March 28, 2003—The Federal Energy Regulatory Commission took action that it expects will increase the amount of refunds in connection with California’s energy crisis of 2000 and 2001. The refunds would cover the period from October 2, 2000, through June 20, 2001. The increase, yet to be calculated, is expected to be greater than the $1.8 billion total estimated by a FERC administrative law judge last December. The Commission’s refund order adopts most of the presiding judge’s findings.
The Commission embraced a staff recommendation that a different set of gas prices be used to calculate refunds. The new pricing methodology, based on gas prices for producing basins plus transportation, was largely explained in Staff’s Initial Report released in August 2002, and was finalized in a staff report on western markets. It would eliminate distortions in gas index prices caused by manipulation in the southern California market. The Commission also adopts a staff recommendation to ensure that generators recover their spot gas costs over the refund period.
Because the gas price proxy values will be lower than the index prices used by the judge in the refund case, estimated energy costs will be smaller and refunds will be larger. The Commission said the new gas price proxy strikes a balance between protecting customers from prices based on manipulation and dysfunction, and protecting suppliers’ incentives to compete in the California energy market. The new method determines the Mitigated Market Clearing Price (MMCP) using a formula based on the generator’s incremental heat rate multiplied by the producing-area gas price index plus an allowance for transportation costs. The producer area index plus transportation allowance to California serves as a proxy for competitively derived gas prices in California. To the degree that generators paid more for gas, the cost of that gas will be taken out of the refund calculation.
