Calif Pwr Filings Test FERC View Of Contract Sanctity25 Feb 17:56
By Bryan Lee and Mark Golden OF DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--Monday's complaints asking the U.S. Federal Energy
Regulatory Commission to void power-supply contracts entered into by the
California Department of Water Resources will test the commission's
long-standing policy of respecting the sanctity of contracts, experts say.
Canceling the contracts "is an extraordinary remedy," said Elizabeth Moler,
the former FERC chairwoman who now heads the Washington office of Exelon Corp.
(EXC).
"This is an industry predicated on the sanctity of contracts," said Julie
Simon, policy director for the Electric Power Supply Association, or EPSA,
which represents competitive power suppliers.
FERC's long-held view is that it's "bad policy" to second-guess contracts,
Simon said. "We expect them to adhere to that here," she said, adding that EPSA
would intervene in the case on behalf of the power sellers.
Moler, Simon and others contacted by Dow Jones Newswires noted that FERC has
been highly reluctant to void contracts in the face of changing market
circumstances. Specifically, they cited the commission's handling of so-called
"take-or-pay" natural gas contracts and power-supply contracts involving
"qualifying facilities" under the 1978 Public Utility Regulatory Policies Act.
California Agencies Seek Power Contracts Cancelation
The California Public Utilities Commission and the California Electricity
Oversight Board filed complaints at FERC Monday asking the commission to
abrogate power-supply contracts the DWR entered into last year collectively
worth $43 billion.
The long-term contracts, representing 44 transactions in 32 contracts with 22
power sellers, collectively exceed "just and reasonable" prices by $21 billion
over the length of the agreements, the PUC said.
Sellers cited in the complaints include Calpine Corp. (CPN), Dynegy Inc.
(DYN), El Paso Corp. (EPE), Mirant Corp. (MIR), Sempra Energy (SRE) and the
Williams Cos. (WMB).
In addition to violating the Federal Power Act's "just and reasonable"
pricing mandate, the contracts contain non-price terms and conditions that are
unjust and unreasonable, the PUC said.
Specifically, the PUC cited terms and conditions evading FERC public-interest
review of the contracts, and "asymmetrical" treatment of payment, credit and
termination terms holding DWR to different standards than the power providers.
"It is our hope that the FERC moves expeditiously on this matter to give
much-needed justice to ratepayers," PUC President Loretta Lynch said.
Utils Couldn't Recoup Costs Under State-Mandated Rates
The DWR entered the California power market in January 2001 after the state's
two largest utilities, Pacific Gas & Electric Co. (PCG) and Southern California
Edison Co. (EIX), spent some $15 billion for wholesale power while unable to
unable to recoup under state-mandated retail rates. PG&E sought Chapter 11
protection last year, while SoCalEd narrowly averted bankruptcy.
At the urging of FERC, the DWR entered into long-term supply contracts to
lessen the amount of power the DWR was purchasing in the highly volatile
real-time spot-power market. When the contracts took effect last summer, the
state said the long-term contracts helped ended a year-long period of extreme
volatility in the state's spot market, in which prices spiked to 10 times
historical levels.
"In this environment, despite its best efforts, CDWR was forced to pay unjust
and unreasonable prices, and to agree to onerous, unjust and unreasonable
non-price terms and conditions, in order to secure the power necessary to
ensure that the lights stayed on in California," the PUC said in its complaint
filed with FERC.
A FERC spokeswoman acknowledged that the commission has received the
complaint,but declined to comment citing FERC policy prohibiting discussion of
cases pending before the commission.
FERC Has Voided Contracts - But Not Often
Moler, the former FERC chairwoman, cited the commission's reluctance to upset
freely negotiated contracts. She noted, however, that FERC has voided contracts
it deemed no longer in the public interest.
Using a public-interest standard, FERC voided take-or-pay contracts for a
pipeline company in bankruptcy, and rejected a California PUC solicitation of
power from qualifying facilities, Moler noted.
Still, there are "lots and lots" of other instances in which FERC opted
against voiding contracts, she said.
"Obviously, this is a very huge policy call," Moler said of FERC's review of
the DWR contracts.
"It'll get a serious review," agreed former FERC commissioner Branko Terzic,
now with Deloitte and Touche LLC. "The whole market-based pricing scheme under
which these contracts were done doesn't fit the classic regulated ratemaking
model."
Responding to the California complaints "may require creating some whole new
policies," Terzic said. FERC will need to balance its views of the sanctity of
contracts against the bedrock "just and reasonable" standard of the Federal
Power Act, he said. "It's a complicated issue," Terzic added.
Suppliers, Fearing New Precedent, Say To Keep Contracts
Suppliers named in the suit said that they expect FERC to uphold the
contracts, although several said they are willing to renegotiate the contract
terms with the DWR.
"These are legally binding contracts," said Dynegy spokesman David Byford.
"Our position has been and will continue to be that even though we have a
legally binding contract with the state, we're willing to discuss a mutually
beneficial solution with them."
If FERC were to cancel the contracts, it's not clear what would happen to
contracts that the suppliers had signed in turn, such as contracts for natural
gas and generator turbines, when prices for those items were also high.
"Once you get into the business of abrogating contracts, it's a slippery
slope and introduces a lot of uncertainty, which isn't good for anybody," FERC
Commissioner Nora Mead Brownell said in December when asked about the expected
California pleading. "I've told the parties it would be a whole lot better if
they go into a room and try to work out an agreement. I believe insettlements."
Constellation Energy Group (CEG), for example, sold the state power from its
High Desert power plant, which is under construction. Until the plant comes on
line, Constellation is supplying the state with 200 megawatts of supply it has
been buying from other generators. Constellation's price of $154/MWh through
June 2003 is five times the current market price.
"We believe the FERC will continue its commitment to open wholesale markets
for electricity," said Charles Welsh, spokesman for Constellation, which has
been in negotiations with DWR since late last year.
-By Bryan Lee, Dow Jones Newswires; 202-862-6647; bryan.lee@dowjones.com; and
Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com
(END) DOW JONES NEWS 02-25-02 05:56 PM |
