This is the second part of Chris Edmonds' column. Please be sure to read the first part.

Not If, but How Much

While generators and marketers continue to claim they shouldn't be forced into refunds, most have agreed to discuss the possibility as part of a comprehensive solution that would end the uncertainty of the investigations looking for a smoking gun.

FERC has ordered representatives from California and the generators to sit down Monday and negotiate a settlement, including possible refunds and the resolution of payment of outstanding bills owed to the generators by the state and its utilities.

FERC Administrative Judge Curtis Wagner, a veteran of January's failed talks to develop a framework for solving the crisis, will officiate the settlement discussions. He is known for his no-nonsense, sometimes brash approach toward negotiations. He's already exercising his directness.

He ordered the state to recreate allowable pricing for power, hour-by-hour, from last fall, as if the new FERC pricing order were in effect. He also asked the generators to produce a complete list of their claims for payment from state power purchasers for the same time period.

In addition, sources say he has quietly been floating a settlement number -- said to be between $1 billion and $1.5 billion -- to the generators, suggesting they bite the bullet to resolve the matter.

This past weekend, in a move unusual even for an administrative jurist, he made his view public even before the settlement talks began, suggesting an appropriate amount may be slightly higher. "We're talking several billion dollars -- $2

billion, $2.5 billion, maybe a little more," he told the

Sacramento Bee

. "But I don't think it is $9

billion."

Wagner told the

Bee

that he has already had informal discussions with executives of the generating companies and thinks "they're now ready to talk settlement

and put this behind them."

While that may be so, write-offs will have to be part of a comprehensive solution. "Everything will be on the table," says a source close to one generator. "If refunds happen, they will be a part of a much larger settlement that addresses a whole host of California issues."

Certainty Might Be Positive

While it's too early to handicap the outcome of this week's talks, many think a settlement would be a positive for the generators' stocks. "Resolution of these key issues would be a major positive and would remove a major overhang for the sector," noted

Credit Suisse First Boston

power analyst Neil Stein in assessing the impact of the settlement discussions.

Certainly, the stocks of the independent generators have suffered as Davis and Senate Democrats have stepped up the rhetoric.

AES

(AES) - Get Report

,

Calpine

(CPN)

,

Duke

(DUK) - Get Report

,

Dynegy

(DYN)

,

Enron

(ENE)

,

Mirant

(MIR)

,

NRG

(NRG) - Get Report

,

Reliant

(RRI)

and others have all felt significant pressure in recent sessions.

While I've

opined recently that the FERC price-cap order will minimally affect most independent generators, as most power is now sold through forward contracts, the impact of refunds is less clear.

Most generators have taken reserves against account receivables because collection of those receivables is less than certain. Any refunds would likely simply offset the reserves. However, companies like Calpine that have limited their reserves might feel an impact if they are drawn into the refund discussions.

While their involvement is a stretch, other Western states have asked to participate in the settlement discussions, and the state of Washington's attorney general plans to press FERC to order certain generators and marketers to provide refunds to the state for high power prices. Those discussions won't likely make it out of the starting gate.

A Smoking Gun?

Last week, three former workers at a California power plant accused Duke Energy of intentionally withholding generation capacity to push power prices higher. The three were laid off when Duke completed its purchase of the plant from

San Diego Gas & Electric

, a unit of

Sempra Energy

(SRE) - Get Report

.

The accusations came in testimony before a California Senate select committee investigating the California power crisis. The workers claimed that Duke took generation offline for unnecessary maintenance, destroyed parts that were needed for repairs to extend downtime and manipulated power deliveries to the

California Independent System Operator

, or ISO, to push prices higher at times of peak demand.

"This is the first smoking gun that's appeared -- whistleblowers," said California Lt. Gov. Cruz Bustamante, who attended the hearing. Bustamante has been a longtime critic of the generators and is a plaintiff in a lawsuit claiming the generators overcharged the state. He is suing as a private citizen.

Duke denies the allegations. "These allegations represent just one more page in a very long chapter of misinformation disseminated by people who don't know the full story," says Bill Hall, Duke's vice president of Western operations. He notes that the California ISO was in charge of dispatching power from Duke's plant and that the ISO's log books requesting dispatch match those of Duke's precisely, suggesting power was available when requested.

Interestingly, the Senate committee would not allow Duke to testify at the hearing to respond to the allegations.

Now, there's a real power play.

Be sure to read the first 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.