings.
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2. False statements as unfair competition
This bill would amend the UCL to provide that "making a
false statement or report for use in an energy price
index is unfair competition," and further would provide
that this provision is declarative of existing law. (The
author's office has indicated that there are no pending
cases to which this provision would apply.)
The UCL currently provides that "any unlawful, unfair, or
fraudulent business act or practice" constitutes unfair
competition. Under existing law, a false statement or
report for use in an energy price index might be
unlawful, if it were made in violation of a particular
statute or regulation; unfair, depending on the
circumstances, whether the falsehood was intentional or
not; or fraudulent, if it were made knowingly in order to
deceive a recipient of the information and thereby gain
an advantage over that person. [ See Witkin, Summary of
California Law (9th Ed. 1988), Torts, Sec. 674.]
According to the author, the bill would specifically
define false reporting to price indexes as a separate UCL
violation in order to subject it to a penalty greater
than the maximum prescribed for other UCL violations (see
Comment 3). The purpose of the penalty enhancement is to
deter fraudulent reports to energy price index
publishers, not to punish inadvertently incorrect
reporting (which might discourage the voluntary reporting
necessary to make price indexes more broadly based and
thus more reliable).
Accordingly, the author may wish to narrow the definition
of the violation that would be subject to the enhanced
penalty, limiting it to knowingly false statements or
reports for use in an energy price index. This would
target the fraudulent statements to which the enhanced
penalty would apply, without affecting the UCL's
application to other statements that may be unlawful or
unfair, and therefore subject to the lesser penalty.
3. Proposed enhancement to civil penalty
This bill would provide that, notwithstanding the
existing maximum penalty of $2,500 for a UCL violation,
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"any person who makes, has made, or proposes to make a
false statement or report for use in a gas price index"
shall be liable for a civil penalty not to exceed $25,000
per violation. (Consistent with the previous provision,
this provision also should be amended to apply to
knowingly false statements or reports.)
This provision would multiply the current maximum penalty
by a factor of 10. In light of the billions of dollars
involved in the trading of energy, and the profound
effects on the economies of California and other states
due to alleged frauds in energy trades, a $25,000 penalty
for a proven act of fraud would not appear to be
excessive, and would be a far more significant deterrent
than the existing maximum penalty.
Application of this enhanced penalty provision to someone
who "makes, or has made " a false statement or report
appears to refer to the bill's clarification that such
false statements already violate the UCL, and that false
statements made before the effective date of this bill
may be prosecuted as UCL violations. However, since the
enhanced penalty provision does not constitute existing
law, any fine in excess of the existing $2,500 maximum
penalty would be applicable only to someone who "makes" a
knowingly false report after the effective date of the
bill, not to someone who "has made" such a statement
prior to that date.
Application of this provision to someone who "proposes to
make" a knowingly false statement or report also seems
problematic. Although conspiracies to defraud may be
punished criminally, they are not specifically subject to
civil prosecution under the UCL, and a "proposed"
fraudulent statement by an individual does not constitute
fraud; the fraud occurs when the statement has been made
to a person intended to be deceived.
4. No specific opposition to penalty provision
Support and opposition to the bill's proposed change in
the energy pricing scheme reflect the belief that the
change would probably result in lower prices being paid
to the QFs than those currently paid under the price
index system. The QFs generally oppose the bill,
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asserting that any substitution for the existing price
index-based methodology would create regulatory
uncertainty that would have a "chilling effect" on the
development of more cogenerating QF projects in
California, contrary to both state and federal policy.
None of the letters express a position on the bill's
proposed enhancement of the penalty provision for false
reporting to price index publishers.
5. Author's amendment
In response to a suggestion by the PUC, the author will
offer an amendment to change the term "bonus payment" to
"shareholder award" in a provision relating to
establishing gas price benchmarks (at page 3, line 24.)
6. Suggested amendments
In light of comments 2 and 3 above, the author may wish
to amend the bill as follows:
(a) Amend the proposed addition to the definition of
unfair competition to read, "Making a knowingly false
statement or report for use in an energy price index
is a fraudulent act constituting unfair competition."
(page 3, lines 38-39);
(b) Amend the enhanced penalty provision to limit it to
a knowingly false statement or report (page 4, line
3); and
(c) Amend the enhanced penalty provision to delete the
references to a person who "has made" or "proposes to
make" a knowingly false statement or report (page 4,
line 2).
Support: Southern California Edison
Opposition: Berry Petroleum Company; Caithness Energy;
California Cogeneration Council; California
Independent Petroleum Association; California
Manufacturers and Technology Association; Calpine
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Corporation; Independent Energy Producers;
Pacific Gas & Electric Company; Sempra Energy;
Sithe Energies; Smurfit-Stone Container
Corporation; U.S. Borax Inc.; Western States
Petroleum Association
HISTORY
Source: Author
Related Pending Legislation: None Known
Prior Legislation: AB 1890 (Brulte) (Ch. 854, Stats. of
1996) (created the Independent System
Operator and otherwise implemented
deregulation of state electricity market)
Prior Vote: Senate Energy, Utilities and Commerce
Committee 6-2
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