Feds will review power contracts

Mark Sherman

Thursday, April 11, 2002 | 10:59 a.m.

WASHINGTON -- Federal energy regulators agreed Wednesday to consider whether power-generating companies used California's energy crisis to pressure two Nevada utilities to sign expensive long-term contracts.

The Federal Energy Regulatory Commission took no position on complaints filed by Nevada Power Co., Sierra Pacific Power Co. and utilities in California and Washington state that called the contracts "unjust and unreasonable."

But the commission ordered a hearing to determine whether there was a relationship between what FERC has called California's "dysfunctional" deregulated electricity market and long-term power prices.

"This is an important issue being asked of the commission," FERC Chairman Pat Wood II said.

The long-term deals were signed when prices on the spot electricity market were $300 per megawatt hour or more in late 2000 and early 2001. The Nevada utilities signed contracts worth more than $1 billion to buy power through 2006 with hourly megawatt prices ranging from $33 to $290.

Current spot market prices are about $30 per megawatt hour. A megawatt is enough power for roughly 750 homes.

Though energy regulators rarely intervene in contracts, a 67-year-old federal law gives them that power.

"This burden is a heavy one and one that the evidence contained in the complaints taken alone does not meet," FERC said. The commission directed an administrative law judge to gather facts.

Nevada Power last month argued that it needed a $922 million rate increase to recover costs and remain solvent after buying high-priced power during the energy crisis. The Nevada Public Utilities Commission granted a $485 million increase, while commission members and consumer advocates derided company executives for management mistakes at a time of spiraling energy costs.

In the FERC complaint, however, the Nevada PUC, Attorney General and Bureau of Consumer Protection are supporting the utilities' claims, noting that ratepayers ultimately will bear the cost.

Paul Heagen, vice president for communications for Sierra Pacific Resources, parent company of Las Vegas-based Nevada Power and Reno-based Sierra Pacific Power, said any reductions in the long-term contract prices would be passed on to ratepayers.

"We are encouraged that FERC has recognized the merits of the case," Heagen said. "We believe the evidence will show that the prices we paid were unreasonable."

The disputed Nevada contracts are with 10 power generators and energy trading companies: Allegheny Energy Supply Co. of Hagerstown, Md.; American Electric Power Services Corp. of Columbus, Ohio; Duke Energy Trading and Marketing of Charlotte, N.C.; Mirant Americas Energy Marketing of Atlanta; and Morgan Stanley Capital Group of New York. Five are Houston-based: BP Energy Group, Calpine Energy Services, El Paso Merchant Energy, Enron Power Marketing and Reliant Energy Services.

Patrick Dorinson, a spokesman for Mirant, said the company was disappointed that regulators did not dismiss the complaints.

"Buyers and sellers entered into contracts voluntarily and willingly," Dorinson said. "Ironically, FERC wanted long-term contracts and we responded. When market conditions change, a little buyer's remorse sets in."

FERC urged both sides to renegotiate the contracts, which would pre-empt federal intervention.

FERC said it would not reach a decision for 13 months.

"Mediation is the way to resolve these," Commissioner Nora Brownell said.

Wednesday's order could have important implications for a separate complaint by the California Public Utility Commission and the California Electricity Oversight Board. They are asking FERC to cancel or reduce about half the $43 billion in long-term contracts California's Department of Water Resources agreed to early last year.

FERC did not address the California complaint Wednesday, but in calling for additional negotiations, the commission echoed the view California Gov. Gray Davis voiced in February. Regulators "need to send a signal to the energy companies to go back and renegotiate" the contracts in earnest, Davis said then.

Davis spokesman Steve Maviglio said the state is close to announcing renegotiated deals with some energy companies. "But there are many generators who have not stepped up to the table," he said.

The other complaints were filed by the Public Utility District No. 1 of Snohomish County, Wash., against Morgan Stanley Capital Group and by the Southern California Water Co., which filed against Mirant on behalf of its Bear Valley Electric Service Division in Big Bear Lake.