California Energy Case Names Koch, Shows Need For Diverse Portfolio

Statement By Mike Jacobs, Union of Concerned Scientists Senior Clean Energy Analyst

Published Feb 22, 2013

WASHINGTON (February 22, 2013) – An administrative law judge for the U.S. Federal Energy Regulatory Commission (FERC) has issued a preliminary decision. The decision may result in energy companies that manipulated California's electricity market in the summer of 2000 paying the state's utility customers $1.6 billion in refunds.
Below is a statement by Mike Jacobs, UCS senior clean energy analyst.

“We learned this week that the energy traders that cheated consumers during the California energy crisis of 2000 are being brought to justice. This enforcement of consumer protections names Koch Energy Trading Inc., one of the many energy companies owned by the Koch brothers. The same Koch brothers have been leading contributors to campaigns seeking to undermine regulatory protections for consumers and the environment.  The judge says the Koch entity was actively manipulating prices. If we don’t build up protections and shine a light when greed runs unchecked, we are neglecting our own interests.

“Here’s what happened in California. Energy supplies were tight in the newly deregulated electricity markets because a winter of less rain and snow reduced the energy from hydroelectric dams. Economic growth in California caused energy demand to grow, but new energy supplies were not added as quickly. Natural gas deliveries for power plants to use as fuel were reduced because repairs were needed on one of the major pipelines connecting southern California to gas fields in New Mexico. All this resulted in electricity prices that were higher than expected and tempting to an immature market full of new energy trading companies.

“Koch Energy Trading, Enron, and others conducted fraudulent trades, among other manipulations, to take advantage of the power shortage and maximize profits.  This week’s judgment ruled that Koch laundered energy from California by simultaneously claiming to make an export out of California and an import into California. This evaded the price cap in place in California to protect consumers from market manipulations.  Koch and others will have to pay fines, which the California Public Utility Commission estimates will total $1.6 billion.

“Looking ahead, it’s not hard to imagine energy shortages arising again. New England power system operators see the over-reliance on natural gas as their greatest challenge—it’s creating reliability worries. Power plants are not making commitments to build new gas pipelines. The electric system is increasingly dependent on the existing gas pipeline system, which also supplies gas to heat homes. This can create a crunch during cold weather when home heating demands go up. In Florida, which also relies heavily on natural gas, the crunch can occur in the summer when air conditioners get cranked up.

“Complicating matters is that bad weather can disrupt equipment. Surprising cold temperatures in Texas in February 2011 froze equipment at dozens of power plants. Rolling blackouts were needed due to the shortage of power, and gas pipeline compressors were shutdown by the blackouts. The pipelines could not provide needed gas, and the power plant shortages got worse. 

“The way to protect against energy supply disruptions and manipulations is to build a more reliable and diverse supply. Markets alone will not provide the reliability that our economy and society require. Reliability requires decisions made with longer perspectives and planning for disruptions. Since 2000, the electric system in Germany has been reinforced with enough solar panels to provide over 50 percent of the electric demand on some days, allowing the Germans to reduce dependence on gas from Russia and aging nuclear plants. During the same time, Spain and Portugal each added wind power supplies to their power grids equal to 19 percent of their electricity needs. Consumer protection requires this kind of supply diversity. By using renewable energy, we get protection from short-term thinking that makes us vulnerable to fuel supply shortages, as well as protection from global warming pollution impacts that build up gradually and are impossible to reverse quickly. Wind and solar for the power grid also bring investments in structural flexibility that reduce the likelihood of monopolies and shortages.

“As the Koch brothers’ greed is on display in the court of law, we can see additional lessons from the 2000 California energy crisis. Decisionmakers should ensure a portfolio of clean energy types as a better protection against shortages and high prices, and a mix of renewable energy supplies will protect against manipulations and fuel cut off.”