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SACRAMENTO — Unchecked free-market forces drove up the price of natural gas to Southern California Edison by about $750 million over the last year, an industry consultant testified Wednesday. 

Paul Carpenter told the Assembly Electricity Oversight Subcommittee the price spikes came after the El Paso Natural Gas Co. contracted first with Dynegy and later with its own marketing affiliate, El Paso Merchant Energy, to control the pipeline capacity. 

The California Public Utilities Commission estimated a year ago that overcharges by the companies that control natural gas flow drove up prices by $100 million a year to California gas and electricity customers. 

But PUC attorney Harvey Morris said that was before last summer’s price spikes, which he blamed on natural gas suppliers using a “monopoly” to “game the system.” 

“It’s way worse than we could possibly have imagined,” Morris said after testifying before the subcommittee. “It’s obviously way higher than $100 million.” 

Natural gas rates at the California border generally tracked national prices until November, when they spiked as high as 11 times higher than the price of natural gas elsewhere in the nation, Carpenter said. 

“I have never seen gas prices like this anywhere in the world,” said Carpenter, who has been studying the energy market for 20 years for Cambridge, Mass.-based consultant The Brattle Group. The Brattle Group was hired by Edison to study the natural gas market. 

Officials with El Paso and other natural gas suppliers have denied illegally manipulating the market. They are scheduled to testify Thursday. El Paso officials did not return telephone calls for comment Wednesday. 

The committee is one of two legislative committees exploring whether illegal market manipulation in the electricity and natural gas markets has driven up California’s energy costs. 

“This is a market that is plagued by the exercise of market power,” Frank Wolak, chairman of the California Independent System Operator’s Market Surveillance Committee, told the Senate Select Committee to Investigate Price Manipulation of the Wholesale Energy Market. The ISO runs the state’s power grid. 

However, “there is no law against me saying, ’I’m not going to sell to you,”’ Wolak said. Market manipulation only becomes illegal when there is collusion, Wolak said, and such evidence is hard to find. 

Electricity generators and natural gas suppliers say a severe supply and demand imbalance – not market manipulation – has led to higher prices. 

“Everybody’s busy doing investigations. They’re not interested in solving the problem,” said Independent Energy Producers Executive Director Jan Smutny-Jones. 

Investigations “are wasting everybody’s time,” Smutny-Jones said, adding that previous probes and lawsuits have uncovered no wrongdoing. He said the state’s power problems came because state regulators denied utilities the chance to sign long-term energy contracts when they had the chance. 

“People have been playing by the rules,” Smutny-Jones said. 

But the Senate committee’s first witnesses are ISO officials who authored studies that claim the state paid more than $6 billion too much for power last year. 

Committee chair Joseph Dunn, D-Garden Grove, also has slated state Auditor Elaine Howell, who last month blamed buyers and sellers for skyrocketing electricity costs. Dunn also has scheduled future testimony from state, federal, academic and private investigators studying the power market. 

He invited five major generators to attend the committee’s second hearing next week. All five – Reliant, Dynegy, Williams Energy, Duke Energy and Mirant – say they are eager to cooperate and clear their names, Dunn said. 

Dunn asked the five for a total of 86 specific documents. If the companies feel they cannot provide documents because of legal or confidentiality concerns, Dunn said he will subpoena them. 

Smutny-Jones said investigators appear to be growing desperate to blame the state’s natural gas and electricity price hikes on illegal market manipulation instead of natural market forces. 

He cited Attorney General Bill Lockyer’s announcement last week that any informant who helped prove wrongdoing would be entitled to a percentage of the state’s recovery he estimated could range from $50 million to hundreds of millions of dollars. 

“If the state’s offering a $50 million reward, they haven’t found anything,” Smutny-Jones said. “I don’t think you’re going to find the fact that anybody did anything criminal here.” 

Assemblywoman Jenny Oropeza, D-Long Beach, said she believes otherwise after Wednesday’s testimony: “I think it is very clear there was some price manipulation going on.” 

But Assemblyman John Campbell, R-Irvine, isn’t sure there was anything illegal. 

“There clearly are market forces at work, that’s evident,” Campbell said. “Whether you make the jump to market manipulation ... I haven’t seen conclusive evidence that leads me to make that jump.” 

WHAT’S NEXT 

• The Assembly’s Energy Oversight Subcommittee plans to resume hearings Thursday in its inquiry into California’s highest-in-the-nation natural gas prices with testimony from gas companies. 

• Davis’ representatives continue negotiating with Sempra, the parent company of San Diego Gas and Electric Co., to buy the utility’s transmission lines. Davis says he expects to have an agreement within two weeks. 

• The state Public Utilities Commission will decide Thursday whether to investigate why a key block of power generators is staying off-line despite regulators’ order last month that they start getting paid by the state’s utilities. Independent Energy Producers Executive Director Jan Smutny-Jones says the generators can’t afford to operate because they are still owed more than a billion dollars, and because the PUC’s rates don’t cover their operating costs. 

The problem: 

• High demand, high wholesale energy costs, transmission glitches and a tight supply worsened by scarce hydroelectric power in the Northwest and maintenance at aging California power plants are all factors in California’s electricity crisis. 

• Edison and PG&E say they’ve lost nearly $14 billion since June to high wholesale prices that the state’s electricity deregulation law bars them from passing on to consumers. PG&E, saying it hasn’t received the help it needs from regulators or state lawmakers, filed for federal bankruptcy protection April 6. 

• Electricity and natural gas suppliers, scared off by the two companies’ poor credit ratings, are refusing to sell to them, leading the state in January to start buying power for the utilities’ nearly 9 million residential and business customers. The state is also buying power for a third investor-owned utility, San Diego Gas & Electric, which is in better financial shape than much larger Edison and PG&E but also struggling with high wholesale power costs. 

•The Public Utilities Commission has raised rates up to 46 percent to help finance the state’s multibillion-dollar power-buying.