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Attorney General Lockyer Calls for Major Legal and Regulatory Reforms to Protect Energy Ratepayers and Deter Price Gouging

Tuesday, April 13, 2004
Contact: (415) 703-5837

(SACRAMENTO) – Attorney General Bill Lockyer today called for major reforms of the legal and regulatory framework that governs California's wholesale electricity market, releasing a report that concludes the oversight and enforcement system failed during the Energy Crisis of 2000-01, worsened the crisis' effects and has undermined ratepayers' ability to obtain redress for price gouging.

"Laws, rules and regulators are supposed to protect consumers and deter misconduct," said Lockyer. "But in the case of the California Energy Crisis, the system has sheltered wrongdoers and left ratepayers out in the cold. The enforcement defects continue to provide sellers incentives to game and gouge. Substantial reforms are needed to remove these incentives and ensure the sad history suffered by Californians is never repeated."

Lockyer submitted the 90-page report to Congress, the state Legislature, Governor Arnold Schwarzenegger, and state and federal regulators. The report offers a wide-ranging set of 33 recommendations for how Congress, the courts, regulators and state policymakers can improve market oversight, strengthen enforcement, prevent misconduct and enhance remedies for violations. The report is available on the Attorney General's web site, at www.ag.ca.gov/publications/energywhitepaper.pdf.

"Three years later, the state still is reeling from the Energy Crisis of 2000-01 and trying to understand what went wrong," the report observes. One key answer, the report concludes, is that "the statutory and regulatory framework that governs California's energy market, and the agencies and entities responsible for enforcing the rules, failed in key respects."

The report analyzes the Energy Crisis from the Attorney General's law enforcement perspective. It does not address whether the deregulation of California's electricity market should be continued or abandoned, saying only that the state's initial effort at open competition "has failed to fulfill its promise of cheap and reliable power – like a light bulb that stays dark when the switch is flipped."

Lockyer stressed, however, that if policymakers retain or expand the deregulated system, the report's recommendations should be implemented to deter abuse and protect consumers. "Those who support deregulation have a responsibility to recognize and help correct the serious, numerous deficiencies of a system that has exalted profit margins and devalued consumers," said Lockyer.

Among the report's key recommendations to strengthen oversight and enforcement, and protect consumers:

Congress should prohibit application of the "filed rate doctrine" to market-based rates and clarify federal law to specify market-based rates are subject to retroactive refunds.
Barring application of the doctrine to market-based rates, the report states, "may be the most important action that can be taken to ensure fairness and deter future attempts to manipulate energy markets."

The court-created filed rate doctrine holds that rates set by regulators cannot be set aside by judges, and can be subject to refunds only prospectively. The courts created the doctrine to apply to systems in which rates were filed with, and reviewed and approved by regulators. In FERC's system for regulating the California market, however, sellers do not file their rates, the agency does not review them, nor does it approve them before their use. FERC has determined that the "filed rate" is the price buyers and sellers negotiate in the market. These negotiated rates – even if they result from market manipulation, gaming or fraud – are largely beyond challenge under FERC's interpretation. That seriously undermines Californians' ability to obtain adequate redress for violations of market rules and laws. FERC has used its interpretation to deny California refunds for overcharges from May-September 2000, a decision Lockyer has appealed. That decision, and others made by FERC, could cost Californians up to $6 billion in refunds, the report notes.
"The file rate doctrine gives energy companies a license to steal from California ratepayers," said Lockyer. "We're asking Congress to revoke that license."

FERC should establish written criteria for market monitoring, identification of market manipulation and responses to market failures.

Congress should amend FERC's charter to require full and complete cooperation with state investigations of fraud, antitrust violations, unfair competition and other market misconduct.

Congress should amend federal law to allow grand jury material to be shared with state and federal investigators in order to promote cooperation and avoid overlapping investigations.

The California Independent System Operator (ISO) should possess explicit authority to investigate and penalize violations of market rules.

The Legislature and Governor should enact specific requirements and procedures for ISO, the California Public Utilities Commission and the Electricity Oversight Board to refer serious market misconduct allegations to the Attorney General.

To encourage direct consumer participation in FERC proceedings, Congress should create a mechanism, similar to that in California law, that entitles consumer representatives who make substantial contributions to FERC proceedings to recover their reasonable costs.

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