California complains that FERC stripped billions from potential refunds

By the OGJ Online Staff

HOUSTON, Aug. 1, 2001 — California complained federal regulators removed billions of dollars from potential refunds owed the state by ordering use of a flawed formula to calculate the amount.

California has alleged generators overcharged the state and its consumers billions by selling electricity at "unjust and unreasonable" prices.

The state Electricity Oversight Board (EOB) Tuesday asked the Federal Energy Regulatory Commission for a rehearing of the commission's July 25 order setting out the method to calculate refunds. The formula will be used to calculate a "refund proxy price" that would be compared with actual prices. The difference would constitute the refunds.

California has argued from the start that generators overcharged consumers by almost $9 billion from May 2000 through March 2001. The commission first ordered the dates of the refund period to be October 2000 through March 2001, lopping off about $2 billion of potential refunds, state officials said. The July 25 order then shaved off another $2 billion, according to the filing.

At best, the state would receive only $5 billion, but a FERC administrative judge is on record estimating the refund should to be closer to $1 billion.

The EOB complained the methodology FERC used incorrectly excludes all purchases made by the California Department of Water Resources (DWR) in the bilateral spot market. The board said the commission and the power sellers forced the DWR into the spot market after the California Power Exchange was eliminated, and sellers declined to do business with the California Independent System Operator because of credit issues.

The commission also imposed a 10% credit risk premium on top of the refund proxy price, thus narrowing any difference between the refund price and actual prices a step further.

Transfer of wealth
The state argued the July 25 order imposes interest on what is owed the generators. The state still owes generators billions of dollars for power they delivered but haven't received payment. The interest will compensate for overdue payments, the state said. "Adding an additional 10% is simply a gift and further increases the transfer of wealth from consumers to generators," the state said.

California criticized the commission's method of calculating the market-clearing prices for refund purposes based on the heat rate of the last generating unit actually dispatched. The state claimed generators withheld more efficient units, driving up prices.

The state argued FERC should use heat rates of all available units, barring notice of a forced or scheduled outage. Finally, California said actual gas prices should be used to determine the proxy price, not spot gas prices.

There is no evidence, the state said, generators supplied their power plants solely with fuel bought on the spot market. In fact, the state argued, it is highly unlikely that a company would rely solely on the spot market for gas.

"Use of actual cost data is accurate and favors no set of interests," the state said. Hearings continue on the refund case at FERC this month.

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