Power Sellers Told to Justify Prices or Refund $69 Million
In its first-ever rebuke of sellers in California’s power market, the Federal Energy Regulatory Commission on Friday ordered 13 companies to justify their prices or reimburse California $69 million.
State officials welcomed the ruling as a significant shift in the commission’s approach, given its earlier refusal to order rebates in a market it deemed “dysfunctional” and vulnerable to manipulation.
The refunds, if upheld on review, would represent a small fraction of what the state and utilities have demanded as penalties against electricity generators and marketers, but “you have to put it in context,” said Charles Robinson, general counsel for the California Independent System Operator. He called the action “unprecedented” in a wholesale market.
The FERC order, based on its review of electricity sales in January, comes one week after state officials petitioned the federal commission to consider ordering the refund of $550 million that was potentially overcharged to California utilities in December and January.
Nevertheless, the symbolic value of Friday’s order outweighs the dollar amount, Robinson suggested.
“The practical effect is that suppliers will recognize . . . that someone is watching them,” said Robinson, whose agency manages the statewide power grid. “When they put in their bids, they may have to justify them and they have to take seriously the possibility that they may have to make refunds.”
The refunds would be collected by the Independent System Operator and sent to Pacific Gas & Electric and Southern California Edison, which are mired in debt, and the third investor-owned utility, San Diego Gas & Electric. Together, they serve 27 million Californians.
Not everyone was impressed by Friday’s order.
“It’s a token,” said Frank Wolak, a Stanford University economist who studies California’s electricity market. “Sixty-nine million dollars is one day worth of payments by the state.
“It’s really mostly to look like they’re doing something,” he said. “They’re trying to head off the tide of public opinion.”
“They’ve been looking so bad that they probably felt they had to do something,” said state Senate leader John Burton (D-San Francisco).
Since wholesale electricity prices started skyrocketing in May, state politicians, the utilities and consumer advocates have accused sellers of reaping hundreds of millions in windfall profits.
The order comes as Gov. Gray Davis, U.S. Sen. Dianne Feinstein (D-Calif.) and other politicians are increasing pressure on the Bush administration to take a more active role in helping California ease its electricity troubles.
FERC Chairman Curtis Hebert Jr. denied that the order was intended to improve the agency’s image in California or protect his leadership position on the commission. Sources say that President Bush, who named him chairman in January, may soon appoint a replacement.
“I’ve been leading FERC a little over a month,” Hebert said. “I think this represents a FERC that is going to take filings and procedures and act on them accordingly. . . . We’re not going to hide the ball from anybody.
“There were a number of transactions, quite frankly, [where] we looked to see if they were justifiable by these companies,” Hebert said. “If they are, so be it. But if not, they will be refunded back.”
The order passed on a 2-1 vote, with Commissioner William Massey dissenting.
Massey called the order “arbitrary, capricious and an abuse of discretion,” saying it automatically cleared 57,151 different sales--or 81% of those eligible for refund--from further scrutiny.
Representatives of PG&E; and Edison said they were studying the commission’s order.
“We think that it’s obviously good news, and seems to be an acknowledgment by FERC or a recognition that rates have been unjust and unreasonable and sets us on a path toward correcting them,” PG&E; spokesman John Nelson said.
The two utilities are hundreds of millions of dollars in debt to power sellers, so any refund would probably be used to shrink that debt.
Since mid-January, when the utilities moved so close to bankruptcy that sellers refused to deal with them for fear of not getting paid, California taxpayers have also been electricity buyers and would therefore be eligible for refunds.
Davis tapped the state Department of Water Resources to buy electricity on behalf of the utilities, and nearly $3 billion of taxpayer money has been spent since mid-January.
A Davis spokesman had no response to the FERC order.
Power plant owners and marketers said they were confident that the federal commission would find no reason to force refunds after reviewing documentation justifying such high wholesale electricity prices.
“We don’t feel we’ve done anything to warrant refunds,” said Chuck Griffin, a spokesman for Mirant Corp. of Atlanta, which was ordered to return more than $2 million. He said the company will respond to the ruling through FERC’s administrative process.
“First thing we have to do is review the conclusions, and then we have to review the basis of those conclusions,” said Jeremy Dreier, a spokesman for Duke Energy of Charlotte, N.C., which was ordered to refund more than $17 million.
He said Duke’s prices were higher for several reasons, including a premium charged because it was unsure that it would get paid by the cash-strapped utilities and abrupt spikes in natural gas prices.
As an example of how risky it is selling to California, Dreier said, the company received the federal order Friday, but has not been paid yet for its January energy sales to Edison, PG&E; and the state.
“We haven’t actually been paid yet and here’s an order for a refund,” he said.
The federal commission applied the refund order to those sellers that charged more than $273 per megawatt-hour during Stage 3 alerts, which occur when California grid operators believe that power reserves are in danger of slipping to less than 1.5% and rolling blackouts are threatened. (One megawatt-hour is enough electricity to supply 1,000 typical homes for one hour.)
Though only a single Stage 3 alert was declared in 2000, the past few months have seen a siege of such days: Stage 3 alerts were declared Jan. 11 and 12 and on the last 16 days of that month and on the first 16 days of February.
The federal commission arrived at the price of $273 per megawatt-hour by assuming that a seller’s power plant was particularly inefficient, polluting and designed to run for brief periods of time.
The order imposes a de facto price cap through April, under which sellers that ask for prices higher than what the commission deems reasonable will be told to explain why they deserve them.
The commission’s so-called “proxy market clearing price” will apply only during Stage 3 alerts, a limitation noted by the grid operations official who watches for anti-competitive behavior.
“We think this is encouraging, but we want to reexamine the threshold,” said Eric Hildebrandt, the Independent System Operator’s manager of market monitoring. “Prices are high outside Stage 3 alerts.”
Under law, the federal energy commission is charged with guaranteeing just and reasonable prices of wholesale electricity. In a report issued Dec. 15, the commission called prices in California’s electricity market “unjust and unreasonable” but would not order refunds.
Meanwhile, the California Power Exchange took a step to preserve its assets as it dismantles its now-defunct market by filing Friday for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code.
The exchange filed for bankruptcy law protection because it has been hit by several lawsuits “and the litigation costs alone would be enormous,” spokesman Jesus Arredondo said.
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Times staff writers Dan Morain in Sacramento and Nicholas Riccardi and Rich Connell in Los Angeles contributed to this story.
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Power Points
Background
The state Legislature approved electricity deregulation with a unanimous vote in 1996. The move was expected to lower power bills in California by opening up the energy market to competition. Relatively few companies, however, entered that market to sell electricity, giving each that did considerable influence over the price. Meanwhile, demand has increased in recent years while no major power plants have been built. These factors combined last year to push up the wholesale cost of electricity. But the state’s biggest utilities--Pacific Gas & Electric and Southern California Edison--are barred from increasing consumer rates. So the utilities have accumulated billions of dollars in debt and, despite help from the state, have struggled to buy enough electricity.
Daily Developments
* The Federal Energy Regulatory Commission on Friday ordered 13 electricity suppliers to justify their prices or refund California $69 million.
* FERC Chairman Curtis Hebert Jr. denied the refund order was intended to improve the agency’s image in California or protect his position.
* Gov. Gray Davis, U.S. Sen. Dianne Feinstein (D-Calif.) and other politicians increased pressure on the Bush administration to help California out of its electricity troubles.
Verbatim
“We think that it’s obviously good news, and seems to be an acknowledgment by FERC or a recognition that rates have been unjust and unreasonable and sets us on a path toward correcting them.”
--John Nelson, PG&E; spokesman.
Complete package and updates at www.latimes.com/power
