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California Changes Stance on Refunds 
Two Sides Far Apart In Energy Talks 
By Peter Behr
Washington Post Staff Writer
Friday, July 6, 2001; Page E01 
California officials have abruptly shifted tactics in their attempt to 
recover billions of dollars in alleged overcharges for electricity, saying 
they may reduce their demands for huge refunds if generators renegotiate $43 
billion in long-term electricity contracts that the state signed this year.
Gov. Gray Davis (D) said part of the $8.9 billion in refunds the state is 
seeking could be offset by reductions in energy prices in the long-term 
contracts, whose costs have become a growing political embarrassment for 
Davis. 
"We've made suggestions, we've offered various ways in which people could get 
us $8.9 billion," Davis told the San Jose Mercury News in a report yesterday. 
"You can renegotiate our existing contracts and save us money. However you 
want to do it, it's just got to net out close to $8.9 billion."
The new offer was introduced this week into the closed negotiations over a 
California settlement being conducted in Washington by Federal Energy 
Regulatory Commission Judge Curtis L. Wagner Jr., according to sources close 
to the negotiations.
Yesterday, Wagner said he may issue his own preliminary finding today on the 
amount of overcharges if California officials and the generators cannot reach 
a compromise.
"What I'm trying to do is get people in a settlement mood," Wagner told 
reporters. "In the event we're unable to do that, [Friday] at some point I 
may offer a preliminary assessment." The settlement conference is set to 
conclude on Monday.
Wagner, FERC's chief administrative judge, has been trying to push both sides 
toward a compromise that would resolve the huge energy pricing controversy. 
Mountainous energy prices have bankrupted California's largest utility, 
drained billions of dollars out of the state treasury and put Davis at 
sword's point with generators that help keep the state's lights on.
Last Friday, Wagner rebuked Davis's chief representative, Michael Kahn, 
chairman of California Independent Grid Operator -- the state's power grid 
manager -- indicating that the state's demand for nearly $9 billion in 
refunds from power generators and marketers was too high, sources said.
Wagner's settlement conference, which has involved more than 100 lawyers for 
all sides, is closed to the public and media.
Wagner complained last month that Kahn was following a political agenda, and 
his lack of independence in the negotiations was such a "joke" that the 
parties might as well wear "clown suits," according to a Dow Jones report 
confirmed by sources close to the talks.
But he has also criticized the generators and power marketers, led by Reliant 
Energy Inc., Williams Energy Services, Duke Energy and Southern Co., for 
failing to make serious settlement offers, these sources said. The suppliers 
have offered to refund $600 million, provided the state is able to call off 
various California lawsuits demanding far larger refunds, sources said. 
Wagner's leverage is his ability to propose his own refund figure to FERC's 
commissioners. FERC has tentatively called for $124 million in refunds, but 
now is taking a harder line on preventing a new escalation of California's 
electricity prices this summer and is likely to be receptive to a higher 
refund figure, some energy analysts believe.
Davis's tactical change, offering to make the long-term contracts part of an 
overall settlement, comes amid growing criticism of what the state will have 
to pay for energy under those deals.
California's energy calamity stemmed in large part from its failed 
deregulation plan, which relied heavily on short-term power purchases at 
volatile "spot market" prices. When energy costs shot upward last summer, so 
did the state's electricity bills. 
In response, Davis's aide, S. David Freeman, and his staff began negotiating 
long-term power contacts with suppliers. The $43 billion in deals signed so 
far would require the state to pay about $70 per hour for a megawatt of power 
for a large part of the electricity it will need over the next 10 years. 
That's well under the average of $250 per megawatt-hour that the state was 
paying at the beginning of this year, but above current power prices -- and 
considerably higher than what electricity may cost in the next decade, energy 
analysts say.
A new agreement to lower those contract prices could relieve political 
pressure on Davis and focus settlement negotiations away from the state's 
controversial demand for the $8.9 billion refund. Davis will argue that 
reducing future power charges that his administration negotiated should count 
as a "refund" because the deals were reached "under commercial duress," 
according to sources close to Wagner's negotiations.
Industry supporters say Davis's refund figure is impossible to justify. 
"There's no benchmark for what a fair and reasonable price should be," said 
Michael Zenger, California director of Cambridge Energy Research Associates. 
The state's advocates counter that if FERC enforced a "just and reasonable" 
standard for power prices based on operating costs and a generous profit, the 
overcharges by all sellers could easily reach the $9 billion figure.
"It's not rocket science, but it does require the regulators to regulate," 
said Frank Wolak, a Stanford University economist who heads an oversight 
committee for the California grid.
Those polar-opposite views have left both sides in Wagner's conference room 
"billions of dollars apart," as the talks approached their final weekend, 
sources said.
, 2001 The Washington Post Company