Deregulation: `Conspiracy of Incompetence'
Even if energy prices are being manipulated, it may not be illegal

David Lazarus, Chronicle Staff Writer 
STATE -- 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. 
1996 DEREGULATION 
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. 
SUPPLY LIMITED, DEMAND RISING 
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? 
FOUR WHOLESALE MARKETS 
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.'' 
NO HEDGING IN SAN DIEGO 
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.'' 
WHAT CAN BE DONE 
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.'' 
E-mail David Lazarus at davidlaz@sfgate.com. 
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Gov. Davis Calls for Cut in Electricity Bills
PUC under no obligation to heed unclear request 
David Lazarus, Lynda Gledhill, Greg Lucas, Chronicle Staff Writers
Thursday, August 10, 2000 
,2000 San Francisco Chronicle 
URL: 
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2000/08/10/B
U99453.DTL&type=business 
Gov. Gray Davis yesterday called on the California Public Utilities 
Commission to cut soaring San Diego electricity bills in half during the next 
two years. 
However, it was not clear how he expects the PUC to accomplish this goal or 
whether the commission will even heed the governor's request. Davis does not 
have the authority to order the PUC to act. 
``This is not a rate freeze,'' Davis told reporters in Sacramento. ``It is a 
rate-stabilization plan.'' 
It appears that what he has in mind is having San Diego Gas & Electric, the 
local utility, level out power bills by spreading its wholesale costs over 
longer periods. This would reduce customers' bills in the summer but raise 
bills at other times of the year. 
``This is an oraclelike document,'' Michael Shames, executive director of San 
Diego's Utility Consumers' Action Network, said after reading a press release 
outlining the governor's position. ``You can read almost anything into it.'' 
Calling electricity prices in San Diego exorbitant, Davis said he wants the 
PUC to reduce average residential power bills from the current level of about 
$120 a month to approximately $65. 
``Electricity is the pulse of our economy,'' he said. ``Without it, consumers 
and businesses are put at risk. California simply cannot afford any more 
price spikes or blackouts.'' 
Carl Wood, a Davis appointee on the PUC, said he believes the governor is 
seeking a so-called level pricing program for SDG&E customers. The PUC is 
empowered to order the utility to implement such a program. 
The utility itself already is urging ratepayers to adopt a similar pricing 
plan, thereby paying consistent electricity fees throughout the year. 
``We can't make the prices go away, but we can set up a system where the 
prices are level and deferred,'' Wood said. 
PUC President Loretta Lynch said she will call a special meeting of the 
commission for August 21 to discuss the governor's proposal. 
Davis' comments came ahead of a joint hearing today at 10 a.m. on 
California's energy woes by the Senate and Assembly utilities committees in 
the Capitol Building. 
Also today, state Sen. Dede Alpert, D-Coronado (San Diego County), and 
Assemblywoman Susan Davis, D-Kensington, are expected to introduce identical 
bills seeking to roll back electricity rates in San Diego to prederegulation 
levels. 
``We appreciate what the governor has done, but we feel there needs to be a 
parallel track in the Legislature where we find a solution for San Diego 
ratepayers,'' Alpert said. 
The governor said he will contact President Clinton and James Hoecker, 
chairman of the Federal Energy Regulatory Commission, to urge them to 
expedite an investigation of California's wholesale electricity market. 
He also has called on Attorney General Bill Lockyer to probe suspected price 
fixing by power generators. 
``I believe in making a profit,'' Davis said. ``I believe in success. But 
charging seven, eight, nine times the price you pay for electricity is simply 
unconscionable. It's not fair to California. It will bring down our economy, 
and it augers very poorly for America.'' 
Meanwhile, the U.S. Navy said it may sail to the rescue in San Diego by 
bringing in its own electricity- generating equipment to keep its extensive 
bases in the area humming. 
The Navy is SDG&E's single biggest customer, drawing about 3 percent of the 
utility's total output. 
The Navy said in a statement that it is looking into transporting 10 
750-kilowatt generators from its facility in Port Heuneme to San Diego. 
For its part, the California Grocers Association said its members will reduce 
electricity usage by 10 percent during periods of unusually heavy demand. 
This could include lowering store lighting and cutting air conditioning at 
some supermarkets. 
``Although consumers may notice some differences while in their local 
supermarket, the energy-saving measures will not affect normal store 
operations,'' said Peter Larkin, president of the association. ``Also, none 
of these measures will have a negative impact on food safety or quality.''