From: jeff.dasovich@enron.com
To: skean@enron.com, richard.shapiro@enron.com, james.steffes@enron.com, susan.mara@enron.com, harry.kingerski@enron.com, leslie.lawner@enron.com, michael.tribolet@enron.com, kristin.walsh@enron.com, karen.denne@enron.com, mpalmer@enron.com, janel.guerrero@enron.com, paul.kaufman@enron.com, susan.landwehr@enron.com, linda.robertson@enron.com
Date: 2001-07-18 16:18:00+00:00
Subject: CAISO cuts refund estimate to $6.1B from $8.9B

Calif ISO Cuts Power Refund Estimate To $6.1B From $8.9B     
Updated: Wednesday, July 18, 2001 11:53 AM;ET    ; 
;

By Mark Golden 

Of DOW JONES NEWSWIRES 


NEW YORK (Dow Jones)--California's estimate of how much the state was 
overcharged by power suppliers dropped to $6.1 billion from $8.9 billion when 
an adjustment requested by a Federal Energy Regulatory Commission judge was 
taken into account, according to data submitted to FERC last week. 

The California Independent System Operator's estimate fell when the grid 
operator excluded power bought by utilities not under its purview, and its 
estimate could fall again as it works in other recommendations made by the 
judge following the conclusion of 15 days of talks between power suppliers 
and the state over potential refunds last week. 

Even as the ISO continues to recalculate its refund estimate, however, the 
state is sticking to the original $8.9 billion figure, which has been called 
arbitrary by critics. The $6.1 billion estimate merely establishes "a 
potential framework for settlement discussions," Eric Hildebrandt, the ISO's 
chief analyst on the matter, told the FERC. 

FERC administrative law judge Curtis Wagner, who has dismissed the $8.9 
billion figure as baseless and criticized California's delegation for not 
negotiating in good faith, estimated in his report on the talks that refunds 
due may amount to about $1 billion. Power suppliers offered just over $700 
million. 

Wagner has recommended FERC hold a 60-day hearing to set the level of refunds 
and has told the ISO to revise its estimate of what California is owed. 

The ISO's original $8.9 billion figure included electricity sales to 
municipal utilities and alternative energy suppliers that didn't go through 
the ISO's wholesale markets, the California Power Exchange or the California 
Department of Water Resources. Without direct knowledge of the prices of 
those purchases, the ISO made estimates. 

"We know the volume (of the bilateral deals)," Hildebrandt said. "The refund 
amount was based on extrapolation of observed prices in the spot market." 


Resetting The Baseline 


Wagner told the ISO to recalculate its figure using only sales through the 
ISO and CalPX markets - which were set up by the state's deregulation law for 
California's three investor-owned utilities to purchase power - in addition 
to sales to the California Department of Water Resources. 

The DWR has been buying power for the utilities since PG&E Corp. (PCG, news, 
msgs) unit Pacific Gas & Electric Co. and Edison International (EIX, news, 
msgs) unit Southern California Edison ran out of cash in January. DWR has 
also been covering the needs of Sempra Energy (SRE, news, msgs) unit San 
Diego Gas & Electric Co. 

In arriving at his new estimate, the ISO's Hildebrandt also recalculated fair 
prices - the baseline against which refundable amounts are determined - by 
retroactively applying the price controls FERC imposed June 19. Those 
controls set prices by the operating costs of the least efficient generator 
needed to meet demand each hour. 

But last week, after Hildebrandt completed his $6.1 billion estimate, Wagner 
recommended to FERC commissioners that the June 19 price control formula be 
modified when used retroactively to determine refunds. 

Those modifications, if applied to the ISO's estimate, would cut refunds much 
further. For example, FERC's price limits are now based on a monthly average 
of natural gas prices covering supplies throughout the state. Wagner 
recommended using power producers' actual gas costs. Since gas is 
considerably more expensive in southern California, using actual prices would 
cut potential refunds sharply. 

Also, Wagner said that refunds should be ordered on sales only as far back as 
Oct. 2, which would reduce the total amount claimed by California by about 
one-third, according to Hildebrandt's previous monthly breakdown. 

ISO staff is again recalculating the refund estimate to reflect some of 
Wagner's recommendations, but the ISO will still include sales back to May 
2000, said spokeswoman Stephanie McCorkle. 

"The reason we're not going back just to Oct. 2 is that all of the 
overcharges going back to May should be repaid," McCorkle said. "We just 
maintain that position." 


FERC Baseline Questioned 


In addition, Hildebrandt argues in his recently released estimate that when 
fair prices are calculated retroactively using FERC's new formula, the price 
cap should be based on the least efficient generator the ISO knows to have 
been available, not the least efficient generator actually used to meet 
demand. 

That's because the FERC's new price controls require all available generators 
be made available to the ISO at any time, Hildebrandt said. 

Applying that rule would raise the ISO's revised estimate substantially: to 
$7.7 billion from $6.1 billion. 

One of the ways generators managed to manipulate prices higher, Hildebrandt 
said, was to not offer cheaper power from more efficient units. Considering 
only the least efficient generator actually used would make permanent the 
rewards for such withholding, he said. 

"The judge is in error to suggest that the actual (least-efficient) unit used 
would have been called on if the must-offer requirement were in effect," 
Hildebrandt said in an interview. 

In arriving at his estimate, Hildebrandt determined the difference between 
actual sales prices and what prices would have been for every seller and for 
every hour since May 1, 2000, had price controls been in effect. The ISO 
released only the total potential refund, not the company-specific shares. 

Hildebrandt took issue with generating companies that have complained his 
numbers aren't justified. 

"These are based on very tangible records," he said. "The idea that it's a 
black box is misleading." 

-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com 

(Jason Leopold in Los Angeles contributed to this article.)