Union Tribune

April 25, 2002 

Hearings on power contracts ordered
Feds want to see if California was gouged by sellers


By Toby Eckert 
COPLEY NEWS SERVICE 

WASHINGTON Federal energy regulators yesterday ordered
hearings on whether billions of dollars in long-term power
contracts California entered into during the height of the
electricity crisis are overpriced and should be scrapped or
modified to lower the costs.

However, the Federal Energy Regulatory Commission said the
state would bear a heavy burden in proving its allegations of
gouging by the power sellers, and urged it to continue trying to
renegotiate the contracts.

The state entered into deals totaling about $43 billion last year,
when wholesale electricity prices were at unprecedented levels.
Market prices have since tumbled.

"I have a strong sense of commitment to a very high burden of
proof that would cause us to abrogate a contract. We need to say that again and again," Commissioner Nora Mead Brownell said.

In fact, the state agencies that filed the complaint will have to
prove that some of the contracts were "contrary to the public
interest" rather than simply unjust and unreasonable.

That prompted a partial dissent by Commissioner William
Massey, who has frequently urged his colleagues to be more
aggressive in responding to the state's power crisis.

"Yes, they bear a heavy burden. That is our case law, and we
respect that here," Massey said. "But the Federal Power Act says
that any contract that is not just and reasonable is flatly
unlawful. We simply aren't doing our jobs and aren't carrying out
our (legal) responsibilities if we rubber-stamp contracts just
because they are long-term contracts."

The commissioners urged the state and the power sellers to
continue trying to renegotiate the disputed contracts so that a
full-blown hearing can be avoided. The state announced this
week that it had reached new contract terms with five
companies, lowering costs by about $3.5 billion.

It will be up to an FERC administrative law judge to determine
when hearings should start. The commissioners hope to have the matter settled by May 2003.

"It's time to make the case on both sides why this should or
shouldn't happen get it out there, air it in public and then put
this issue to bed," said FERC Chairman Pat Wood.

Steve Maviglio, a spokesman for Gov. Gray Davis, said the FERC's decision "looks like a mixed bag" for the state.

"Our complaints are still standing, but (the) FERC will give us a
hard day in court," he said. "There seems to be a general sense
that (the FERC) would like all the contracts renegotiated, and
that's our sense as well.

"We're talking to other generators. Hopefully, this will nudge
others to come to the table and close the deal."

Power sellers said any hearings would vindicate their contracts
with the state.

"Our contract offers among the lowest costs of all the contracts
in the state's portfolio," said Tom Murnane, a spokesman for San Diego-based Sempra Energy Resources, one of the sellers
targeted by the state. "It is well within the FERC's confines for
just and reasonable prices."

The California Public Utilities Commission, which filed the
complaint along with the state Electricity Oversight Board,
refused to comment until the FERC issues a written order.

The agencies asked the FERC in February to scrap or lower the
cost of 32 long-term contracts that the California Department of
Water Resources negotiated with 22 power sellers.

The department started buying power on the state's behalf in
January 2001, when soaring prices in California's partially
deregulated electricity market threatened to sink private
utilities and power shortages were widespread.

The PUC alleged that power sellers were able to demand "unjust
and unreasonable" prices and other "onerous" conditions
because of the leverage they wielded in the dysfunctional
market. It questioned at least $14 billion in charges.

Since then, power prices have fallen sharply, leaving the state
with a portfolio of expensive electricity. Davis has faced intense
political pressure to lower the costs in the midst of his
re-election battle.

The contracts that the FERC set for review were entered into
before June 20, 2001. The FERC imposed power price controls
in California and the rest of the West on June 18, 2001.

The FERC ordered similar hearings two weeks ago into long-term
power contracts held by several utilities in Nevada, Washington
and California. The utilities also accused the power sellers of
gouging.