http://biz.yahoo.com/rf/010709/n0941498_5.html

Monday July 9, 6:48 pm Eastern Time

California, power firms fail to reach refund deal

By Patrick Connole and Chris Baltimore

WASHINGTON, July 9 (Reuters) - Negotiations to settle California's demand for $8.9 billion in electricity refunds from energy companies collapsed on Monday, prompting the mediator overseeing the talks to draft a refund plan that may leave the state empty-handed.

Curtis Wagner, chief administrative law judge with the Federal Energy Regulatory Commission, stepped in to end 15 days of closed-door talks after both sides failed to reach a settlement by a Monday deadline.

Power generators offered a combined $716 million to resolve the dispute over alleged wholesale electricity overcharges, an amount far below the $8.9 billion sought by California alone. Other Western states asked for some $6 billion in refunds.

``You can take a horse to water but you can't make him drink. That's the dilemma any settlement judge is faced with,'' Wagner said.

At stake in the complex case is California's demand that power firms doing business in the state repay billions for allegedly inflated wholesale electricity sales from May 2000 to May 2001. The nation's most populous state faced a series of blackouts in recent months, and a tenfold increase in power prices has drained state coffers.

Power generators maintain that wholesale prices reflect market conditions. The companies criticized California for failing to pay its overdue bills and provide creditworthiness guarantees for future sales.

JUDGE SAYS CALIFORNIA MUST ALSO PAY

The veteran agency judge said California likely owes more money to power generators for its unpaid electricity purchases than it is entitled to in refunds, raising the prospect the state may end up empty-handed under his plan.

The California Power Exchange and California Independent System Operator, which manage the state's electricity grid and auction system for power sales, were owed ``hundreds of millions of dollars, maybe a billion dollars'' but not more, Wagner said. That amount would ``probably'' be more than offset by what the state owes to the power generators, he said.

Wagner said he had already prepared an outline of the refund recommendations he would make to the five-member FERC, which has the power to impose refunds. He said he would finalize a detailed version in the next few days, and set a Thursday deadline for power generators and the state to submit comments on his proposal.

Michael Kahn, tapped by Democratic Gov. Gray Davis to be California's chief negotiator, told reporters the state has a ``viable claim'' and would go to court if necessary.

``What we have is a situation where California will get its $8.9 billion,'' Kahn said.

ENERGY FIRMS FRUSTRATED

Power generators had expressed growing frustration earlier on Monday, accusing California of being unwilling to budge in its demand for the entire $8.9 billion in refunds.

Details of various settlement offers made by the power companies came tumbling out on Monday after the judge lifted a gag order and gave all sides a chance to summarize their arguments in a public session.

Representatives of Reliant Energy Inc. (NYSE:REI - news), Duke Energy Corp. (NYSE:DUK - news), Mirant Corp. (NYSE:MIR - news), Williams Cos. (NYSE:WMB - news), and Dynegy Inc. (NYSE:DYN - news) criticized California for being unwilling to move from its initial refund demand. The five companies had offered a combined $510 million to California.

``We really haven't come close with these proceedings to reaching a settlement,'' said John Stout, head of Reliant's California operations.

The companies said the five-member FERC commission would have to decide the amount of refunds and how they would be allocated, based on the judge's proposal. In March, FERC ordered $125 million in refunds for January and February.

North Carolina-based Duke Energy took a firmer line.

Duke said it owed no more in refunds than what FERC ordered the company to pay in March. The judge's refund proposal ``should acknowledge'' that no evidence exists to support any additional refunds, said Larry Eisenstat, a lawyer for Duke.

The power generators accused the state of underestimating the actual cost of natural gas and skewing other related costs to inflate its refund demand total.

California officials had said the refunds could include a non-cash portion, such as renegotiation of long-term power contracts or debt forgiveness.

Kahn said the 15 days of secret negotiations under Wagner's guidance did not produce any serious settlement offers. ``We did not receive any meaningful offers,'' he said.

Wagner said the commission should launch its own proceeding to gather information and untangle the complex issue of refunds.

He said he would recommend calculating refunds by applying retroactive to Oct. 2, 2000, a June 19 FERC order that limited the price of spot market purchases at 85 percent of the price set in the latest emergency situation.

-- (in@energy.news), July 10, 2001