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FERC Issues Report to Congress on Continuing 2000-2001 Energy Crisis Refund Proceedings

While it facilitated more than $6.3 billion in settlements stemming from the western energy crisis in 2000 and 2001, the Federal Energy Regulatory Commission said it could have done more if four years ago it had the broader anti-manipulation authority it was given in the Energy Policy Act of 2005, enacted in August. And while the Commission "has worked diligently" to address flawed California Independent System Operator (CAISO) rules, the system has experienced 12 system emergencies since the official end of the crisis period in mid-2001.

FERC detailed its activities related to the crisis in a report, "The Commission's Response to the California Electricity Crisis and Timeline for Distribution of Refunds," required by the energy act and submitted to Congress Dec. 28.

"The Commission lacked the necessary statutory authority to respond more robustly with meaningful civil penalties and express anti-manipulation authority. The Commission played a weak hand rather well, in my opinion," commented Commission Chairman Joseph T. Kelliher.

The Commission expressed its own frustration with how long the California Refund Proceeding is taking to conclude, while providing an explanation regarding the complexity of the proceeding -- made more complicated by extensive litigation, including more than 100 petitions for review of Commission orders arising out of the California and Western energy crisis. FERC said it has completed action on all but one investigation of market manipulation.

The report also noted that the final refunds will be affected by settlements reached with California parties, which among other things settled the refund obligations of several large electricity generators. Further, the extent of the Commission's final refund order has been limited by a recent appeals court decision barring the Commission from ordering refunds by government-owned utilities, such as the Los Angeles Department of Water and Power, which accounted for about 30% of sales in California in 2000 and 2001.

"No one can dispute that the California Refund Proceeding has gone on far too long," the Commission report said. "The lack of closure contributes to uncertainty in California -- some refunds are still owed and owing; investment, and recovery of that investment is unclear; and the state of the transmission grid and electricity markets remain vulnerable," the Commission report said.

"The Commission and its staff have worked diligently with the California parties (and others) to address the many issues in the California Refund Proceeding, to reach settlements, and to address flawed rules that were in place in the California ISO electric energy markets during the California energy crisis; and we remain committed to doing so to ensure that there is not a repeat of the California crisis," the report continued, noting that in fact, the California ISO has experienced 12 system emergencies since the crisis ended in June 2001.

Bringing closure to the refund case is a clear priority, but not at the expense of due process, the Commission said. "It is very important that the Commission-adopted procedures for addressing refund issues strictly adhere to the due process principles, to ensure that the Commission's determinations withstand judicial scrutiny on due process grounds. Otherwise, we may have to revisit decisions already made, which could delay the issuance of refunds by years. We are committed to progressing as quickly as the law will allow."

Prior to passage of the Energy Policy Act (EPAct2005) the Commission's authority and ability to impose penalties was very limited under the Federal Power Act and the Natural Gas Act, with its main recourse being the ability to order refunds or disgorgement of profits.

The new energy law contains express prohibitions on market manipulation and includes civil penalty authority. If these enforcement tools been in place in 2000 "it is very possible it would have deterred market participants from manipulating the market because they would have known the serious consequences of their actions. Although this would not have eliminated all the price increases due to the shortages that existed in California at that time, it certainly could have lessened the severity of the crisis."

The FERC report said it is not possible to, as Congress requested, to give an accurate timetable for completion of the refund proceedings since final action awaits actions by many others, including CAISO and the federal courts. While the market manipulation proceedings are coming to a close, the refund proceeding "is a contentious proceeding with over 100 active parties and many factual elements that are disputed time and again. FERC's own evidentiary hearing took 18 months to complete and the hearing record consists of 5,945 pages. The supporting exhibits encompass over 20 shelf feet with more than a yard of briefs addressing the stipulated issues."

The 26-page report to Congress details the Commission's multitudinous actions in pursuing the cases and the settlements which have been approved. It also outlines progress on the petitions for review of its orders regarding activities in California, which the Ninth Circuit Court of Appeals has grouped into three phases. The recent court opinion on FERC authority over municipals was part of phase one. There also are appeals in the Ninth Circuit to the Commission's orders in the Pacific Northwest refund proceeding.

There are other court appeals to Commission orders on docket-specific investigations of individual energy sellers and still others on FERC orders addressing complaints seeking relief from electricity prices charged during the crisis period.

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