Forcing Sempra Energy Resources (SER) and other suppliers to renegotiate the long-term electricity contracts that were brokered with California during the state’s energy crisis could jeopardize the very survival of some companies, threaten the development of a strong energy market in the state and result in higher power prices for consumers, energy suppliers told FERC.

It is “unlikely that SER would survive abrogation of the [power] agreement” that it negotiated with the California Department of Water Resources (DWR) during the 2000-2001 period, said SER President Michael R. Niggli. Even if it could somehow pull through, the company “would be reluctant to enter into long-term, fixed price contracts in the future and would also look for ways to sell or terminate construction of its generating assets in and around California.”

He estimated Sempra Energy spent “well over a billion dollars” on generating assets based on its power contract with DWR, and said the company was “out of money as a result of sales made to DWR in the summer of 2001 at below-market prices.”

Echoing Sempra Energy’s concerns, Mirant Americas Energy Marketing LP (MAEM) believes it “will be harmed, not merely through the loss of an expected margin, if the contracts are abrogated or modified,” said Robert Schaefer, vice president of marketing and development for the West Region. “MAEM may have purchased power to cover its delivery obligations in some months, and may have entered into forward gas transactions at prices well above current gas price levels. On a broader level…that contract abrogation or modification…will discourage long-term sales, will be detrimental to the development of the electric market, and will ultimately result in a higher delivered price for power,” he noted.

Dynegy Power Marketing Inc. and its generation affiliates turned the tables on DWR, calling it a “virtual monopsonist” over the energy suppliers during 2000-2001, with the “potential to exercise some form of market power over sellers.” Contary to popular belief, there was “no potential for the exercise of market power in the forward market on the part of sellers in that market,” according to testimony of Dr. Richard D. Tabors of Tabors Caramanis & Associates on behalf of Dynegy Power.

Mirant Americas agreed, noting that it “did not have undue bargaining leverage over [DWR] during the negotiations” of the power contracts in 2000-2001. Rather, it said it “was…under intense pressure to complete a sale to [DWR]” for immediate delivery of power for the summer peak period, at a price well below the market price for that period.

The comments were in response to the complaint brought by the California Public Utilities Commission (CPUC) and California Electricity Oversight Board against Sempra Energy and other power suppliers, accusing them of overcharging the state’s electric customers by billions of dollars during the western electricity crisis nearly two years ago.

In September, FERC Administrative Law Judge Curtis Wagner Jr. set the complaint case for hearing on Dec. 2 to explore the issue of whether the California energy market was so dysfunctional during the 2000-2001 crisis that it rendered long-term power contracts unjust and unreasonable. The hearing will not address individual contracts between suppliers and the state, or decide how individual contracts should be modified. Subsequent hearings, if necessary, will take up the issue of the terms and conditions of individual contracts, which means it could take years to resolve some of the contract disputes.

In the meantime, Wagner said he planned to continue talks with suppliers and California representatives to settle the contract disputes. The judge last month reported six power suppliers had brokered either settlements in principle or final settlements with the state over the disputed high-price contracts, and he indicated he was optimistic that all suppliers — with the exception of Allegheny Energy Supply and Morgan Stanley Capital Management Group — would eventually resolve their differences with the state.

Wagner at the time told reporters that Sempra Energy, which held possibly the largest contract with DWR, had made “extremely good progress” with California, and that a settlement was imminent. But Niggli’s comments suggest otherwise.

California is seeking to renegotiate about three-quarters of its $43 billion worth of long-term power contracts, signed at the height of the state’s electricity crisis with more than 20 energy firms to obtain needed supplies. In February, the state alleged energy suppliers overcharged it up to $21 billiion during the critical period, when California experienced rolling blackouts.

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