California Tells Ninth Circuit That Feds Owe It Millions

SAN FRANCISCO (CN) — An attorney for the California Public Utilities Commission told the Ninth Circuit on Wednesday that the federal government owes it millions of dollars after miscalculating refunds stemming from California’s energy crisis 15 years ago.

The appellate panel was largely silent during oral argument, with Senior Circuit Judge Richard Clifton raising the only substantive question during the 30-minute hearing: Why did the Federal Energy Regulatory Commission (FERC) calculate the refunds on an hourly basis?

“The government-owned utilities who are net sellers wind up being treated a whole lot more like buyers who are sellers,” he said of FERC's decision to calculate by the hour.

California deregulated its electricity sector in 1996 under Republican Governor Pete Wilson, who said deregulation would reduce electricity prices and reinvigorate the state’s economy. But FERC found that power suppliers such as Shell and MPS Merchant Services took advantage of deregulation by manipulating energy markets. Within four years the state was suffering electricity shortages, rolling blackouts and soaring prices, and Pacific Gas & Electric, California’s largest utility, went bankrupt.

After the energy crisis subsided, FERC determined that government entities that had bought and sold electricity should receive refunds. The California Public Utilities Commission asked that the purchases and sales be “netted” over the entire nine-month refund period in calculating refunds, but FERC netted them on an hourly basis.

Seeking reversal Wednesday, CPUC attorney Stan Berman with Sidley Austin in Seattle told the court that the hourly netting was flawed.

In its brief to the court, the CPUC said that under hourly netting, government entities that were large net sellers, and which FERC had found to have contributed to the energy crisis, would receive multimillion-dollar refunds, while buyers such as CPUC would have to pay.

“The petitioners in this case are paying not just people who overcharged the market but people who have been found as a result of trials held in this case to have committed the same tariff violations that this court addressed in MPS Merchant Services v. FERC,” Berman told the court Wednesday.

FERC attorney Beth Pacella countered that FERC had determined that its energy export tariffs required hourly netting, and that “the commission's determination here was consistent with the tariffs and appropriate.”

Judge Clifton, however, questioned the wisdom of the hourly netting.

"Why does the commission make the decision that 'We're going to look at whether somebody is a buyer or a seller on an hour-by-hour basis,' and in the case of government utilities disregard the seller part because they can't be ordered to pay refunds, but still treat them as buyers when, in fact, over the long haul, there are far more sellers than buyers?” he asked.

“I don't understand if there is any logic behind the treatment of the refund period as not one solitary time period to see what's the big-picture effect, plus or minus, but rather looking narrowly hour-by-hour and stacking up one and not the other,” he added.

Pacella responded that netting over the entire period would require government entities to pay refunds, “which this court made clear the commission could not do, and the commission was being very careful to make sure it was staying within that line.”

Clifton seemed satisfied with Pacella's answer, asking her to discuss the other issue on appeal: whether FERC reasonably determined that electricity buyers alone should be charged for a $5 million shortfall in the now-bankrupt California Power Exchange Corporation account, from which refunds will be paid.

According to FERC's brief, the California Power Exchange Corporation discovered in 2010 that it had mistakenly transferred $5 million nine years earlier from its settlement-clearing account — where buyers deposited money to pay sellers — to its operating account, and that it had spent the money to keep itself afloat.

Pacella told the court that FERC determined that the shortfall should be allocated in the same way it was allocated in Bonneville Power Admin. v. FERC, requiring buyers to bear the $5 million cost.

Berman challenged that determination on rebuttal, saying that the money came from an account used by both buyers and sellers. “So the cost should have been allocated to buyers and sellers, and not what FERC did, which was to allocate to buyers alone for no good reason.”

Chief Judge Sidney Thomas and Ninth Circuit Judge M. Margaret McKeown joined Clifton on the panel.

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