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Report: State Policies Enabled Energy Market Abuse

Report: State Policies Enabled Energy Market Abuse

Upside-Down System Allowed For Inflated Last-Minute Sales


Staff Writer

A recently released report by the federal government found electric companies “exercised market power by raising prices above competitive levels” during California’s energy crisis.

However, the study cited flaws in the state’s restructured energy market that enabled companies to take advantage of the system.

The report released on July 16 by the U.S. General Accounting Office, the investigative arm of Congress, outlined two main problems.

Frozen retail prices failed to curb consumer demand for electricity, which in turn helped suppliers reap bigger profits as prices soared.

And the California Public Utilities Commission prohibited long-term contracts between utilities and wholesale suppliers, setting up a scenario for suppliers to exert market power by withholding electricity.

The report described an upside-down system in which wholesale prices didn’t peak with demand and the state’s day-before method of buying power pitted traders against the state in a game of chicken.

Knowing the state would try to avoid blackouts, “suppliers would wait until the last minute to sell their electricity, in an attempt to see how much the increasingly desperate (California Independent System Operator) would pay,” the report said.

The ISO operates the state’s power grid.

State officials and energy providers agreed on one aspect of the GAO’s findings: The California energy market was flawed.

Steve Maviglio, Gov. Gray Davis’ spokesman, called the state’s deregulation law , put in place by former Gov. Pete Wilson in 1996 , a “colossal failure” that Davis has to deal with.

Maviglio blamed the Federal Energy Regulatory Commission, which is the only entity that can control wholesale electric prices, for not helping.

“(FERC) lifted the price cap we had, essentially throwing gasoline on the fire,” he said.

Douglas Austin, a senior writer analyst for the Washington, D.C.-based Electric Power Supply Association, a national advocate for power generators and marketers, said many factors led to the state’s energy crisis.

“The market design was highly flawed in California,” Austin said. “Almost everyone agrees with that.”

But the GAO study cited several circumstances , the state’s over-reliance on spot-market buys, hot summer weather, a shortage of hydro power , that converged to create the 2000-2001 energy crisis.

According to Austin, the report failed to provide data that proved market power existed.

“This report spends quite a bit of time explaining the conclusions it doesn’t reach rather than giving clear conclusions about alleged market power in the California market,” he said.

The GAO report does not deal with whether companies’ alleged market power abuses amounted to legal wrondoing.

ISO spokesman Gregg Fishman said there was a glut of electricity in California when Wilson’s administration enacted electric deregulation laws.

Then, the economy boomed and a dot-com explosion swept the state. Demand for electricity soared, which accentuated flaws in the newly deregulated system, Fishman said.

“It was certainly the ‘perfect storm’ of negative factors,” he said.

But some power companies abused the system, Fishman argued.

The abuse of market power cost state consumers more than $9.5 billion during the energy crisis, one ISO official earlier estimated.

The governor’s office has asked FERC for a $8.9 billion refund. A decision isn’t expected until November.

Duke Energy spokesman Pat Mullen said the North Carolina-based company has done everything it can , amid inflammatory allegations against power firms , to help the state during the energy crisis.

Duke operates the South Bay Power Plant.

“We’ve tried to stay focused on operating ethically and within the rules of the market,” Mullen said.

The company has cooperated with federal and state investigations to date “and not one has shown wrongdoing on the part of Duke Energy.”


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