San Diego Union-Tribune

July 10, 2001

A-1

Refunds in jeopardy as talks fail
Judge sees possibility of offsets equal to the billions sought by state


By TOBY ECKERT
COPLEY NEWS SERVICE 

WASHINGTON -- Settlement talks between California and power
providers accused of electricity price gouging collapsed yesterday, and the judge who will now hand the case over to federal regulators set a course far from favorable to the state's demand for $8.9 billion in refunds.

"There are refunds due that total hundreds of millions of dollars and maybe a billion dollars," Curtis L. Wagner Jr., chief administrative law judge for the Federal Energy Regulatory Commission, said in previewing the recommendations he will make to the commission.

But Wagner, who mediated the talks, also suggested that power sellers are still owed sums for electricity "that probably are higher than any overcharges" for which they may have to pay refunds.

That opened the possibility that California could see no cash refunds, only a reduction in the billions of dollars the power generators and marketers claim they are owed by state entities and utilities.

Wagner said he would recommend that FERC hold a "fast-track hearing" to try to untangle the complex financial claims and counterclaims arising from California's power crisis.

Wagner also outlined a method that he said FERC should use for calculating refunds. 

While his proposed formula includes part of one method the state used, it contains several elements for calculating electricity costs that were favored by power sellers, who maintain that California's numbers are wildly exaggerated.

"I would suspect that would result in a number much below $8.9 billion," said Joe Ronan, vice president of Calpine, a San Jose-based electricity generator. "I think (Wagner's method) reflects more accurately what actually happened" in the state's dysfunctional power market.

But Michael Kahn, the state's lead negotiator, said Wagner "vindicated" California's core arguments.

"The hundreds of people who came here on the other side had argued to the mediator that there should not be any refunds, and that position was loudly rejected," said Kahn, chairman of the organization that manages most of California's power grid. 

"We think the numbers, even using the judge's formula, are going to be in the multiple billions. Whatever amount of money . . . is awarded to us, we will have viable claims in state court and other jurisdictions for the remainder. So what we have here is a situation where California will get its $8.9 billion."

Power sellers acknowledged that the threat of litigation remains worrisome to them. They sought an end to investigations of their conduct, and immunity from legal action as part of their bargaining position.

During two weeks of negotiations ordered by FERC, the two sides came nowhere near bridging their differences. Wagner said a number of power sellers had put forward offers that totaled $716.1 million.

"That's a long way from splitting the difference," he said. "In 15 days, you can't work miracles."

Yesterday -- the deadline for completing the talks -- the ill will between the two sides broke into the open as Wagner allowed reporters into the previously closed hearings.

Each side essentially accused the other of bargaining in bad faith and failing to put forward realistic proposals.

John H. Stout, a senior vice president at Reliant Energy Wholesale Group, said the state used "biased calculations" to arrive at its $8.9 billion refund demand. He also said that Reliant offered to knock $50 million off the $300 million it claims it is still owed for power sold into the state.

Kahn shot back that Reliant made the offer confidentially to Wagner and never approached the state.

Figures scrutinized

"This is the first time we've heard any of this information. And to give the impression that somehow there's been cooperation or forthcomingness, I think is misleading," Kahn said.

The state's refund calculations were scrutinized repeatedly during the talks. 

The $8.9 billion figure emerged from a study by the California power grid operator of charges for electricity between May 2000 and May 2001, a period when wholesale power prices soared.

Kahn said the figure was essentially duplicated when the state went back and calculated what power costs would have been if a pricing method instituted by FERC last month had been in effect for the entire yearlong period.

FERC ordered the pricing method in a bid to tame wholesale prices in the West.

In a partial win for the state, Wagner said he would recommend that FERC use the order retroactively as a basis for calculating refunds, an approach resisted by the power sellers.

But he said that FERC should only scrutinize charges going back to October 2000, and should make several key changes in how power-generating costs are calculated.

For instance, he said, FERC should determine the actual amount of gas heat it takes to generate a megawatt of electricity and use spot market prices in Northern and Southern California to determine the cost of gas, rather than a statewide average cost, computed monthly.

Fewer overcharges?

Those and other parts of the complex formula Wagner will recommend could increase the benchmark cost of producing power and drive down the amount of overcharges.

Kahn said that applying FERC's pricing method only back to October would put about $3 billion of the state's refund claim off-limits.

Brent Bailey, vice president and general counsel for Duke Energy North
America, said, "We think (Wagner's) modifications are certainly a vast
improvement over FERC's June 19 order and also certainly over (the state's) model."

In Sacramento, Gov. Gray Davis issued a statement characterizing the
electricity suppliers as pirates who refused to negotiate in good faith.

"While in the past the FERC has shown little, if any, interest in consumers, they now have the opportunity to redeem themselves by returning the $8.9 billion California has demonstrated it is owed," Davis said.

Despite the harsh rhetoric, both sides indicated that they would continue trying to reach one-on-one settlements.

Ronan of Calpine said the generator was close to making a deal with the state. Bailey said that while Duke would continue to push for a "global settlement" between all the parties, "We've had serious settlement talks with the state over the last few days and hope to continue."