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Power Sellers Told to Bargain on Pacts

Energy: U.S. regulators decline to overturn electricity contracts but order firms to renegotiate with state.


SACRAMENTO — Federal regulators warned California on Wednesday that they will not easily overturn long-term electricity deals signed during last year's power crisis, but they moved to help the state renegotiate the contracts on its own.

Meeting in Washington, the Federal Energy Regulatory Commission ordered electricity companies to return to the bargaining table with California officials and a federal mediator to consider amending deals signed when California faced soaring market prices and the threat of blackouts.

The commission order comes in response to a petition filed by the California Public Utilities Commission in February. That petition sought to break 44 long-term power deals with 22 sellers. The PUC argued that the state was forced to overpay by $14 billion in the contracts because they were signed when electricity sellers held sway over the power market launched under a 1996 deregulation plan.

Barry Goode, legal affairs director for Gov. Gray Davis, said the federal order should prod energy companies that so far have been reluctant to talk seriously about changing their contract prices and terms.

"They can't now think that FERC is not watching this," Goode said. "They are going to have to come to grips with the fact that they made contracts at a time when the market was dysfunctional."

But a representative of energy companies said the order puts as much pressure on the state as it does on power sellers. That's because the federal commissioners stressed in their unanimous decision that they are reluctant to break contracts, as California has asked, without a clear showing that it would be in the greater public interest to do so.

Gary Ackerman, executive director of the Western Power Trading Forum, called that an "extraordinarily high burden of proof."

"I think we both now have, in our enlightened self-interest, a reason to meet," he said.

This week, state officials enjoyed their first success in getting power sellers to amend contracts. The Davis administration announced Monday that after five months of talks it had reached agreement on changes to eight contracts--including major deals with Calpine Corp. and Constellation Energy Corp.--at a savings of $3.5 billion over the next decade.

California signed $43 billion worth of long-term power contracts last spring after the state was forced to buy power for financially crippled utilities. The contracts buffered the state from spot-market prices for several months, but in June, for various reasons, market prices crashed. Now the long-term contracts look expensive in comparison, and numerous critics have made them a political burden for Davis as he seeks reelection.

After initially praising the contracts as a safeguard, Davis last fall agreed with critics that they should be renegotiated. To improve the state's leverage at the bargaining table, the PUC petitioned federal regulators to overturn the contracts.

This week, the PUC dismantled part of its own petition. It voted to drop the claims against Calpine and Constellation as part of the new agreements it reached with the companies.

The federal commission praised California for its success in reworking some contracts, and asked a federal mediator to report back in 30 days on the state's progress in renegotiating other deals.

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