Opinion ID: 3040019
Heading Depth: 3
Heading Rank: 1

Heading: The Western Energy Crisis of 2000-2001

Text: This is not the first case, and it will not be the last, that requires this court to address the western energy crisis of 2000-2001, the basic facts of which are outlined elsewhere. See Pac. Gas & Elec. Co. v. FERC, 464 F.3d 861, 863-66 (9th Cir. 2006); Pub. Utils. Comm’n of Cal. v. FERC, 462 F.3d 1027, 1035-46 (9th Cir. 2006); Bonneville Power Admin. v. FERC, 422 F.3d 908, 911-14 (9th Cir. 2005); Lockyer, 383 F.3d at 1008-11; California ex rel. Lockyer v. Dynegy, Inc., 375 F.3d 831, 835-36 (9th Cir. 2004), cert. denied, 544 U.S. 974 (2005); S. Cal. Edison Co. v. Lynch, 307 F.3d 794, 80001 (9th Cir. 2002); Duke Energy Trading & Mktg., L.L.C. v. Davis, 267 F.3d 1042, 1045-46 (9th Cir. 2001); Cal. Power Exch. Corp. v. FERC (CalPX), 245 F.3d 1110, 1114-19 (9th Cir. 2001); see also Duane, supra, at 511-24; Michael A. Yuffee, California’s Electricity Crisis: How Best To Respond to the “Perfect Storm,” 22 Energy L.J. 65, 65-84 (2001). Accordingly, we summarize here only those facts most relevant to this case. As noted, in 1996, the California legislature deregulated the power industry in California through passage of A.B. 1890. The bill froze residential and small commercial consumer retail rates12 and required that the three largest California investor-owned utilities13 divest most of their electricity generation facilities. See CalPX, 245 F.3d at 1114-15. Additionally, the bill created the CalPX, which operated a single-day 12 The legislature froze rates at a level utilities expected to be far above rates utilities were likely to have to pay, thus allowing them to recoup “stranded costs” as California’s energy market shifted to a new regulatory era. See Duane, supra, at 501. 13 The three largest investor-owned utilities were San Diego Gas and Electric Company, Southern California Edison, and Pacific Gas and Electric Company (PG&E). CalPX, 245 F.3d at 1114. 19568 PUBLIC UTILITY DISTRICT v. FERC auction for day-ahead and day-of trading in wholesale electricity, known as the “spot market.” Id. at 1114.14 In the summer of 1999, CalPX also opened up a “forward market” to facilitate long-term wholesale electricity contracts. Id. The California Public Utilities Commission, however, allowed the investor-owned utilities to purchase only a limited amount of electricity from the CalPX forward markets. The great bulk of their load still had to be purchased from the CalPX spot markets. Id. at 1115. In the summer of 2000, there was a dramatic spike in the price of wholesale electricity in the spot markets. Id. For example, “[t]he CalPX’s constrained day-ahead price peaked at $1,099/MWh [megawatts/hour] on June 28, 2000 — an astounding 15-fold increase over the pre-restructuring average cost of $74/MWh.” Id. at 1115 n.2. On November 1, 2000, FERC issued an order explaining that, in its view, this dramatic increase was primarily the result of three factors: First, “competitive market forces played a major role in the run-up of prices through significantly increased power production costs combined with increased demand due to unusually high temperatures and a scarcity of available generation resources throughout the West and California in particular.” San Diego Gas & Elec. Co., 93 F.E.R.C. ¶ 61,121, at ¶ 61,354 (2000). Second, “[m]any of the market dysfunctions in California and the exposure of California consumers to high prices can be traced directly to an over reliance on spot markets.” Id. 14 The term “spot market” refers to deals for energy provided over periods generally not exceeding 24 hours and entered into the day of or day prior to delivery. It contrasts with the term “forward market,” in which energy is delivered some time beyond 24 hours after the sale. PUBLIC UTILITY DISTRICT v. FERC 19569 ¶ 61,359. The rules requiring investor-owned utilities to purchase primarily through the spot markets precluded any significant reliance on forward markets. “And other retail suppliers who would have been free to implement appropriate risk management strategies could not be induced to participate in California’s market because the low retail rate, frozen at 10 percent below historical levels, thwarted competitive opportunities for new participants to enter the market.” Id. Third, FERC suggested that there was the opportunity for abuse of the markets through the exercise of market power, but could not point to specific instances. Id. ¶ 61,376. FERC’s staff later issued a report concluding that the spot market was dysfunctional, partially due to market manipulation by sellers; that conclusion is assumed by all parties here. See STAFF OF THE FEDERAL ENERGY REGULATORY COMMISSION, FINAL REPORT ON PRICE MANIPULATION IN WESTERN MARKETS: FACT-FINDING INVESTIGATION OF POTENTIAL MANIPULATION OF ELECTRIC AND NATURAL GAS PRICES [“Staff Report”] (2003), available at www.ferc.gov/legal/maj-ord-reg/land-docs/PART-I-3-2603.pdf. California is part of a single integrated electricity market in the West. Its energy problems therefore created a “dysfunctional marketplace both in California and the remainder of the West.” See San Diego Gas & Elec. Co. (June 19 Order), 95 F.E.R.C. ¶ 61,418, at ¶ 62,556 (June 29, 2001). For example, in the Pacific Northwest, prices have historically averaged approximately $24/MWh. During this period, short term prices spiked to unprecedented levels, peaking at $3,300/ MWh in early December of 2000, and during the summer and fall of 2000 averaged between $200/MWh and $500/MWh. Markets were also marked by unprecedented levels of price volatility. In response to this volatility, between August 2000 and December 19, 2001, FERC issued nearly 75 orders providing for spot market mitigation measures, see, e.g., id., most aimed at reducing the size of the spot market. San Diego Gas 19570 PUBLIC UTILITY DISTRICT v. FERC & Elec. Co., 97 F.E.R.C. ¶ 61,275, at ¶ 62,171 (Dec. 19, d2001). The order issued on December 15, 2000, is of particular relevance to the issues here. See San Diego Gas & Elec. Co. (December 15 Order), 93 F.E.R.C. ¶ 61,294 (Dec. 15, 2000). That order strongly urged investor-owned utilities to move to long-term contracts of two years or more. Id. ¶ 61,993. “To address concerns about potentially unjust and unreasonable rates in the long-term markets,” FERC agreed to “monitor prices in those markets” and established a “benchmark” rate of $74/MWh to “use as a reference point in addressing any complaints regarding the pricing of long-term contracts negotiated over the next year.” Id. ¶ 61,994-95. In response to the contention that such a shift would only transform the forward market into another strong sellers’ market resembling the then-dysfunctional spot market, FERC declared that it would “be vigilant in monitoring the possible exercise of market power” in the forward market. Id. ¶ 61,994. FERC’s monitoring, the agency promised, would “also provide customers protection by providing early review of as-bid prices that may not be just and reasonable and prompt rate relief for prices that are mitigated.” Id. ¶ 61,997.