San Diego Union-Tribune

June 26, 2001

State, generators lock horns in talks;  Davis' $8.9 billion refund call too high, judge says

By TOBY ECKERT 
COPLEY NEWS SERVICE 

WASHINGTON -- California officials staked out a tough bargaining position yesterday at the start of talks aimed at resolving disputes over refunds and other thorny issues arising from the state's power crisis.

California's lead negotiator, Michael Kahn, called the $8.9 billion in refunds Gov. Gray Davis has demanded from power sellers "an extremely conservative estimate" and indicated the state would reserve the right to press for more in court.

The judge overseeing the hearings has called the state's refund estimate too high.

Some power industry sources, meanwhile, were pessimistic about whether the negotiations would lead to a settlement between the long-warring sides, given the state's position.

Some 150 representatives from state agencies, cities, utilities and numerous power-generating and marketing firms packed a hearing room at the Federal Energy Regulatory Commission for the first day of the talks. The negotiators will attempt to settle the state's claim that power sellers have gouged California for more than a year, and the sellers' contention that they are still owed billions of dollars for power they provided.

Pacific Northwest states were also invited into the discussions and are seeking $6 billion in refunds from the power companies.

The electricity sellers deny wrongdoing, saying several factors converged to drive up prices, including California's faulty power deregulation law, a huge
spike in the price of natural gas that is used to generate most electricity in the state, and a short supply of electricity.

Speaking to reporters during a break in the closed-door session, Kahn said the state would not trim its estimate of what it believes it is owed for electricity overcharges. Kahn chairs the Independent System Operator, the organization that manages most of California's power grid.

"Let there be no mistake. We are not going to ask the courts or FERC in proceedings for $9 billion. We're going to ask for a lot more money than that in our litigation position," he said. "The governor has said that he believes FERC should order refunds at $8.9 billion now."

FERC Chief Administrative Law Judge Curtis Wagner Jr., who is mediating the talks, has said he believes the refund amount the state is seeking is far too high. A more realistic figure would be around $1 billion to $2.5 billion, he said.

Wagner also said that one of the issues up for discussion would be whether power generators should be offered immunity from current and future legal
action if a settlement is reached.

Kahn argued that the time period subject to refunds should start in May 2000, when power prices started a dramatic upward spiral in California. Wagner had indicated he would scrutinize prices going back only to October, when FERC started examining the market.

When California officials took the price curbs that FERC approved last week for future power sales and applied them to power charges going back to May 2000, the refunds owed to the state would came to roughly $9 billion, out of $43.8 billion in total sales, Kahn said.

"I am absolutely confident that we have valid legal claims back to May. There is no way that we are going to do anything to compromise those claims. That
includes last summer, when San Diegans were terribly overcharged," Kahn said.

"Last summer is a very important period to Californians that are seeking redress. And we are not going to abandon those claims just because . . . FERC has decided not to include them," he added.

Wagner asked the California officials to provide more information to back their numbers.

Power sellers continued to maintain that Davis' estimates of excessive power charges are wildly inflated. One group that represents generators gave a bleak prognosis on the chances for a settlement.

"It's hard for us to contemplate how we're going to come to some agreement with 130 players in the room," said Gary Ackerman, executive director of the
Western Power Trading Forum.

"We stand by our business dealings in California," said Richard Wheatley, a spokesman for Reliant Energy, one of the companies targeted by the state for refunds. "Our power was priced competitively."

But Wagner, a courtly veteran of such complex discussions, appeared to take the sparring in stride.

"Everybody has to stick to their guns for a while," he told reporters after the first day of talks ended. "Everybody has their say, and now we're getting ready to get down to brass tacks."

Still, the starkly different positions taken by the state and the power sellers illustrate the daunting task facing Wagner after months of bitter charges and
countercharges between the two sides. FERC, which ordered the settlement talks as part of its price-curb order, gave the parties 15 days to reach an agreement.

If they fail, Wagner will have an additional seven days to make a recommendation to FERC.

"I can tell you now that you are far better off to work out the refund issue in these settlement proceedings," Wagner admonished the parties before the hearing room doors were closed to the media. "The time to put California's past energy problems to rest and structure a new arrangement for California's energy future is now."

Wagner, who underlined his role as a broker by sitting among the parties to the talks instead of presiding from the bench, also warned the participants not to talk to reporters about specific negotiations.

While most of the attention has focused on refunds, Wagner laid out a broad agenda for the talks, including:

Moving more power sales in California into long-term contracts and away from the volatile spot market.

Ensuring there is a "creditworthy party" to pay for power in California. Resolving concerns about the independence of the California grid manager,
the Independent System Operator, whose board is appointed by Davis.

Exploring natural gas issues, including transportation constraints and high prices in Southern California.

The bankruptcy of California's largest utility, Pacific Gas and Electric, which sought protection from creditors after it was unable to pay soaring wholesale
power costs.