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Shell Denies Playing|Games in Energy Crisis

SAN FRANCISCO (CN) — In a bid to avoid reimbursing Californians tens of millions of dollars in overcharges, Shell and others told the Ninth Circuit Monday that they didn't manipulate electricity prices during California's energy crisis 15 years ago.

Shell, MPS Merchant Services and other energy companies are asking the appeals court to reverse an order by the Federal Energy Regulatory Commission denying rehearings and upholding a finding that they must reimburse customers the extra money they paid for electricity after the companies violated the commission's export tariff rules to raise electricity rates during the energy crisis of 2000 and 2001.

California deregulated its electricity sector in 1996 in a move it said would lower electricity prices for customers and reinvigorate the state's economy. But four years later, the state fell victim to electricity shortages, rolling blackouts and sky-high prices. Pacific Gas & Electric, California's largest utility, went bankrupt.

The commission concluded in a 2003 staff report that power companies had manipulated the electricity market for profit. Reaffirming that initial finding, Administrative Law Judge Steven Glazer found this past April that Shell's export tariff violations during the crisis drove energy prices so high that Californians overpaid the company by $779 million.

On Monday, commission attorney Beth Pacella told a three-judge panel that Shell and MPC rigged the market in their favor by purchasing electricity in California and shipping it out of the state, then importing it back in for sale on the real-time market. In reality, the power never crossed state lines, but the companies pretended it did because energy purchased in California can only be sold on the cheaper day-ahead market.

The commission says that Shell made 87 percent more profit by selling power on the real-time market through false export than it would have had it sold that power on the day-ahead market.

"The energy didn't actually flow in the system, it's bogus," Pacella told the panel. "It was just a pretend transaction."

Moving energy in and out of the state constitutes a tariff violation in and of itself, Pacella said, accusing the companies of using the tactic to hide their intention to sell energy generated in California on the real-time market.

"It's not a normal, typical thing to be exporting energy out and importing it in, it's innately improper," she said.

Shell maintains that its power left the state, and that the commission's tariff provisions were so vague that the company couldn't have known it was breaking any rules. Moreover, Shell argues that the commission didn't notify it of the violations until three years after the crisis ended.

Shell attorney David Frederick told the panel that contrary to the commission's assertions, simultaneous transactions don't indicate that Shell parked its power in California. He offered an example: At 6:00 p.m. on a particular day, power was sold through Southern California to Arizona and other entities. Likewise, power was purchased in the Pacific Northwest for use in Northern California.

"That can't possibly be the same power," Frederick said.

Frederick added that nothing in the record indicates where the power was generated and that Shell wasn't obligated under the commission's tariff provisions to identify its source.

Despite Shell's contention, the commission says it did not base its finding that Shell and MPS violated false export rules solely on simultaneous import and export transactions. Instead, the commission says evidence links the simultaneous transactions and reveals a consistent pattern of false export violations.

In what may presage the panel's final ruling, Circuit Judge M. Margaret McKeown on Monday echoed the commission's argument.

"Would you agree whether you actually sell it outside and then it comes back in, isn't it a way of potentially engaging in a false export violation?" she asked.

Frederick is with Kellogg, Huber, Hansen, Todd, Evans & Figel in Washington D.C.

The appeal is before McKeown, Chief Circuit Judge Sidney Thomas and Circuit Judge Richard Clifton. The panel did not indicate when or how it would rule.

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