Regulators Say Wholesalers Sold Power at ‘Unjust, Unreasonable’ Prices

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San Jose Mercury News

In the strongest indication yet that California’s energy market is being manipulated, federal regulators said Friday that electricity wholesalers sold power during January at prices that appear to be “unjust and unreasonable,” and signaled it may order them to refund $ 69 million.

The unusual action was cheered by some California officials, derided as grossly inadequate by others and denounced by the wholesalers. Though the money involved is relatively small, the move signifies that the Federal Energy Regulatory Commission — which has stood on the sidelines throughout most of the state’s energy crisis — now believes it has a role in helping California to recoup some of the high prices it’s been paying for electricity.

After reviewing the power transactions of 11 firms and two trading exchanges, the agency gave those firms until March 23 to submit documents justifying their prices or to refund the money. The recipients of the refunds, apparently, would be the state’s utilities and the state itself, which has been buying power because high costs have driven the utilities close to bankruptcy.

“Today’s refund order demonstrates the commission’s commitment to ensure appropriate and reasonable prices in the wholesale electricity market,” said the agency’s chairman, Curt Hebert, in a prepared statement. Hebert also promised that his commission will implement new procedures for monitoring the state’s dysfunctional electricity markets by May 1, “so that we do not have to order after-the-fact refunds” again.

FERC’s order follows last month’s determination by the state’s Independent System Operator, which oversees power distribution in California, that the state had been overcharged by $ 315 million in January and $ 248 million in December.

FERC promised to address the December charges in a later order. It also said some of the alleged overcharges involved municipal power companies, which are not under its jurisdiction.

To calculate the overcharges, FERC came up with a maximum reasonable price for electricity of $ 273 per megawatt hour in January, based on its own analysis of the costs of generating power. It applied this maximum price only to power purchased during Stage 3 alerts, when electricity is especially short.

That method, however, drew fire Friday.

“Finally the ideologues in Washington D.C. have acknowledged that the power companies have been ripping us off,” said Doug Heller, an advocate with the Foundation for Taxpayer and Consumer Rights in Santa Monica. “The problem is, in looking at the numbers, they’re going to let the thieves keep too much of the money.”

At the state’s current rate of spending for power, $ 69 million would buy enough electricity for about a day and a half.

Even one member of the federal commission, William Massey, criticized the order. He said the commission’s decision was “arbitrary, capricious and an abuse of discretion” because the $ 273 price is much higher than the fair value.

By way of comparison, the long-term power contracts recently announced by Gov. Gray Davis average $ 69 per megawatt hour and in 1999 prices were around $ 40 per megawatt hour.

Massey also noted that FERC ignored 7,793 power transactions in January that exceeded the $ 273 threshold because they did not take place during Stage 3 alerts. “There is no logic to this methodology other than limiting the universe of potential refunds,” he said.

The order also drew a mixed reaction from California officials.

“I think that’s a positive development on the part of FERC,” said Assemblyman Fred Keeley, D-Boulder Creek, who has become heavily involved in the state’s energy policies over the past few months. “It also points up the need for the state to enact market reforms.”

Howard Gantman, press secretary to U.S. Sen. Dianne Feinstein said, “It’s significant that FERC has finally seemed to realize that California is due refunds for exorbitant wholesale costs of electricity.”

However, Gantman and others also expressed disappointment that the order didn’t go further. Some even suggested that by indicating a willingness to order some refunds, the federal agency was merely trying to deflect criticism. Hebert is rumored to be at risk of losing his job after little more than a month.

“Everybody has perceived that they have abdicated their responsibility,” said Frank Wolak, a Stanford economist and electricity market specialist. “Now, they can spout the rhetoric that they’re at least doing something.”

But several suppliers contacted Friday insisted that no refunds were warranted, arguing that their prices have merely reflected the recent high cost of natural gas — which they use to fuel their plants — and the fact that many of their older plants are expensive to run.

Richard Wheatley, a spokesman for Reliant Energy, said it will gladly provide the federal agency with documents to back up its prices, which FERC said included more than $ 12 million in overcharges in January.

Wheatley also described the $ 69 million as “a small percentage of sales in January, which means that the majority of the transactions according to FERC are appropriate.”

“We don’t feel we’ve done anything to warrant refunds,” added Chuck Griffin of Mirant California and its affiliates, which the order said had potential refunds totaling more than $ 2 million.

The general counsel for the Independent System Operator, Charles Robinson, described himself as “pleased” and “encouraged” by the order, because “it demonstrates a willingness to review these rates and grant refunds where appropriate.”

Robinson said his agency has identified $ 170 million in possible overcharges from municipal utility districts and other entities outside of the federal government’s control, though he wasn’t sure if that was for just January or for January and December. Robinson said his agency was reviewing other options for possibly getting that money back, but declined to be more specific.

But Jerry Jordan of the California Municipal Utilities Association rejected the notion that municipal utilities gouged the state by so much. He said the $ 170 million figure “seems preposterous.”

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