Companies expected to forgive $ 1 bn or more in California energy charges

by John Woolfolk

After making record profits while Californians suffered rolling blackouts, energy companies for the first time are likely to give up much of that windfall when deal making begins in Washington, D.C. Federal regulators pressing for a quick end to the year-old power crisis expect companies to forgive $ 1 bn or more in payments from California. Though short of the $ 9 bn state leaders say may have been overcharged, it's vastly more than the few million dollars considered before.

Companies in return want the state to call off investigations and threats to seize power plants and windfall profits that are giving their shareholders jitters. And they want assurance they will get paid something, and soon. Never have federal regulators attempted to settle such a costly and bitter dispute affecting so many, let alone under a deadline of 15 days.
"I'm not saying this is going to be easy," said Linda Key Breathitt, a member of the Federal Energy Regulatory Commission, which ordered the settlement talks. "This will be the highest stakes effort this commission has undertaken." But commission officials sense that both sides are eager to put the damaging crisis behind them.
"Everyone seems to be in a settlement mood, so I'm very hopeful we'll get something out of this," said Curtis L. Wagner Jr., the commission's chief administrative law judge who will shepherd the talks.
Consumer advocates are heartened. "This is just outstanding," said Mike Florio, a lawyer for the Utility Reform Network and board member on the state's power grid operator. "This could be the biggest event in regulatory history. This is really the first time people have had hope that they are doing more than just rearranging the deck chairs on the Titanic."

A settlement won't end the power shortage that threatens rolling blackouts in California, but would greatly ease the state's energy woes. The energy commission set up the negotiations to settle the issue of overcharges by July 10. If no settlement can be reached under the auspices of an administrative law judge, the judge will make a recommendation to the commission and it will resolve the dispute, Commission Chairman Curtis Hebert said.
At stake is multibillion dollar debt for high-priced power that forced Pacific Gas & Electric into bankruptcy and prompted costly state bailout plans for two other utilities. The bailout plans could burden consumers for decades. The unpaid bills threaten the state's power supply because energy firms are hesitant to sell more power or build needed generators.
The state has been buying power on behalf of the troubled utilities since January. The settlement talks come after federal regulators approved round-the-clock limits on power prices throughout the West after nearly a year of ineffectual controls. Settling the dispute over past charges was the next step.

Commissioner Nora Mead Brownell, a new energy commission appointee of President Bush, modelled the settlement talks on negotiations that resolved $ 12 bn in deregulation disputes in Pennsylvania, where she was a utility regulator. "You'd be amazed how simple the issues get when you're disciplined," Brownell said. "People really began to focus on what are the real issues."
Overseeing the show will be Wagner, a 72-year-old veteran regulator highly regarded at the agency. "He has a great reputation for being able to cut through the rhetoric and get to the issues, and to be tough when necessary," Brownell said.
State and company officials are playing their cards close to their chest. Michael Kahn, chairman of the state grid operator and an adviser to Gov. Gray Davis, will lead the state's team. It will open with a demand for $ 8.9 bn in refunds since last May, the grid agency's latest overcharge estimate.
"We're experienced negotiators and understand that the process involves give and take," Kahn said. "But we do have an obligation to make sure any result is fair to the people." The state, however, isn't making plans for that money. "We have to assume for purposes of our own planning that we'll have to do without it," Kahn said.
Company officials maintain their charges were appropriate but were reluctant to stake out a position. "Things are a little delicate at this point," said Pat Dorinson, spokesman for Mirant, a major California generator that claims California owes it $ 385 mm. Vance Meyer, a spokesman for Enron, which claims to be owed $ 500 mm, said that "We're going into the session with an open mind."

Wagner has already indicated what he considers a fair starting number for negotiations. He's asked state officials to calculate the overcharges as if this week's price controls were in effect since last October, when regulators told companies their profits were subject to refund. State officials were still working on that calculation. But the judge has an idea what it will be. "If there are refunds, it will be in the neighbourhood of a billion or so -- amounts of money I can't even comprehend," Wagner said.
It would be difficult to legallyjustify repayments before last October's refund notice, Wagner said. The state's $ 8.9 bn overcharge estimate goes back to May 2000 and includes charges by government-run utilities not subject to federal controls. State grid officials estimated $ 3.7 bn in overcharges since October. If today's price limits had been applied since then, the potential refund would be "several billion" dollars, Florio said, more than consumer advocates expected.
"We were thinking that was what we should go in asking for," Florio said. An industry spokesman said each company has different standards for what it will settle for, but said there's negotiating room in the mark-ups above production costs. "If there were an assurance they would get paid a certain amount on the dollar, they'd be willing to accept less than they're owed," said Mark Stultz, spokesman for the Electric Power Supply Association.

In exchange, companies want an end to the threats from state officials and the uncertainty over payment, Stultz said. "They want some indication that investment is welcome, that the state won't come and try to seize their assets," Stultz said. Commission officials say both sides will have to give a little. "I'm trying to figure out what everybody's bottom line is and negotiate something in between," Wagner said.