Lockyer's Criminalizing of Energy Firms under California's Alice in Wonderland Antitrust Laws

chronwatch.com ^ | May 23, 2005 | Wayne Lusvardi

[WayneLusvardi]

Lockyer's Criminalizing of Energy Firms Under California’s 'Alice in Wonderland' Antitrust Laws

Almost 45 years ago current Federal Reserve Chairman Alan Greenspan prophetically wrote:

“The world of antitrust is reminiscent of Alice in Wonderland: everything seemingly is, yet apparent isn’t, simultaneously. It is a world in which actions designed to limit competition are branded as criminal when taken by businessmen, yet praised as ‘enlightened’ when initiated by the government. It is a world in which the law is so vague that businessmen have no way of knowing whether specific actions will be declared illegal until they hear the judge’s verdict – after the fact.”

The above quote fits almost “perfect to the letter ‘t’” the recent announcement by State Attorney General Bill Lockyer, a 2006 candidate for Governor, that California is using antitrust laws to sue two power companies for their alleged misconduct during the energy crisis of 2001 (as reported in May 19, 2005 SacBee)

Lockyer has filed suit against Canada’s Powerex Corporation and New Mexico’s Public Service Company alleging they colluded in a “megawatt laundering” scheme whereby they possibly: (1) shipped electrons out of, and then back into, California without tacking on a “competitive transition” surcharge; and (2) evaded state-mandated retail electricity price caps.

In 2001, California energy regulators intentionally designed a scheme to “jack up” electricity prices during the state energy crisis to pay off “stranded liabilities” on mothballed polluting power plants, expensive nuclear plants stuck with hundreds of millions of dollars of overkill environmental lawsuits, and unrecoverable subsidies in overpriced renewable energy (e.g., solar, wind, geothermal). The debts on these “stranded assets/liabilities” had to be paid off or mortgaged before the state could proceed with opening its energy market to deregulated competition. This financial crisis was given the misnomer of the “California energy crisis.”

Some energy firms found a non-prohibited way around this government price rigging scheme by reaping profits for themselves and their customers rather than for the government. Now the government wants the profits returned after it intentionally induced a fever in the wholesale electricity market in 2001 which resulted in such high wholesale prices in the first place; while a spike in natural gas prices resulting from a drought of hydropower made high wholesale prices inevitable.

So the purported crime is that some market players in the private sector made a seemingly unjust profit which only government, the regulated monopolies, and municipal utilities were supposed to reap. Other players, such as the regulated monopolies So Cal Edison, PG& E, and SDG&E were hemorrhaging billions of dollars in losses because they couldn’t escape the retail price caps when wholesale prices skyrocketed higher than retail prices. It can only be surmised that Powerex’s and the Public Service Company’s “crime” was that they were nimble enough to avoid losses like the regulated monopolies suffered.

Put a different way, the state and regulated monopolies devised a scheme to invite out-of-state merchant energy companies, which had no “stranded liabilities,” into the California energy market to pay for their debts. That a few merchant energy companies possessed the mental dexterity to avoid taking losses is apparently now considered a crime after the fact. If such merchant energy firms had not found a creative way around California’s energy pricing entrapment scheme in 2001, fewer electrons would have been made available and the crisis would have been even worse on those days where lack of supply, not grid congestion, was the problem.

Lockyer’s lawsuit additionally alleges that these two firms withheld reserve power until the price was right. Reserve power is a precious commodity for most merchant energy companies because it is dead-weight asset until such time as it becomes profitable to sell it.

Because reserve power is dormant and its payback is uncertain, its price must be many times higher than historical prices to compensate for risk. Most state energy regulatory agencies require power companies to have reserve capacity as a condition of operating in their state. However, this requirement is not necessarily a “contract” such as the “long-term” electricity contracts that were consummated with energy providers after the California electricity crisis of 2001. If Lockyer has such contracts he should drag them out in public view for the public to see.

If Lockyer is alleging that merchant energy companies should have sold their reserve power at a loss during the energy crisis, just as the regulated monopolies were taking losses, this conceivably would have smacked of being confiscatory. This raises the whole notion of what is called a “deregulatory taking.”

Unless, that is, Lockyer can make a case that merchant energy companies were paid for their reserve power once in their rate structure and doubly paid during the energy crisis. But that is not what Lockyer is alleging in the media.

Lockyer’s lawsuit against Powerex and the Public Services Company reportedly is being prosecuted under the provisions of antitrust law. Originally, antitrust laws were supposed to keep any one firm or group of firms from dominating the marketplace. The thinking is that without the oversight of government regulatory agencies large corporations would ruthlessly eliminate their competition and then raise prices at the expense of consumers.

But antitrust has come to mean the opposite of what it was originally intended just as in the children’s story of Alice in Wonderland where all words mean the opposite of what they are supposed to mean. Antitrust law is fluid, highly-subjective and all-too-frequently retroactive. Antitrust is often wielded by favor-seeking businessmen and their allies in the political arena, such as the recent antitrust action against Microsoft. It has also been co-opted by both business and government to create barriers to entry to protect existing producers from competition.

In California, those protected by the threat of antitrust lawsuits in the regulated energy sector are the former regulated monopolies, municipal electric utilities, and their protected trade union employee base. Thus, antitrust laws often have political capital for politicians who can buy votes and gain power by wielding it.

A criminal is presumed to be innocent until proven guilty. It is only businesses which are considered guilty in the media and by government and made to prove their innocence. Even suspected child sexual predators are given the innocuous term “persons of interest” or "suspects" while corporate heads are convicted before the fact in the press and by government press releases as “greedy price gougers” and “market manipulators.” Only businessmen are shown on television handcuffed as they come to court while ironically actual hard criminals must be shown in business suits without such restraints. Pseudo-serious books and movies are made about greedy corporations, but never about the role of government in the California energy crisis of 2001. Government’s actions during the energy crisis were hidden in plain view because the mainstream media rarely focused on it.

Contrary to mainstream media accounts, Enron, which only had a 4% peak share of the state energy market and departed after six months, did not singularly cause the California energy crisis. Enron erected an accounting and securities house of cards that fell like the animated playing card figures in the children’s story of Alice in Wonderland. What pulled the rug out from under Enron’s house of cards was, in part, the enactment of price controls and a “competitive transition” surcharge in the California energy market; as well as Shohomish County, Washington stiffing Enron for a $120 million electric bill at the peak of the energy crisis in 2001. That there could have been a political motive for these two “blue” states overturning the card table on red-state Enron has been overlooked by the mainstream media.

From what we know thus far neither Powerex nor the Public Services Company significantly contributed to the California energy crisis of 2001. In a scene right out of Alice in Wonderland, they reportedly reaped a handsome profit that the Red Queen, perhaps more appropriately titled the Blue State Barrister, now wants returned.

Instead of praising energy merchants for bailing government out of an even worse energy crisis in 2001, coming clean about what that crisis was all about, and then negotiating behind the scenes for rebates, Lockyer has chosen to criminalize them publicly in the media and threaten a shakedown using arbitrary antitrust law. That there is political capital in doing so for a candidate running for Governor of the state should be obvious to all. Except the mainstream media reports such posturing as serious criminal violations instead of seeing it for the political game playing which it is.

Powerex and the Public Services Company, and (hold your nose) even the scurrilous Enron, are being condemned for being too successful and too good of competitors. For example, if it weren’t for such firms as the Mirant Corporation which heroically produced extra power during the electricity crisis of 2001, California would have experienced more than just a financial crisis (see The Unsung Heroes of the California Energy Crisis, ChronWatch, January 29, 2005, But such firms now know full well that game playing antitrust law in California is not just a children’s fairy tale.

[markman46]

if the power co's do that then we all could not freep.