State Dealt Setback on Power Costs

Judge says California, seeking $9 billion in refunds, instead owes firms $1.2 billion.

December 13 2002

WASHINGTON -- A federal regulatory judge found Thursday that energy companies overcharged California utilities by $1.8 billion during the electricity crisis — far short of the $9 billion that Gov. Gray Davis and others had demanded.

In fact, according to the finding, it's the power suppliers that are owed money — $1.2 billion for unpaid bills.

The initial finding by Judge Bruce Birchman of the Federal Energy Regulatory Commission sparked angry denunciations from California officials.

"The Federal Energy Regulatory Commission rigged the rules," Davis said at a news conference in Sacramento. "They threw out just about everything we could claim."

Davis said he would continue to press the state's case before FERC, in the political arena and in the courts. He said he would write to President Bush demanding that FERC "do the right thing." He added: "We want at least $9 billion back."

Despite the setback, Davis promised that utility rates to California consumers would fall within 24 months with the decline of financing charges for emergency power purchases by the state. And he emphasized that any refunds from generators would be used to further reduce consumers' bills.

Davis and other officials contend that the state's case for refunds has been bolstered by new evidence showing that energy companies took advantage of California's byzantine electric deregulation scheme to game the market for higher profits.

Birchman concluded that energy companies including Mirant Corp., Duke Energy Corp., Dynegy Inc. and Reliant Energy Inc. overcharged California utilities such as Southern California Edison Co. and Pacific Gas & Electric Co. $1.8 billion for electricity purchases from Oct. 2, 2000, to June 20, 2001.

That is the time frame he was directed to examine by the FERC board after it concluded that power prices in California were "unjust and unreasonable."

Birchman based his finding on a hypothetical "just and reasonable" price computed by taking into account fuel and other production costs.

But the judge also concluded that the companies still were owed $3 billion for power they delivered during this time of skyrocketing energy costs and for which they have not been paid.

The net result: The utilities owe the suppliers $1.2 billion.

In the end, that debt may be reduced by FERC — by $500 million or more — according to energy lawyers who follow the case in Washington. That's because the final decision rests not with the judge but with the full FERC board. It will take into account any evidence of market manipulation and artificially inflated prices for natural gas, the chief fuel used to generate electricity.

That additional evidence, still being developed by investigators, was not presented in the narrow case before the judge. California sued FERC in federal court to ensure that market manipulation would be factored into the ultimate decision.

Deliberations by the FERC board are expected in the spring.

Birchman's findings filled more than 235 pages with arcane details of the workings of the power business. More than 100 entities were represented in the case, including power generators, government agencies and public and private utilities. Exhibits took up more than 20 feet of shelf space.

The $1.8-billion figure "is well within the range of what was expected," said Roger Berliner, a Washington energy lawyer with Manatt, Phelps & Phillips who is representing Los Angeles County in the case.

An appendix to the ruling, captioned "Who Owes What To Whom," provided a rough accounting for each company.

For example, Birchman found that Duke overcharged by $71.5 million. But it was owed $265 million. The net result: Duke still is owed $193.5 million.

Pat Mullen, a Duke spokesman, said the judge's finding "confirms that Duke Energy is owed substantially more ... than could ever be credited back to the state."

"To the extent that the judge's findings will move the refund issue any closer to finality, Duke Energy considers that a positive step," Mullen said.

Other firms said they also were pleased with the ruling.

The recommended $1.8-billion refund "is a fairly significant number," said Jan Smutny-Jones, executive director of Independent Energy Producers, a trade group representing California generators. "The state should ... declare victory and go home."

One of the main reasons California and FERC are so far apart on refunds is that the state says consideration should include power charges dating to early 2000, instead of the fall of that year. That change could garner the state $2 billion, Davis said.

FERC's board, however, has said it has no legal authority to consider a broader time frame for refunds. The Oct. 2, 2000, starting date was determined by the date on which the first complaint of overcharges was filed, FERC officials say.

FERC also refused to consider ordering refunds for electricity purchases by the state Department of Water Resources on behalf of the cash-strapped utilities, on the grounds that the state agency was not a utility. Davis called that "an artificial constraint that makes no sense" and said it cost the state $3.4 billion in refunds.

Last July, FERC decided that California could not offer evidence of market manipulation. But the ruling was overturned by a federal appeals court, and the state is assembling that information and preparing to submit it next year.

Other state officials echoed the governor's criticism of FERC.

"Let me get this straight — the judge found California ratepayers were indeed ripped off, but at the end of the day, they still owe the energy generators $1.2 billion?" said Sen. Debra Bowen (D-Marina del Rey), chairwoman of the Senate Energy, Utilities and Communications Committee. "I hope FERC and the generators aren't holding their breath, waiting for that check to be cut."

Loretta Lynch, president of the California Public Utilities Commission, said: "FERC's awarding of $1.8 billion is merely a slap on the wrist to the energy companies that illegally lined their pockets at California ratepayers' expense. FERC must not approve a proposed decision that defies logic and rewards criminal behavior."

FERC officials counter that such criticism is unfair, given that the agency now is committed to aggressively policing the energy markets.

Tom Dresslar, a spokesman for California Atty. Gen. Bill Lockyer, said the decision was "not all bad."

"It's obviously, in terms of the $1.8 billion, not the number that we think is accurate," he said. But several of the findings bolster the state's case, "so it's something we can build on."

Alonso-Zaldivar reported from Washington, Vogel from Sacramento and Rivera Brooks from Los Angeles.If you want other stories on this topic, search the Archives at latimes.com/archives . For information about reprinting this article, go to www.lats.com/rights .