Nonexistent power deal questioned

Kevin Rademacher

Tuesday, April 15, 2003 | 11:27 a.m.

A contract that never was took center stage Monday in Nevada Power Co.'s $195 million rate case before the state Public Utilities Commission.

Douglas Burton, an energy expert testifying on behalf of a big power user, MGM MIRAGE, criticized Nevada Power for failing to enter into long-term contracts to cover the summer of 2002 when competitive prices were available. That criticism included the failure to execute a contract with Merrill Lynch in 1999 that would have covered 25 percent of the utility's demand for the summer of 2002.

The same contract was called into question during Nevada Power's $922 million rate case last year. The PUC disallowed $434 million in that case. Of that total, $180 million was attributed to the failed Merrill Lynch contract.

Nevada Power is currently seeking an $81 million rate decrease as part of its overall plan to recover $195 million. Lower prices for future fuel and purchased power is expected to create a rate decreased in at least the first year.

Burton, on behalf of MGM MIRAGE, has proposed that $169 million of Nevada Power's requested rate recovery be disallowed, including a $96 million disallowance based on the Merrill Lynch contract.

Attorney Julia Sulivan, representing Nevada Power, questioned Burton, citing testimony he made last year outlining "market imperfections" that were becoming evident when Nevada Power and Merrill Lynch were negotiating the contract in 1999.

"Do you believe the company should have closed an open summer 2002 position despite market imperfections," Sulivan asked.

Burton responded: "Yes, if good products were available."

Earlier, John Candelaria, a PUC staff engineer, testified that the Merrill Lynch contract should not be considered when determining a disallowance.

"There were many terms yet to be resolved (between Merrill Lynch and Nevada Power)," he said. "The price element itself is just one of many factors to be resolved before entering into with Merrill Lynch."

Earlier this month, Nevada Power filed an $850 million lawsuit against Merrill Lynch and Allegheny Energy.

The suit claims Merrill Lynch provided misleading testimony last year to the PUC, resulting in the disallowance. Allegheny purchased Merrill Lynch's energy trading operation in 2001.

The suit also said Merrill Lynch "lacked the competency, capacity, or the intention to perform the proposed offerings."

Separately, the Federal Energy Regulatory Commission announced it will hold an April 23 hearing over disputed high-cost, long-term energy contracts including some involving Nevada Power. A final decision is expected to come at a later date.

Nevada Power has appealed $300 million in contracts with nine suppliers to the FERC, claiming the deals should be set aside because prices were inflated due to market manipulation.

"This is an important and positive step," PUC Chairman Don Soderberg said in a statement. "Contract relief is never something that should be done without careful consideration, but FERC must recognize the significant inequities that were occurring and the impact those inequities had on distorting the market."

A FERC administrative law judge recommended in December the commission throw out Nevada Power's claim.

The matter was delayed at a March 26 FERC hearing, despite the release of a 300-page report by the commission's staff outlining market manipulation and linking short-term market dysfunction to inflated long-term deals.

While the report appeared to back up Nevada Power's claims, two of the three commissioners said they favored upholding the contracts.

While the federal regulators appear skeptical of Nevada Power's claims, they handed down in the March 26 meeting modified calculations that could nearly double refunds to California customers. In December, a commission judge ruled that California was due $1.8 billion because of inflated costs paid for short-term deals during the energy crisis. Commissioners expect that recalculated refunds could total more than $3 billion. California officials had sought nearly $9 billion in refunds.

Those refunds amount to the difference between non-manipulated market rates and the apparently inflated rates actually paid. Those purchases were made by the state after utilities became insolvent when the market collapsed amid a failed effort to deregulate that state's energy market.

Parties from Washington and California will be seeking to have addiitonal long-term deals overturned in the same hearing.