State Faces Setback in Energy Case
California’s bid to recoup billions of dollars in energy costs under contracts signed during the height of the 2000-01 power crisis is expected to be rejected by federal regulators today, and the matter may end up in court.
California contends that nearly $12 billion in long-term contracts should be thrown out, saying they were signed under the duress of a frenzied market in which manipulation by energy companies cause prices to soar.
FERC has sent strong signals that it is reluctant to set aside the contracts. At least one of the three sitting commissioners has argued that it would set a dangerous precedent, subjecting the battered energy industry to even more financial uncertainty. Last month, the commission ordered an energy company to honor its contract with a Connecticut utility, even though the company says it is bankrupt.
The FERC vote, scheduled for today, is expected to be a watershed in the long-standing controversy over California’s energy travails. It would be the first time that FERC commissioners have ruled definitively on the California contracts dispute and probably would shift the arena from the regulatory agency to the federal courts. The losing side is expected to either ask FERC for a rehearing or take the case to the U.S. Court of Appeals.
“We think we will get a pretty good reception in the Court of Appeals -- should we have to go there,” said Sean Gallagher, an attorney for the California Public Utilities Commission, adding: “We are not overly optimistic about what FERC is going to decide.”
A coalition of state agencies and its major utilities, including Southern California Edison Co. and Pacific Gas & Electric Co., are asking FERC to order renegotiation of the disputed contracts. The state parties contend that energy companies created false shortages that distorted the market and sent short-term energy prices soaring.
Gov. Gray Davis has pushed hard for throwing out the contracts, saying energy companies “stole” the money from California. Davis signed the long-term contracts, and leaders of a recall campaign against him have charged that he panicked by signing too many of the long-term deals.
In the wildly gyrating energy market of 2001, the California Department of Water Resources negotiated pacts worth $42 billion on behalf of the state’s financially battered utilities. Those deals were heralded at the time for securing power at stable prices for as long as 10 years.
At the time, daily “spot” prices for energy exceeded $300 per megawatt-hour. The long-term deals guaranteed energy at $60 to $70 per megawatt-hour. But soon after the contracts were signed, the energy crisis subsided and short-term prices plummeted toward $30 per megawatt-hour.
Since then, some of the contracts have expired or been voluntarily renegotiated. Deals worth about $11 billion to $12 billion remain contested, with estimates varying because of the difficulty of predicting future usage. California officials estimate utilities could save $4 billion by renegotiating those contracts, with savings passed on to ratepayers.
Separately, the state coalition wants FERC to order $9 billion in refunds from energy companies for allegedly inflating electricity charges. FERC still must rule on the refunds, and it was not clear Tuesday when the commission would act on that matter.
Energy companies that hold the contracts argue that they have met their legal obligations and that the state lacks the legal grounds to overturn the deals. They also say the dispute has wounded the industry by making investors wary of committing themselves to much-needed new energy projects.
“We’re looking forward to closure on this issue,” said Michael R. Niggli, president of Sempra Energy Resources in San Diego, which holds a contract valued at $6.7 billion over 10 years. The California dispute has put “a cloud” over other potential contracts, he said, making it harder for energy companies to draw investments and weighing down stock prices.
The California Public Utilities Commission and Electricity Oversight Board have tried to convince FERC that the deals should be thrown out, given the dysfunction in the market and evidence of price manipulation by energy firms. They contend that a FERC regulatory judge was wrong to prevent them from collecting and introducing evidence of illegal conduct that worsened the energy shortage and distorted the market.
“I think the court of appeals will agree that didn’t make a lot of sense,” Gallagher said. “Our whole complaint was premised on market manipulation.”
On March 26, federal regulators said that more than 30 private companies manipulated natural gas and electricity prices during the energy crisis. Action against those companies is pending.
The same day, FERC staff released a report concluding that there was “a statistically significant relationship” between short-term energy prices and long-term prices from January 2000 through June 2001.
Energy suppliers have defended the contracts, at times accusing California of “buyer’s remorse” after the short-term prices went down. They have cited a 1956 Supreme Court doctrine known as Mobile Sierra, in which parties to energy contracts have been held to an exceptionally high “public interest” standard in order for a deal to be rendered void. But the showdown at FERC comes after a long series of signals that the agency is wary of overturning contracts.
FERC Administrative Law Judge Bobbie J. McCartney ruled in December that California could not introduce evidence of market manipulation in its legal effort to renegotiate the contracts, a decision that seriously weakened the state’s bid. More recently, FERC Commissioner Nora Mead Brownell warned that consumers would be saddled with added costs if the principle of contract sanctity were undermined.
“Investors simply will not participate in a market in which disgruntled buyers are allowed to break their contracts,” Brownell said after a FERC meeting in late March.
Commissioner William L. Massey, an appointee of former Democratic President Clinton, has expressed sympathy with California’s argument.
FERC Chairman Patrick Wood III has not clearly tipped his hand, but as a Republican appointee of President Bush he is considered to share the widely held sentiment of congressional Republicans that contract sanctity is an extremely important principle to uphold.
In May, FERC provided another signal, ordering a financially struggling energy supplier to honor its contract with a Connecticut utility. Last week, FERC urged a federal judge to end an order he recently issued allowing that supplier, NRG Energy Inc., which has filed for bankruptcy protection, to stop providing electricity to Connecticut Light & Power.
Energy suppliers whose contracts are contested include Sempra, Dynegy Power Marketing, Coral Power and El Paso Merchant Energy.
