Union Tribune

June 11, 2003

State challenges efforts to reduce power refunds


WASHINGTON California officials are disputing claims by power generators that could reduce refunds to the state for high-cost electricity sold during the power crisis.

The generators are trying to reduce their refund liability by more than $500 million by making "grossly inflated" claims about what they paid for natural gas to fuel their power plants, the California officials argue. The companies deny the allegations, saying they can back up their data.

At issue is an obscure part of a March ruling by federal regulators that set the stage for refunds to the state estimated at $3.3 billion. The ruling rested on a finding by investigators for the Federal Energy Regulatory Commission, or FERC, that natural gas prices had been widely manipulated during the 2000-01 power crisis.

Natural gas is used to produce much of the electricity Californians consume.

In response, FERC said it would change the method used to calculate electricity refunds due to California. The new calculation was to be based on natural gas prices at production hubs plus transportation costs, rather than published price indexes that FERC had concluded were subject to manipulation.

Power companies were given a chance to reduce their potential liabilities by submitting evidence that they also were victims of the manipulation.

"Many generators paid these distorted gas prices (to run their plants), and fundamental fairness dictates that they be able to recover their costs," the FERC investigators concluded.

The California officials who have been pressing the state's case for refunds totaling $8.9 billion say they do not object to the generators recovering unfair gas costs. But in a recent filing with FERC, they said claims made by the companies in mid-May "are unsupported by evidence and other data and appear to be grossly inflated."

The officials, representing several state agencies and California's two largest utilities, estimated that the companies "seek to reduce their refund obligations by more than half a billion dollars." The companies include Reliant, Duke, Dynegy, Williams and Mirant.

"There are many instances where they're appearing to grasp at any straw they can to reduce their refund liability," said Vickey Whitney, a California deputy attorney general. "The biggest thing the California parties want to see here is a fair method to represent actual gas costs."

The California officials claim the companies included the cost of power plant fuels other than natural gas in their estimates, are trying to recover costs for producing electricity not sold in the state and failed to account for gas they resold.

Some of the companies seeking to reduce their electricity refund liabilities also were accused by FERC investigators of trying to manipulate natural gas prices. Erik Saltmarsh, chief counsel for the California Electricity Oversight Board, said FERC should impose "an extraordinary burden" on those companies as it scrutinizes their claims.

The generators counter that their gas-cost estimates are accurate.

"We made a submission based on our understanding of the commission's requirements and the costs that we paid," said David Byford, a spokesman for Dynegy.

Gary Ackerman, executive director of the Western Power Trading Forum, an industry group, said the generators view recovery of inflated gas costs as crucial to the fairness of the refund process.

"They have the invoices to back those up," he said of the data submitted by the companies.

The California officials want FERC to use a complex, six-step process for determining the companies' gas costs.

In a recent filing with FERC, Reliant called California's claims "frivolous" and said the proposal for calculating gas costs would lead to "yet another exhaustive foray into the generators' files."

Staff experts at FERC have heard arguments on the issue from both sides. The commission has not said when it may act on the refunds.