California's victims
A desperate governor has good reason to overplay Federal Energy Regulatory Commission findings of market manipulation during California's energy crisis of 2000-01. The rest of the country shouldn't be fooled.
The FERC staff on Mar. 26 issued a complex report describing apparently deceitful practices by traders of natural gas and electricity bound for California. Gov. Gray Davis quickly claimed vindication, saying, "FERC has finally recognized what we in California have known for a long time: that we were a victim of market manipulation and illegal gaming."
False reports
That some traders in California's energy market broke rules and lied for profit seems clear. Near the center of the controversy are unbridled whiz-kids from bankrupt Enron Corp., which set a challenging standard for unscrupulousness. FERC also has evidence of shady communications by employees of other companies trading California energy during October 2000 and June 2001. It reveals deals made to inflate trading volumes and efforts to influence price indices, including false reports to price-reporting publications.
Such treachery is reprehensible, and it's FERC's job to uncover and punish it. But the extent to which trading shenanigans levitated energy prices in California is certainly less than what Davis claims and probably less than what the FERC staff alleges.
Davis, whose state faces an unprecedented budget deficit of $26-35 billion, demands rebates from the energy companies totaling $9 billion. He wants to lay all the blame for the high electricity prices of 2000-01 on energy suppliers.
Anyone inclined to believe him should read the first paragraph of the FERC staff's executive summary. It qualifies its findings of "significant market manipulation" with a reassertion "that significant supply shortfalls and a fatally flawed market design were the root causes of the California market meltdown."
The context is important. The "root causes" FERC cites are the fault of weather, a gas-pipeline accident, and the state government. California, not energy traders, withheld electricity supply by resisting power-plant construction for more than a decade. California, not energy traders, encouraged consumption by—among other mistakes—capping retail prices when it restructured the electricity business. When drought cut hydroelectric supply and a pipeline explosion slashed gas deliveries, problems were inevitable. Indeed, California's flawed market design generated trading temptations that don't arise under true deregulation.
In the energy crisis of 2000-01, Californians were victims more of faulty state governance and bad luck than of market manipulation. Yet the FERC staff report proposes to make energy companies compensate for all of the price escalation. In refund calculations based on retrospective estimates of gas costs, it wants to replace price indices subject to falsification with producing-area price averages adjusted for transport costs. The result of the change would be refunds much greater than the $1.8 billion calculated by an administrative law judge last December.
This doesn't seem fair. It makes the energy companies, including those denying any involvement in price manipulation, pay for a power-price surge not wholly or even mostly attributable to traders' misbehavior. The report acknowledges that some of the price elevation of the investigation period resulted from "legitimate scarcity." It should add that much of the scarcity is the state's fault. Instead, it simply concedes its inability to assess how much of the price increase resulted from scarcity alone—and ignores it. The result is a looming gift of probably more than $1 billion—maybe much more—from energy-company shareholders to California ratepayers who should be extracting compensation from a state government chronically hostile to energy supply.
'Huge victory'
That hostility manifested itself in another, familiar way last week, when the Department of the Interior backed away from a fight over 36 federal oil and gas leases off California. The state has blocked activity on the leases and won a judgment upholding its right to do so. DOI decided not to appeal to the Supreme Court. Davis called the decision—which guarantees that his nearly bankrupt, energy-starved state will receive no shared royalties and no oil and gas from the affected leases—"a huge victory."
Yes, California's tax-paying consumers of energy are victims. But there should be no doubt about what menaces them most.
