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Judge says energy companies bilked California out of $1.1 billion on electricity deals

A federal hearing officer has ruled that two energy companies defrauded the state of California out of $1.1 billion on a series of long-term electricity contracts that state officials signed at the height of the energy crisis.

The ruling, an initial decision by an administrative law judge at the Federal Energy Regulatory Commission, found that Shell Energy North America and Iberdrola Renewables LLC conned state officials during negotiations over long-term energy deals. The Shell contract represented an “excessive burden” on California ratepayers totaling $779 million, wrote administrative law judge Steven Glazer. The Iberdrola contract was $371 million more than it should have been, he wrote.

The figures include interest dating from 2001, when the contracts were signed.

The judge’s decision was announced late Wednesday by the California Public Utilities Commission, which has been pushing the federal agency for years to make energy companies issue refunds due to overcharges during the energy crisis. So far the state agency has recovered several billion dollars from various energy companies, which has been refunded to customers of California’s investor-owned utilities.

The energy crisis of 2001 was a product of the state’s botched deregulation scheme, which forced the big utilities to sell most of their generating plants and then buy their power on a daily spot market. Legislators believed the spot market would produce low prices.

But the plan backfired. Prices soared, and the state was hit with a series of rolling blackouts when supplies ran short. It was later revealed that energy traders at the now-defunct Enron Corp., as well as other companies, manipulated the market to produce shortages and send prices skyrocketing.

Seeking to tame the runaway spot market, then-Gov. Gray Davis deputized the Department of Water Resources to negotiate long-term contracts with a variety of sellers on behalf of the state’s utilities. Although the prices were considerably higher than state officials wanted, the contracts did have the effect of easing the crisis and rescuing California’s utilities from the perils of the day-to-day market. California officials later argued that the contracts were flawed because they were negotiated under duress and were subject to manipulation.

“I am gratified that the (judge) agreed that FERC has a duty to vindicate the public interest and protect consumers from exorbitant overcharges that Shell and Iberdrola pocketed due to the worst electricity crisis and market meltdown in modern history,” said Public Utilities Commissioner Mike Florio, who testified in the case.