San Diego Assails FERC Refund Calculations

FERC's order requiring potential refunds of up to $69 million on January bulk power sales in California has come under further assault, with San Diego County claiming that the "proxy market clearing price" established by the Commission in the order allows sellers to recover almost double their marginal production costs, and that the decision not to subject sales during non-Stage 3 emergencies to refunds was grossly unfair. It further blasted FERC for not ordering power suppliers to publicly disclose their rates and costs.

In seeking rehearing of the March 9 order, San Diego Country said the decision also comes up short because it "allows suppliers to continue charging unjust and reasonable rates" in the California wholesale markets while FERC weighs whether the cited suppliers should pay the refunds (see NGI, March 12). It urged the Commission to immediately return to cost-based pricing until the state's energy crisis is resolved [EL00-95-019].

Separately, the city of San Diego urged that sellers owing potential refunds be ordered to "sequester" these amounts in trust, with accumulating interest, to ensure their ability to pay the refunds to California customers in the future, if FERC so orders. The city claims that the "limited liability structure" of the companies of many suppliers and generators could leave electric customers in the state high and dry when it comes to the actual paying of refunds.

San Diego County contends the "proxy market clearing price" of $273/MWh for January sales established by FERC in the March 9 order was far too excessive, and that the approach taken in the order would have permitted average suppliers in California to collect nearly double their marginal costs during the last 10 months (since April 2000). The Commission's proxy price was based on the assumption that the least efficient generator set the market-clearing price --- an assumption that has been sharply criticized.

Employing the same inputs for Btu rate, NOx emissions costs and natural gas prices that FERC used to reach $273/MWh, San Diego calculated what the proxy price would have been for least-efficient generator units for each month since April. Then for comparison purposes, it calculated the marginal costs for (more efficient) average generator units and new generator units during the same period.

It found that "marginal costs for the average unit ranged from $36.10 [MWh] to $283.60 [MWh] over this period of time [10 months], while the permissible price under the FERC proxy price assumption [for least-efficient units] would have ranged from $64.40 to $519.03." In December 2000 and January 2001 in particular, the FERC proxy price would have allowed the average supplier to collect $235.43/MWh and $123.41/MWh, respectively, over its per-unit costs.

As for new generation units, they should have realized a profit of $72.19/MWh per unit over an average unit during December 2000, according to San Diego County. This compares to a profit of almost $318/MWh per unit over total costs that a new generator unit would have realized for that month under FERC's proxy market clearing price, it said

The "blueprint for refund obligations that the Commission has crafted with this order is woefully inadequate," San Diego County told FERC. "As Commissioner [William] Massey correctly recognizes in his dissent, the $273/MWh proxy market clearing price is excessive, since it is based on the assumption that the least efficient generator will set the market clearing price."

San Diego County also took issue with FERC's decision to limit supplier refund obligations to transactions that occur only during Stage 3 emergencies. "While there is no dispute that Stage 3 emergencies present supply imbalance situations that are ripe for the exercise of market power, it is also indisputable that unjust and unreasonable prices resulted from the exercise of market power in significant portions of 2000 even though there were no Stage 3 emergencies before December of that year," it said.

For example, in June, the California Independent System Operator (Cal-ISO) reported that the average energy cost was $147/MWh, which was well above an average generation unit's estimated marginal cost of $56.30/MWh for that month, according to San Diego County.

Further, it assailed FERC for failing to order suppliers to submit supporting cost data to the Cal-ISO, so that it can determine the "reasonableness" of overall costs and the magnitude of potential refunds. "It is ironic that the Commission on the one hand criticizes the accuracy of the ISO's refund obligation assessment, and on the other hand impedes the ISO from engaging in a more accurate analysis by refusing to compel suppliers to provide the ISO with their cost data," the county admonished the Commission.

"The Commission's unwillingness to force the suppliers' hand on this issue points to a more fundamental problem in this proceeding. While the Commission has repeatedly promoted the concepts of openness and cooperation, it has been unwilling to disclose - or force the suppliers to disclose - their rate schedules...The County urges the Commission to open up this process by make market-based rates and supplier costs available for public scrutiny."

In a request for an emergency motion, the city of San Diego wants FERC to act quickly to ensure that the potential refund amounts are secured for California customers. "...[I]t is highly likely that the revenues exceeding such costs - the very revenues that are potentially subject to a refund order - have been flowing and will continue to flow out of the legal entities [suppliers and generators] that are subject to the refund obligations, to investors who are shielded from the refund exposure due to the limited liability structure used by sellers," the city said.

"In short, when the time comes for the sellers to pay the hundreds of millions of dollars in refunds to compensate buyers for past overcharges, the California ratepayer is going to be treated as just one more unsecured creditor of the wholesale sellers unless this Commission adopts interim protective measures," it noted.

FERC "should make clear that such amounts are to be retained by the sellers in trust to fulfill refund obligations. Sellers should be required to report to FERC on a monthly basis the balance of all amounts held in such accounts. In the event that a seller desires to make an interim distribution of such amounts to equity investors, the seller should file a request...with FERC."

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