Cal-ISO Says Suppliers Overcharged

Power: State report calls for a refund of $562 million above 'reasonable' prices. Generators deny gouging.

By NANCY VOGEL and JENIFER WARREN, Times Staff Writers

SACRAMENTO--Wholesale electricity suppliers overcharged California's utilities more than $500 million during December and January, an amount that the federal government should demand be refunded, according to a no-holds-barred state report released Thursday.

The report by the California Independent System Operator, which oversees the flow of electricity in the state, said power suppliers charged $11 billion during those two months alone--more than they did for all of 1999.

Studying various market dynamics, the agency concluded that there was a "prima facie case" that the unnamed generators and marketers had charged $562 million above "just and reasonable" prices, warranting further investigation and federal hearings into the appropriateness of refunds.

The state report is the most accusatory of a number of studies undertaken to determine why wholesale electricity prices have soared in California since last summer, throwing the state's biggest utilities into financial crisis and dashing hopes for lower consumer rates under deregulation.

The study also provides new ammunition to members of California's congressional delegation, who have unsuccessfully been pressing the Federal Energy Regulatory Commission to impose price ceilings on wholesale electricity costs.

Generators defended their operating practices and rejected the allegation that they had raked in unfairly large profits in December and January. "We have played by the rules, acted ethically and legally in all our operations," said Richard Wheatley, a spokesman for Houston-based Reliant Energy, which owns power plants capable of supplying more than 3 million homes. "We have nothing to hide."

Gary Ackerman, executive direcor of the Western Power Trading Forum, said the Cal-ISO report does not account for less tangible factors that tend to drive up prices, such as political and financial uncertainties.

"Those are the things my people take into account when deciding whether to sell into California," said Ackerman. He noted that, in the second week of December, a period analyzed in the Cal-ISO report, electricity prices were higher in the Pacific Northwest than in California.

The report, he said, "provides some reasonable questions which will be responded to by my members, under FERC authority."

Cal-ISO officials stressed Thursday that they are not accusing any seller of inflating prices but are simply asking for federal action to restrain costs. "We have not seen prices come down to what we feel are justifiable levels," said Anjali Sheffrin, director of market analysis for Cal-ISO.

Although federal energy commission officials on Thursday refused to comment on the study, many experts predicted that refunds would not be forthcoming. Since July, when Gov. Gray Davis first asked the federal commission to give San Diego Gas & Electric customers refunds for electricity costs that doubled and in some cases tripled, the agency has refused to order power sellers to give back some of their profits to California utilities and consumers.

The commission, charged by Congress with assuring "just and reasonable" wholesale electricity rates, has also resisted imposing firm price caps on California's electricity market. In November, the commission called that market "dysfunctional" and vulnerable to manipulation by power sellers, but the agency has so far failed to document or punish specific cases of such anti-competitive behavior.

"The real question is what is FERC going to do with all of this?" said Gary Stern, chief of market analysis for Southern California Edison, once one of the two biggest buyers of electricity in California. "Based on past history, we think they're probably going to say they don't see wrongdoing that provides a reason for refund."

Determining rebates could prove a logistical nightmare for federal regulators and Cal-ISO, Stern said, but the data exist to show how much it cost power plant owners to generate electricity and what price they charged.

Given that Edison and PG&E have defaulted on payments of hundreds of millions to power sellers, Stern said, a rebate order wouldn't lead to reimbursement for individual utility customers. Instead, it could help the utilities eliminate some of their debt to generators and marketers.

Edison and PG&E have been pushed nearly to bankruptcy by high wholesale costs, which they could not pass on to their customers because of a state-imposed rate freeze.

Last week, Davis announced that Edison had agreed in principle to state financial help in exchange for its transmission lines. Negotiations with PG&E continue. The Folsom-based Cal-ISO drew its conclusions after reviewing electricity purchases made between Dec. 8, 2000, and Jan. 31, 2001.

To calculate the cost of producing electricity in those months, Cal-ISO analysts assumed power plant owners were buying natural gas from the spot market, where prices soared this winter, and were running old, inefficient plants. They also assumed relatively high prices for air emission credits in Southern California and added a 10% buffer to the operating costs.

Cal-ISO officials then compared these costs with the prices sellers were paid. Their report did not name the individual sellers, which range from the province of British Columbia to the publicly owned Los Angeles Department of Water and Power to private companies. Several lawmakers praised the report as long overdue.

"It's about time," said state Sen. Debra Bowen (D-Marina del Rey), chairwoman of the Senate Energy Committee. She said that the desire among some legislators to seize power plants and take other drastic actions stems from the sense that "there's no one willing to enforce the provisions of the federal power act regarding just and reasonable rates.

"The utilities are doing a great job looking out for their shareholders, but who is looking out for ratepayers?" she asked.

Consumer advocacy groups applauded Cal-ISO's action and said the agency's evidence of overcharges underscored the need for hard price caps or a tax on generator profits.

"It's certainly not news to us that the generators are charging excessive wholesale prices," said Mindy Spatt, spokeswoman for the Utility Reform Network of San Francisco. "If there had been a real price cap, this investigation would not be necessary."

California's congressional delegation has pushed hard in recent months for legislation that would impose temporary price controls on wholesale power supplies in the West. On Wednesday, a bipartisan team met with Curtis Hebert, chairman of the Federal Energy Regulatory Commission, and came away discouraged by Hebert's opposition to price caps.

The federal commission has imposed a so-called "soft cap" of $150 per megawatt-hour in California's electricity market. When sellers ask a higher price they must explain why it is necessary. Within 60 days, the commission can launch a review of those bids that could lead to refunds. So far, the federal panel has ordered none.

On Thursday, Cal-ISO asked the commission to extend the two-month deadline in its examination of the purchases made during December and January.

Times staff writer Nancy Rivera Brooks in Los Angeles contributed to this story.

Copyright 2001 Los Angeles Times

-- Swissrose (cellier3@mindspring.com), March 02, 2001