San Jose Mercury News

Federal regulators Wednesday said California’s electricity rates last summer were “unjust and unreasonable” but found no grounds to order refunds in a much-anticipated report that left many in the state disappointed.

State leaders, utilities and consumer advocates had hoped the Federal Energy Regulatory Commission would rescue ratepayers from some $5 billion in excessive electricity costs this summer. But the commission said it doesn’t have authority to order refunds from energy companies.

“Why the Federal Energy Regulatory Commission can find that the prices were unjust and unreasonable and not order the only remedy they have — a refund — is beyond me,” Governor Gray Davis said.

With the question of who will pay the summer energy bill unanswered, state officials vowed to keep pressing for federal relief.

“We are going to continue our fight to have them order it,” Davis said. “If we have the power to order it, we’ll pursue that.”

U.S. Sen. Dianne Feinstein will introduce a measure in the next few days that would give the federal commission authority to order such refunds, according to spokesman Howard Gantman. That measure most likely will face a tough road to approval.

Some consumer groups also called the commission’s report a let-down.

“After a $5 billion fleecing of Californians, the only regulator left to protect consumers has failed us,” said Douglas Heller of the Foundation for Taxpayer and Consumer Rights.

Nettie Hoge, executive director of The Utility Reform Network, added that “the decision in effect places the financial responsibility for this disaster squarely on the backs of those least responsible for it _ consumers.”

Others saw hope. Michael Shames, executive director of Utility Consumers’ Action Network in San Diego, said the commission’s findings lay ground work for class-action lawsuits against power sellers to recover the funds.

While the commission “chose not to play the white knight and ride in and rescue California,” Shames said, “the decision today was actually a pretty good one. I think it gave California the ammunition it needs.”

The commission began investigating the California energy market in August, after complaints of skyrocketing power costs and charges of market manipulation. The state attorney general and the Public Utilities Commission also are investigating the market.

But the commission found no specific evidence of market manipulation by companies selling electricity. Without such evidence, market experts say prospects for refunds are dim.

The commission’s 65-page proposed order declared California’s wholesale electricity market, the result of a pioneering, 4-year-old experiment in energy deregulation, “seriously flawed.”

“Never has this commission had to address such a dramatic market meltdown as occurred in California’s electricity market this summer,” said commission Chairman James J. Hoecker, who expressed regret that the agency couldn’t go farther.

“While I might have hoped that the law permitted the commission to do more, I am nevertheless persuaded that the commission has responded firmly and fairly,” Hoecker said. “We have pulled no punches.”

The report’s recommendations include a new wholesale price cap and bidding structure and replacing the governing boards of two agencies that oversee energy supplies and trades for most of the state. While saying it could not order retroactive refunds from last summer, the commission did say energy firms could face refunds of unreasonable profits from Oct. 2, 2000, to Dec. 31, 2002.

The proposed order will be the subject of considerable debate over the next two months. The commission scheduled a hearing Nov. 9 and plans to issue a final order by the end of December.

Many in the state were encouraged that the commission saw the severity of the problem. Its proposed changes in the state’s energy market structure were generally praised.

“The good news is that they agree with our premise that the market is dysfunctional, rates are unreasonable and unjust,” Davis said.

The state’s major utilities said the report is just a start.

“Kind of bitter-sweet,” said Stephen Baum, chairman and chief executive officer of Sempra Energy, the parent company of San Diego Gas & Electric Co., whose 1.2 million customers saw their bills triple last summer. “Bitter because they didn’t order refunds,” Baum said, but sweet in that “they recognized that the market is broken.”

San Diego Gas & Electric customers are the first in the state to pay market prices for power. A state-ordered rate freeze protects customers of Pacific Gas & Electric Co. and Southern California Edison Co. until March 2002, but could be lifted sooner if the companies pay off power plant debt before then. Those utilities want the freeze lifted soon, after which they could hand customers the tab for summer energy costs of more than $5 billion.

PG&E officials, who say the utility is $2.9 billion in debt, called the report “a sound beginning to repairing the marketplace.” But they added that “more actions will need to be taken at both the state and federal level.”

“We welcome thoughtful intervention to repair the market,” PG&E President Gordon Smith said. “We cannot continue to borrow money to pay excessive wholesale power prices, which will hit our customers sooner or later.”

For energy companies, whose profits soared to record heights this summer but drew suspicions of unlawful profiteering, the report largely was a relief.

“We’re very pleased with the fact that they said the generators were not the problem,” said Bill Highlander, spokesman for San Jose’s Calpine Corp. “We’re generally pleased with the way they’re approaching the situation.”

Still, energy companies were troubled by the prospect of further price caps and future refunds.

“There needs to be regulatory stability so we know the economic models we run one month apply six months later,” said Tom Williams, spokesman for Duke Energy North America.

Deregulation raises the federal government’s role in overseeing electricity supplies, once largely the responsibility of state regulators.

The commission stressed that California officials must encourage more power plant generation, transmission capability and conservation, and let utilities buy power in long-term contracts that limit exposure to price spikes.

The commission recommended more independent governing boards of the California Independent System Operator, which oversees most of the state’s power grid, and Power Exchange, which handles wholesale energy trades. Critics have complained that those agencies’ boards are stacked with officials with ties to energy companies, creating conflicts of interests.

ISO President Terry Winter said the governing board change already was being considered.

The commission also recommended changing the way wholesale energy is bid. Currently, the highest bid sets the price for all, a system aimed at spurring power plant investment. The commission proposed that bids over $150 per megawatt-hour will not set the price for all.