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Supreme Court hears Snohomish County PUD case

By Christopher S. Rugaber
Associated Press

WASHINGTON -- The Supreme Court on Tuesday appeared to side with power suppliers in a series of contract disputes with electric utilities stemming from the 2000-2001 California energy crisis.

Utilities in Washington state and Nevada are seeking to set aside long-term contracts they signed with power companies such as American Electric Power Co. Inc. and Allegheny Energy Inc. During the crisis, electricity prices soared 15-fold.

The Federal Energy Regulatory Commission has concluded that the crisis resulted from increased demand, bad weather, and market manipulation by energy traders such as the now-defunct Enron Corp.

"This was the worst electricity market crisis in history," said Christopher J. Wright, an attorney for the utilities. "We think (the contracts) were the product of market manipulation."

But Walter Dellinger, a lawyer for the power companies, urged the justices to uphold the integrity of the contracts, which he said enabled the utilities to procure electricity at fixed prices at a time when short-term prices were highly volatile.

"The long-term contracts were part of the solution," he said.

A majority of the justices seemed to side with Dellinger.

Justice David Souter said Wright's argument would set a broad precedent that "no contracts are enforceable if they're made during times of market volatility."

A public utility in Snohomish County, Washington and several Nevada companies argue that the power suppliers, including Morgan Stanley, which has a unit engaged in energy trading, contributed to the overall manipulation of the Western energy market. Morgan Stanley and AEP paid fines to government regulators to settle charges of manipulation, without admitting wrongdoing.

The utilities asked FERC to set aside the contracts in late 2001 and 2002, but FERC refused to do so in a 2003 ruling.

At issue is the legal standard that FERC applied. The commission said that once a contract was signed, it could only be thrown out if it was necessary to protect the public interest. FERC determined that the utilities hadn't met that standard.

The 9th U.S. Circuit Court of Appeals, however, disagreed. In a December 2006 ruling it sent the case back to FERC, ordering it to consider the impact of market manipulation.

The Supreme Court's ruling in this case will likely affect the outcome of two separate cases brought by California's Public Utilities Commission. The California agency is seeking to reduce the cost of several contracts signed by its utilities by $1.4 billion. Those contracts were signed with units of Sempra Energy, Dynegy Inc., and Royal Dutch Shell PLC.

Chief Justice John Roberts and Justice Stephen Breyer recused themselves from the case. Justices generally don't provide reasons for recusing themselves, but both Roberts and Breyer own energy-related investments, though not in the actual parties to the case.

The justices are considering two cases jointly: Morgan Stanley Capital Group v. Public Utility District No. 1 of Snohomish County, 06-1457, and American Electric Power Service Corp. v. Public Utility District No. 1 of Snohomish County, 06-1462.

A ruling is expected by July.