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Deregulation: `Conspiracy of Incompetence' / Even if energy prices are being manipulated, it may not be illegal Source: The San Francisco Chronicle Publication date: 2000-08-10

Profit-hungry power companies may be manipulating California's electricity prices, industry insiders say, but the attorney general will have a tough time finding a smoking gun in his price-fixing probe. Even if he does prove that electricity generators are "gaming" the market with a variety of price-influencing techniques, it's a whole other matter as to whether their actions violate the law.

State legislators will attempt to shed some light on this murky matter during hearings today in Sacramento.

What they will quickly discover is that power companies are having a field day as California muddles through deregulation of its electricity market.

Among other things, power generators are said to be rigging electricity auctions and holding back juice until higher demand drives up wholesale prices, representing perhaps the single most glaring example of gaming, or price-fixing, the market.

However, the generators aren't the only ones to blame for the current mess.

"This has literally been a conspiracy of incompetence," said Michael Shames, executive director of the Utility Consumers' Action Network, a San Diego grass-roots organization. "Almost every player has made major mistakes or a series of mistakes."

Utilities, he said, are also to blame for whopping price increases by mishandling power purchases. Meanwhile, state and federal regulators have demonstrated a virtually unwavering reluctance to weigh in and help stabilize electricity rates.

At the same time, legislators themselves share some of the blame for California's energy woes by drafting rules for the deregulated market that are too easily bent, if not broken.

"All the market participants are taking advantage of very lax rules," said Loretta Lynch, president of the California Public Utilities Commission. "The market is not competitive."

As a stopgap, Gov. Gray Davis yesterday called on the PUC to cut San Diego electricity prices in half over the next two years, although he was vague on how this can be accomplished.


When electricity deregulation was approved in 1996, the goal was to lower prices by boosting competition.

In practice, however, only about a half-dozen power generators are now responsible for as much as three-quarters of the state's energy supply, and they can set prices pretty much as they see fit.

Officials at the California Power Exchange, the wholesale market where power companies sell their juice and utilities go shopping, insist that they closely monitor all transactions.

But they admit that it is impossible to know what may transpire among generators off the trading floor.

"There are hundreds of ways that somebody could do it," exchange spokesman Jesus Arredondo said of whether price-fixing is possible. "You could argue that it happens every day.

"But I don't see how you could call this gaming," he said. "You call it business."

There's the rub. Although residents of San Diego, the first California city to feel the full effects of deregulation, have seen average power bills more than double over the past three months, power generators say this is simply a result of supply and demand.


With supply severely limited -- no major power plants have been built in the state in a decade -- and demand rapidly rising, it is only natural, they say, that electricity prices would go through the roof.

"It's a feast-or-famine business," said Gary Ackerman, executive director of Menlo Park's Western Power Trading Forum, an energy industry group. "You make a lot of money when times are good, and lose a lot of money when times are bad."

At the moment, times are very good for power generators. An unusually hot summer has combined with a booming, tech-fueled economy to push California's power grid nearly to the breaking point on an almost daily basis.

The question is: Are power companies benefiting from what are, for them, lucky circumstances, or are they making a bad situation even worse with practices that may not be illegal but still could be viewed as highly irresponsible?


There are four major wholesale markets for electricity in California. The biggest is called the daily forward market, where generators and utilities meet each morning to buy and sell power on an hour-by-hour basis covering the next 24 hours.

Electricity at times of expected low demand, such as 1 a.m., might go for as little as $25 per megawatt, while electricity during peak demand -- 3 p.m. to 7 p.m. -- often sells for the maximum allowable amount, or $250 per megawatt.

Longer-term contracts are negotiated on what is called the block forward market, where prices are more stable.

But, industry sources say, power companies are increasingly focusing more on the hourly and real-time markets, where the potential for profit is greater than on the daily forward market because buyers have less room to maneuver -- they have to meet immediate demand.

"Of course people are gaming the market," said Dan Richard, senior vice president of Pacific Gas and Electric Co. "They know when to make bids and how to get what they want. Is that illegal? I honestly don't know."

Brian Rahman, who oversees the real-time wholesale market on behalf of the California Independent System Operator, agreed that the legality of such moves has yet to be determined.

"The power marketers know our rules," he said, "and they use them to their benefit."

Even so, Power Exchange officials said they will tell legislators today that their own study of wholesale electricity prices shows that California rates in June and July were in fact lower than in other states.

"This makes it harder to make a case that market power is being exerted by power generators," said the exchange's Arredondo. "It's exceedingly difficult to prove that there's market power."


Meanwhile, San Diego Gas & Electric has been accused of adding to electricity price volatility in the Southern California city by not securing long-term contracts for energy at a steady rate -- a process known as "hedging."

Instead, the utility exposed its customers to daily price spikes, which resulted in power bills surging skyward.

"San Diego is bearing the brunt (of deregulation) for a couple of reasons: poor hedging and poor hedging," Arredondo said.

For its part, PG&E has said it learned its lesson from San Diego and will make active use of hedging when its customers face the impact of deregulation, perhaps as soon as next summer.

Davis called last week for Attorney General Bill Lockyer to investigate "possible manipulation" in the wholesale electricity market. He also has asked federal regulators to rule that California's energy market is not competitive and to mandate "just and reasonable" rates.

But regulators at both the federal and state levels so far have been reluctant to act, preferring instead to allow deregulation to run its course.

For all these reasons, California's energy market has been especially vulnerable to exploitation by those who may not have consumers' best interests at heart.

"The system of responsibility is fragmented," the PUC's Lynch said, "and because it is fragmented, it allows various players to game the market."


The solution? It depends who you ask. Most of those on the energy playing field believe that some degree of regulation is necessary to stabilize electricity prices, but no one yet knows how far legislators should go in drafting revised rules.

Increased generating capacity will go a long way toward solving California's problems, but it will be years before enough new plants come online to bring supply and demand into balance.

Today's hearings in Sacramento will presumably lay the groundwork for future initiatives. Although few if anyone knows how to fix things, everyone at least agrees that something -- anything -- needs to be done.

"Government messes things up a lot of times, and the private sector messes things up a lot of times," said PG&E's Richard. "But in the end, solutions emerge because it's just too important. That's the case now."

-- Martin Thompson (, August 11, 2000


"Conspiracy of incompetence"

I'm gonna frame that one.Love it.

-- Sam (, August 12, 2000.

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