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Federal Energy Agency Unlikely to Order Refunds

Power: Regulatory panel says much of the overcharge alleged by Cal-ISO is beyond its jurisdiction, and questions whether the rest is 'excessive.'


WASHINGTON — What are the chances that federal regulators will order electricity wholesalers to refund $6.3 billion in alleged overcharges?


Officials of the Federal Energy Regulatory Commission have already made clear that nearly $3 billion--almost half the total that California's grid operator said last week was excessive--is off the table because a statute of limitations puts alleged overcharges that took place before Oct. 2 beyond their reach.

As for the rest, lawyers familiar with the agency and industry observers note that FERC has consistently hesitated to use its full legal authority to enforce "fair and reasonable" rates because of difficulty in defining that phrase. Some within FERC question how much of the "excessive" rates documented by the California Independent System Operator fall beyond FERC's jurisdiction--for example, rates charged by municipal power suppliers that are not regulated by the federal agency.

So far, FERC has ordered electricity wholesalers to justify or refund only $124 million in alleged overcharges--just 5% of the amount that the Cal-ISO has identified. That sum deals only with rates charged in January and February 2001 during Stage 3 alerts--periods when electricity reserves fall below 1.5%.

FERC's approach to the alleged California overcharges will probably not become any more aggressive as a result of the two new members it will soon have. President Bush has picked two state utility regulators to fill vacancies on the five-member commission, the White House announced Tuesday.

The president plans to nominate Pat Wood III, chairman of the Texas Utility Commission and a Bush ally, and Nora Mead Brownell, a member of the Pennsylvania Public Utility Commission, to the FERC governing board.

Administration officials have indicated that Wood, 38, would assume the FERC chairmanship, a position now held by Curt Hebert Jr., a staunch advocate of energy deregulation.

Shake-Up at FERC Was Expected

The shake-up has been expected because of continuing complaints that FERC has not been aggressive enough in dealing with high energy prices and electricity shortages in California and elsewhere in the West. Hebert in particular has angered California officials with his opposition to price controls on wholesale electricity sales.

Although the administration wants to appear sympathetic to California's plight, replacing Hebert has been a problem because he is a protege of Senate Majority Leader Trent Lott (R-Miss.).

Cal-ISO officials--who pointed out that their $6.3-billion figure was part of a study calling for stronger market controls, not for refunds--may still formally ask FERC to augment the refund order for January and February. FERC ordered wholesalers to justify $124 million worth of charges shortly after Cal-ISO asked for $550 million in refunds for December and January.

FERC's refund process reflects the ambiguities facing federal regulators who oversee an electricity market that was designed to follow the law of supply and demand. At stake may be the final bill for electricity used to date in California as well as future rates.

And the debate over the role refunds should play in addressing skyrocketing wholesale electricity prices underscores diverging philosophies of what went wrong in the California market and how to fix it. What role should the government--specifically FERC, an agency with a mandate to ensure "fair and reasonable" rates--play?

"The whole notion that there's such a thing as a just price is kind of an anachronism from New Deal days," said Pietro Nivola, a Brookings Institute scholar who studies regulatory politics. "Especially as we move closer to some form of deregulation, we've come to understand that the price is what the traffic will bear. In this case, utilities simply have to be able to get higher rates at the retail end."

But others say FERC has failed to assert its authority, allowing the wholesalers to operate with impunity.

"The message FERC has sent so far is, as long as you leave 10 cents of every dollar in the bank we won't pull the alarm," said Mark Cooper, director of research for the Consumer Federation of America.

Some on Capitol Hill say a massive refund order by FERC--while highly unlikely--would go a long way toward reining in wholesale prices. But FERC officials and many economists say that view is myopic and may do more harm than good, potentially discouraging new suppliers from entering a market already too tight. The memory of the 1970s oil crisis and a prevalent view among economists that government intervention made matters worse has informed the views of some longtime government officials and observers.

Refunds Called 'Inferior Remedy'

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