Regulators may seek $3.3 billion in refunds

H. Josef Hebert

Thursday, March 27, 2003 | 9:54 a.m.

WASHINGTON -- Federal energy regulators, cataloging widespread manipulation of Western markets, said Wednesday they probably will require about $3.3 billion in refunds, a third of what California says it's owed.

The Federal Energy Regulatory Commission also signaled that it probably will not force energy companies to renegotiate more than $20 billion in long-term power contracts California agreed to when natural gas and electricity prices soared to record levels in 2000 and 2001.

Two of the three commissioners -- both Republicans -- oppose renegotiating the contracts that California officials say were inflated because of the corrupt market activities prevalent at the time. The issue will be decided next month.

The actual amount of refunds has yet to be determined by the commission and whatever they decide is likely to be challenged in court. But the staff report's analysis put the amount due at about $3.3 billion, according to FERC officials.

California officials continued to argue the state is owed nearly $9 billion in refunds because of price manipulation.

"I'm pleased that FERC finally has recognized what we've known for a long time in California, that California was the victim of market manipulation and illegal gaming," Gov. Gray Davis said. "I'm saying show me the money. Give me back $9 billion."

Sen. Dianne Feinstein, D-Calif., said newly released documents submitted by California to bolster its claims demonstrate potentially widespread illegal practices by energy companies to withhold power and drive up prices. Feinstein called on Attorney General John Ashcroft to launch a criminal investigation.

Federal prosecutors already have obtained guilty pleas from two former Enron Corp. traders who admitted they profited illegally from California trading schemes.

In a lengthy report, FERC investigators outlined a broad array of manipulation of natural gas and electricity prices that aggravated electricity supply problems in the West, causing prices to soar in late 2000 and early 2001.

"Price gouging abounded," said Commissioner William Massey, the only commissioner who favors renegotiating the contracts. Massey is a Democrat; FERC Chairman Pat Wood is a Republican, as is Commissioner Nora Brownell.

Massey said the situation was allowed to run out of control because the commission refused to impose significant price controls until the summer of 2001. "We should have intervened earlier."

Wood said power supply problems caused by the shortage of hydropower in the Northwest "created a fertile environment for companies to twist and turn and perhaps break the rules."

The staff report concluded that key to the electricity price run-up in California and later the Pacific Northwest was the manipulation of natural gas prices by energy companies through false reporting of prices and other techniques that misled traders.

Many of the suspect trading strategies previously had been disclosed, mainly through a string of internal Enron memos provided to the FERC last year. The report, based on a 13-month investigation, found that companies other than Enron also were deeply involved in price manipulation.

Along with seven Enron subsidiaries, five other companies were singled out in the report as having engaged in marketing activities that warrant disciplinary action. The FERC commissioners said they would decide within the next few weeks whether to impose sanctions on the companies that would severely restrict or ban their activities in energy trading.

The companies included Reliant Energy Services Inc., and BP Energy Co., two marketers that allegedly colluded at a major California trading hub to rapidly drive up prices and then down again, in the process taking profits.

A spokesman for Reliant emphasized that FERC has yet to decide on disciplinary action.

The other power and gas markers singled out for discipline were Bridgeline Gas Marketing LLC, Citrus Trading Corp., ENA Upstream Company, Enron Power Marketing Inc., Enron Energy Services Inc. Enron Canada Corp., Enron Compression Services Company, Enron Energy Services Inc., Enron MW LLC and Enron North America Corp.

Enron filed for bankruptcy in December 2001 and has sold off its online power trading operation.

The 2000-01 Western energy crisis cost California as much as $45 billion in higher electricity bills, lost business due to blackouts and a slowdown in economic growth, according to the Public Policy Institute of California.

FERC for the first time on Wednesday indicated it was ready to examine alleged market abuses during the summer of 2000 when California energy prices also soared. If energy companies are found to have violated commission rules and orders, they could be required to return some of their profits from those sales as well, FERC officials said.

"This was a very ugly situation in the West, one where I don't think anyone was on the side of the angels," Brownell said.