Ruling Backs Calpine on Pacts

The Federal Energy Regulatory Commission denied Tuesday a request by three California state agencies to force Calpine Corp. to honor long-term power supply contracts the insolvent producer inked with the state.

Calpine has asked the U.S. Bankruptcy Court in New York to reject eight “financially burdensome and unprofitable” contracts, under which it said it would lose $1.2 billion over their remaining terms.

The California Electricity Oversight Board, attorney general’s office and Department of Water Resources asked FERC last month to order Calpine to continue delivering power on the contracts, warning of shortages if they were canceled.

A temporary restraining order issued Dec. 21 by the Bankruptcy Court “precludes the commission from granting the relief requested” by California’s attorney general and others, FERC’s three commissioners said in an order. The commission said it would seek comment on whether rejection of the contract posed any reliability concerns for the state, and would inform the court of its views.

“The commission does not intend to supplant the role of the Bankruptcy Court in considering whether to reject” the contract, the agency said.

Among the eight contracts are one to provide 1,000 megawatt hours of electricity to the water resources agency through Dec. 31, 2009, and another to sell Southern California Edison 200 megawatt hours of power through April 1, 2013.

The California parties said that allowing San Jose-based Calpine to cancel the contracts would raise electricity rates for customers and possibly threaten power supplies.

Calpine told the court that rejecting the contracts was “critical to Calpine’s long-term financial viability.

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Reuters and Bloomberg News were used in compiling this report.