New Energy Tiger Goes After Gouging.

What a difference a change makes.

Less than a year ago, the California Independent System Operator -- the nonprofit public-benefit corporation that oversees the state's energy transmission grid -- was little more than a shill for the energy industry. With its governing board made up of energy company executives, Cal-ISO took an active part in covering up the state's energy scandal by withholding information from state regulators.

At the order of Gov. Gray Davis, the Cal-ISO board was replaced with independent members. Now, with newly sharpened teeth, the agency has released a scathing report charging energy producers with price-gouging California consumers by as much as nearly $7 billion since last May.

The report was presented to the Federal Energy Regulation Commission in response to FERC's proposed wrist-slap requiring energy producers to refund a miserly $124 million in overcharges to California utilities.

Cal-ISO points out the statewide cost of energy usage in December 2000 and January of this year alone totaled more than $11 billion, compared to $7.43 billion in costs for the entire year of 1999. "Electricity costs in California could total $70 billion for 2001, or more than an order of magnitude beyond the less than $6 billion expended in 1998 ...," the study reports.

These high costs are the result of simple price gouging, the report concludes. Cal-ISO accuses energy producers based in California as well as out of state of widespread price manipulation, or what the industry euphemistically calls abuse of "market power."

According to an attached analysis by Eric Hildebrandt, of the ISO's Department of Market Analysis, "the degree of market power observed in California" racked up about $6.8 billion in excess profits for energy producers over a 10-month period. Only about $600 million of that was accrued during periods of so-called energy shortages, meaning we were over-charged $6.2 billion even when the state had adequate power and prices should have dropped.

Hildebrandt's analysis factored in the cost of the state's stringent pollution regulations and periods of supposed energy scarcity, and found they had little impact on the overcharges. Profits from market manipulation were so excessive, maintains Hildebrandt, that the costs of a new power plant built today could be paid off in less than two years.

In an another attached report, Anjali Sheffrin, also of the ISO's market analysis department, described two methods power suppliers used for jacking up prices. One was "physical withholding," or withholding available electricity from the bidding process to produce a shortage and run-up prices. The other was "economic withholding," or simply offering the energy at exaggerated prices. Both methods result in market clearing prices far above what a competitive market would produce, Sheffrin writes.

According to Sheffrin, between May and November 2000, energy suppliers manipulated electricity prices by either economic or physical withholding as much as 98 percent of the time. "As a result of their exercise of market power, many of the suppliers earned extraordinary amounts of excess profit ... at huge cost to the consumers," Sheffrin wrote.

Not only have suppliers manipulated prices, they've also "laundered" electricity produced in California to sell it back to state consumers at inflated prices.

According to Cal-ISO, state energy producers frequently withhold electricity from California consumers on the pretense it has been scheduled for sale outside of the state. With prices jacked up by this withholding, the energy is then secretly imported back into the state for sale at higher prices. Cal-ISO officials expect this "megawatt laundering" will "become more severe during peak load periods this summer ..."

The Cal-ISO report comes at a bad time for the energy industry. Within days of the report's release on March 22, the cities of Long Beach and Los Angeles both filed suit against Sempra Energy alleging price manipulation of natural gas. The two municipal suits join two private suits making the same allegations.

The state of California also filed charges with FERC accusing Texas-based El Paso Natural Gas Co. of manipulating natural gas prices in California by conspiring with a sister company to control an interstate pipeline which delivers gas here. EPNG, interestingly enough, also figures into the Sempra lawsuit.

In its report, Cal-ISO concludes FERC must take "effective, comprehensive action to prevent continuing widespread abuse." However, don't hold your breath.

Despite an increasing pile of evidence of corruption and abuse in the energy industry, FERC has stubbornly refused to yield from its course of energy market deregulation. Twice FERC has issued whitewashed reports denying evidence of market manipulation in California by energy producers, though in each case agency staffers were not allowed to conduct thorough investigations.

According to the New York Times, FERC commissioners were recently presented the option of going after "bad actors" in the energy market, or simply issuing the $124 million in refunds for a handful of questionable overcharges. As it's done in the past, FERC chose instead to turn a blind and ordered the chump change refund.

Nevertheless, as each thread of the massive energy industry scandal unravels, it becomes clearer that some industries -- those that have control over such vital economic services as energy production and delivery -- simply can not be deregulated. There is just too much greedy temptation and too little self-control on the part of industry executives.

At some point, even the most hard-core free marketer must recognize that.

Hill is editor of the San Diego Business Journal.