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Enron Mail |
As most of you are aware, the FERC mediator yesterday submitted his
recommendation to the agency, culminating a 15-day mediation process. Among the mediator's recommendations is that FERC convene an evidentiary hearing, to close within 60 days, to determine the offset or refund liability of suppliers of energy, including Enron, into the California's spot markets. I expect FERC to act on the recommendation early next week and issue an order directing that a hearing be convened within possibly a week or less. Accordingly, getting organized is an imperative. Several of us participated in a conference call yesterday to discuss whether Enron should retain Seabron Adamson of Frontier Economics to serve as Enron's expert in the hearing. The decision was made to retain Seabron for this purpose. Seabron has informed me that he can come to Washington to start preparing discovery and developing a theory for Enron's case. The discovery that Enron pursues will obviously need to be coordinated with litigation counsel representing Enron in the various California civil litigations and investigations. The mediator's recommendation largely ignores two of the issues that were set for mediation (moving CA power supply to the forward markets and restoring creditworthiness of CA purchasers) and instead deals exclusively with the third issue: Did any supplier overcharge for post-October 1, 2000, short-term (24 hrs or less) sales into the PX and ISO and, if so, should the supplier refund the overcharge or have it offset against amounts owed the supplier? The mediator did not find a specific overcharge amount. Instead, he opined that, while not the $8.9 billion claimed by the CA delegation, overcharges "do amount to hundreds of millions of dollars, probably more than a billion dollars in an aggregate sum." Per the mediator's recommendation, the evidentiary hearing should address the details of a methodology for determining how much each supplier overcharged. The "single" methodology recommended by the mediator is a modified, retroactive application of the price ceiling that FERC ordered imposed prospectively on the entire west in a June 19 order. That methodology classes as an overcharge any amount charged between October 2, 2000, and May 28, 2001, that exceeded the operating cost of the least efficient gas-fired turbine dispatched in CA in an hour plus an adder for O&M, a credit premium and NOx. The recommended methodology deviates from the prospective price ceiling in several respects, including that it would be applied in all hours, without discount, and would reflect actual heat rates and separate actual hourly natural gas prices for southern CA and northern CA, resulting in two separate proxy prices. The mediator recommends that this methodology be applied to all suppliers, even those that did not supply power wholly from gas-fired turbines. Nevertheless, in a contradictory passage, the mediator goes on to recognize that his recommended methodology "may not be appropriate for all sellers," but that any sellers advocating a different methodology "should bear the burden of demonstrating that their costs exceeded the results of the methodology recommended herein over the entire refund period.." (emphasis added). Assuming that the agency largely follows the recommendation of the mediator, then it appears Enron, working through Seabron, can pursue one or two basic theories. First and most simply, Enron can accede to the mediator's methodology and work with the large generators (Duke, Reliant, Dynegy, Mirant) to force up the proxy price (and lower the overcharge amount) that the mediator's methodology produces. Alternatively, in addition to trying to force up the proxy price, Enron can try to develop a theory that the mediator's methodology either should not apply to power marketers or should apply differently to them. This second approach will likely be joined by other non-thermal generator suppliers, such as PowerEx. The obvious risk in pursing this second approach is that Enron might become exposed to discovery into the cost basis of its book over the entire refund period.. Those of you who will need or want to discuss the issues with Seabron, please respond by letting me know as between Wednesday, Thursday or Friday of next week, which works better for you for a meeting in Washington or a teleconference.
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