Henderson plant in dispute with supplier

Grace Leong

Thursday, July 11, 2002 | 10:46 a.m.

The Colorado River Commission sued to enforce an agreement it says requires a chlorine and hydrochloric acid producer in Henderson to pay more than $100 million for electricity the commission purchased from 13 energy suppliers for delivery starting next January.

The commission, which buys power from several federal hydroelectric projects including Hoover Dam and resells it to 11 utility companies and industrial energy consumers in Nevada, sued the chemical plant's Houston, Texas-based parent Pioneer Companies Inc. and the 13 energy suppliers in U.S. District Court on Tuesday.

The commission sells hydroelectric power to Nevada Power Co., the Overton Power District, Lincoln County Power District, Valley Electric in Pahrump and the City of Boulder City. Other customers include six companies located at Basic Management Inc.'s industrial complex in Henderson -- Titanium Metals Corp., Kerr-McGee Corp., American Pacific Corp., Chemical Lime, Basic Power Co. and Pioneer.

Pioneer is one of several companies that has contracts with the commission to buy additional electricity because hydroelectric supplies aren't sufficient for all of the 374-acre chemical plant's needs -- especially during periods when hydroelectric supplies are low due to reduced river flow.

At issue is a dispute over whether Pioneer should be held liable for more than $100 million of forward power contracts the commission said it bought at high prices in 2000 and 2001 from the 13 energy suppliers during the energy crisis in the western United States to protect against future price volatility and ensure reliable power supplies for its customers.

Commission Executive Director George Caan said the commission took legal action when Pioneer -- which filed for Chapter 11 bankruptcy protection in Texas last July and emerged from bankruptcy in November -- disputed liability for those contracts in a lawsuit against the commission on June 11 in Texas and in an April 15 annual report with the Securities and Futures Exchange Commission.

"The commission bought those contracts when prices were high during the energy crisis in anticipation of higher prices. But electricity prices have since collapsed because of the economic slowdown," Caan said. "Pioneer is now trying to breach their agreement to avoid paying at high prices."

"We've been working with Pioneer since its bankruptcy to develop solutions to mitigate these high-priced contracts. They include lengthening the term of the agreements to lower prices and improve Pioneer's cash flow and restructuring some of the energy contracts and positions to lower costs. But Pioneer has rejected these solutions," he said.

Caan said the lawsuit is also an attempt to force the 13 energy suppliers to "come to the table with proposals to ameliorate the impact of the high-priced contracts."

But Pioneer challenged the commission's claims, saying it "lacked the statutory authority to undertake the speculative trading of electricity."

Pioneer, in its June lawsuit, said the commission's "inexperience in power trading and lack of effective risk management procedures ... resulted in the purchase of electricity at a cost of more than $100 million above current market values."

"This is because the (commission) gambled that electricity prices would remain high or rise further, and did not attempt to make any 'hedging' transactions to reduce the risk of falling prices," Pioneer said. "When prices fell sharply in 2001, these transactions became valueless and/or obligated Pioneer to purchase power at many times the market value."

The Pioneer suit said the commission bought $130 million of contracts and options in 2000 and 2001 allegedly without Pioneer's approval or knowledge and allegedly claimed this was done to "minimize" then volatile energy prices.

Pioneer said the commission's power purchases failed to match the plant's power needs and included contracts for delivery in California and Oregon "that are so far from the Henderson plant that power could never even be utilized by that plant."

Pioneer also claimed its allegations were supported by a March report by consultant R.W. Beck Inc. that allegedly confirmed a "lack of proper institutional controls" at the commission and allegedly recommended the commission "no longer participate in market speculation."

But Caan disputed Pioneer's allegations.

"We did nothing improper and everything we did was with due diligence and with the consent of Pioneer. Their allegations are incorrect and impropriate," he said. "We hired Beck to perform a risk management study for the commission to develop risk management policies and procedures and Pioneer cited only a portion of that report they thought would support their claims."

Caan said he believes Pioneer is the only company disputing its power costs. Timet and American Pacific also receive additional electricity from the commission.