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Case Highlights

Economics, Energized.

Brattle support helps buyers during the California Energy Crisis achieve $4 billion in settlements.

Background

Background

In May of 2000 electricity prices in the nascent power markets operated by California Power Exchange (PX) and Independent System Operator (ISO) rocketed from less than $50 per MWh to $750, the then prevailing price cap. Despite ISO efforts control prices by reducing price caps over the Summer of 2000 and remedial measures undertaken by the Federal Energy Regulatory Commission (FERC) in December, the California Energy Crisis continued and prices remained extraordinarily high for an unprecedented period of 14 months, falling back to normal only after further FERC action in late June of 2001.

As the Crisis ended and debates over its causes and appropriate remedies raged on, a series of memos penned by Enron attorneys provided startling evidence of widespread manipulation by Enron and others of the California power markets. In response, the FERC initiated an investigation by its Staff of manipulation in Western natural gas and electricity markets in February 2002. The investigation culminated with the Staff’s Final Report filed in March 2003 which concluded that there was evidence of manipulation in both natural gas and electric power markets in California and the West. In June 2003 FERC issued Show Cause Orders (103 FERC ¶ 61,345 and 103 FERC ¶ 61,346) to over 40 suppliers to demonstrate why their behavior did not run afoul of the gaming and/or anomalous behavior provisions of the PX and ISO tariffs or of the requirements of their authorizations to charge Market-Based Rates. For the decade following these orders, numerous refund proceedings relating to the Crisis have continued before the FERC, in Federal District Court, US Court of Claims and the Ninth Circuit Court of Appeals.

Brattle’s Role

Since late 2002 a team of Brattle experts and researchers has supported the efforts of the California Parties, a group representing purchasers, to obtain refunds for the high prices they suffered during the Crisis. Brattle experts working with attorneys from the California Attorney General’s Office, the California Public Utilities Commission, Steptoe and Johnson, Sidley & Austin, and Hawke McKeon & Sniscak have filed five major rounds of testimony, most involving explanation and analysis of evidence of seller manipulation and market power or responding to the myriad arguments raised by witnesses for the Respondent suppliers. These have addressed a range of factual and analytic questions that fall generally into three categories.

  • Forensic Analyses: Brattle witnesses Dr. Peter Fox-Penner and Mr. Gary Taylor analyzed transaction data and documentary evidence to discover and document trading practices that violated tariff provisions and other applicable legal requirements. Mr. Taylor also assessed the profitability of illicit trading strategies and the sufficiency of supplier compliance with FERC reporting requirements and Dr. Fox-Penner developed a market model to demonstrate the impact of manipulative trading practices on a transaction-by-transaction basis upon market prices.
  • Market Power Analyses: Brattle experts provided evidence of market power and its exercise through several approaches. Dr. Robert Reynolds applied regression techniques to demonstrate supplier withholding and the impact of aggregation of supply upon prices. Dr. Fox-Penner analyzed transaction data to establish seller pivotality and aggregation. Mr. Philip Hanser reviewed operating data to establish use of unwarranted outages as a means of generator withholding, and Dr. Romkaew Broehm analyzed transmission data at certain interfaces of the ISO and found that some suppliers enjoyed transmission dominance and used it to foreclose competition and demand high prices.
  • Mobile-Sierra Assessment: In response to a FERC determination that the Mobile-Sierra Doctrine would apply to bilateral purchases during the Crisis, Mr. Taylor collected evidence of fraud, duress, or bad faith in negotiating contracts in which the California Department of Water Resources purchased energy bilaterally in the Pacific Northwest on behalf of the ISO. Under the Morgan Stanley decision such evidence might justify not applying the Mobile-Sierra presumption of just and reasonable rates to the affected contracts. He also assembled evidence of manipulative seller activity which, along with evidence of excessive ratepayer burdens resulting from the contracts might support a finding that the contracts were not in the public interest and thus should be reformed even under the Mobile-Sierra standard.

The Outcome

In August 2013, after a full evidentiary hearing and a favorable decision from a FERC administrative law judge, Powerex, the major supplier of real-time energy during the Crisis agreed to settle with a payment of $750,000,000. Over the ten years of litigation concerning the Crisis, Brattle assistance has provided the evidentiary basis for the recovery of approximately $4 billion in settlements from suppliers in the PX and ISO auction markets and the bilateral markets in the Pacific Northwest. Settling parties include Sempra, Dynegy, Williams and Reliant and many others. The Brattle team continues to support the California Parties as they press their claims to recover overcharges in purchases made in the Pacific Northwest during the Crisis.