The state of California’s persistent claim that it’s owed $8.9 billion on electricity overcharges for the May 2000-May 2001 period “has not and cannot be substantiated,” said Chief Administrative Law Judge Curtis L Wagner in his report and recommendations to the full Commission yesterday.

The amount of refunds due the state is in the “hundreds of millions of dollars, probably more than a billion dollars in an aggregate sum,” he said, but at the same time there are “even larger amounts owed to energy sellers” by the California Independent System Operator (Cal-ISO) for unpaid power purchases. “Can a cash refund be required where a much larger amount is due the seller?” he asked, adding that he “thinks not.”

The two weeks of settlement negotiations, which Wagner mediated, resulted in five settlement proposals totaling $703.6 million, he said. This is lower than his initial estimate of $716 million. A breakdown of the offers were: $510 million by in-state generators (Williams, Duke Energy, Reliant Energy, Dynegy and Mirant); $125 million by Powerex, the energy marketing arm of government-run BC Hydro in Canada; $49.6 million by 15 power marketers; $6.5 million by seven members of the California Municipal Utilities Association; and $12.5 million by load-serving entities located outside of California.

“The sellers’ overriding concern is that they should be paid the amounts owed at the same time that [the] refunds are made,” Wagner reported to FERC.

He noted that the refund dispute between California and power suppliers raises “material issues of fact,” and as a result a trial-type evidentiary hearing should be ordered by the Commission to settle the refund issue once and for all. “Because of the urgent need for an answer to the refund issues that hearing should be on a 60-day fast-track schedule.”

Wagner said FERC will need to make several alterations to its June 19 price-mitigation order to determine the level of past refunds owed. For starters, “the gas costs associated with the marginal unit should be based upon a daily spot gas price,” not the monthly bid-week prices that the Commission ordered.

Further, “the calculated refund price for the refund period should reflect the gas purchasing practices of sellers during the refund period,” he said.

Gas prices should be based on the location of the marginal unit — northern California and southern California. “In the event that the marginal until is located…North of Path 15, the daily spot gas price for PG&E Citygate and Malin [Oregon] should be averaged with the resulting gas price multiplied by the marginal unit’s heat rate to calculate a clearing price for that hour,” he said. If the unit is located South of Path 15, then “the daily spot gas price for Southern California Gas large packages should be multiplied by the marginal unit’s heat rate to calculate a clearing price for that hour.”

He agrees that a $6/MWh operational and maintenance adder should be included when estimating the clearing price, as well as a 10% adder to reflect the credit risks of suppliers when selling to the California market.

Wagner indicated, however, he did not think FERC’s method for calculating the maximum price for power during non-emergency hours — 85% of the highest Cal-ISO’s hourly market clearing price established during the last Stage 1 alert — would be suitable for computing retroactive refunds.

“On a retroactive basis, the 85% maximum price could distort re-creation of a competitive market,” he noted. To illustrate his point, he noted that the Cal-ISO declared a Stage 1 alert on Sept. 20, 2000 and did not declare another until Nov. 14, 2000. During that period, power prices remained at the 85% level and the refund date (Oct. 2) went into effect. “If gas prices rose (or fell) significantly during the interval between Stage 1 emergencies, the maximum price could be significantly different, either higher or lower than the true competitive price. Therefore, to measure the amount that actual prices may have exceeded the refund price, every hour should be re-calculated,” Wagner proposed.

“Re-calculating the hourly competitive price for purposes of a refund calculation would also permit the Cal-PX and Cal-ISO to re-settle all charges for the refund period.”

Lastly, Wagner said “interest should not be charged against any refund amounts unless the refund amount exceeds the amounts that are past due to the seller.”

As for potential refunds owed in Pacific Northwest, he said there wasn’t enough time during the settlement discussions to address the issues raised representatives from the region. “They did not have data on what they were owed, nor an amount of refunds due them.”

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