Antitrust Case Revived against Gas Traders Blamed for Sparking Energy Crisis

Thursday, April 11, 2013

An antitrust lawsuit over manipulation of the natural gas market―a precursor to   manipulation of the electricity market and the California energy crisis of 2000-2002―has been given new life by the 9th U.S. Circuit Court of Appeals.

The lawsuit by retail gas buyers grew out of litigation begun in 2001 and seeks compensation from more than a dozen companies for the exorbitant prices they paid when the market was rigged. The price of natural gas, which also contributes to setting the price of electricity, spiked at one point in Southern California from a few dollars per BTU to $58.

CMS Energy Corp, Duke Energy Corp, Kinder Morgan Inc and ONEOK Inc. were among the defendants named in the suit.

U.S. District Judge Philip Pro ruled in 2011 that the federal Natural Gas Act was the controlling authority and preempted claims that cited California’s antitrust laws. A three-judge panel of the appellate court reversed the decision (pdf) and let the suit proceed. Judge Carlos Bea, who wrote the court’s decision, said the legislative intent was clear that states were to retain their traditional roles regulating the natural gas industry.   

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.

Traders took advantage of the state’s partial energy deregulation in 1998. Wholesale prices were effectively deregulated, but retail prices were capped, squeezing the state’s three energy distributors.   

FERC said the gas traders and producers goosed indexes used for setting prices by giving incorrect information to the two trade magazines that 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.

Buyers also claimed the traders “washed” their trades with offsetting moves that distorted demand and volatility.    

The natural gas market manipulation that led to the electricity market manipulation caused rolling blackouts in California and undue hardship to 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.

–Ken Broder


To Learn More:

Antitrust Case Tied to California Energy Crisis Revived (by Jonathan Stempel and Jeanine Prezioso, Thomson Reuters)

Antitrust Claims Against Gas Traders Revived (by Annie Youderian, Courthouse News Service)

FERC Says California Was Swindled (San Francisco Business Times)

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