San Diego Business Journal

The findings announced last week by the Federal Energy Regulatory Commission that energy producers were not cheating Californians should not come as any surprise to readers of the Business Journal. That, after all, was exactly what we predicted would happen on this very page back in August.

It's not realistic to expect an agency charged with promoting energy deregulation to really condemn the industry it is designed to support. FERC's dilemma is the same that led to the breakup of the Atomic Energy Commission in 1975 and saw the formation of the Nuclear Regulatory Commission and the Department of Energy. Just as the AEC could not simultaneously be a proponent of nuclear energy growth and a regulator of the industry, FERC cannot regulate an industry it is trying to deregulate.

Therefore, we never expected FERC to put the blame on the energy cartels; it instead put it on the structure and design of California's deregulated electricity marketplace.

We agree with FERC that California's energy marketplace is fatally flawed; we'd reported so many times over the past several weeks. However, what we find interesting is the fact that despite insisting there was no illegal manipulation of energy prices in California, FERC is recommending imposing remedies that have every earmark of being designed to stop just such manipulation.

For instance, FERC recommends the California energy market move to greater use of forward markets, or buying power in advance at locked-in prices. Currently, most electricity in this state is purchased on the spot market, which is most vulnerable to price manipulation.

FERC rejects ordering a ceiling on wholesale energy prices in California, preferring instead a "soft cap" of $150 per megawatt hour and doing away with "clearing pricing." Under California's current electric power market structure, all power generators are entitled to charge the "clearing price" or the highest accepted bid.

Electricity producers would be allowed to sell power into California's energy system at megawatt-hour prices higher than $150 , if they could find takers , but they would have to fill out a ream of paperwork justifying those prices, the last thing price manipulators are wont to do.

The federal commission also wants to limit the amount of power generators can sell to the California Independent System Operator, the private public-trust nonprofit established to ensure the state's power needs are met. Under deregulation, the ISO can buy small amounts of electricity at emergency prices to keep the electrons flowing.

However, so-called unexpected power shortages resulted in the ISO buying up vast quantities of power at exorbitant prices , usually from the same producers who had claimed those "shortages." FERC wants to limit generators to selling no more than 5 percent of their product to the ISO, effectively preventing them from manipulating prices by withholding power until emergency pricing kicks in.

Finally, FERC wants the ISO and Power Exchange governing boards , largely made up of executives from power generation firms , abolished and replaced with truly independent boards. No more foxes guarding the chicken coop.

Each of these remedies is what one would expect to be recommended if illegal price manipulation was suspected. In recommending them, FERC is like a judge who refuses to find a suspect guilty of a crime but still locks him away so he won't be tempted to repeat the act.

FERC may be loath to find evidence of illegal activities in California's energy marketplace. But it's obvious that when they looked, they did not like what they found.