Court Rules Against FERC

Rebuking federal regulators, a U.S. appeals court said Thursday that the Federal Energy Regulatory Commission failed to protect California consumers during the energy crisis and ordered the panel to consider an additional $2.8 billion in refunds.

The decision by the U.S. 9th Circuit Court of Appeals rejected the regulators’ contention that they lacked legal authority to require refunds for the first phase of the market meltdown in the summer of 2000. The ruling inflamed the long-running dispute over the energy crisis of 2000 and 2001, sparking new calls for refunds and placing unexpected pressure on the federal energy panel.

The state has sought $9 billion in restitution for electricity overcharges during the crisis -- a time of record power prices, rolling blackouts and severe financial problems for Edison International’s Southern California Edison Co. and PG&E; Corp.’s Pacific Gas & Electric Co.

However, FERC has suggested that the final tally could be about $3 billion, much of which the utilities owe their power suppliers. The ruling Thursday by the three-judge panel in San Francisco sets the stage for a near doubling of the refunds.

Where any money winds up -- that is, how much would be pocketed by the utilities and how much would flow through to customers -- is ultimately to be determined by state regulators.

The court decision was applauded by California politicians who urged federal regulators to push ahead with a refund process that has been slowed by an array of technical obstacles and legal disputes.

The suit was brought by California Atty. Gen. Bill Lockyer, who is engaged in various legal skirmishes with FERC over the energy crisis.

“I think the 9th Circuit Court’s decision is a fantastic one,” Gov. Arnold Schwarzenegger declared in a statement.

“The court’s action today gives clear direction to FERC that they should issue significant refunds to California ratepayers who were overcharged,” Schwarzenegger said.

Lockyer indicated that the state would petition FERC to increase the refund by $2.8 billion. “This is a huge victory for California ratepayers, and vindication for state officials who have been struggling for years to wrench justice out of FERC,” he said.

Lockyer maintained that the court echoed the state’s own criticisms of FERC: “The watchdog was sleeping during the robbery, it failed to enforce its own rules, and it unduly restricted remedies for consumers with artificial chains.”

Although the legal dispute involved a seemingly obscure matter -- the failure of energy suppliers to meet their federal obligations to report on all their transactions -- the issues at stake went to the core of FERC’s authority to demand refunds for charges that weren’t just and reasonable.

The panel sought to put the decision in the most favorable light, noting that the court reaffirmed FERC’s mandate to oversee a market-based system for wholesale electricity, rejecting an argument of Lockyer’s.

That finding was “a welcome victory,” said Bryan Lee, a FERC spokesman. Had Lockyer prevailed on that point, “it would have thrown competitive power markets into chaos.”

The commission, Lee added, will review the court’s finding to determine “the scope of the remedial authority” to grant refunds for the early phase of the energy crisis.

Federal regulators argued that the Federal Power Act requires them to wait 60 days after a complaint has been filed to consider refunds.

In California’s case, that has largely eliminated refunds before Oct. 2, 2000.

The court ruled Thursday that no such restriction exists. The justices said FERC “misapprehends its legal authority” by insisting that it can’t order refunds for overcharges from the summer of 2000.

“With FERC abdicating its regulatory responsibility, California consumers were subjected to a variety of market machinations,” the court found.

“This is a very significant decision,” said Roger Berliner, an energy lawyer with law firm Manatt, Phelps & Phillips. “It states in no uncertain terms that FERC has retroactive refund authority where suppliers to California and throughout the West were violating rules.”

Sen. Dianne Feinstein (D-Calif.) fired off a letter to FERC Chairman Patrick H. Wood III urging immediate action on the state’s request for $9 billion in refunds.

Sen. Maria Cantwell (D-Wash.) said the ruling vindicated those who questioned whether FERC was performing adequate oversight: “I was convinced the commissioners weren’t doing their job, and now the courts are saying the same thing.”

Loretta Lynch, who was president of the California Public Utilities Commission during the crisis, called the decision “a major win for California.”

But Lynch, who is still on the PUC, expressed concern that the court told FERC to set the size of the refunds, which “does allow FERC lots of mischief.”

Meanwhile, a representative of the energy industry cautioned that the ruling infuses new uncertainty into the regulatory process, which some had hoped might be wrapped up this year.

“I would expect that regardless of the financial outcome, which is difficult to speculate at this time, it will add another year or so to ... determining the final refund amount,” said Gary Ackerman, executive director of the Western Power Trading Forum in Menlo Park, Calif. “And then there will be appeals.”

Times staff writer Elizabeth Douglass contributed to this report.