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Energy Regulators to Demand Refunds for Western Markets by Rebecca Smith, Staff Reporter Wall Street Journal - March 26, 2003

The Federal Energy Regulatory Commission is expected Wednesday to order several big energy suppliers to defend themselves against charges they manipulated Western electricity markets in the midst of an energy crisis in 2000 and 2001 that cost consumers tens of billions of dollars.

People with knowledge of the commission's work said FERC will issue as many as a dozen "show cause" orders as it continues to investigate alleged profiteering from the region's energy woes. The orders would effectively put the suppliers on notice that they could face penalties for alleged market misconduct. In addition, FERC is expected to demand the companies make refunds for overcharges to California and other Western states that exceed the $1.8 billion in refunds previously recommended by a FERC administrative-law judge.

The list of accused market manipulators is expected to include Enron Corp., which collapsed into bankruptcy-court protection in late 2001 amid allegations of accounting fraud. People with knowledge of enforcement actions said they expect other energy companies, including Dynegy Inc. and Reliant Resources Inc., to also face investigative actions.

Others that might be named include government-sponsored electricity sellers such as the Los Angeles Department of Water and Power, the federal Bonneville Power Administration and Powerex Corp., the power-marketing arm of BC Hydro of Canada, according to people familiar with the work of the commission staff. The inclusion of government-owned suppliers is expected to prove contentious since FERC has limited regulatory jurisdiction over them.

Late Tuesday, the commission was still weighing its next move and the situation remained fluid ahead of a public meeting Wednesday. More complete details on any enforcement action were expected during the meeting.

Power suppliers that could face censure, except Bonneville Power, were reached Tuesday. They said they had no knowledge of any enforcement actions but would respond if and when show cause orders were issued.

FERC hopes the moves will help it repair its damaged credibility as an enforcer of market rules intended to protect consumers. During the California power crisis, FERC did little when prices soared to record levels, pushing the state's utilities into financial distress and eventually prompting the state government to buy power on their behalf. "People have lost confidence in us, and one reason is because of what happened in California," one FERC staffer said.

FERC's credibility problem with the states has made it tough for the federal agency to push through overhauls of the nation's power markets. Led by California, several states have resisted ceding control to an agency that it felt failed to protect them from predatory behavior on the part of the suppliers.

"We don't have any interest in helping FERC with the next market initiative until they show they can fix the last one," said Eric Saltmarsh, general counsel for the California Electricity Oversight Board.

FERC's order for refunds would set a new formula for determining fair electricity prices. Amounts charged in excess of these fair prices would have to be refunded to buyers.

For instance, different prices for natural gas must be used as part of the revised formula because FERC has amassed solid evidence that natural-gas prices were manipulated from March 2000 until June 2001. Last week, El Paso Corp. reached a settlement worth more than $1 billion with several Western states over accusations the company had restricted gas flows into the state.

It is expected to take four to six months before a final refund tally is announced. Tuesday, California officials said they don't expect to receive the $8.9 billion in refunds they have insisted they were owed. But they said whatever the final amount is, it would flow back to consumers who saw electricity rates spike 40% to 80% as a result of the 13-month crisis that ended in June 2001.

FERC must also decide what to do about the long-term electricity purchase contracts signed by California and other buyers in response to the price spikes in 2000 and 2001. California alone signed more than $40 billion worth of contracts at prices that seem high. It has since renegotiated roughly $23 billion of these, garnering savings of $5.2 billion but wants FERC to release it from contracts it hasn't been able to renegotiate. Energy companies are fighting that effort. One of these, Allegheny Energy Inc., has gone to court seeking to uphold the California contract, which the company counts as one of its most valuable assets.

FERC has a tradition of upholding contracts, but the state officials say they entered into the purchase contracts at a time when energy prices were inflated artificially and thus, they were signed under duress. For California, the outcome of the contract dispute is almost as important as the refund issue, since half of the inflated costs it claims to have suffered resulted from its decision to enter into the high-priced contracts. It is unclear, however, whether the commission will settle the issue in its meeting Wednesday.