Winning Power Crisis Refunds Just Got Tougher

Fifteen years after California faced electricity shortages and rolling blackouts caused by market manipulations, the state is still fighting to recover money from some of the companies accused of overcharging.

On Thursday, the 9th U.S. Circuit Court of Appeals made that tougher.


First, let’s recall that California deregulated its electric power market in 1996 and the spot market for energy began operation in 1998.  Some unscrupulous traders, most notably some in the now defunct Enron Corp. figured out how to game the short-term market. Electric prices began to shoot up in June 2000. Blackouts hit 97,000 San Francisco bay area customers during a heatwave.

Again in January 2001, more than 100,000 customers were hit with rolling blackouts due to power shortages, and 1.5 million in March and in May another 167,000.

A major California utility, PG&E, declared bankruptcy.  The company was not insolvent but was trying to protect itself from contracts that locked it into selling power at fixed low rates while the electric spot market prices suddenly spiked by hundreds of dollars then fall as quickly.

Gov. Gray Davis declared a state of emergency.

In 2001, with the new Bush Administration in office, Vice President Dick Cheney blamed California saying it had failed to build enough power plants, when in fact, the state was using less power during the January rolling blackouts than it had in prior years before the price gouging began.

The crisis cost between $45 billion and $50 billion in energy overpayments.

It turned out that Enron traders in Oregon and Houston had designed a number of schemes, with names like “Death Star,” to allow them to fool California’s central energy market, the Independent System Operator, ISO, into paying Enron and its partners to alleviate congestion on the electric grid when none existed.

Enron would flood the power exchange with offers to sell massive amounts of electricity beyond the peak capacity, triggering ISO congestion procedures and raising prices. In another scheme Enron traders created the illusion of power flowing through critical congested pathways without any of the actual contracted energy going through the lines.

Investigations and criminal indictments eventually caught up with some of the wrongdoing in the ensuing years, but the fight for recovery of the money slogged on through the courts.


The Federal Energy Regulatory Commission, FERC, which is supposed to investigate and ensure just and reasonable rates, didn’t help much.  When California utility regulators issued 120 subpoenas for in 2000 to investigate suspected manipulation, energy companies ran to FERC seeking to quash the subpoenas and FERC accommodated.

Then a few years ago, the 9th Circuit ordered FERC to reconsider California’s claims that refunds are warranted for purchases of energy made in the Pacific Northwest spot market and new evidence of market manipulation that might affect the commission’s determination on the award of refunds.

The 9th Circuit did not suggest the answers, only that the state get a chance to present its evidence that the rates during the manipulation were not “just and reasonable.”

FERC took back the case and did something unusual – it changed the ground rules.  FERC said it would employ a new legal standard, known by the precedent-setting case name, “Mobile-Sierra” in considering whether the rates were “just and reasonable.” Under the Federal Power Act, any rate that is not just and reasonable is illegal and may be refunded.

FERC’s decision to now adopt the Mobile-Sierra standard, means that FERC will now “presume that the rate set out in a freely negotiated wholesale-energy contract is ‘just and reasonable.’”  The presumption can only be overcome if the state can show that its contracts included such “extensive unlawful market manipulation as to alter the playing field for contract negotiations.”

That’s a higher burden for the state than was previously envisioned.  The state appealed to the 9th Circuit to nix the Mobile-Sierra standard.

On Thursday, the 9th Circuit said it would defer to FERC’s decision to apply the higher standard as “reasonable” and let the review proceed.

California now faces a steeper hill to climb in its continuing attempts to recover refunds for the market manipulations of 15 years ago.

The opinion by Judge Margaret McKeown was joined by Chief Judge Sidney Thomas and Judge Richard Clifton.

Case: People of California v. FERC, No. 13-71276



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