FERC Orders Nevada Hearings

In a hearing closely watched by California politicians, federal energy regulators on Wednesday warned Nevada utilities seeking to force renegotiations of deals struck during the energy crisis that they “bear a heavy burden.”

Meeting in Washington, the Federal Energy Regulatory Commission refused to accept, at least for now, the argument of Nevada utilities that their long-term power contracts should be overhauled because they were signed at a time when Western power markets were dysfunctional and manipulated by power sellers. California has made similar arguments in support of renegotiating deals struck here at the height of last year’s electricity crisis.

Instead, the commission asked an administrative law judge to hold hearings to decide whether soaring spot-market prices in 2000 and 2001 justify overturning long-term power contracts that were signed by the Nevada utilities.

The judge will then make recommendations to the FERC. The commission also ordered the utilities and its power sellers to sit down with arbitrators and voluntarily amend the long-term power contracts.

The administration of Gov. Gray Davis, which is trying to renegotiate tens of billions of dollars’ worth of contracts with energy companies even as it challenges the legality of the contracts, found encouragement in Wednesday’s order.

“The governor is pleased that FERC apparently is nudging reluctant generators to the table to renegotiate contracts that were signed at the height of the energy crisis,” said Davis spokesman Steve Maviglio. “Several generators are negotiating in good faith, but some have told us, frankly, to pound sand. Perhaps FERC’s action will be a wake-up call to them to get serious.”

The 4-0 FERC decision to order hearings and arbitration, with a partial dissent by Commissioner William Massey, gives a good indication of how the FERC will consider California’s request because both petitions use the same legal reasoning.

Nevada’s petition, filed in December, involves contracts worth $1 billion.

California’s petition, filed by the Public Utilities Commission in February, asks the FERC to nullify or modify nearly $43 billion worth of contracts.

Those deals helped rescue California from exorbitant spot-market prices last spring. But market prices have since plummeted, making the contracts a political liability for Davis and financial burden for utility customers.

A longtime advocate of deregulated electricity markets, the FERC repeatedly referred to the “sanctity of contracts” in its order and stated that power plant builders need “regulatory certainty, including certainty that the commission will not modify market-based contracts unless there are extraordinary circumstances.”

Massey, one of two Clinton appointees on the commission, argued in his dissent that the FERC must also consider its obligation to ensure that wholesale electricity rates are just and reasonable.

“Here you had an out-of-control spot market that was out of control for months, and it would be shocking indeed to me if that had no adverse impact on long-term contract prices,” Massey said.

The FERC has not set a date yet to hear California’s complaint.