California Power Play: Generators on the Line - TheStreet

The focus on the California energy crisis shifts east this week.

The

Federal Energy Regulatory Commission

has summoned executives from independent power producers that sell California power out to Washington, D.C., in hopes of settling disputes over amounts owed by the state for power sales that began last October.

While nearly a dozen investigations have provided no concrete evidence of illegal shenanigans, pressure is mounting on the generators and marketers to give in to demands for refunds of high power charges incurred last fall.

The question to be resolved in Washington this week is just how much those refunds will amount to. There appears to be no black-and-white answer to that question. However, it'll probably be heavily influenced by shades of Gray.

The Davis Crusade

In a remarkable reversal of political fortune, California Gov. Gray Davis' claim that California's electricity troubles are a result of greedy, out-of-state generators seems to be gaining steam. While the change in

Senate

control didn't hurt the case for price caps, many pundits think pressure-filled lobbying from Davis and his Capitol Hill allies resulted in last week's FERC order, which extended flexible caps on prices that generators can charge for power across 11 Western states, including California. The caps, originally only effective in California during periods of severe supply shortages, now apply continuously across the West.

"There is no question that Davis' continued combativeness has worn on federal regulators," says one source who closely follows FERC actions. "It's almost as if the FERC was tired and gave in."

In fact, the source suggests two recent

Bush

appointees to the FERC were the biggest surprises. "I didn't even recognize Pat Wood," the source quips, referring to the former

Texas Public Utility Commission

chairman who many think is the heir apparent to the FERC chairmanship. Wood is often credited with implementing a successful power-deregulation plan in Texas, often cited as a successful model compared to California's failure. Nora Brownell, formerly a member of the

Pennsylvania Public Utility Commission

, is the other Bush appointee.

Now that Davis appears to have won at least partial victory in his quest for price regulation in California, he remains vehement that generators be forced to refund what he claims are billions in illegal charges. "California was bilked out of $9 billion," Davis said in testimony last week before a Senate committee. He argues that the FERC order should be applied retroactively, at least to last fall.

Who Made the Rules?

Davis also continues to claim -- even with no evidence of illegality -- that generators and marketers broke the rules by selling power at prices well above 10 times historical norms. However, the market readily accepted those prices at the time, signaling that demand far exceeded supply in California, which hasn't built a new power plant in well over a decade. Davis claims the prices violate FERC rules calling for just and reasonable pricing of wholesale power.

"And now they have to play by the rules," Davis said last week, referring to the generators after the FERC ruling.

Davis' biggest problem hasn't been anyone breaking the rules; it has been the rules themselves. No question, the rules were broken, but the rules needed fixing. Instead of quickly creating an environment to mitigate the damage to his state, he became combative, trying to blame others rather than looking for solutions.

Under Davis' watch, California regulators and agencies that controlled power purchases refused to allow utilities to secure power under cheaper, long-term contracts when spot-market prices began to soar. It wasn't until months later -- about the time the state took over purchasing power -- that forward contracts became chic.

The results: More than $10 billion in unpaid wholesale power bills,

Pacific Gas & Electric

in bankruptcy,

Southern California Edison

teetering on insolvency's brink and a power system in such disarray that even

Thomas Edison

wouldn't recognize it.

It will take much more than a FERC order to solve the California power crisis. It will take leadership and vision, two commodities that -- like electricity -- are currently lacking in California.

What role will refunds play in the settlement talks, and what has the FERC judge said about them? Plus, which stocks are seeing pressure from the political rhetoric? Find out in the second part of this column.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds' firm was long AES, Enron and Mirant, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to

Chris Edmonds.