Calif ISO Cuts Power Refund Estimate To $6.1B From $8.9B     
Updated: Wednesday, July 18, 2001 11:53 AM ET      
 

By Mark Golden 

Of DOW JONES NEWSWIRES 


NEW YORK (Dow Jones)--California's estimate of how much the state was overcharged by power suppliers dropped to $6.1 billion from $8.9 billion when an adjustment requested by a Federal Energy Regulatory Commission judge was taken into account, according to data submitted to FERC last week. 

The California Independent System Operator's estimate fell when the grid operator excluded power bought by utilities not under its purview, and its estimate could fall again as it works in other recommendations made by the judge following the conclusion of 15 days of talks between power suppliers and the state over potential refunds last week. 

Even as the ISO continues to recalculate its refund estimate, however, the state is sticking to the original $8.9 billion figure, which has been called arbitrary by critics. The $6.1 billion estimate merely establishes "a potential framework for settlement discussions," Eric Hildebrandt, the ISO's chief analyst on the matter, told the FERC. 

FERC administrative law judge Curtis Wagner, who has dismissed the $8.9 billion figure as baseless and criticized California's delegation for not negotiating in good faith, estimated in his report on the talks that refunds due may amount to about $1 billion. Power suppliers offered just over $700 million. 

Wagner has recommended FERC hold a 60-day hearing to set the level of refunds and has told the ISO to revise its estimate of what California is owed. 

The ISO's original $8.9 billion figure included electricity sales to municipal utilities and alternative energy suppliers that didn't go through the ISO's wholesale markets, the California Power Exchange or the California Department of Water Resources. Without direct knowledge of the prices of those purchases, the ISO made estimates. 

"We know the volume (of the bilateral deals)," Hildebrandt said. "The refund amount was based on extrapolation of observed prices in the spot market." 


Resetting The Baseline 


Wagner told the ISO to recalculate its figure using only sales through the ISO and CalPX markets - which were set up by the state's deregulation law for California's three investor-owned utilities to purchase power - in addition to sales to the California Department of Water Resources. 

The DWR has been buying power for the utilities since PG&E Corp. (PCG, news, msgs) unit Pacific Gas & Electric Co. and Edison International (EIX, news, msgs) unit Southern California Edison ran out of cash in January. DWR has also been covering the needs of Sempra Energy (SRE, news, msgs) unit San Diego Gas & Electric Co. 

In arriving at his new estimate, the ISO's Hildebrandt also recalculated fair prices - the baseline against which refundable amounts are determined - by retroactively applying the price controls FERC imposed June 19. Those controls set prices by the operating costs of the least efficient generator needed to meet demand each hour. 

But last week, after Hildebrandt completed his $6.1 billion estimate, Wagner recommended to FERC commissioners that the June 19 price control formula be modified when used retroactively to determine refunds. 

Those modifications, if applied to the ISO's estimate, would cut refunds much further. For example, FERC's price limits are now based on a monthly average of natural gas prices covering supplies throughout the state. Wagner recommended using power producers' actual gas costs. Since gas is considerably more expensive in southern California, using actual prices would cut potential refunds sharply. 

Also, Wagner said that refunds should be ordered on sales only as far back as Oct. 2, which would reduce the total amount claimed by California by about one-third, according to Hildebrandt's previous monthly breakdown. 

ISO staff is again recalculating the refund estimate to reflect some of Wagner's recommendations, but the ISO will still include sales back to May 2000, said spokeswoman Stephanie McCorkle. 

"The reason we're not going back just to Oct. 2 is that all of the overcharges going back to May should be repaid," McCorkle said. "We just maintain that position." 


FERC Baseline Questioned 


In addition, Hildebrandt argues in his recently released estimate that when fair prices are calculated retroactively using FERC's new formula, the price cap should be based on the least efficient generator the ISO knows to have been available, not the least efficient generator actually used to meet demand. 

That's because the FERC's new price controls require all available generators be made available to the ISO at any time, Hildebrandt said. 

Applying that rule would raise the ISO's revised estimate substantially: to $7.7 billion from $6.1 billion. 

One of the ways generators managed to manipulate prices higher, Hildebrandt said, was to not offer cheaper power from more efficient units. Considering only the least efficient generator actually used would make permanent the rewards for such withholding, he said. 

"The judge is in error to suggest that the actual (least-efficient) unit used would have been called on if the must-offer requirement were in effect," Hildebrandt said in an interview. 

In arriving at his estimate, Hildebrandt determined the difference between actual sales prices and what prices would have been for every seller and for every hour since May 1, 2000, had price controls been in effect. The ISO released only the total potential refund, not the company-specific shares. 

Hildebrandt took issue with generating companies that have complained his numbers aren't justified. 

"These are based on very tangible records," he said. "The idea that it's a black box is misleading." 

-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com 

(Jason Leopold in Los Angeles contributed to this article.)