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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: IssueAlert@SCIENTECH.COM X-To: ISSUEALERTHTML@LISTSERV.SCIENTECH.COM X-cc: X-bcc: X-Folder: \RSHAPIRO (Non-Privileged)\Shapiro, Richard\Refund Cases X-Origin: Shapiro-R X-FileName: RSHAPIRO (Non-Privileged).pst Today's IssueAlert Sponsors:=20 The Center for Public Utilities and The National Association of Regulatory Utility Commissioners present: THE BASICS:=20 <http://cpu.nmsu.edu/<; Hands-on framework that shows the interrelationships of the topics and how = they fit together and provides a set of analytical skills required to understand= the issues.=20 October 14-19, 2001 in Albuquerque, NM. Contact Jeanette Walter at=20 jeawalte@nmsu.edu <mailto:jeawalte@nmsu.edu< for more information. <http://www.nuclear-gen.com< Infocast's Building New Nuclear Power Plants Conference brings together the= leading operators, equipment manufacturers, regulators, financial analysts= , and builders of nuclear power plants to one place to discuss the road for= ward for building new nuclear power. Contact Infocast at (818) 888-4444 for= more information or go to www.nuclear-gen.com <http://www.nuclear-gen.com<= =20 <http://secure.scientech.com/rci/wsimages/scientech_logo_small.jpg< <http://secure.scientech.com/rci/wsimages/IssueAlert_Logo_188< September 25, 2001=20 FERC and California ISO Move Closer to Decision on Refund Issue=20 By Will McNamara Director, Electric Industry Analysis=20 <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg< [News item from Reuters] U.S. regulators met with California state energy o= fficials on Sept. 24 as part of ongoing mediation efforts to determine pote= ntial refunds in the Western power market, a spokeswoman for the Federal En= ergy Regulatory Commission (FERC) said. Separately, a House of Representati= ves panel signaled a possible probe into alleged price manipulation by two = government-controlled California bodies that buy power for the state, accor= ding to a memo obtained by Reuters. FERC will facilitate meetings with the = California Independent System Operator (ISO), the California Department of = Water Resources-the state's main power buyer-seven private energy firms, an= d the state's investor-owned utilities. FERC is concerned that "reliability= is being compromised" on the California power grid, Andrea Wolfman, a lawy= er in FERC's enforcement office, wrote in a letter dated Sept. 17 obtained = by Reuters.=20 Analysis: In one of the lingering issues of the California energy crisis th= at has yet to be resolved, FERC, California officials and representatives f= rom out-of-state power generators seem only incrementally closer to reachin= g a consensus on the refund issue, which has been under debate for most of = this year. Two months ago, with California and power generators already loc= ked in a stalemate over the state's demand for $8.9 billion in wholesale el= ectricity refunds, FERC Administrative Law Judge Curtis Wagner halted negot= iations on July 9 and declared that he would draft a refund plan. At that t= ime, Judge Wagner made it clear that, while he had not calculated the amoun= t, refunds would be returned to California and that the vast majority of th= e methodology presented by the California delegation would be adopted in hi= s recommendation. Nevertheless, the issue still remains unresolved and now = faces a new wrinkle: alleged market manipulation on the part of the Califor= nia ISO and Department of Water Resources, the two state agencies with the = biggest hand in wholesale transactions in California.=20 It is also important to note at the onset that Judge Wagner disclosed on Ju= ly 9 that power generators had offered a settlement of $716 million, which = California officials flatly refused. Of that amount, reportedly $510 millio= n was offered by the five biggest generators-Duke, Dynegy, Mirant, Reliant,= and Williams. California's rejection of the offer signaled the end of the = negotiations. In any case, the general message from Judge Wagner was one of= support for the generators and a belief that any possible refunds would fa= ll closer to a $1-billion level rather than $9 billion. Nevertheless, now t= hat Judge Wagner has made his recommendations to FERC, he has apparently st= epped out of these negotiations.=20 In addition to the California ISO and the three California IOUs (Pacific Ga= s & Electric Co., Southern California Edison and San Diego Gas & Electric),= the seven out-of-state energy companies that are participating in the nego= tiations on refunds are: Calpine (NYSE: CPN), Duke Energy (DUK), Dynegy (DY= N), Enron (ENE), Reliant (REI), Mirant (MIR), and Williams (WMB). All of th= ese companies are subject to potential refunds and as a result have seen th= eir stocks fluctuate on the basis of positive or negative projections. In a= nutshell, negotiations among the various parties stalled due to quantitati= ve dispute over the amount of money that is owed to California. Gov. Gray D= avis won't budge regarding his claim that generators owe the state nearly $= 9 billion. Most of the generators have consented to paying some amount of r= efund, but claim that the figure should be no more than $1 billion as a who= le, adding that any amount above this figure would be unjustified. The wide= range between the two amounts is what caused the negotiations to hit a bri= ck wall and caused Judge Wagner to assume responsibility for a final recomm= endation to FERC. The stakes in this decision are huge, as Judge Wagner's r= efund plan (and FERC's subsequent ruling based on its own conclusions) will= undoubtedly set a precedent for how wholesale power is bought and sold in = U.S. markets that are subsequently deregulated.=20 The other point of contention for the out-of-state generators is that the C= alifornia ISO has reportedly not yet provided any detailed breakdown of dat= a related to energy consumption by the California IOUs. With what they deem= as insufficient data in hand, the generating companies are reticent to mak= e any further refunds related to what they may or may not owe the state. Al= so at issue is whether or not previous refund demands made by the state of = California included transactions that were manually completed or transactio= ns that were in the process of being filled, the omissions of which could h= ave artificially inflated the actual refund amount. Further, the generators= maintain that their prices only reflected market conditions and that they = are still owed billions from the state of California.=20 In fairness, the actual dollar amount that the state of California may have= been overcharged remains ambiguous because, up to this point, power genera= tors have also refused to provide data showing their actual cost of produci= ng power, as this represents competitive information. Rather, all of the pa= rties involved in the negotiations have made presentations to Judge Wagner,= and naturally have made the best case to support their various positions. = This could all change if the dispute makes its way to a full-blown federal = trial, as power generators (and state officials, for that matter) might be = forced to turn over proprietary operational data.=20 Moreover, out-of-state power generators have long been accused of price man= ipulation by Gov. Davis. Now, however, the new claims are being leveled aga= inst the California ISO and the Department of Water Resources. As a reminde= r, the California ISO manages the state's power grid with a mission to ensu= re that the grid is safe and reliable and that there is a competitive marke= t for electricity in California. The Department of Water Resources assumed = the unprecedented role of California's main power purchaser in January 2001= when the creditworthy status of the three IOUs became questionable. Specif= ically (according to the Reuters report), FERC is concerned that "reliabili= ty is being compromised" on the California power grid by the scheduling and= dispatch procedures of the California ISO.=20 In addition, the buying practices of the Department of Water Resources have= also been brought into question. The accusation waged against the two agen= cies is essentially that the Department of Water Resources has spent an exo= rbitant amount of money for power through long-term contracts that it estab= lished when electricity prices soared from an average of $30/MWh to over $1= ,000/MWh earlier this year. Prices have now fallen to about $50/MWh due to = cooler weather trends and reduced demand. FERC's concern, according to the = memo obtained by Reuters, is that the California ISO is now purchasing surp= lus power from the Department of Water Resources at high prices to protect = Gov. Davis from embarrassment related to the high price that the state is s= till paying for power. These accusations may fall under the investigation o= f the U.S. House Committee on Government Reform, but at least in this inter= im period are another sticking point for FERC in the refund negotiations.= =20 However, from my perspective, these new accusations against the California = ISO and Department of Water Resources do represent an entirely separate iss= ue from the refund-from-generators issue. Apart from everything else, the t= imeframe for which the refunds are being assessed is limited to October 200= 0 through May 2001. This time period may or may not overlap with any allege= d market manipulation on the part of the two California state agencies. In = any case, this issue will likely be sorted out through legislative interven= tion and will probably be kept separate from the refund issue.=20 Although much of this case still remains in contention, some key factors ar= e fairly undisputed. For instance, FERC has established that it is only see= king to establish a ruling based on three key areas: refunds of overcharges= , long-term power contracts, and debts owed to generators by California uti= lities. Also, as noted, it is clear that the time period for which power ge= nerators may ultimately have to issue refunds is October 2000 through May 2= 001. Any overcharging that might have occurred outside of this timeframe is= beyond the scope of this investigation and would not be included in any re= funds made by the generators. It is also important to note that, according = to a report issued by the California Energy Commission, other companies suc= h as Destec and NRG also participate as non-utility generators in the Calif= ornia market and are presumably also under investigation. However, both of = these companies have partnerships with Dynegy, which may have had the more = active role in determining wholesale prices in the state. In addition, FERC= has previously stated that it would be using its new price methodology as = a basis to determine any potential refunds. The price control methodology, = issued in June 2001, set an initial price ceiling of $107.9/MWh for wholesa= le power sales, which is considerably lower than the average price screen p= ut into place by FERC's original order. Power generators will not be permit= ted to sell above the mitigated prices in the Western markets.=20 Regarding the refund dispute, Gov. Davis maintains that the $8.9 billion in= refunds, a figure that was calculated by the California ISO, is an accurat= e amount and one that is non-negotiable. Davis acknowledges that the figure= includes potential overcharges from government-run operations such as the = Los Angeles Department of Water and Power (LADWP) and BC Hydro, which FERC = does not regulate. If the municipal utilities are not included in the equat= ion, California officials allege that the power generators listed above col= lectively owe the state around $6 billion. Yet, when considering other West= ern states besides California that may also seek refunds from the power gen= erators, the potential refund claimed by the states could reach as high as = $15 billion. Records provided to Judge Wagner by California officials indic= ate that in January 2001, the first month in which the Department of Water = Resources started to serve as the state's power purchaser, California spent= about $332 per megawatt-hour for power on the wholesale spot market.=20 Typically, the contracts already signed by the governor are in place for 10= years and were based on higher-than-cost-to-service rates. Some reports ha= ve indicated that the long-term contracts make the state liable for $43 bil= lion in power payments over the next decade. At the time the contracts were= signed, Davis felt pressure to ensure that California had a reliable suppl= y of power, but he reportedly has been criticized for locking the state int= o expensive, long-term agreements and is eager to renegotiate them. While D= avis is flexible on the various forms that the refunds could take, he has s= aid, "they have to net out close to $8.9 billion." However, some of the pow= er generators that established contracts with the state say re-negotiation = is not possible as they have already locked themselves into deals with natu= ral-gas suppliers.=20 An archive list of previous IssueAlerts is available at www.scientech.com <http://secure.scientech.com/issuealert/<;=20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring <mailto:nspring@scientech.com< Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz <mai= lto:jpelz@scientech.com<. Advertising opportunities are also available on o= ur Website.=20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. If you would like to refer a colleague to receive our fr= ee, daily IssueAlerts, please reply to this e-mail and include their full n= ame and e-mail address or register directly on our site.=20 If you no longer wish to receive this daily e-mail, and you are currently a= registered subscriber to IssueAlert via SCIENTECH's website, please visit = <http://secure.scientech.com/account/<; to unsubscribe. Otherwise, please se= nd an e-mail to to IssueAlert <mailto:IssueAlert@scientech.com<, with "Dele= te IA Subscription" in the subject line.=20 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis = of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts= are not intended to predict financial performance of companies discussed, = or to be the basis for investment decisions of any kind. SCIENTECH's sole p= urpose in publishing its IssueAlerts is to offer an independent perspective= regarding the key events occurring in the energy industry, based on its lo= ng-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved. <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=3D9/25/2001<;
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