Williams last Tuesday said that it has completed its settlement with California resolving most of the company’s outstanding litigation and civil claims related to natural gas and power markets with the states of California, Oregon and Washington.

The settlement also restructures Williams’ energy contracts with California (see NGI, Nov. 18). Under the terms of the settlement, the restructured energy contracts may be assigned to California utilities at some point in the future.

California is poised to benefit from the deal since it will get more control of its long-term power contracts going forward and up to $417 million in separate payments from the energy company. At the time of the original deal announcement, state officials said its value to California could be characterized as being worth more than $1.6 billion, but because there was a $180 million overlap between a lower contract value and settlement amounts on pending litigation, $1.4 billion was established as a net total for the benefits.

In return, Williams gets to remove the uncertainty and pall hanging over it surrounding all civil actions regarding its dealings in California, including prices charged to the state during the western energy crisis, and has the opportunity to sell the state additional power supplies at the same $62.50/MWh to $87/MWh prices in its original long-term contract going forward.

As part of the renegotiated remaining eight-year power deal, Williams has agreed to increase maximum supplies through 2010 from 1,400 MW to 1,875 MW; given the state more flexibility on when power is dispatched; signed a long-term natural gas agreement through 2010 for 1.2 to 1.8 million MMBtu/month; and is released from any future refund determinations as they relate to the state.

“This agreement removes significant uncertainty from our company and preserves substantial value in our California energy contracts,” said Steve Malcolm, Williams’ chairman, on Tuesday. “This is a practical solution for an important customer like California and improves Williams’ opportunity for selling or doing a joint venture for this part of our business. The agreement is an important step toward our goal of reducing the financial risk and liquidity requirements related to our energy marketing and risk management business.”

In addition to the states of California, Oregon and Washington, private class-action plaintiffs joined the agreement as expected. While the settlement is now effective with the states, various court orders must be obtained to finalize the settlement with the private class-action plaintiffs.

Malcolm added, “This has been one of the most difficult years in Williams’ history. Ending the year with a finalized, favorable agreement with California is a major achievement for our company. This agreement, combined with significant financial progress, provides momentum for us to move forward in 2003. We will continue to focus on strengthening our finances and concentrating our business around finding, producing, gathering, processing and transporting natural gas.”

Last week’s announcement came on the heels of a FERC order issued Dec. 30 that dismissed Williams Energy Marketing & Trading Co. from the agency’s ongoing proceedings to determine the level of refunds owed to California for high-priced power sold during the state’s energy crisis in 2000-2001.

The decision satisfied a condition included in the settlement hammered out between Williams and California, but doesn’t mean that the federal agency is making a call one way or another as to the merits of the deal.

The settlement agreement required that FERC issue an order by Dec. 31, 2002 granting a motion filed by Williams to dismiss claims for refunds due to the California entities, or in relation to any power provided to the California Department of Water Resources, that is or may be subject to the refund proceeding from Williams.

In turn, the agreement provides that California will release Williams from any claims based on the alleged existence or exercise of market power during the relevant period of time.

Williams on Nov. 25 filed a motion at the Commission asking the agency to dismiss it from the ongoing California refund proceeding to the extent that the proceeding directs refunds for electric power sold by the generator to the state.

Williams explained that it is not seeking dismissal with regard to claims that non-settling entities may have in the refund proceeding, such as investor-owned utilities. Williams also stated its intent that the dismissal not adversely affect any other party to the refund proceeding. The generator recognized that the Commission has not yet finalized the process with regard to how refunds will flow and that the question of “who owes what to whom” in the refund proceeding remains unsettled.

In response to the Williams’ filing, several parties noted that the issues of whether there are bilateral refunds owed by suppliers to particular claimants and how such obligations would be calculated were pending before FERC Administrative Law Judge Bruce Birchman. These same parties said that they were concerned that, depending on how bilateral obligations are calculated, the partial dismissal could adversely affect their positions.

FERC on Thursday issued a decision granting Williams’ request that it be dismissed from the California refund proceeding to the extent that the proceeding directs refunds for electric power sold by the generator to the state.

At the same time, the Commission noted that the matter is complicated by the fact that the California refund proceeding doesn’t contemplate the computation of bilateral obligations between buyers and sellers in the California Independent System Operator and California Power Exchange spot markets.

FERC pointed out that in an early December certification of proposed findings on California refund liability, Birchman rejected offered “bilateralization” proposals. Birchman’s initial decision is now pending before FERC. The agency found itself agreeing with Duke Energy “that nothing in this order should be construed as pre-judgment of this issue by the Commission.”

Similarly, FERC said it would not rule at this time on Williams’ proposal for implementing the proposed settlement in a compliance filing to be made after the Commission reviews Birchman’s ruling and filings made in response to that decision.

“It may be possible to respect Williams’ request, but to decide the matter at this time is premature,” FERC said. “However, we emphasize that, even if it is later determined that it is necessary to calculate the bilateral obligation between Williams and the state in the refund proceeding, that calculation would not in any way supersede the proposed settlement agreement (if it is approved) or our granting of Williams’ motion for partial dismissal. Moreover, our action today will not affect in any way the amount of refunds that Williams may owe to the non-settling parties.”

The Commission further clarified that its order only addresses Williams’ motion for partial dismissal, but does not rule substantively on the proposed settlement agreement between Williams and California.

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