Federal Energy Agency Unlikely to Order Refunds

What are the chances that federal regulators will order electricity wholesalers to refund $6.3 billion in alleged overcharges?

Zero.

Officials of the Federal Energy Regulatory Commission have already made clear that nearly $3 billion--almost half the total that California’s grid operator said last week was excessive--is off the table because a statute of limitations puts alleged overcharges that took place before Oct. 2 beyond their reach.

As for the rest, lawyers familiar with the agency and industry observers note that FERC has consistently hesitated to use its full legal authority to enforce “fair and reasonable” rates because of difficulty in defining that phrase. Some within FERC question how much of the “excessive” rates documented by the California Independent System Operator fall beyond FERC’s jurisdiction--for example, rates charged by municipal power suppliers that are not regulated by the federal agency.

So far, FERC has ordered electricity wholesalers to justify or refund only $124 million in alleged overcharges--just 5% of the amount that the Cal-ISO has identified. That sum deals only with rates charged in January and February 2001 during Stage 3 alerts--periods when electricity reserves fall below 1.5%.

FERC’s approach to the alleged California overcharges will probably not become any more aggressive as a result of the two new members it will soon have. President Bush has picked two state utility regulators to fill vacancies on the five-member commission, the White House announced Tuesday.

The president plans to nominate Pat Wood III, chairman of the Texas Utility Commission and a Bush ally, and Nora Mead Brownell, a member of the Pennsylvania Public Utility Commission, to the FERC governing board.

Administration officials have indicated that Wood, 38, would assume the FERC chairmanship, a position now held by Curt Hebert Jr., a staunch advocate of energy deregulation.

Shake-Up at FERC Was Expected

The shake-up has been expected because of continuing complaints that FERC has not been aggressive enough in dealing with high energy prices and electricity shortages in California and elsewhere in the West. Hebert in particular has angered California officials with his opposition to price controls on wholesale electricity sales.

Although the administration wants to appear sympathetic to California’s plight, replacing Hebert has been a problem because he is a protege of Senate Majority Leader Trent Lott (R-Miss.).

Cal-ISO officials--who pointed out that their $6.3-billion figure was part of a study calling for stronger market controls, not for refunds--may still formally ask FERC to augment the refund order for January and February. FERC ordered wholesalers to justify $124 million worth of charges shortly after Cal-ISO asked for $550 million in refunds for December and January.

FERC’s refund process reflects the ambiguities facing federal regulators who oversee an electricity market that was designed to follow the law of supply and demand. At stake may be the final bill for electricity used to date in California as well as future rates.

And the debate over the role refunds should play in addressing skyrocketing wholesale electricity prices underscores diverging philosophies of what went wrong in the California market and how to fix it. What role should the government--specifically FERC, an agency with a mandate to ensure “fair and reasonable” rates--play?

“The whole notion that there’s such a thing as a just price is kind of an anachronism from New Deal days,” said Pietro Nivola, a Brookings Institute scholar who studies regulatory politics. “Especially as we move closer to some form of deregulation, we’ve come to understand that the price is what the traffic will bear. In this case, utilities simply have to be able to get higher rates at the retail end.”

But others say FERC has failed to assert its authority, allowing the wholesalers to operate with impunity.

“The message FERC has sent so far is, as long as you leave 10 cents of every dollar in the bank we won’t pull the alarm,” said Mark Cooper, director of research for the Consumer Federation of America.

Some on Capitol Hill say a massive refund order by FERC--while highly unlikely--would go a long way toward reining in wholesale prices. But FERC officials and many economists say that view is myopic and may do more harm than good, potentially discouraging new suppliers from entering a market already too tight. The memory of the 1970s oil crisis and a prevalent view among economists that government intervention made matters worse has informed the views of some longtime government officials and observers.

Refunds Called ‘Inferior Remedy’

A clear sign of FERC’s reluctance to call for refunds came late last year, when the commission issued its initial proposition for remedies for the California price increases. FERC officials said at the time, “Refunds may be an inferior remedy from a market perspective and not the fundamental solution to any problems occurring in California markets.”

The decision by FERC to scrutinize electricity charges only during Stage 3 alerts in January and February was harshly criticized earlier this month by some lawmakers and utility company officials. They complained that the narrow focus eliminated tens of millions of dollars in charges some observers believed were outrageous.

But even the $124 million questioned by FERC has been defended by the wholesale companies. In briefs filed with the agency last week, they said rates exceeding $430 per megawatt-hour--compared with a pre-crisis average of $30 per megawatt-hour--were justified by the increased credit risk wholesalers took in selling to near-bankrupt utilities that have billions of dollars in outstanding debts.

Duke Energy, which FERC has said overcharged California by $20 million, signaled some room for compromise in its compliance filing.

“We would be willing to forgo collection of credit premiums for these months provided we were paid the FERC clearing price,” company president Jim Donnell said this week. “If we are not assured payment, the credit premiums are obviously appropriate, and we would reserve our right to collect the entire amount of the bids that are subject to the FERC order.”

Both of Bush’s Republican nominees to the commission are expected to win Senate confirmation. But they can expect a grilling from Sen. Dianne Feinstein (D-Calif.), who has accused power suppliers of price-gouging and FERC of doing little to stop it.

“Certainly, my vote would be dependent on whether they’re going to be responsive to the present situation,” Feinstein said Tuesday, grousing that the administration has been “recalcitrant to the point of arrogance.”

Feinstein met Tuesday with Vice President Dick Cheney, head of a White House energy task force, but she described the meeting as “disappointing.” Feinstein also sent a letter to Bush asking to meet with him on the California crisis, and adding a hand-written note: “The West needs your help.”

A spokesman for Gov. Gray Davis said he hoped the new commissioners would have a “more sympathetic ear” for the concerns of the Western states.

But word of the nominations came as Bush reiterated his opposition to price controls. “Price controls contributed to the gas lines of the 1970s, and the United States will not repeat the mistake again,” he said in a speech in Kalamazoo, Mich.

The nominees drew praise from the Electric Power Supply Assn. The group expressed confidence that they would be “strong proponents of completing the much-needed transition to truly competitive and vibrant power markets all across the country.”

Neither Wood nor Brownell could be reached for comment. Wood said in a statement: “On our best day as regulators, we cannot deliver benefits to customers as well as a functional market can. But the market must work right first.”