FERC Seen Upholding Power Contracts,Raising Calif Refund
By MARK GOLDEN
Of DOW JONES NEWSWIRES
NEW YORK -- Wall Street expects the Federal Energy Regulatory Commission to take big steps Wednesday in resolving disputes stemming from California's electricity crisis of 2000-2001, even if final resolution of the issues may be left to the courts.
In what analysts see as the most important decision, FERC commissioners will likely uphold contested long-term power supply contracts signed during the crisis, analysts said. Such a decision would give a boost to struggling energy companies, which are counting on the income from the profitable deals and, in some cases, hope to sell or leverage the contracts to improve their balance sheets.
On the other hand, analysts think FERC likely will increase the amount of refunds suppliers owe California for spot-market sales during the crisis from the $1.8 billion recommended last summer by an administrative judge, although not to the $8.9 billion claimed by California.
"More important is what the commission decides to do about the contracts," said Chris Ellinghaus, analyst for Williams Capital Group. "It appears from every indication that we have so far that they will uphold the contracts. It would be more interesting if they decide not to, but that's almost inconceivable."
FERC on Tuesday added challenges to the long-term contracts brought by the California Public Utilities Commission, the California Electricity Oversight Board, and Sierra Pacific Resources (SRP) units Sierra Pacific Power Co. and Nevada Power Co. to its Wednesday meeting agenda.
Deals In Dispute
California has already renegotiated many of its contracts, but deals with Allegheny Energy (AYE), Dynegy Inc. (DYN), Mirant Corp. (MIR), Morgan Stanley (MWD), Royal Dutch/Shell (RD) unit Coral Energy and Sempra Energy (SRE) are still in dispute.
Sierra Pacific Resources has asked FERC to abrogate contracts with Allegheny, BP PLC (BP), Calpine Corp. (CPN), Enron Corp. (ENRNQ), El Paso Corp. (EP), Mirant, Morgan Stanley, American Electric Power (AEP) and Reliant Resources (RRI), though it has settled with Duke Energy Corp. (DUK).
In the two cases before the commission, as well as in a similar complaint winding its way through FERC, three FERC administrative judges have said the contracts could only be abrogated if they were shown to be counter to the public interest, a difficult standard under the Mobile-Sierra doctrine, rather than simply that they violate FERC's requirement that electricity prices be just and reasonable.
Two of those three judges have said explicitly that FERC shouldn't abrogate the contracts, and FERC staff has taken the same position, though the final decision belongs to the commissioners.
Breaking the contracts, Ellinghaus said, would effectively kill electricity deregulation, which been pushed by FERC for nearly a decade, and create electricity shortages nationally in a few years.
"Very few people would be willing to build future generating capacity, and if people aren't willing to do that, we will have a California style crisis on a nationwide basis," Ellinghaus said.
Refunds Could Rise
The refund case stems from FERC's determination that electricity prices during the crisis reached unjust and unreasonable levels. Judge Bruce Birchman recommended a refund of $1.8 billion in December, after FERC staff calculated proxies for fair prices and reran California's markets for October 2000 through June 2001.
But FERC staff arrived at that number using published gas prices to determine generators' costs, and FERC has questioned the accuracy of those prices, as Birchman said in his initial decision. Commissioners may use lower gas prices, which would increase the size of the refund due California's utilities by $1 billion to $2 billion, analysts have said.
A persistent rumor among energy companies involved in the case holds that FERC will order them to pay $4 billion in refunds after factoring in lower gas costs, said Gary Ackerman, executive director of the Western Power Trading Forum, a group that represents the interests of many of the sellers to the state's utilities.
California wants the refund period to reach back to the beginning of the crisis in May 2000, and that certain purchases made by the state's Department of Water Resources currently not under consideration for refunds ought to be. California is looking for a refund of almost $9 billion.
Christine Tezak, an analyst for Schwab Capital Markets, expect the commissioners to order refunds between $2 billion and $3 billion.
"The threshold of pain hits at a number that's higher than $3 billion," Tezak said. "The market will take in stride total refunds up to that, because as long as sellers don't have to put cash together for it investors don't care."
California's two main utilities, PG&E Corp.'s (PCG) Pacific Gas & Electric Co. and Edison International's (EIX) Southern California Edison, still owe suppliers some $3 billion via the state's Power Exchange and Independent System Operator. Several analysts expect the refund to be raised to around the level of utilities' outstanding payable.
"Plenty of people think that, regardless at what's right or wrong, FERC's got a number in their head of what they've got to get to and let's just zero it out," Tezak said.
FERC shouldn't resort to a politically palatable solution, Ackerman said.
"As an adjudicatory body of the federal government, the FERC is supposed to make its decisions based on facts and law," he said. "To make a decision based on politics would leave the decision very open to appeal in the courts."
Various California government officials have said the state will appeal FERC's decision if it orders less than the $8.9 billion the state is seeking.
Manipulation Report Due
The FERC also plans on Wednesday to release a report to Congress on the extent of market manipulation during the crisis. The commission also could release as soon as Wednesday all of the evidence of alleged market manipulation collected during two years of investigation, plus the accused companies' replies.
FERC has already said Avista Corp. (AVA), Enron and its subsidiary Portland General Electric, and El Paso Electric Co. (EE) violated market rules, and Tezak said other companies may be similarly charged.
Other analysts, however, have said that if anything embarrassing had been discovered by California or FERC, the offending party likely would have agreed to fines and made the matter public by now, as in the case of Reliant, which recently settled with FERC over charges it shut down a power plant to force prices higher.
FERC staff has cleared Avista of market abuse, and El Paso Electric has reached a settlement with FERC staff and California. Both await a final decision from the commission.
Regardless of what FERC decides in the market-manipulation case, California State Attorney General Bill Lockyer is likely to pursue more than 100 suits against sellers under state law, Tezak said. Individual companies may renegotiate long-term contracts and agree to bump up refunds to settle such cases, as happened with El Paso Electric, she said.
-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com
Updated March 25, 2003 2:56 p.m |
