PUD’s case reaches U.S. Supreme Court

EVERETT — Snohomish County PUD’s battle to invalidate a $200 million electricity contract signed during the West Coast energy crisis reached the U.S. Supreme Court on Tuesday.

The case, which could net the publicly owned utility millions of dollars, will spotlight the response of federal regulators when electricity prices soared due to manipulations of the energy market by suppliers such as Enron Corp.

The high court will decide whether the Federal Energy Regulatory Commission used the right legal standard in refusing to nullify the PUD’s contract with Morgan Stanley Capital Group Inc.

PUD signed that deal in 2001. It started trying to get out of it soon after because the price of electricity it paid was four times the historic rate. The contract ends in 2009.

Because market shenanigans led to the artificially inflated pricing, federal regulators had the authority to intervene in the public interest and set a lower “just and reasonable” rate to protect consumers, said spokesperson Neil Neroutsos.

Instead, the commission relied on a different standard that effectively steered it clear of interceding on behalf of PUD and other West Coast utilities wilting under the weight of expensive electricity contracts.

In December 2006, the 9th Circuit Court of Appeals sided with the PUD and directed FERC to reconsider the contract. Morgan Stanley appealed.

“We believe we have a strong position,” Neroutsos said. The 9th Circuit “was a significant ruling because it called on FERC to step up and meet its regulatory authority and look at contracts like these with prices that may have been inflated.”

Walter Dellinger, lead counsel for Morgan Stanley, said that “upholding these types of contracts is essential to the predictability of wholesale energy markets.”

John Shelk, leader of an association of energy suppliers, said if the Supreme Court doesn’t affirm the existing contracts and the regulatory approach employed by FERC, it will bring instability to the market.

“The uncertainty created by the 9th Circuit decisions could prove costly for consumers and suppliers alike,” said Shelk, president and chief executive officer of the Washington, D.C.-based Electric Power Supply Association.

Officials at the Federal Energy Regulatory Commission declined to comment Tuesday.

The Supreme Court will consolidate the PUD’s case with that of Sierra Pacific Resources of Nevada, which sued to invalidate its deal with Calpine Energy Services.

That means the justices could provide a clearer picture of the breadth of authority for this group of federal regulators.

The agency “has the tools to protect the public and to enforce just and reasonable rates” for consumers, said U.S. Rep. Jay Inslee, D-Wash. “The defendants want FERC to be a title on the building and no authority.”

Inslee, along with Rep. Rick Larsen, D-Wash. and Sen. Maria Cantwell, D-Wash., raised concerns of FERC’s impotence when the PUD battled Enron.

In 2001, the public utility district signed a nine-year contract with Enron, then canceled seven months later. Enron sued it for $180 million.

This year, in June, FERC ruled the PUD didn’t have to pay millions for pulling out early. In July the two sides settled with the PUD, agreeing to pay $18 million to the bankrupt corporation and its creditors.

In the course of this fight, the PUD uncovered taped conversations of Enron day traders devising and deploying schemes that drive prices up.

“I hope that the U.S. Supreme Court makes the right decision for Snohomish County ratepayers, who have already paid through the roof for unfair market manipulation,” said Rep. Rick Larsen, D-Wash.

“Moreover, I hope that their decision empowers FERC to protect U.S. consumers from unfair contracts in the future,” he said.

Depending on the Supreme Court action, there’s a possibility the PUD might net a hefty refund of the roughly $175 million it’s paid to Morgan Stanley.

But it won’t come easy.

Justices would have to side with the PUD and direct FERC to re-examine the contract. Then the federal regulators would have to decide to invalidate it and rewrite it with a lower price for the electricity.

“If money comes back to the utility, it would give us needed resources to operate,” Neroutsos said. “It would benefit ratepayers one way or the other.”

Reporter Jerry Cornfield: 360-352-8623 or jcornfield@heraldnet.com.