A FERC administrative law judge (ALJ) last Wednesday certified to the full Commission a combined settlement between El Paso Electric Co., the California attorney general, the California Electricity Oversight Board (CEOB) and FERC trial staff aimed at resolving allegations that the utility colluded with Enron during California’s energy crisis to manipulate the wholesale market and artificially inflate prices.

El Paso Electric and FERC trial staff in December 2002 reached a settlement stemming from a Commission investigation of possible misconduct by El Paso Electric and two subsidiaries of Enron that was launched in August of that year. Under the terms of the negotiated settlement, El Paso Electric agreed to refund $14 million of revenues it earned on wholesale power transactions (see NGI, Dec. 9, 2002).

Then, in February 2003, California Attorney General Bill Lockyer announced a settlement with El Paso Electric under which the utility agreed to pay $15.5 million to the California Electric Power Fund. That fund is used to pay off bonds sold by the state to finance the California Department of Water Resources’ (CDWR) wholesale energy purchases.

The settlement resolved allegations that El Paso Electric aided Enron in specific transactions designed to reap inflated wholesale prices for Enron. These transactions included so-called “ricochet” deals in which Enron evaded price caps on energy sold within California. In such transactions, Enron transferred energy across the California border, where it was held by El Paso Electric, then sold back into the state at uncapped prices, Lockyer’s office noted.

The California settlement supplemented the El Paso Electric-FERC trial staff agreement reached in December by increasing the company’s payment from $14 million to $15.5 million, and by directing the money to California to benefit ratepayers.

FERC ALJ Carmen Cintron certified the combined settlement between El Paso Electric, Lockyer, the CEOB and FERC trial staff to the full Commission last Wednesday. The ALJ noted that along with having to pay $15.5 million in refunds, El Paso Electric is also agreeing to a suspension of its market-based rate authority for over two years. The utility will also “continue to cooperate with all the parties in investigations of the California energy crisis.”

Cintron said that approval of the settlement “obviates a hearing and a decision on the merits concerning El Paso [Electric’s] conduct. As trial staff correctly points out, the record developed in this case supports approval of the settlement as proposed, with El Paso [Electric] agreeing to refunds without admitting to any violations.”

The ALJ said that the only contested matter is the distribution of the $15.5 million that El Paso Electric has agreed to pay under the settlement. The City of Tacoma, WA, said that the settlement precludes wholesale purchasers of electricity outside of California injured by El Paso Electric’s conduct from any recovery. Tacoma said that Public Utility District No. 1 of Snohomish County, WA, supports its position.

Since the Western Electric Coordinating Council operates as a single market, Tacoma asserted, and market prices in one region are reflected in another, the consequences of El Paso Electric’s behavior were felt beyond California’s borders, even if parties did not buy power from the utility.

But Cintron said that Tacoma’s arguments are without merit. The ALJ said that Tacoma “failed to establish any connection or causal nexus between itself” and El Paso Electric. “Suggesting that any refunds must be paid to western power market participants allegedly financially injured by price manipulation is a nebulous remedy and is unsupportable by the evidence developed in this case.”

The ALJ said that despite numerous opportunities before and during the hearing in the proceeding, Tacoma and Snohomish failed to introduce any evidence supporting contentions and allegations that they were harmed by El Paso Electric.

Cintron said that the evidence in the case justifies disposition of the settlement money to the CDWR for the benefit of California ratepayers. The ALJ said that El Paso Electric’s wholesale trading activity primarily revolved around California, since a substantial amount of the utility’s available capacity was at Palo Verde. “As staff points out, the record shows that California has the strongest claim for receipt of the refund money,” wrote Cintron. “Additionally, the Enron strategies involved in this proceeding were targeted at the California markets.”

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