Disclosures by energy companies that employees filed bogus prices for natural gas with trade newsletters which compile price indices, as well as an unfavorable ruling against El Paso Natural Gas by a FERC judge last month, lend support to FERC staff’s proposal to toss out the spot gas price indices when it comes to computing the gas price component of potential refunds owed by California electricity generators, according to California regulators, the state’s Attorney General and a number of other parties.

The staff proposal, which essentially would establish a new formula for calculating spot gas prices to be used in assessing generator’s refund obligations to California energy consumers, “is…supported by the recent revelations by Dynegy Inc. and American Electric Power that certain of their employees furnished inaccurate information to publications that compile and report index prices,” said the California Public Utilities Commission (CPUC), the California Electricity Oversight Board, state Attorney General Bill Lockyer and others [EL00-95-045].

As further justification, the CPUC and others cited the ruling last month by FERC Chief Judge Curtis Wagner, who found that El Paso pipeline had withheld substantial amounts of capacity from the California market during the 2000-2001 energy crisis to drive up prices at the state’s border.

Staff’s conclusion that published gas price indices are “not verifiable” and are prone to manipulation by energy companies was “straightforward and accurate,” they told the Commission, which sought industry comments on the proposed price change. Staff provided “persuasive evidence of price manipulation,” and found that there were “significant incentives” in the market to influence prices, “that ‘wash’ trading may have had an adverse impact on reported prices, and that as a result EnronOnline, a source of price formation, was subject to manipulation,” the California parties said.

FERC staff proposed changing the formula for computing California spot gas prices as part of the agency’s initial report on the status of its ongoing investigation into manipulation of energy prices in western markets, which was released in August. Specifically, staff recommended that, for the purpose of determining the amount of customer refunds owed by power generators, gas prices in California or at the state border should be based on published spot prices at selected production basins (San Juan and Permian), plus a regulated cost of transportation. The price for gas is a critical component of the FERC equation for assessing power refund amounts, given that a large number of generators use gas to produce electricity.

The staff proposal is at odds with the existing method of determining actual gas prices paid by power generators, which is based on the simple average daily spot price as report by Natural Gas Intelligence’s Daily Gas Price Index, Inside FERC’s Gas Market Report and Gas Daily. The net effect of staff’s recommendation, if adopted by the full Commission, would be to reduce the gas price component of the refund equation, which would result in a corresponding increase in the level of refunds owed by electricity generators for the 2000-2001 period.

Some have speculated the proposed change in the reference price for natural gas could boost the amount of power generator refunds by $1 billion. Without this revision, potential refunds owed by generators to California energy consumers have been estimated at about $8-$9 billion.

Like the CPUC, the California Independent System Operator (Cal-ISO), which operates the state’s transmission grid, said it “believes that the evidence uncovered by staff as to the potential for manipulation, and possible actual manipulation, of California natural gas indices is highly convincing.” The FERC staff’s proposed action “confirms the [Cal-ISO’s] long-standing position that spot market gas price indices should not be used in determining refunds because of the dramatic irregularities in these price indices during the refund period.”

It, however, urged FERC to clarify that gas-fired generators should only be allowed to seek recovery of demonstrated gas costs in the event they opt for cost-based rates during the 2000-2001 refund period. In addition, the Cal-ISO asked the Commission to impose “clear, stringent requirements for the calculation and allocation of gas costs before sellers seeking cost-of-service rates are permitted to recover costs in excess of the competitive proxy price for gas proposed by staff.”

It also asked the agency not to make any allowances for additional generator gas costs related to capacity scarcity. “Even if it could be determined with certainty that true scarcity of gas transportation capacity existed during specific days during the refund period, the ISO urges the Commission to avoid efforts to establish some ex post ‘scarcity rent.'”

While the staff proposal suggests there was scarcity of gas transportation capacity from producing regions to the California market during the energy shortage, the Cal-ISO contends the conclusion is “inconsistent” with Wagner’s ruling in the El Paso complaint case, which found there was “excess, unutilized” gas transportation on the pipeline to California during the period, and that El Paso withheld “substantial volumes” of capacity to border delivery points to drive up prices for natural gas, the grid operator said.

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