U.S. Regulators Overrule PUC on Power Pacts : Energy: The ruling could save Southern California customers $1 billion, Edison says.

Federal energy regulators ruled Wednesday that a controversial auction of contracts with independent electric-power producers ordered by the California Public Utilities Commission violates federal law and should not be completed.

The ruling by the Federal Energy Regulatory Commission is a victory for Southern California Edison Co. and San Diego Gas & Electric Co., which challenged the PUC, arguing that the contracts would result in higher rates for customers.

“It’s a big deal,” said Vikram Budhraja, Edison vice president of planning and technology. “We have to look at exactly what the commission ruled, in terms of how binding and how strong it is.”

The FERC decision was grim news for independent energy producers in California--including companies that produce power from solar, geothermal, wind and other renewable sources.

The ruling seriously threatens more than $1.5 billion in new business investment and 5,000 new jobs, according to the Sacramento-based Independent Energy Producers Assn. The independent generators won long-term contracts under the rancorously contested rules of the competition, but they have had their projects held up for almost a year as Edison and SDG&E; have resisted signing power contracts.

The independent producers dispute the savings estimated by Edison and SDG&E; over the 17-to-30-year life of the auction contracts. The independents say their power would be cheaper than that from many of the utilities’ own generating plants.

Edison said the ruling means its Southern California electricity customers could save more than $1 billion from what their power bills would have been from 1997 though 2003. SDG&E; estimated that in its service territory, customers could save almost $300 million over the same period.

The federal commissioners voted 5 to 0 to ask the PUC to halt the auction. The auction, designed to diversify the state’s electrical energy sources, is a legacy of the 1970s oil shocks and California’s strong support for non-fossil-fuel power generation.

But Edison and SDG&E; have resisted signing contracts with the independent producers for the past year.

Edison contends it won’t need new sources of electricity as early as the PUC estimates it will. Both utilities also say the bidding process, intended to support certain independent generators, was based on an inflated price for the so-called avoided cost--the price the utilities would have to pay to make or buy more electricity.

The federal commissioners ruled that the PUC’s formula for estimating the avoided cost in its auction violates the Public Utilities Reform Policy Act of 1978, the federal law that set the stage for utilities to buy power from independent producers.

All parties to the FERC ruling--including the PUC and individual independent producers--can request a rehearing with the federal commission within 30 days.

“Clearly the FERC rushed to judgment on this matter, and we will seek a rehearing,” said Jan Smutny-Jones, executive director of the independent producers group. “ . . . It is fundamentally unfair that the utilities have brought this matter to the FERC at this late date. California’s bidding methodology has been in place since 1988.”

But Greg Barnes, SDG&E; assistant general counsel, said he believes that particularly with the impending introduction of deregulation in some form to utilities around the country, the mood of federal regulators seems to have changed.

FERC, Barnes said, “is extremely reluctant to overturn state decisions. This tells me that from the regulators’ perspective, the gravy train to the unregulated generators is over. And the consumer’s perspective will reign from here on out.”