Referee Shift Seen in Refund Talks

For the better part of 15 days of closed-door negotiations, the federal mediator in California’s price-gouging case bandied about the possible dimensions of a settlement.

Curtis L. Wagner Jr. went as high as $4.5 billion, fully half of what California said it had been overcharged by out-of-state electricity suppliers.

But Wagner got no takers for that figure. And in the end, when talks ended Monday with no deal between the state and the energy generators, he said publicly that $1 billion was closer to the truth.

Participants in the talks, speaking on condition that they would not be identified, said Wagner appeared to have been persuaded by the power suppliers that California’s $8.9-billion overcharge estimate was based on unreliable economic analysis.

The state’s analysis “is fatally flawed and cannot be used to . . . determine overcharges or refunds,” William Tabors, an MIT economist retained by one of the companies, said in an affidavit that is part of a transcript released by the judge.

“I certainly think Tabors was very persuasive,” said an industry lawyer.

By contrast, at another point, Wagner questioned whether California regulatory agencies were truly independent of Gov. Gray Davis, saying their representatives to the talks might as well put on “clown suits.”

Now the issue is about to move to the governing board of the Federal Energy Regulatory Commission, which had given Wagner the job of trying to broker a settlement. The California side will have one more chance to make its case. But it will have to go back to its spreadsheets and generate numbers that can withstand scrutiny.

Wagner is to send his formal recommendation to the FERC board in a week, and the board is expected to hold a hearing on how to calculate a refund before finally deciding whether California is owed one.

California’s delegation was disappointed by what it perceived as a shift in the mediator’s sentiments during the two weeks of talks. “For [Wagner] to do what he did was a 180-degree turn,” said a participant familiar with the delegation.

Clues to the arguments that swayed the judge can be found in a transcript he released of this Sunday’s session, the only portion of the deliberations that has been made public.

During his public comments at the end of the talks Monday, Wagner echoed some of the technical points that Tabors, the industry economist from MIT, made in the transcript.

California’s delegation was headed by San Francisco lawyer Michael Kahn, chairman of Cal-ISO, the California Independent Systems Operator, which runs the state’s electricity grid. An industry lawyer said the decision to have Kahn, who is a political supporter of the governor but who has no experience with FERC, head the delegation may have hurt the state.

But a source close to the Californians said Kahn was an effective leader. “We were better served by the fact that we didn’t have a FERC lawyer,” said the source.

At the end of the first week of negotiations, Wagner delivered a tongue-lashing to all sides, questioning the political independence of the Californians but also growling at the generators. He warned the companies that they might be ordered to refund “substantially more” than $2 billion.

On July 2, Wagner told the California delegation he was disappointed with the offers he had received from the generators. Later, he revealed they added up to $670 million. That total rose only $46 million by the conclusion of the negotiations.

The next day, Wagner floated a possible deal: $2.5 billion in cash payments and $2 billion in discounts on long-term power contracts.

The Californians were intrigued. “When you’re talking about $4.5 billion, you’ve got to sit down and start thinking about it,” said a source close to the delegation.

An industry participant sized it up differently. “That proposal was floated out one day and never really went anywhere,” he said. “No one seemed interested.”

From there the talks bounced up and down before finally ending on a decidedly down note.

On Sunday, Wagner scheduled a session to go over once more how California had estimated that it had been overcharged by $8.9 billion. Once again, he came away unconvinced. But this time there was no next time: On Monday, Wagner ended the talks and prepared to make his recommendation to the FERC board.

*

RELATED STORY

PG&E; ruling: A judge bars ratepayers group from bankruptcy proceedings. B8