By Wayne Lusvardi

In George Orwell’s novel “1984,” “doublespeak” meant the reversal of the meaning of words: “war is peace,” “ignorance is strength” and “freedom is slavery.”

Ever since the California Electricity Crisis of 2000-01, California has been afflicted with what might be called “powerspeak,” where “deregulation is re-regulation,” “underbuilt is overbuilt” and requiring power companies to make bids to provide backup power is called “gaming the system.”

The California ISO, which operates most of California’s power system, filed a complaint with federal energy regulators to get JP Morgan Chase Bank to agree to the conversion of two power plants in Huntington Beach owned by the AES Corporation.  The ISO’s order requires AES to convert the two plants to gas-powered steam plants.  JP Morgan Chase holds the right of approval of any financing for the ordered conversion of the power plants.

The ISO also has a running dispute with JP Morgan Chase over profits made under the bidding rules in the “day-ahead” energy market.  No mention is made in the press that the rules are intended to overpay bidders, rather than face the much bigger potential problem of lack of power leading to blackouts — as happened in 2001.

But profiting legally by regulatory design creates the appearance of wrongdoing that could embarrass politicians. In “powerspeak” terms, what is legal can also be criminalized. Under the double standard of powerspeak, only the government is allowed to gouge the public and not disclose the bid prices in its new Cap and Trade program.

Population, overbuilding may end up with WHOOPS

JP Morgan Chase apparently doesn’t want to get stuck with financing added backup power plants in a state with slowing population growth, less energy use due to economic recession, industries fleeing to other states, LEED building energy standards with rigged paybacks and redundant green power plants being overbuilt.  It has recently been announced that California lost about 100,000 citizens net last year (although immigration from other countries still slightly increased the overall population).

Understandably, AES and JP Morgan Chase have appealed to California Treasurer Bill Lockyer, who is responsible for the state’s bond ratings, to mediate the dispute over stalled power plant construction and energy bidding.

Not facing blackouts

Contrary to an erroneous report by the Sacramento Bee, California is not facing the possibility of blackouts if the Huntington Beach power plants are not converted to “synchronous condensers.”   In fact, AES and JP Morgan Chase have already responsibly re-opened the old mothballed Huntington Beach fossil fuel power plants back in May 2012 at the request of the ISO.  California is facing a glut of power plants, not a lack of construction of new power plants as occurred in 2001.

The Dec. 10 Sacramento Bee article mis-quoted Jim Bushnell, the research director of University of California institute. It had him saying, “What you have to confront is, we don’t own these power plants anymore.  If we want to re-regulate, we’d have to buy them back.”  This suggests the state should use eminent domain to nationalize the power industry in California.

He didn’t meant that. Bushnell clarified in an email to me:

“The ‘we’ is not referring to the government. The quote is from a long analogy in which I was comparing cost-of-service regulation to ‘owning’ power plants in the sense that ratepayers are obligated to pay the average cost of owning and operating the power plant (e.g., capital plus operating expenses) to a restructured regime under which ratepayers are no longer obligated to those costs but instead need to pay a market-based price for the output. Obviously the subtlety of the analogy doesn’t come through in the article.”

To add to Bushnell’s clarification, the power plants in Huntington Beach were never owned by the state. Government owned only municipal power plants and hydropower plants. But governments were not forced under energy deregulation to divest ownership in their plants in 2001, as were investor-owned utilities such as Edison, PG&E and SDG&E.

These divested power plants never were owned by the government, but were always regulated by the CPUC. The reason the state required divestment was that it feared regulated investor-owned Utilities would exercise monopoly power in the new so-called “de-regulated” market.

Power plant divestment and reverse auctions the real culprits

In fact, power plant divestment was the hidden culprit behind much of the 2000-2001 electricity crisis.  New power plant owners were not permitted to discuss anything with each other for fear of collusion. This ultimately led to the disaster, because plant operators could not discuss maintenance scheduling.  This lack of communication further led to multiple power plant units being off-line simultaneously and resulted in shortages of supply and wild price swings.

It should be clarified that California ISO is not a state agency, but is a nonprofit public benefit corporation.  So using Bushnell’s quote as inferring that the state should buy out private power plants is technically inaccurate, because the ISO has no eminent domain powers.

The original energy bidding rules were set up under deregulation with the assumption that there would be a surplus supply.  But the rules called for a “reverse Dutch auction,” where buyers competed on the basis of the lowest price, not the highest price, as is typical in a conventional auction.  Reverse Dutch auctions fail during shortages because they create a psychology to buy more cheap power than under a conventional auction, in which high prices restrain buying and conserve supply.  According to some energy experts, this led to the magnitude of the 2000-01 crisis and Enron’s highly profiled bidding abuses.

To reform the system, end doubletalk

If California is going to consider reforms and more intervention into energy markets by regulatory agencies, the first order of reforms should be to stop the overused negative cliché of “deregulation” for everything that the private energy sector does and that politicians, the public and the media do not understand.

“Deregulation” never accurately described the energy system reforms in 2000, and it doesn’t describe it in 2012.  Re-regulation is not deregulation, overbuilding is not underbuilding and providing legally-allowed mandated backup power bids is not “gaming the system.”

By Warren Duffy

It happened again.

First, earlier this year the California Independent System Operator reported to the Federal Energy Regulatory Commission suspicion that J.P. Morgan Chase was guilty of a plot to keep electric power off the California consumer market until it was able to command “exceptionally high prices.” The amount grabbed was $73 million. The ISO oversees California’s electricity market.

J.P. Morgan Chase’s name became public when FERC sued it in U.S. District Court for access to internal emails. J.P. Morgan denies the charge.

Now, another company has done the same thing. So far, the company name has not been revealed. Reported the Sacramento Bee, “The company, which state officials wouldn’t identify, has allegedly reaped $10.5 million in ‘excessive gains’ since April.” There has been no court filing against the second claim, so the name of the alleged company remains a mystery.

Are market speculators circling the California Cap and Trade waters preparing to repeat the gaming of the California electric system as they did in 2000 and 2001? For those who may have forgotten, it was Texas company Enron that drove electric prices to record highs, causing massive blackouts for California consumers, while billions of dollars were made in excess profits. Enron went bankrupt and some of its executives went to prison.

What does all of that have to do with California Cap and Trade?

The California Air Resources Board is poised to being its Cap and Trade carbon-credit auction in the state on November 14. At least 400 California manufacturers, utilities and energy producers will be participating.  These are businesses in transportation, construction, food processing, concrete, refineries and even colleges.

They will be required to purchase carbon credits to cover the excess over their pollution “caps.”  The fear among many people is this will open the Cap and Trade market to all sorts of sophisticated players who know all too well how to “game the system” at the cost of more than just electricity.

At the end of August, CARB conducted a “dry run carbon credit auction” with approximately 150 non-disclosed participants.  What happened during that 3-hour exercise remains a closely guarded secret.

What little we do know came from CARB spokesman, David Clegman, who admitted attempts by unidentified players to test the boundaries of the market. Some bids offered by so-called carbon purchasers were described as “completely screwy,” exceeding price limits designed to prevent any cornering of the market. And yet, CARB insists they have safeguards in place to protect their carbon credit auctions from market manipulators.

Since CARB cannot sell carbon credits, it has set up the Western Climate Initiative to oversee all transactions. Having incorporated as a Delaware Corporation , WCI is free from open-meeting disclosures required under California law. If CARB is adamant about protective measures in place, why would they not insist on open-meeting disclosures?

Is the wolf guarding the hen house?