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Davis Open to Noncash Ways to Repay State for Overcharges

Energy: As a mediator considers alternatives, the governor says he might accept electricity at below-market prices.

July 07, 2001|RICARDO ALONSO-ZALDIVAR and DAN MORAIN | TIMES STAFF WRITERS

WASHINGTON — A federal mediator said Friday that he is considering alternatives to cash refunds for the $9 billion that California claims it was overcharged by power sellers, as the pace of settlement negotiations unexpectedly quickened.

Curtis L. Wagner Jr., chief judge of the Federal Energy Regulatory Commission, said there are "a half-dozen or more" ways he could structure an agreement, including renegotiating controversial long-term power contracts signed by Gov. Gray Davis' administration.

Wagner's comments came as the stalemated, closed-door talks suddenly seemed to lurch into gear, with just three days left before they are scheduled to end at midnight Monday.

"The pace of the discussions has picked up," said Michael Kahn, chairman of the state's power grid operator and Davis' representative at the talks. "We continue to be ready to discuss all offers with all sellers."

Sources familiar with the talks, however, said the state and power sellers still are nowhere near a deal.

In Sacramento, Davis vowed to pursue his full request for $8.9 billion in court if necessary, and not settle for less.

The governor did, however, leave open the possibility that, as part of any settlement, he might accept electricity from generators at below-market prices. Perhaps, he said, generators who have signed contracts to sell power to the state might settle by agreeing to renegotiate to give the state better terms.

"We're going to vigorously pursue every dime that was wrongfully taken from us," Davis said.

Davis has noted repeatedly that FERC has found California's marketplace to be dysfunctional on three separate occasions--in November, December and in April.

"They have an obligation under the Federal Power Act to return excessive charges to Californians," Davis said. "That is not a discretionary act. That is mandatory. The ball is in FERC's court to get us back $8.9 billion. Will I take less than $8.9 billion? No."

Wagner earlier praised Davis for indicating that he would not insist on a refund wholly in cash but could accept discounted, long-term power deals as well. The judge was responding to comments Davis made Wednesday, as reported by the San Jose Mercury News.

"I thought that the governor's statement was encouraging," Wagner said during an impromptu hallway news conference. "We're looking at different ways of doing this."

The contracts--once touted as a stabilizing influence--have become a political liability for the Democratic governor amid falling energy prices.

A Times analysis of payments made so far under the long-term contracts shows the average cost per megawatt hour has been $173. Currently, prices for next-day, peak-hour delivery of electricity in California have fallen to about half that amount, according to Platts Energy Trader, an industry publication.

Despite the new sense of purpose Friday, a settlement still was considered a longshot. Only the day before, Wagner threatened to issue a preliminary report that was expected to detail the unwillingness of the parties to budge from staked-out positions. But the judge said Friday morning that he would hold off on a report.

"I wouldn't do anything to kill the prospects," he said.

Nevertheless, Wagner said there would be no extensions of his midnight Monday deadline. If the negotiations fail to produce a settlement by then, Wagner said, he will recommend one to FERC's governing board. Although the board has indicated it would not hesitate to order refunds, a mandated settlement is virtually guaranteed to lead to extended litigation.

The FERC board placed three issues on the agenda for the settlement talks: the refunds claimed by California, payments that still are owed to the generators for power already delivered and efforts to shift more of the state's power purchases to long-term contracts.

The judge has imposed a strict gag order on the more than 140 lawyers participating in the talks, but a source familiar with the proceedings said California representatives first raised the issue of renegotiating the long-term contracts in a presentation June 29.

"The contracts are one of the currencies that are being talked about," said the source, who asked not to be identified. "Clearly the governor was negotiating these contracts with a gun to his head."

Davis told the Mercury News that he would accept a mix of cash and contract concessions as long as the total added up to the $8.9 billion the state is claiming it is owed for overcharges.

However, other participants are skeptical that the state can get the full amount it claims. A hefty chunk--more than $3 billion--is attributable to sellers who are outside FERC's jurisdiction to order refunds if prices exceed "just and reasonable" levels.

Also Friday, Davis said state spending on power fell below expectations in June, to $1 billion. Electricity costs averaged $167 per megawatt hour in June, almost half of January's price of $332 and more than 30% below May's price of $243.

"Obviously, we have a long summer ahead of us," Davis said. "We need to be vigilant; there will be challenges. I expect there will be some outages before the summer is over, but I do believe we are making good progress."

Davis attributed the fall in prices to conservation, his administration's work to increase power supplies and long-term contracts that reduced the state's reliance on the volatile spot market.

"You can see the value of these long-term contracts dramatically shrinking these spot prices," Davis said, "and dramatically shrinking our overall price, which is what matters to Californians."

*

Alonso-Zaldivar reported from Washington and Morain from Sacramento.

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