Allegheny Energy Supply and its parent, Allegheny Energy Inc., are being hit with “significant financial harm” as a result of ongoing proceedings at FERC resulting from complaints filed by California state regulators challenging contracts for power supply between Allegheny Energy Supply and the California Department of Water Resources (CDWR), the power supplier told the Commission last Tuesday.

As a result, Allegheny Energy Supply, in an emergency motion, pleaded with the Federal Energy Regulatory Commission to toss out the complaints filed by the California Public Utilities Commission (CPUC) and the California Electricity Oversight Board (CEOB) against the company. The complaints ask FERC to reform Allegheny Energy Supply’s contracts with the CDWR.

Allegheny Energy Supply told the agency that “it is now clear that continuation of this fruitless proceeding is inflicting significant financial harm” on the power supplier and Allegheny Energy. The power supplier pointed out that its parent company has lost approximately $4.6 billion in shareholder value since FERC set the relevant complaints for hearing.

“This harm is attributable in significant part to concerns in the financial community that the Commission has signaled a departure from long-standing precedent,” and may not respect Allegheny Energy Supply’s contracts with the CDWR.

The power supplier said that even assuming there is a nexus between alleged spot market dysfunctions and forward market prices, the CPUC and CEOB have not satisfied their burden of proof under the Mobile Sierra public interest test that the contracts specify and the Commission determined to apply.

Rather than show that Allegheny Energy Supply’s contracts with the CDWR exceeded FERC’s presumptively just and reasonable benchmark price of $74/MWh for round-the-clock power, the CPUC and CEOB base their case upon a challenge against the Commission’s benchmark, which the supplier said it relied upon in negotiating the contracts at issue.

“The Commission can and should decide this issue as a matter of law,” Allegheny Energy Supply asserted. “Once the Commission reaffirms its benchmark, the remainder of the complainants’ case quickly unravels.”

The supplier said that it is “now undisputed” that its contracts with the CDWR were well below the Commission’s $74/MWh benchmark price. Allegheny Energy Supply said that its 11-year agreement provided “substantial benefits” for the CDWR and California, namely “low priced firm power during a time when California’s investor-owned utilities lacked the creditworthiness necessary to buy power.”

In return, Allegheny Energy Supply said that it incurred a “multi-hundred million dollar realized cash loss during 2001, which is continuing to date, while only giving Allegheny Energy Supply the opportunity to recoup these losses during the remainder of the contract term.” The supplier argued that the “undisputed fact” that its contracts are below the benchmark are sufficient in and of themselves to require dismissal.

Moreover, Allegheny Energy Supply said that the record indisputably also shows that it was a power marketer that owned no generation in the western U.S. market, “that it assumed price risks that the CDWR was unwilling to take, and was not able to dictate prices to the CDWR as the complainants allege, but have now failed to show.”

The supplier underscored the point that it was “part of the solution envisioned by the Commission when it called for suppliers to make long-term commitments to California, and assured them that prices up to $74/MWh for round-the-clock power ‘are just and reasonable.'”

Allegheny Energy last month reported that Allegheny Energy Supply received authorization from the Securities and Exchange Commission (SEC) to borrow up to $2 billion on a secured basis.

Allegheny Energy sought the SEC authorization a day after the company disclosed that it was in technical default under its principal credit agreements and those of its subsidiaries Allegheny Energy Supply and Allegheny Generating Co., after it declined to post additional collateral in favor of several trading counterparties.

Allegheny Energy in October also announced that Allegheny Energy Supply will drop speculative energy trading and instead only trade with corporate power plants. In a filing made at the SEC, Allegheny Energy said that “in difficult market conditions, AE Supply’s merchant power business is creating stress on its financial performance.”

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