Wednesday, September 3, 2008


Federal Regulators Uphold California Energy Contracts

Published: June 26, 2003

Federal energy regulators today rejected a request by California to invalidate more than $12 billion in energy contracts signed at the height of the state's electricity crisis, even though they have determined that widespread manipulation helped drive prices higher.

In a series of rulings issued today, the Federal Energy Regulatory Commission also demanded that more than 60 sellers, including some of the nation's largest power companies, justify why they should not be forced to give up profits obtained through improper tactics.

The commission also stripped the Enron Corporation, which is now bankrupt, of the right to sell electricity and natural gas at prices set in the open market. The commission called its action unprecedented and said it stemmed from Enron's ''numerous market manipulation schemes.''

But the most important action today was the 2-to-1 decision upholding the long-term contracts for electricity that California signed to help bring raging power prices under control in 2000-01. Had the regulators invalidated the contracts, the state could have saved several billion dollars by arranging for alternate power supplies at lower prices, people on both sides of the issue said.

In a separate proceeding at the commission, the state is seeking $9 billion in refunds from electricity overcharges. Commission officials have indicated that those refunds will probably total $3.3 billion to $4 billion. But the state will have to spend $3 billion of that to cover unpaid power bills still owed to electricity generators and traders.

The two commissioners who voted to sustain the contracts, Patrick Wood III and Nora Brownell, both appointees of President Bush, said the state had failed to meet a high standard of proof that would allow for such drastic action.

Mr. Wood said that voiding the contracts was not in the public interest and noted that California officials had said at the time the contracts were signed that they were good deals for the state.

The third commissioner, William Massey, who was appointed by President Bill Clinton, sharply dissented, saying it was impossible to square the commission's market-manipulation findings with the ruling that the contracts should be enforced.

California officials criticized the decision, and officials with the state's Public Utilities Commission said they would appeal in a federal court.

The contracts ''were based on prices driven to record levels by market manipulation, so this unfortunate ruling could cost California billions of dollars if it is allowed to stand,'' said Senator Dianne Feinstein, Democrat of California.

Yet the commission has found that while manipulation helped drive prices higher, the root cause of the crisis was the state's deeply flawed deregulation plan and a severe shortage of electricity. Taken together, the two factors made possible many of the abuses that later occurred, commission officials have said.

Commission officials said the standard required to cancel contracts would have required a finding that the pacts would impair the ability of a public utility to continue providing service or cause an ''excessive burden'' on customers.

In an interview, Mr. Wood, the commission chairman, said that while some of the contracts were signed at very high prices, the average price over the long term -- about $70 per megawatt hour -- was not that different from the cost of wholesale power before the state deregulated its marketplace.

In one comment cited by Mr. Wood, the state's lead official on the contract negotiations said, ''We didn't just fall off a turnip truck. I'm not saying we took the shirt off their back, but I'm saying these were fair, negotiated, hard-fought deals.''

Gary Ackerman, the executive director of the Western Power Trading Forum, a group that represents power sellers and traders in California, characterized the commission's actions as ''two steps forward and one step backward.'' Mr. Ackerman said he was disappointed by the demand that companies justify their trading tactics or give up profits, but he said the contract decision ''means that the market will prevail.''