Opinion: FERC’s Failure To Order Refunds Spells Trouble For Generators

FERC’s Failure To Order Refunds Spells Trouble For Generators | Norton Rose Fulbright

December 01, 2000

By Lynn Hargis

Several events in early November spell big trouble ahead for generators in the California market.

The Federal Energy Regulatory Commission said in a November 1 proposal to “fix” the Cali- fornia power market that wholesale rates in California markets last summer were “unjust and unreasonable” – and, therefore, unlawful – under the Federal Power Act, but found that the governing law did not permit it to order any refunds retroactively for that period. However, FERC made all rates in the California Power Exchange subject to refund prospectively from October 2, 2000 through December 31, 2002.

Most generators who sold into the California market breathed a sigh of relief that FERC had not given in to politics just before a presidential election and ordered refunds retroactively. The debate shifted to whether FERC’s “soft cap” of $150 per MWh for the single price auction for energy sales was something they could tolerate.

Meanwhile, Governor Gray Davis of California made a nearly unprecedented trip to the Federal Energy Regulatory Commission on November 9 to express his dismay that the commission had found the California rates to be unlawful, but had done nothing about it. State lawmakers threatened a voter referendum that could overturn all aspects of the state restructuring law, putting all power facilities under state – not federal – control. Governor Davis also said he “cannot allow” FERC’s proposal “soft cap” instead of a “hard cap.”

Further, the two big investor-owned utilities in California, Pacific Gas & Electric and Southern California Edison, made legal moves in an effort to ensure they will not be left holding a bag of many millions of dollars of wholesale power costs that cannot be passed through immediately to their ratepayers because of the rate moratorium in place.

These combined facts could spell big trouble for generators. The Federal Power Act was simply not designed to promote competitive markets or to protect people speculating in the power business. It was enacted to protect wholesale rate consumers and utilities required to serve them.

While FERC correctly listed the key cases saying that FERC cannot retroactively change rates and order refunds, one cannot ignore the fact that those cases dealt with vastly different facts. Given the pro-consumer protection rationale of the statute, a way might be found legally to order the refunds that Governor Davis wants.

Only San Diego ratepayers actually had to pay rates that increased by 70% or so last summer. Even so, not only the California legislature, FERC, and the governor of California, but also the president of the United States got into the act because the political uproar was so huge. Once it becomes clear that the customers of Pacific Gas & Electric and Southern California Edison will be hit with similar increases on a delayed basis, the political uproar will be thunderous.

Under these circumstances, what approach should generators take with the Federal Energy Regulatory Commission? The logical reaction would be to take the profits and run, insisting that refunds cannot be made, and simply debating the finer points about whether a single price auction or some other auction is preferable in the future, and what other incentives generators will require to come into California.

Here’s a more heretical suggestion: generators should recognize that a market for a commodity as essential as electricity simply cannot, for political reasons, allow prices to rise unchecked indefinitely with no recourse for consumers. Therefore, generators should take it upon themselves to find a compromise method of imposing a ceiling and – if necessary – refunds on customer rates and their own profits.

When I left the FERC staff 14 years ago, I remember a utility lawyer urging me not to work for independent power producers. He told me that investor-owned public utility managements thought of themselves as quasi-public servants and understood the public interest role of their business, but that some of the independents were simply profit-hungry “cowboys.” I think the “cowboy” spirit of independence and initiative has done a lot for this industry, but it may be that the public-interest side of the business has sometimes been overlooked.

The independent power business might be practice enlightened self-interest by recognizing that the one true thing about almost every voter is that he or she pays utility bills, and then by taking upon itself as an industry a “public interest” gloss in any public statements to the federal regulators. Unless the industry itself proposes or accepts some limits on what consumers can be charged and thus on its own profits, the possibility is strong that the nascent market for competitive power and market-based rates will be stifled in infancy by the public outcry over unfettered and skyrocketing utility bills.

by Lynn Hargis, in Washington