California May Not Deserve Utility Refund, Referee Says


A federal mediator said Monday that electricity suppliers overcharged California by only a fraction of the nearly $9 billion claimed by Gov. Gray Davis and suggested that the state might ultimately receive no refund because its utilities' unpaid bills exceed the overcharges.

The mediator, Curtis L. Wagner, said after two weeks of hearings that refunds of up to $1 billion were probably justified--a fraction of California's claim. But in an indication that the state might come away from the proceeding empty-handed, Wagner added: "Can a refund be required when overcharges are less than the outstanding bill? The case judge thinks not."

Wagner said he would present his conclusions to the Federal Energy Regulatory Commission, which had given him 15 days to try to engineer a settlement between California and the energy suppliers. Monday was the 15th day.

Because no deal emerged from the closed-door negotiations, Wagner has seven days to recommend a settlement to FERC's governing board, which may then take months to resolve the issue.

Power generators and representatives of the governor each claimed qualified victory in the complex negotiations.

"I don't know if giving a billion is ever a victory," said Brent Bailey, general counsel for Duke Energy. "But certainly, to the extent it helps refute California's claims, it's a victory."

Michael Kahn, the San Francisco lawyer who represented Davis in the talks, pointed out that FERC had not yet used a formula that Wagner suggested Monday to calculate refunds. He predicted that the figure resulting from this formula would be in the billions of dollars.

Davis, in the Bay Area to help open a new power plant in Pittsburg, vowed to pursue the full $9 billion--and more--through lawsuits.

"We're in a war with generators, mostly out of state, that are trying to bleed us dry," he said. "Clearly, they don't have the best interests of Californians at heart, and they're trying to ship every dime out of our state and back to Houston, Texas."

But Wagner, a veteran mediator who is also FERC's chief judge, appeared to be less than persuaded by extensive technical presentations on how the state calculated its refund demand.

"There are refunds due that total hundreds of millions of dollars, and maybe a billion," Wagner said. "At the same time, there are sums due that are probably higher than the overcharges."

FERC's governing board ordered the negotiations on June 18, the same day it approved sweeping all-day price limits on wholesale electricity throughout the West.

But the task proved too complicated. Wagner said he would ask FERC's board to conduct a fact-finding hearing because he found it difficult to obtain hard financial information from the parties. "People don't trust each other," he said.

How much California utilities owe the generators, for example, is still a matter of dispute and guesswork, even though it is fundamental to any refund calculation.

PG&E; said that when it filed for bankruptcy in April, it owed roughly $4 billion. Edison said it owed $1.5 billion as of January.

But according to an industry source, the figures used in the negotiations were different, totaling $4.5 billion. Of that, an estimated $1 billion to $2 billion was owed to so-called "competitive suppliers" under FERC's jurisdiction. The agency has no authority over publicly owned generators, such as the Los Angeles Department of Water and Power.

In one small sign of compromise, Wagner disclosed Monday that he had received a total of $716 million in settlement offers from generators.

Of that, $510 million came from the so-called "Big Five" generators--AES/Williams, Duke, Dynegy, Mirant and Reliant. John Stout, a Reliant Energy vice president, said his company's offer was $50 million of the $300 million it claims it is still owed.

Another $125 million was offered by Powerex, the power-marketing branch of BC Hydro, a government-owned electric utility of British Columbia. A group of 15 energy marketers offered $49.6 million. Six municipal utilities offered $6.5 million. And a group of power sellers outside California offered $25 million.

One company, Calpine, said it will pursue a settlement with the state on its own.

The judge compared the question of how to balance overcharges against unpaid debt by using an analogy about a car accident. Suppose, he said, he crashed into someone who owed him a lot of money.

"I may have done some damage, but if it isn't as much as you already owed me I shouldn't have to pay you anything," he said. "I'll just reduce your debt."

The state's $8.9-billion figure was based on a series of Cal-ISO estimates that came under attack from power-marketers, who insisted they rested on faulty methodology and grossly exaggerated alleged excess profits.

Reliant's Stout dismissed the figure as the product of "a secret black box."

Even Cal-ISO officials warned in internal documents that the estimates rested partly on assumptions that could be significantly wrong, and they cautioned against characterizing the estimates as alleged overcharges. Further study and more information would be needed before the estimates could be used to demand specific refund amounts, according to a Cal-ISO letter to Congress last month.

Still, as the settlement talks opened, Davis administration officials and spokesmen for Cal-ISO said they stood firm on the $8.9-billion figure, calling it a conservative estimate of the unfair profits owed the state by power-sellers.

Wagner recommended splitting off from the California case about $500 million in overcharges claimed in the Pacific Northwest.

His conclusions--even when delivered in his formal report to FERC's board--are unlikely to be the last word. The commission may adopt, reject or amend his recommendations. Even then, few observers expect the case to be over.

The California power crisis is likely to be the most complex and costly case ever handled by the agency, which functions as a kind of national utilities commission. Some lawyers say the board's decision will surely lead to years of litigation.


Staff writers Nancy Vogel, Eric Bailey and Rich Connell in Sacramento contributed to this report.



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