Although an “unwelcome” and “unprecedented” development, FERC’sdecision last week ordering 13 power generators and suppliers inCalifornia to pay potential refunds of $69 million on transactionsfor the month of January will have a “relatively benign” impact onthe companies’ finances, according to a Merrill Lynch report.

“Given the intense political pressure on the FERC (particularlyChairman Curt Hebert, whose position is thought to be in jeopardy)to help California in its crisis, we see this order primarily as awarning shot to the generators that FERC will not remain on thesidelines,” wrote analyst Donato J. Eassey in the report. “What maybe more negative is that FERC might be descending a slippery slopeto WSCC [Western Systems Coordinating Council] region-wide pricecaps this summer (which we now view as a likely outcome),” hewarned.

Nevertheless, the “damage from this is likely to be morepsychological than financial as companies like Dynegy and Williamsexit the spot market and enter into long-term contracts with thestate,” it said.

On the plus side, however, this latest “development could infact help lead to a larger solution” in the California bulk powermarket,” Eassey predicted. “With refunds being addressed, theimplication is that the remainder of companies’ [suppliers’]receivables are legitimized. We have little doubt that [thesesuppliers] would gladly settle the ordered refunds without appealshould assurances be given regarding their remaining moneys owed.”

The Commission’s refund order tagged three companies in MerrillLynch’s natural gas group: the Dynegy Power Marketing/NRG jointventure for $22.5 million; Williams Energy Services for $8 million;and Enron for $3.2 million, the report noted. FERC singled out the13 suppliers as owing potential refunds on the basis that theprices they charged for power were “unjust and unreasonable” on the18 days of Stage Three alerts during January. The suppliers haveuntil March 23 to appeal the decision and justify the higher pricescharged.

In its March 9 order, FERC calculated that the highest pricecharged for power should have been $273/MWh in January based on theaverage cost of natural gas, emissions credits and otheroperational criteria. But the order “ignores a basic component ofrisk management — credit risk,” according to Merrill Lynch.”January was a dynamic month to say the least, with increasingthreats of bankruptcies at the electric utilities, ISO and PX (thelatter of which just declared Chapter 11 Friday in a somewhatexpected move), utility-debt downgrades to junk and the non-paymentof receivables; as such, we believe some premium for credit riskshould be justifiable. Each company is expected to appeal.”

The Commission’s decision was in response to the Cal-ISO’s claimthat generators had overcharged on power sales in California byabout $550 million during December and January. FERC said last weekthat it would address potential December refunds in a separateorder.

FERC plans to continue manually screening bulk powertransactions for potential overcharges in California through theend of April, at which time real-time market monitoring is expectedto take effect. “While such actions could lead to further refundsgoing forward, if the constraint holds to only Stage IIIalerts…..future refunds should be limited,” said the MerrillLynch report .

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