California kicked off the new millennium with an energy crisis, exacerbated, if not precipitated, by manipulation of the national natural gas market, which led to the eventual collapse of Enron.
The result was rolling blackouts and undue hardship for millions (especially the poor). Democratic Governor Gray Davis was recalled and replaced by Republican Governor Schwarzenegger. Pacific Gas & Electric Co. filed for bankruptcy. The Public Policy Institute of California put the cost to the state at $45 billion.
This week, 13 years later, the U.S. Supreme Court ruled 7-2 that some of the nation’s largest energy trading concerns could be sued (pdf) for violation of state antitrust laws, despite federal authority in such matters.
More than 20 state governments participated in the case, which had consolidated other state and federal litigation brought by natural-gas buyers, like Learjet Inc. and Briggs & Stratton Corp., who got hammered years ago by 10-fold increases in energy prices.
But California was not one of them.
“We could have been in this case,” then-president of the California Public Utilities Commission (PUC) Loretta Lynch told the San Francisco Chronicle. (She is not the same Loretta Lynch as the current nominee for U.S. attorney general.) But a majority vote by the PUC to join was rejected by the Schwarzenegger Administration. Lawsuits could still be filed in the future under California anti-trust laws.
The jurists, minus Chief Justice John Roberts and Justice Antonin Scalia, upheld a decision by the Ninth Circuit Court of Appeals. The appellate ruling had reversed one by U.S. District Judge Philip Pro in 2011 that the federal Natural Gas Act was the controlling authority and preempted claims that cited California’s antitrust laws. That let energy-trading companies, including Duke Energy CO., ONEOK Inc. and American Electric Power Co., off the state antitrust hook despite their known culpability.
A 2003 report by the Federal Energy Regulatory Commission (FERC) detailed a host of actions by gas traders that drove the price artificially higher, which, in turn, contributed mightily to pushing electricity prices higher. That engendered a state of chaos, which opened the door for even more energy market manipulation, including pipeline closures by Texas energy consortiums.
FERC said the gas traders and producers manipulated indexes used for setting prices by giving incorrect information to the two trade magazines that regularly published them. Gas Daily collected its information through telephone conversations with industry sources and Inside FERC went with unconfirmed spreadsheet submissions via email. FERC found that many of the companies would pass the spreadsheet around before turning it in and any trader could adjust the numbers.
Justice Stephen Breyer took note of this when he wrote for the majority, “The free-market system for setting interstate pipeline rates turned out to be less than perfect.”
Breyer acknowledged the pre-eminent position of the federal government in energy matters, but said it did not preclude participation by the states in the area. However, he made it clear the traders could still prevail if they can successfully argue that California’s anti-trust law interferes with federal rate-setting process.
The high court’s decision clears the way for states, businesses and consumers to sue energy suppliers for decade-old losses.
Scalia predicted the decision would create chaos. “The court's make-it-up-as-you-go-along approach to preemption has no basis in the Act, contradicts our cases, and will prove unworkable in practice,” he wrote in dissent.