Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Revisiting California

Market power after two years.
Fortnightly Magazine - April 1 2002

been observed. Enron's sales directly to the California ISO were not large.

Enron's sales at the hubs were vastly greater than its sales to the ISO. This simply reflects the fact that the market leader need not show up in every transaction. Price leadership sets the prices for all participants. Each transaction would reflect the price leader's price even though the price leader only had 30 percent of the market.

Do we know whether Enron exercised its market power in an attempt to increase prices during the market crisis that occurred between May 2000 and June 2001? No.

Publicly available data simply isn't that detailed. And while the California ISO continues to restrict availability of such data through its aggressive use of confidentiality agreements, the public debate will not become much clearer. The irony of the situation is that the ISO-the victim-has restricted market information to the market participants since they must have access to participate in the FERC refund cases and ongoing litigation. But the ISO has taken the same data out of the hands of the public, the press, and policy makers.

If arrogance was a clue to the exercise of market power, Enron's behavior during this period was legendary. During one transaction we were involved in, a junior Enron trader simply hung up on a senior executive of a Fortune 500 company because he could not move fast enough. This is market power with a vengeance.

Looking Backward

The clarity of the evidence leads to a striking conclusion. If FERC had intervened in May 2000, the entire crisis might well have been avoided. FERC should have imposed a WSCC-wide price cap in May 2000 along with the "must offer" rule on California generation at the beginning of the crisis. If FERC had taken this step, the bankruptcy of Pacific Gas and Electric and the closure of industries from Arizona to British Columbia could have been avoided, and thousands of jobs could have been preserved.

Even better, allowing open access on the Pacific Northwest model-access for large customers ready and able to enter the bilateral market without the unnecessary California Power Exchange and ISO superstructure-might have conferred the benefits of open access without the costs of a distorted market.

The lesson for policy makers is that simple market rules apply only to simple markets. The California market failure was hardly simple and California's markets never reflected true competitive conditions. The complex AB-1890 structure required and continues to require extensive FERC regulatory intervention to operate in a fashion even remotely similar to a competitive market.

Robert McCullough is the managing partner of an energy consulting firm-McCullough Research-based in Portland, Ore. The firm specializes in business and public policy issues throughout the United States and Canada. McCullough Research also represents industries in Oregon, Washington, California, Idaho, and Utah. Before starting McCullough Research, Mr. McCullough was an officer at Portland General Corporation where he had responsibilities in finance, power marketing, and rate setting. He was educated at Reed College, Portland State University, and Cornell University in economics and finance. He is a member