San Diego Union-Tribune

July 13, 2001

Refund claim can't stand, judge says

By TOBY ECKERT 
COPLEY NEWS SERVICE 

WASHINGTON -- California's claim for $8.9 billion in refunds for
overpriced electricity "has not and cannot be substantiated," a judge
formally told federal energy regulators yesterday.

Offering his official version of closed-door settlement talks between
California officials and power sellers that collapsed Monday, Judge Curtis L. Wagner Jr. said the state "summarily rejected" a settlement proposal he devised. The state was slow to give him information he requested and "many parties" have not provided details of long-term power contracts, Wagner said in a written report to the Federal Energy Regulatory Commission.

"The problem was that there were those who simply did not want to
negotiate, but rather, stood firm on their litigation position with no
movement," Wagner said, without naming names.

Michael Kahn, who led the California delegation in the talks, said he
does not recall rejecting any settlement proposal from the judge. But he acknowledged that data from the state was slow in coming because of the amount of information involved and the short time frame to produce it.

Wagner, who mediated the settlement talks as FERC's chief
administrative law judge, said the state is due "hundreds of millions of dollars, probably more than a billion dollars . . . ," slightly raising an estimate he suggested earlier this week.

Kahn said that a methodology Wagner spelled out for calculating the
refunds would produce "greater than $1 billion and less than $5 billion" for the state. A firmer estimate is not available, said Kahn, chairman of the California Independent System Operator, which manages most of the state's power grid.

Whatever the figure, Wagner maintained that power sellers are owed more for unpaid bills by state entities and utilities than the state has coming in refunds.

"Can a cash refund be required where a much larger amount is due the seller? The chief judge thinks not," Wagner wrote in his 12-page report.

Instead, any refund due the state should come in the form of "offsets" to the bills owed to the power sellers, Wagner suggested.

Though Wagner had previewed his recommendations on Monday and his written report contained little that was new, it marked the start of another phase in the state's protracted quest for refunds for sky-high wholesale power costs. It is now up to the five-member FERC to decide the issue.

Kahn said the commission should reject Wagner's proposal for further
hearings and settle the issue as early as next week.

"We don't want any more delays," Kahn said, maintaining that the
commission has more than enough information to act.

Gov. Gray Davis has been adamant in demanding at least $8.9 billion in refunds. Davis has vowed to go to court, if necessary, to get them.

In his report, Wagner said he made numerous attempts to keep the
settlement talks going.

Wagner said California rejected a settlement proposal he devised on his own after more than a week of talks failed to generate a firm proposal from either side. He did not divulge details of his proposal.

Kahn responded: "I was there for 15 days. I don't remember summarily rejecting any proposal the judge made. . . . The judge bandied around a lot of different numbers." Wagner said the state also rejected five separate settlement offers from sellers but agreed to discuss seller-by-seller settlements.

Power sellers offered only $703.6 million in give-backs, Wagner said.
Many of the sellers conditioned their offers on a "global settlement" that Kahn said included an end to investigations of their conduct and an end to litigation.

Wagner told FERC it was "extremely difficult to obtain numbers to base a refund figure on, or for that matter, to even reach any decision on the size of the relevant market" for power. Each side submitted a competing set of data, he said, with some from California trickling in as late as Wednesday, two days after the deadline for completing the talks.

Nor have several California entities -- the Department of Water
Resources, investor-owned utilities and the ISO -- provided an estimate of how much money they believe they owe power sellers, Wagner said.

Kahn said the ISO had less than a week to pull together information
before the talks started.

"We were talking about literally millions of transactions. We had
people working day and night responding to the judge's requests and we got it to him as quick as we could," he said.

Wagner recommended that FERC order "a trial-type, evidentiary hearing . . . on a 60-day fast-track schedule" to sort out the financial
complexities.

He outlined a formula for determining appropriate power costs dating
back to Oct. 2. The formula relies on a pricing method instituted by FERC last month in a bid to tame wholesale power prices in the West.

Power sellers opposed using the FERC method. However, Wagner proposed several changes to the way power production costs would be calculated, a move favored by the sellers.