By Jennifer Langston
Herald Writer
Federal energy regulators agreed this week to look into whether utilities like the Snohomish County PUD were unfairly gouged when they signed expensive long-term power contracts in the thick of last year’s energy crisis.
But that doesn’t necessarily mean the utilities will be allowed to get out of the high-priced contracts, which would save the PUD about $200 million over the next seven years.
Terminating two contracts in dispute would also enable the PUD to lower customers’ rates by an additional 8 percent, officials estimate.
The Federal Energy Regulatory Commission directed an administrative law judge to look into the matter, but warned that the utilities would have to offer more compelling proof that the contracts were unfair and should be broken.
"This burden is a heavy one and one that the evidence contained in the complaints alone does not meet," the commission said this week.
The regulators in Washington, D.C., also encouraged the power buyers and sellers to try mediation and find a solution that wouldn’t require federal intervention.
Eric Christensen, associate general counsel for the PUD, said it was an encouraging sign that the commission didn’t dismiss the complaints outright.
"FERC has generally been leaning very heavily with sympathy towards the power marketers and generators, and this order at least indicates that they’re willing to listen to what we have to say," he said Thursday.
On the other hand, FERC seems to be hinting that it will set a very high standard to allow the utilities to get out of the contracts, he said.
The largest contracts covered in Wednesday’s order were signed by two Nevada utilities with about 10 power generators and energy trading companies like Duke Energy, Enron and Mirant Americas Energy Marketing.
The PUD has challenged one eight-year contract signed with Morgan Stanley. Unless attempts to mediate improve, the PUD expects to file a second complaint against American Electric Power soon.
The PUD has already unilaterally terminated a contract with Enron, which will save another $100 million unless the bankrupt company or its creditors try to challenge it.
The utilities that filed the complaints with FERC found themselves short on power in late 2000 and early 2001. They’ve argued that regulatory problems in California and market manipulation artificially inflated the prices they paid.
The power marketers and energy traders who sold them the power have pointed out that the utilities entered into the contracts voluntarily.
A Morgan Stanley spokeswoman on Thursday stood by the company’s contention that the PUD’s complaint had no merit, since both parties willingly negotiated the terms of the contract.
Rulings in similar complaints brought by utilities that paid exorbitant prices on the short-term energy market during that time period have been mixed.
A judge ruled that the state of California, which spent $9 billion during the energy crisis, was entitled to refunds from energy generators and marketers because it was buying power in a dysfunctional market.
A different judge, however, decided that Tacoma Power and Seattle City Light were victims of their own risky decisions and weren’t entitled to money back.
The Snohomish County PUD ended up about 100 megawatts short of power after it sold its share of a coal plant in 2000. It sold the plant in May of that year, but worked out a deal to continue receiving power through the end of the year.
Weeks after the sale, wholesale energy prices in the West started to climb. The PUD delayed signing contracts or buying power to fill that hole, hoping prices would return to normal.
But things got worse, and by the end of the 2000, prices on the open market were spiking as high as $3,600 a megawatt-hour.
Despite pleas from utilities like the PUD, FERC had repeatedly indicated it would not intervene or impose price caps to help calm a market that many felt had gone crazy.
In order to shelter itself from having to pay exorbitant prices on the spot market, the PUD decided to seek long-term contracts in December 2000.
It accepted offers from Enron, American Electric Power and Morgan Stanley that gave the utility a better price — between $105 and $150 a megawatt-hour — than the spot market at the time.
But the contracts also locked the PUD into paying those prices for six to eight years. "We chose the least bad option out of what were really bad options," Christenen said.
The utilities have since laid much of the blame for their plight on FERC, which did an about-face a few months later. It set new rules and price caps limiting what power marketers could charge.
Prices plummeted within weeks and returned to a more normal range of $40 an hour. That left utilities like the PUD with expensive long-term contracts.
U.S. Rep. Jay Inslee, D-Wa., said the PUD was forced into the contracts during a time when the FERC and the Bush administration continued to announce they would not act to remedy the crisis.
"People are just now beginning to feel the pain of those rate hikes, and after the FERC and the administration bled Washington consumers dry, it is a relief that our complaints are finally being acted upon," he said.
The Associated Press contributed to this report.
You can call Herald Writer Jennifer Langston at 425-339-3452 or send e-mail to langston@heraldnet.com.
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