Judge Sides With Power Companies in California Refund Case

A Federal Energy Regulatory Commission hearing officer sided with power generators Thursday in the dispute over California's energy crisis, saying the state is due perhaps a fraction of the $8.9 billion in power-cost refunds it has sought.

In a report submitted to FERC commissioners, Curtis Wagner called California's claim grossly inflated and said the damages were likely closer to a billion dollars than the state's number. But rather than setting a dollar figure for the refunds, Wagner recommended the FERC hold a hearing within 60 days.

Wagner also suggested the state may well end up owing the generators, not vice versa, when the whole process is complete. "While there are vast sums due for overcharges, there are even larger amounts owed to energy sellers by the [California Independent Systems Operator, the agency that controls California's power grid], the investor-owned utilities, and the State of California," the judge wrote. "Can a cash refund be required where a much larger amount is due the seller? The Chief Judge thinks not."

News of Wagner's opinion is likely to be celebrated by investors in generator stocks Friday. "It's definitely a positive for the power generators," says Simmons & Co. analyst Jeff Dietert. "The potential amount is clearly below what they have reserved as a group, and the fact it appears there will be no cash payment is a real positive."

Wagner clearly felt Gov. Gray Davis' refusal to allow state negotiators to compromise hindered settlement efforts. Davis has publicly said he will sue the FERC if it does not grant the entire $8.9 billion refund.

The judge's opinion noted that the generators' offer amounts to $703.6 million. Of that, $510 million was offered by a group of five large California generators -- Duke Energy (DUK Quote), Dynegy (DYN Quote), Mirant (MIR Quote), Reliant Energy (REI Quote) and Williams (WMB Quote); $125 million by PowerX, the marketing arm of BC Hyrdo; $29.6 million from 15 power marketers, including Enron (ENE Quote); $6.5 million from the California Municipal Utilities Association; and $12.5 million from other utilities outside of California.

The decision will help bring predictability to the industry, Deitert adds. "It takes away a lot of uncertainty, although this will likely be litigated for a long time to come."

That's especially true if Gray Davis has his way.