9th Circ. Rejects Big Energy’s Overcharges

      SAN FRANCISCO (CN) — Shell and others came a step closer Thursday to reimbursing Californians $200 million for overcharges during the 2000 electricity crisis, when the Ninth Circuit rejected their challenge.
     Upholding a 2013 finding by the Federal Energy Regulatory Commission, the appeals court cited “substantial evidence” that the power companies inflated electric rates by violating the FERC’s export tariff rules.
     Power companies repeatedly got around regulators during the crisis, through bags of tricks, including “kilowatt washing”: claiming to buy electricity in California at regulated rates, then shipping it out of state, and repurchasing it at unregulated, emergency prices. Since electricity is simply a directed flow of electrons, and electrons cannot be traced, there was no way to prove whether the companies were doing that or not.
     FERC determined, among other things, that Shell Energy North America boosted its profits by 87 percent this way: selling power on the real-time market, often at emergency rates, rather than through the cheaper, day-ahead market.
     When demand in California came within 5 percent of capacity during the crisis, price controls were lifted, and power companies bid up the rates to stratospheric levels. One way they could do that was by claiming to be selling power to consumers out of state, then having to buy it back: kilowatt washing.
     FERC attorney Beth Pacella described the trick for the Ninth Circuit at an August hearing this year.
     Shell attorney David Frederick insisted at the hearing that the power had left the state, and that the FERC tariff provisions were so vague the company could not have known it was breaking the rules.
     The Ninth Circuit didn’t buy it. It affirmed the FERC’s finding that the companies – a list that also includes MPS Merchant Services, Illinova and APX – drove up prices. Writing for a three-judge panel, Chief U.S. Circuit Judge Sidney Thomas cited expert testimony from Boston University professor Peter Fox-Penner.
     Fox-Penner testified that because day-ahead electricity volume exceeded real-time volume, “a price change of a given magnitude in the [day-ahead] market-clearing price had a much larger impact on the buyers of electricity than that same price change would have in the [real-time] market.”
     The power companies claimed that transferring energy between the two markets actually reduced electricity rates by increasing real-time supply.
     Judge Thomas disagreed, writing that “substantial evidence supports FERC’s conclusion that the violations affected the [day-ahead] market price.”
     “Indeed, substantial evidence supports FERC’s finding that the expert’s model understates the price effects of sellers’ actions.”
     Thomas found that after the FERC examined data the companies submitted indicating “unusual” import and export activity, FERC “reasonably determined” the companies broke the law. FERC’s interpretations were “not arbitrary, capricious, or an abuse of discretion,” as the power company claimed.
     The California electricity crisis was a case of failed deregulation. Under Gov. Pete Wilson, in 1996, the state said that deregulation would reduce electricity rates and boost the economy.
     Deregulation created two nonprofit entities: the California Power Exchange Corporation, or CalPX, and the California Independent System Operator, or Cal-ISO. As Judge Thomas explained it, CalPX was a wholesale clearing house for electricity, which operated two spot markets: “(1) the ‘day-ahead’ trading market, in which the market clearing price was derived from the sellers’ and buyers’ price and quantity determinations for the next day’s energy transactions, and (2) the ‘day of’ or ‘hour-ahead’ trading market, in which CalPX would determine, on an hourly basis, a single market clearing price which all suppliers would be paid. The Cal-ISO tariff comprehensively regulated California’s power markets. In relevant part, the tariff barred power marketers from buying electricity in the day-ahead market in order to resell that electricity in the real-time market.” (Citations omitted.)
     But in power emergencies — real or created — there was no alternative to the real-time market, other than rolling blackouts, to reduce demand.
     Power companies discovered, perhaps by accident, that because emergency rules kicked in when the system was within 5 percent of capacity, any company with control of 6 percent of the market could set prices virtually at will by threatening to go offline for any reason: “maintenance,” for example.
     As regulators struggled to fix the system through the long hot summer of 2000, the power companies, figured out their own “fixes” to the regulators’ fixes, often within the same day.
     The FERC concluded in a 2003 staff report that power companies had manipulated the market. Reaffirming that finding, Administrative Law Judge Steven Glazer found in April this year that Californians were overcharged $779 million during the crisis.
     California Attorney General Kamala Harris said Thursday that she was “gratified that the court upheld FERC’s determination. My office will continue to pursue compensation from those who gamed the market and profited from the skyrocketing prices that resulted.”
     U.S. Circuit Judges M. Margaret McKeown and Richard Clifton joined the 34-page opinion.

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