State in Last-Ditch Effort to Kill Energy Pacts

California officials Thursday urged the Federal Energy Regulatory Commission to overturn more than $16 billion in long-term energy contracts, arguing that suppliers who benefited from a rigged marketplace should not be rewarded.

“No court anywhere will enforce a contract by a party who committed fraud or manipulation that raised the price of that contract,” said William J. Kayatta, an attorney for the California Electricity Oversight Board.

In a last-ditch effort to nullify the contracts, California parties emphasized that recent allegations that many suppliers exploited the energy marketplace provided FERC a basis for overturning the deals.

The message from federal regulators, Kayatta said, should be that “those who do not play by the rules do not gain as a result.”

It was not clear whether the approach gained points with the panel of one Democrat and two Republicans.

But California’s arguments met vehement resistance from firms holding the contracts, including Sempra Energy Resources, Allegheny Energy Supply, Mirant Americas Energy Marketing, Dynegy Power Marketing, El Paso Merchant Energy, Morgan Stanley Capital Group and Coral Power.

Lawyers representing the companies argued that the prices for the long-term contracts were reasonable and that California was relying on unproved allegations of misbehavior as well as a misreading of the link between short-term and long-term prices.

“California has provided no credible evidence of any impact [on long-term prices], much less one that would warrant modification” of the contracts, said Thomas J. McCormack, an attorney for Allegheny Energy Supply, which was not cited for misconduct in FERC’s staff investigation but holds a contract worth more than $4 billion with the state.

“The overarching question for this commission is: Do the contracts pass muster under the Federal Power Act?” McCormack said. “The answer to that question is yes.”

Federal energy regulators have been trying to clear up the lingering controversies over the meltdown of California’s energy market in 2000 and 2001, and the issue of contracts is among the last major disputes. FERC still hopes to resolve the matter within the next several months, but it has been complicated by a barrage of recent allegations from California parties and FERC’s own staff.

Before this year, FERC judges had blocked efforts by the state to uncover evidence of wrongdoing and introduce such evidence into cases involving contracts and refunds. But in March a group of California parties, backed by a federal judge, handed FERC thousands of pages of evidence alleging misconduct by many energy companies. Later that month, FERC’s staff questioned the behavior of dozens of energy companies.

On Thursday, energy suppliers -- without acknowledging any wrongdoing -- argued that such evidence was not a key to the contracts case. But FERC Commissioner William L. Massey, the lone Democratic commissioner, was skeptical of that argument. “It’s germane to me,” he said. “I’m interested in it.”

Another issue for FERC is whether to apply a standard of “just and reasonable” prices in deciding whether to uphold the contracts or rely on a much stiffer “public interest” standard.

The panel’s two Republicans have previously hinted that they are reluctant to toss out the contracts and sympathize with the tougher standard, but on Thursday they did not tip their hands.

The companies insisted that the state had received reasonably priced contracts that only appeared less appealing when short-term energy prices later plunged. Many of the long-term contract prices are estimated to be in the range of $70 a megawatt-hour. At the time they were signed, short-term prices exceeded $300 a megawatt-hour. Recently, short-term prices have been closer to $40.

In a conference call earlier this week, California officials said they hoped to save at least $5 billion if given the chance to renegotiate the disputed contracts, which originally exceeded $40 billion. That amount has declined sharply, as some of the pacts have been renegotiated.

“Contracts entered into with a gun at your head are not sacrosanct,” California Gov. Gray Davis said Tuesday. “As long as the FERC allows these contracts to stand, the public interest has not been met.”

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Times staff writer Nancy Rivera Brooks contributed to this report.