Seizing power

Despite the Enron revelations and a glut of lawsuits, California’s deregulated energy system could be here to stay

Illustration By Conrad Garcia

Left in the wake of the multibillion-dollar energy crisis are lawsuits galore filed in state and federal courts by almost every interest group affected by the energy crisis—from state agencies to generators—most of which try to alter California’s deregulation experiment in some way.

Nearly lost in the huge pile of legal documents is a unique suit by the California attorney general that attempts to get at the root of the deregulation problem: too few businesses with too much control over the tap of electrons that power homes, schools, hospitals, businesses and farms.

Many attribute much of the 2000-2001 deregulation chaos and its skyrocketing power prices to traders and suppliers jerking around the flow and supply of electricity, a manipulation highlighted and spelled out by Enron e-mails revealed in early May.

The former energy trader behemoth gave pop culture names—including “Fat Boy,” “Get Shorty” and “Death Star”—to market schemes aimed at driving up wholesale energy prices, offering more ammunition for politicians and consumer activists to shoot at California’s flawed deregulation scheme.

Before those ploys became front-page news and other generators admitted to engaging in similar controversial trading practices, Attorney General Bill Lockyer sued two energy companies to force them to divest some power plants to loosen their grip on electricity supplies. It is one of many complaints brought by the attorney general against generators for allegedly gaming the system, and like the others, seeks to put money back in California ratepayers’ pockets. But it also adds a potentially powerful twist.

The lawsuit targets Mirant and Reliant, which bought power plants from Pacific Gas and Electric and Southern California Edison, and alleges their large share of the California energy market violates the federal antitrust laws.

“Our investigations discovered that these major power companies were able to raise prices by illegally taking advantage of their control of California electricity markets,” Lockyer said.

The goal of forcing a divestiture of some power plants is to bump up the number of generators operating in the state to boost the chances of creating a healthy, competitive market. As supervising Attorney General Ken Alex said: “If you allow more participants there will be less exercise of market power.”

Yet a divestiture that brings more players into the California market could also make it nearly impossible to ever re-regulate the system, and even smaller players have shown the ability to game the market. This effort to help could seal our deregulated fate.

In the mid-1990s, the state’s regulated energy system, dominated by PG&E, Edison and San Diego Gas and Electric, was replaced with a supposed free-market design to be kept in check by the far away Federal Energy Regulatory Commission (FERC).

The expected tradeoff for cutting most of the state regulatory strings was that wholesale energy dealers would be allowed into the newly deregulated market on condition that none could take unfair advantage of the system, the investor-owned utilities profits would rise and utility bills would drop. Reality has proved quite different from that theory.

Given deregulation’s underlying assumption, many believe increasing the number of companies in the energy business is the way to create a fair market. “Anything we can do to bring more players to increase competition is a best-case scenario,” said Senator Joe Dunn, a Southern California Democrat who has been investigating manipulation of the wholesale market during the energy fiasco.

Mark Bernstein, RAND senior policy analyst, added, “Having four or five actors is not exactly a healthy, robust market.” He noted that the generators operating in the state know what one another’s costs are, which makes it easy to influence the market.

There is considerable support for Lockyer’s suit and his efforts to help fix the deregulated system. Reliant and Mirant, however, could be forced to reduce their share in California’s energy market only if the attorney general surmounts some formidable hurdles.

The first one will be defining illegal manipulation of the market, which has been a topic of intense debate in and outside the state Legislature for months. “There will be 50 different definitions,” Bernstein said.

The key focus of the attorney general’s suspected gaming investigations is on power trades during hot days when air conditioners are cranked up and other times when electricity supplies are stretched thin, such as when power plants are down.

“It hit us at one point how much power Mirant and Reliant had,” said Peter Siggins, chief deputy attorney general.

But the challenge is that there are no hard and fast rules and the definition of market power is akin to the definition of pornography: that is, you know it when you see it. In addition, Enron’s e-mails made things even murkier by revealing that energy traders with only a small amount of power can impact the state market.

“It begs the question of what is market power and lowers the threshold,” said Guy Phillips, consultant to Assemblymember Fred Keeley (D-Boulder Creek).

Enron, known as deregulation’s lead cheerleader and the instigator of trading ploys, was a small player in the state market. Its and other traders’ bags of tricks included creating phony traffic jams on the electrical system highway, selling power out of state then importing back in to skirt price caps, and getting paid for phantom services.

Therefore, more generators do not necessarily translate into a balanced market because those with only a small amount of power can play games under current conditions. And those who didn’t know how to game the market before now have Enron’s playbook.

To further complicate matters, the percentage of the energy business exposed to the whims of the market was shrunk considerably when the state locked up $40 billion worth of long-term energy supplies last year. Price spikes, however, occur during times of the highest energy use, when the last few megawatts are the most important because of concerns about blackouts, said the attorney general’s Alex. “There is still a market chasing dollars, and the biggest dollars are chasing the fewest megawatts.”

But even after going back to square one and assuming that boosting the number of generators playing the energy field would right the wronged deregulation market, there is still another catch. The cost of entering the market today—building generation supplies—is very steep, while the price of electricity has dropped significantly.

Some see that as an opportunity for the state’s newest energy agency, the California Power Authority (CPA), to step in and fill the void. The CPA was given the authority to tap into low-cost financing to help stabilize and clean up the state’s power supplies. But the problem is bigger than the CPA and some question whether it is worth the effort to try and make deregulation work.

“We are going down the wrong path,” said Doug Heller of Foundation for Taxpayer and Consumer Rights, who advocates re-regulating the cost of electricity. “The costs are too high and the market doesn’t work well for necessities, like electricity.”

Heller and others may support ending California’s deregulation experiment, but the combination of the attorney general’s suit and efforts in the Legislature to shore up the system doesn’t offer much hope that a state regulatory system can be rekindled.

“The problem is that we gave too much power to FERC too willingly,” Phillips said.

Be that as it may, he and others recognize that there are a limited number of tools at the state’s disposal, some of which the attorney general, along with Senator Dunn, is using to try and control deregulation’s excesses.

Dunn introduced a bill that seeks to outlaw energy market scams at the state level, which is supported by consumer advocates. But his attempts to draw a clean line between legal and illegal trading schemes in a deregulated world have been attacked by private generators and public power agencies as casting too wide a net and being unworkable.

Once again it comes back to the squishy nature of energy activities. But if you ask Bernstein, he will tell you far too much time is spent on debating the definition of market power and the key is getting federal energy regulators to do their job and ensure power prices are just and reasonable.

Following the exposé of the multiple trading schemes and crash of energy company stocks, the federal tide may have turned. FERC has launched investigations into questionable energy transactions and is giving serious consideration to some long-term regulatory safeguards, including possible extension of the caps of energy prices.

“All recognize that market operations will be different,” said Lenny Goldberg, consumer activist lobbyist. But he added, “We need to make sure the rules are right and the regulatory regime effective.”

And until then, the attorney general and Dunn are working to fill in the void.