J’Accuse! The Balance of Power Has Shifted

The only thing surprising about Wednesday’s announcement that wholesale electricity generators have ripped California off for $6.2 billion is that the announcement took so long. In fact, the comprehensive study of major power suppliers by the California Independent System Operator has confirmed what we’ve known for months: They systematically manipulated the wholesale market.

This new study is important for two reasons. It should jump-start stalled proceedings at the Federal Energy Regulatory Commission. It may also give Gov. Gray Davis the political and legal weapons he needs to quickly bring the wholesale generators to heel.

The ISO study was presented to FERC as part of a broader proceeding intended to demonstrate that wholesale rates have been “unjust and unreasonable.” Under the Federal Power Act, such a finding is grounds for recovery of excess profits.

It is not necessary for FERC to prove a conspiracy in which wholesale generators explicitly colluded. From both the law and economics, we know that when there are so few suppliers in a market, such an oligopoly can coordinate its behavior through “tacit collusion” simply by watching and reacting to each other.

That is clearly what happened in California. Yet the FERC has been largely unresponsive to the idea that wholesale generators should pay Californians back. Now, the ISO study provides a credible price tag for the theft and solid grounds for a more comprehensive evidentiary hearing.

That’s progress, but there is something much more fundamental and profound here, namely, a potent negotiating weapon for Davis. The governor is seeking to nail down long-term contracts for wholesale power, which accounts for about 40% of the state’s needs. With electricity supplies artificially tight and the lights flickering, the governor has been bargaining from the weakest of positions. Now, Davis is being forced to sign some contracts that even his own policy advisors know are too expensive and too long in duration--7 cents to 9 cents a kilowatt hour for 10 years.

Until Wednesday’s announcement by the ISO, the governor seemingly had no choice. The only way he could get a lower rate for power was to agree to longer terms. But within just a few years, there will be a glut of power, natural gas prices should soften and the cost of power would fall to around a nickel per kilowatt-hour, so the state would wind up paying almost double the going price.

Now here’s the broader point. As evidence of a broad-based conspiratorial market manipulation mounts, so, too, does the possibility of a successful lawsuit against the wholesale generators. Numerous suits have been filed by the state, by cities like Los Angeles and San Francisco and by consumer groups. These lawsuits seek to recover any portion of the rates found to be unjust and unreasonable as well as seek punitive damages.

In fact, the real “compensatory damages” owed by the wholesale pirates are not limited to the excess profits they have earned. Consider that their monopolistic behavior has set in motion a whole chain of events that has been very costly to taxpayers, ratepayers and businesses.

Without the rip-off by the wholesale generators, the utilities would not be on the brink of bankruptcy. Without the possibility of bankruptcy, there would have been no need for the state to rescue them by dissipating the budget surplus--at great expense to taxpayers.

In addition, without near-bankrupt utilities, the small independent generators could have been paid by the utilities for their power. Then they would not have had to shut off their plants this week, thereby dropping 3,000 megawatts out of the system and causing rolling blackouts.

Without rolling blackouts, thousands of businesses would not have suffered millions in lost revenues, and hundreds if not thousands of Californians would not have found themselves in traffic jams, stalled elevators and other dangerous situations.

Get the picture? Just add all this up and the true compensatory damages for the havoc these wholesale generators have wreaked dwarfs the measly $6.2 billion that the ISO has found to be unjustly taken from Californians.

Accordingly, the governor can now credibly threaten the wholesale generators with a legal action that may ultimately result in the awarding of damages equal to the value of these companies. The ISO finding is a potent exclamation point to this crisis, which may finally help turn national opinion against the wholesale generators, which heretofore have been viewed simply as honest businesses serving a need.