A lawyer for a California-based power supplier said last Wednesday that Nevada Power and affiliate Sierra Pacific Power Co., which are seeking to reform electric contracts negotiated at the height of the western energy crisis, have only themselves to blame for the above-market contract arrangements with which they now are saddled.

The Nevada utilities adopted an “accelerated procurement strategy” in late 2000 under which they made a series of rapid purchases of power “well in advance of the delivery period” before the “market [could] get wind” that their credit status was deteriorating, said Keith McCrea, counsel for Calpine Energy Services. In short, they wanted to “out-maneuver the market by locking in contracts before the market fully understood their [financial] situation.”

This was a “radical departure from what the company deemed to be prudent practice,” he told FERC Commissioners during oral arguments on the hot-button issue of whether Nevada Power, Sierra Pacific Power and two other western-based power entities should be permitted to reform power contracts that they entered into with power suppliers during the 2000-2001 energy crisis.

Calpine Energy is one of several suppliers who negotiated contracts with Nevada Power, Sierra Pacific Power, Southern California Water Co. and the Snohomish Public Utility District in Washington during the western energy crisis, and is now having its contracts challenged. Other suppliers include Morgan Stanley Capital Group, Mirant Americas Energy Marketing, Allegheny Energy Supply Co., El Paso Merchant, and Enron Power Marketing [EL02-28].

The Nevada utilities pursued this accelerated procurement strategy with the hope that they would make money from it, according to McCrea. In 2000, the record shows the Nevada companies earned over $100 million in wholesale power sales, he said. In 2001, he reported they sold four times the wholesale power that they did in the previous year. During this period, Nevada Power reportedly sold power at prices ranging from $400 to $750 per MWh into California. But in the end it was a “flawed strategy” for the companies.

“Why is their procurement strategy relevant to the [issue of] whether the price…was just and reasonable?” asked Commissioner William Massey. “I get stuck on that.”

He questioned how supplier power contracts with Nevada Power, Sierra Power and others could be considered “just and reasonable” in light of FERC’s staff recent report, which found widespread manipulation existed in the western energy markets during 2000-2001.

“I cannot imagine that we can reach a decision [on whether to abrogate contracts] without taking that into account,” Massey noted. “Isn’t [that report] the elephant in the living room?” If FERC ignored the report’s findings in its ruling in the contract case, “I would think the court would send that right back to us.”

The oral arguments revealed once again the deep split on the Commission over the issue of contract abrogation. Massey favors annulling the contracts, while Chairman Pat Wood and Commissioner Nora Brownell strongly support upholding the sanctity of the original contracts.

There is “no evidence of fraud, market power or manipulation in this case,” countered McCrea. Even Nevada Power conceded the prices were below market at the time the contracts were negotiated, he said. However, the utility and others now argue the contract prices were high in retrospect, given that the western energy market was dysfunctional and prone to widespread manipulation at the time.

Representatives of Nevada Power, Sierra Pacific and others contend the Commission simply needs to find that the contracts were “unjust and unreasonable” to rule in favor of reforming the contracts. But Calpine Energy and others believe the contract-holders have a much higher burden to meet under the Mobile-Sierra doctrine, which requires them to show that the contract rates have adversely affected the public interest.

FERC Administrative Law Judge (ALJ) Carmen Cintron in December dismissed the complaints brought by Nevada Power, Sierra Pacific and others against the power suppliers, saying they had failed to meet the public-interest standard under Mobile-Sierra. The full Commission can now accept or reject Cintron’s decision in full or part.

The utilities “in this case would have this Commission be the first to lower that bar,” said McCrea. “If this were to happen, the industry would be ushered into a new era of regulatory risk and uncertainty.”

While contract-holders would prefer the agency to judge the case based on the “just and reasonable” standard, G. Philip Nowak, an attorney for Nevada Power and Sierra Pacific, argued that the supplier contracts run afoul of the public-interest standard as well. He noted that FERC has issued show-cause orders against three of the suppliers named in the complaints, the agency staff found pervasive manipulation in western energy markets, and one ALJ declared contracts to be “null and void” in cases where fraud was involved in the execution of a contract.

“Clearly, the Nevada companies contracts in this case were [obtained through] fraud,” Nowak said. The Commission’s concern about upholding the sanctity of contracts is not warranted in light of the conditions found in the market — fraud, gaming, anomalous behavior and manipulation, he told the agency during the oral arguments.

The “massive manipulation” in the western energy markets should be “the most critical and driving consideration” of FERC in reaching a final decision on whether to reform the high-priced contracts, Nowak said.

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