Utilities Owe Refunds to Electricity Buyers

There’s an ancient principle to the effect that even if you’re the unwitting recipient of an undeserved bonanza -- say a bank mistakenly funnels a million bucks of someone else’s money into your ATM account -- you can’t keep the money.

Apparently this notion hasn’t registered at the Los Angeles Department of Water and Power. The DWP has so far refused to concede that it should return the estimated $250-million windfall it drained from the pocketbooks of California ratepayers during the energy crisis in 2000 and 2001. That’s when sleazy maneuvers by the likes of Enron drove electricity prices up, and innocent municipal generators like DWP pocketed the windfall like everybody else who sold power.

Did I say innocent? A fair amount of evidence suggests that DWP and other munies knowingly joined in this jolly rip-off -- all the more reason that they should cough up. (DWP, for its part, has denied that allegation as “sheer speculation.”) By keeping the money, of course, the municipal utilities do a favor for their local customers, but only at the expense of everybody else in the state.

This issue, which has been percolating through the regulatory and court systems for years like a digestive complaint, resurfaced last week when Southern California Edison Co., Pacific Gas & Electric Co., and the California Electricity Oversight Board sued DWP and 20 other public power agencies for refunds of their windfall profits. The defendants include the cities of Burbank, Glendale and Pasadena and a few out-of-state entities. The plaintiffs are asking for more than $500 million in restitution, of which DWP’s share is the largest. DWP refused to comment on the lawsuit.

As followers of the electricity deregulation train wreck may recall, the state contends that power generators overcharged California consumers $9 billion between May 2000 and June 2001 by gaming the power market. The Federal Energy Regulatory Commission has recalculated what the prices would have been in a normal market during some of that period, and concluded that more than $3 billion in refunds is warranted. The state, meanwhile, has reached settlements totaling $4.5 billion with nine generating and trading companies. (There’s some overlap between the FERC figure and the settlements.) Other claims are pending.

Before considering the role of the municipal generators, it may be useful to revisit how the electricity market functioned during the crisis.

At the time, the state’s largest utilities purchased most of their power on the open market, seeking bids from generators up to a day in advance of when it was needed. Two state agencies, the state Power Exchange and the California Independent System Operator, or Cal-ISO, operated auctions at which power was bought and sold.

Electricity generating and trading companies would offer their power at prices that were supposed to reflect their costs of generation. The PX or ISO would buy power starting with the lowest bid. When it bought up all that was needed to fill demand for a given period, the price charged by the highest bidder whose power was purchased would be paid to all sellers.

For example, let’s say that the state needed to buy 20,000 megawatt-hours to meet demand for a given Wednesday afternoon at 1 p.m. Twenty or 30 generators or traders would bid to sell from a few hundred to thousands of megawatt-hours each, at prices ranging from $35 to perhaps $200 per megawatt-hour. The PX would start with the $35 bidder and continue buying until it acquired all 20,000 megawatt-hours. The price of the final purchase -- say, $175 -- would then be paid to all sellers, regardless of their initial bids. But those who bid so high that their power didn’t get bought were left out in the cold.

In a normal market, each generator’s bid would be determined by its actual cost of producing power. Its hope would be that another company with less-efficient plants would sell its power at a higher price, and that it could pocket the difference as profit. Although a generator could theoretically bid any price, that’s a gamble -- if it tried to eke out a few extra bucks per megawatt-hour, it might inadvertently overbid, and consequently sell nothing. By giving generators an incentive to bid as low as they could without incurring a loss, the market was supposed to keep prices rational.

Obviously this market would break down if the bidders actually knew how much power was to be bought, if they manipulated demand so an inordinately large quantity was needed, or if they colluded in setting their bids. What would be a risky high bid in a normal market would become a sure thing in a corrupted market.

State and utility officials allege that all three conditions occurred in 2000-01, partially through the trading scams whose fanciful names have become part of energy crisis lore: “Death Star,” “Ricochet,” “Fat Boy” and so on. Power generators allegedly used such maneuvers to create the illusion of power shortages where none existed or to create real shortages artificially. They also allegedly shared information about power plant outages and other conditions that shouldn’t have been public, which also enabled them to skew their bids high.

Even if they’re innocent of wrongdoing, the municipal utilities plainly owe ratepayers a refund of their windfall profits. But they’ve rebuffed formal claims from the state and the big utilities. As a result, Edison, PG&E;, and the state board filed last week’s lawsuit.

There’s one last intricacy worth mentioning. Although the municipal utilities were net

sellers of power during the

energy crisis, at times most, if not all, also purchased overpriced power. As such, they’re in line to receive some of the refunds to be paid by Enron and other participants. To date, none of the municipalities has disclaimed a right to that money. In other words, they want to be refunded what they overpaid, but they don’t want to pay what they overcharged. That’s as good a picture as any of the state of public service in today’s world.

You can reach Michael Hiltzik at golden.state@latimes.com and view his weblog at

latimes.com/goldenstateblog.