Energy disaster may recur

Energy disaster may recur ; Lockyer says lax enforcement of rules, deregulated market present problems

Apr 14 - Oakland Tribune

SACRAMENTO -- State and federal energy laws and regulations are stacked against California officials who are seeking refunds for overpriced electricity during the energy crisis, a report by the California attorney general released Tuesday concluded.

Federal energy regulations continue to create "enormous incentives on the part of generators to try and create an energy crisis in the future because of the massive potential for profits" and lax enforcement of the rules, said Ken Alex, a deputy attorney general.

"At least part of the energy crisis, we believe, has been caused by the abuses of the deregulated market," said Alex, who headed Attorney General Bill Lockyer's energy task force.

He singled out electricity generators accused of manipulating the wholesale energy market to drive up prices, saying their games "created a dysfunctional system."

The state is seeking $9 billion in refunds for overcharges during the 2000-2001 energy crisis, when wholesale prices hit record highs. The Federal Energy Regulatory Commission, which oversees wholesale energy markets, has ruled that the state is due about $3 billion.

"I think it's fair to say that three years after the end of the energy crisis, we are frustrated that we haven't recovered some of the billions of dollars Californians were overcharged," Alex said.

FERC spokesman Bryan Lee disagreed with Lockyer's assessment of both the cause of the energy crisis and how federal regulators reacted to California's plight.

The commission "has done everything within its legal authority to rectify the unjust and unreasonable prices that occurred in 2000 and 2001," Lee said, pointing to more than $100 million in FERC-ordered refunds.

Lockyer's report was correct in saying laws would have to be changed for FERC to go beyond what it has already done, Lee said.

However, the report "conveniently downplays the state's own culpability in insisting upon a fatally flawed market design."

FERC also took issue with the report's finding that price spikes were due to market manipulation, Lee said. FERC's own investigation found that "none of the manipulation would have been possible if not for the underlying supply-demand imbalance and improper market design."

The 1996 deregulation law was designed to open the wholesale and retail electricity markets to competition. Utilities sold many of their power plants, and then bought wholesale power through a day- ahead market. Eventually, utilities would be allowed to raise or lower customers' rates based on wholesale prices.

But wholesale rates soared in 2000, before most utilities could escape a retail rate cap imposed by state regulators as part of the deregulation law. The utilities then ran up huge debts, requiring the state to step in and buy wholesale energy on their behalf.

Among the changes Lockyer's report proposes is the elimination of the federal "filed rate doctrine," which states that once a wholesale electricity seller files its rates with FERC, that rate cannot be challenged retroactively.

That works for cost-based electricity markets, Alex said, but it doesn't make sense to use it when that switches to a market-based system.

Alex said FERC has ruled that when the buyer and seller agree on a price, even if it's in a market rife with manipulation or fraud, that price is considered to be the filed rate and cannot later be challenged.

This, Lockyer said, "gives energy companies a license to steal from California ratepayers. We're asking Congress to revoke that license."

Gov. Arnold Schwarzenegger agreed that "it's important to have strict market monitors," said his spokeswoman Ashley Snee. "He feels strongly that adequate safeguards must be in place to protect consumers from another energy crisis."

Schwarzenegger hasn't released his own energy plan yet, but Snee said the governor was "focused on it. It's one of his priorities."

In other energy developments Tuesday, state Treasurer Phil Angelides warned that California Gov. Arnold Schwarzenegger's plan to eliminate the California Power Authority puts the state at risk of another energy crisis.

The Power Authority was created at the height of the energy crisis by then-Gov. Gray Davis. It can sell up to $5 billion in bonds to buy, build or lease power plants or create conservation programs.

Since 2001, the Power Authority has set up a program to cut energy use among commercial users by 250 megawatts, the equivalent of a mid-sized power plant, and created a program to double the number of solar panels on state buildings, Angelides said.

The agency doesn't use state general funds, he said, so dissolving it won't save the state any money, while making the state rely on private companies to build enough power plants to meet California's future energy needs.

The governor's plan to eliminate the Power Authority "ought not to even be considered until the governor comes forward with a comprehensive energy plan that clearly protects the ratepayers of this state and helps meet its energy needs," Angelides said.

Rob Schladale, with the Department of Finance, said Schwarzenegger didn't feel the Power Authority was critical in securing an adequate supply of electricity for the state.

"It's the structure of the market that needs to be fixed," he told the Senate Energy Committee Tuesday. "The Power Authority won't do that."