Union Tribune

May 16, 2003

State asks FERC to throw out contracts
Officials cite market abuse; two commissioners leery


WASHINGTON Invoking Teddy Roosevelt fighting the "robber barons" of a century ago, California officials yesterday asked federal energy regulators to scrap long-term contracts with power suppliers that the state contends were massively inflated due to market abuses.

Power suppliers dismissed the state's argument as "garbage science" in a clash before the Federal Energy Regulatory Commission.

All the rhetoric may have little impact on the three-member panel; two members already have signaled that they are leaning against shelving the contracts.

But a California official said after the lengthy session that he hoped the state "shined more light" on allegations uncovered by FERC's staff in recent months that power suppliers routinely manipulated the market during the state's 2000-2001 energy crisis.

"If you believe the staff report, you know California consumers are paying above-competitive rates to the very people described in the staff report as having contributed to the market crisis," William J. Kayatta Jr., attorney for the California Electricity Oversight Board, told FERC commissioners during the hearing.

Kayatta asked FERC to be as vigilant against rogue energy suppliers as Roosevelt was against the corrupt railroad barons a century earlier.

For months, California has argued that power prices in the contracts signed in the midst of the energy crisis were inflated by market abuses and are illegal under federal law. While the deals once totaled $43 billion, the state has since reached several settlements, resulting in savings to ratepayers of some $5 billion, officials said.

If FERC agrees to adjust the seven remaining contracts to "just and reasonable" prices, state officials said they believed they could save ratepayers as much as $5 billion to $7 billion more.

While Kayatta and other California officials argued that FERC could "serve the public interest" by shelving the contracts, power suppliers countered that the state failed to make its case. They said getting rid of long-term agreements could have a wide-ranging impact on the government's investment and contracting system.

Throwing out long-term contracts "is bad public policy," said Debra Raggio Bolton, an attorney for Mirant American Energy Markets. "That will guarantee long-term harm to the markets and consumers."

Thomas McCormack, an attorney for Allegheny Energy, said the state hasn't proved its case, displaying instead "buyer's remorse."

Michael Gergen of Sempra Energy Resources, based in San Diego, characterized the state's position as "garbage science."

After the arguments, FERC commissioners gave no indication when they would make a final decision on California's request.

Previously, Chairman Pat Wood and Commissioner Nora Brownell had expressed skepticism about California's desire to scrap the contracts.

Yesterday, Wood questioned why state officials waited nine months before challenging the contracts' pricing. And Brownell expressed concern about the long-term ramifications of shelving contracts.

The third commissioner, William Massey, repeatedly suggested there was some merit to examining the staff reports of market manipulation and the economic fallout on California.

In December, an administrative law judge recommended maintaining the contracts. But FERC officials indicated yesterday that there is a possibility that the commission may again refer the matter to a judge for review.

The existing long-term contracts range from $6.4 billion to $188 million.

In March, FERC, citing widespread manipulation in the California power markets, set the stage for a separate refund for California in a different energy case. The tentative refund was estimated at $3.3 billion, far short of the $9 billion the state has demanded. No final decision has been made.