Sierra Pacific’s Nevada Power brings landmark legal case before FERC, study says

MORRIS PLAINS, N.J., April 9, 2002 — The Federal Energy Regulatory Commission (FERC) is on the verge of a pivotal ruling about power contracts, a new study concludes.

“FERC is about to make one of its most important rulings in recent times,” according to William P. Kucewicz, editor of GeoInvestor.com, “and that’s saying a lot given the California power crisis. The issue before the FERC is nothing less than the sanctity of contract.”

Nevada Power and Sierra Pacific Power filed formal complaints with the FERC in December seeking a reduction in future prices on contracts they entered into in late 2000 and early 2001, when power prices were high. In the filings, made under Section 206 of the Federal Power Act, the utilities are asking the FERC to reduce the prices of the contracts to current market prices.

“The ramifications of FERC’s decision in these cases could be immense,” Kucewicz says. “If the sanctity of contract isn’t respected, no long-term deals would ever be struck. Electricity would become, in effect, a wholly cash-and-carry business. In which case, power prices would skyrocket.”

The contracts were brokered transactions, meaning that neither the buyer nor the seller was identified prior to agreement on the price, terms and conditions of the long-term bilateral contract. “The Nevada utilities do not allege that the contracts were improper; they simply no longer like the prices they agreed to pay for the future delivery of electricity,” Kucewicz says. The utilities claim that their troubles over the contracts were due to price caps FERC placed on the spot market in California, which caused a collapse in electricity prices.

Kucewicz rejects this argument. “Nevada Power says the troubles with its forward purchase contracts arose after the FERC instituted price caps on June 19, 2001. However, prices for natural gas — a principal fuel used to produce electricity — began falling long before the FERC June 2001 actions. The market was already correcting the energy supply-demand imbalance and prices were heading down. To ascribe the drop in power prices in the latter part of 2001 to FERC’s actions is a gross misreading of the facts,” Kucewicz concludes.

On March 29, the Public Utilities Commission of Nevada disallowed the recovery of $437 million of Nevada Power’s “imprudently incurred expenses.” The utility has appealed the ruling in addition to asking FERC for relief. Ironically, the FERC’s authority to interfere with the contracts is limited by two 1956 court decisions, one involving Sierra Pacific. Under the Mobile- Sierra doctrine, the FERC may only modify the terms of a valid contract when the “public interest” demands it.

“Nevada Power and Sierra Pacific gambled and lost. They could have hedged their bets; they didn’t.” Kucewicz went on to speculate that Nevada Power and Sierra Pacific might not have entered the contracts if Nevada’s power market had been deregulated on schedule. “Had there been other entities in Nevada negotiating bilateral forward contracts, perhaps Nevada Power and Sierra Pacific would have made more informed decisions. At the very least, they would have been less obligated to supply the state’s future power needs.”

Kucewicz, a former Wall Street Journal Editorial Board member and Dow Jones correspondent, has written extensively on energy issues for more than 20 years. He founded the global investment Web site GeoInvestor.com in 1999. The report is available at http://www.geoinvestor.com/ .


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