February 24, 2002 PUC: 18

Media Contact: PUC Press Office, 415.703.1366, news@cpuc.ca.gov

PUC TO MAKE COMPLAINT TO FERC AGAINST SELLERS
OF LONG-TERM POWER CONTRACTS

The California Public Utilities Commission (PUC) on Monday will file a Section 206 complaint with the Federal Energy Regulatory Commission (FERC) against specified sellers of long-term power contracts to the California Department of Water Resources (DWR).

Section 206 of the Federal Power Act (FPA) requires that the FERC ensure that all wholesale power contracts are "just and reasonable," with respect to both price and non-price terms and conditions, and affected entities may file a complaint at the FERC over any contract.

The Complaint

The PUC's complaint addresses 44 transactions embodied in 32 contracts with 22 sellers. The PUC's preliminary calculations indicate that collectively, the challenged contracts are priced at levels exceeding just and reasonable prices by approximately $21 billion.

In addition to unreasonable pricing, the terms and conditions of each contract are unjust and unreasonable, including provisions providing for:

· Payment priority over bond repayment;

· Attempted evasion of FERC review of the contracts;

· Asymmetrical credit treatment that calls for DWR to remain creditworthy, but not the seller of the contract;

· "Most-favored nation" treatment with respect to credit and security provisions, requiring DWR to offer the most favorable credit terms offered to any other seller to sellers with these provisions in their contracts;

· Asymmetrical mitigation and termination treatment, which, for example, call for termination payments in the event of a DWR breach, but not in the event of a seller's breach.

In bringing this complaint, the PUC seeks abrogation of the contracts, which will enable California to obtain replacement contracts as necessary at reasonable prices and on reasonable terms. In the alternative, the PUC asks the FERC to reform the challenged contracts to provide for just and reasonable pricing, reduce the duration of the contracts, and strike from the contracts the specific contract terms and conditions found to be unjust and unreasonable.

"It is our hope that the FERC moves expeditiously on this matter to give much-needed justice to ratepayers," said Loretta Lynch, President of the PUC. "When these contracts were negotiated, the sellers had California over a barrel. Now it's time for the FERC to recognize last year's out of control market prices and lower California's power costs."

History

In the midst of an unprecedented electric crisis, DWR was forced to procure enormous amounts of power in order to keep the lights on in California - under conditions of extreme market power.

At that time, the FERC had already found that unjust and unreasonable rates had been charged in the California markets, and had held that "there is clear evidence that the California market structure and rules provide the opportunity for sellers to exercise market power when supply is tight and can result in unjust and unreasonable rates under the FPA."

In the months in which DWR negotiated the bulk of the contracts (February-April 2001), spot market prices averaged over $300/MWh every hour of every day-ten times higher than prior year prices. Suppliers took advantage of their market power and charged unreasonable prices, for unreasonably lengthy periods, and under unreasonable non-price terms and conditions. DWR was forced to accept these terms or let the state go black.

Electricity Oversight Board FERC Complaint

On Monday, the Electricity Oversight Board (EOB) will also make a Section 206 complaint to the FERC. "Last year, FERC's indifference unnecessarily cost Californians billions of dollars for energy. Now, federal regulators say they cannot give relief to California unless it files a complaint. Tomorrow's filing by the PUC and EOB will put FERC to the test," said Governor Gray Davis.

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