Hi

THought you might get a kick from this.  Hope you made it home smoothly and spent the weekend playing soccer.  Talk to you soon.


Elizabeth Sager
713-853-6349

 -----Original Message-----
From: 	Hall, Steve C. (Legal)  
Sent:	Monday, October 15, 2001 1:00 PM
To:	Sager, Elizabeth; Yoder, Christian; Murphy, Harlan; 'mwood@stoel.com'; 'sswalters@stoel.com'; Boose, Justin
Subject:	Drafting tip

Look at California's spin on contract provisions preventing California from seeking FERC review of contract prices.  California officials now argue that such provisions indicate that suppliers had undue bargaining power.  Rather than protecting suppliers, these provisions are having the opposite effect of drawing political and legal scrutiny.---sch


THE STATE
Energy Pacts Bar State From Seeking U.S. Review of Prices
Crisis: The provisions suggest the amount of clout generators had during negotiations. Consumer advocates want the agreements redone.
By VIRGINIA ELLIS and NANCY VOGEL
TIMES STAFF WRITERS

October 15 2001

SACRAMENTO -- Buried in the fine print of the long-term contracts California officials signed to buy billions of dollars in electricity are provisions giving up the state's right to seek a federal examination of whether the contract prices are unreasonably high.

Critics of the contracts call those clauses the clearest evidence yet that many of the agreements need to be renegotiated.

"You would never find a provision like that in a contract that was negotiated under normal circumstances, because it's patently ridiculous," said Senate Energy Committee Chairwoman Debra Bowen (D-Marina del Rey). "It demonstrates how much clout the generators had in negotiating these contracts." The Federal Energy Regulatory Commission is obligated to ensure that wholesale power prices are "just and reasonable." If the FERC finds otherwise, it has the authority to order power sellers to refund profits.

In recent weeks, Loretta Lynch, president of the state Public Utilities Commission, has asked the FERC to review two of the state's long-term power contracts. The prices and terms of those contracts may be "unjust and unreasonable," Lynch said. Neither contract had the no-challenge clause.

But when asked about contracts that include the prohibition, Lynch expressed outrage.

"They didn't want anybody looking over their shoulder," she said. "From my perspective, that contractual provision is great evidence that the generators knew they were sticking up the state. . . . If they thought this was a reasonable contract, why wouldn't they want FERC to uphold their deal?"

State's Bargaining Position Was Weak

The companies with no-challenge clauses in their contracts included Mirant Americas Energy Marketing, Dynegy Power Marketing, Sempra Energy Resources, Allegheny Energy Supply Co., Coral Power and Williams Energy Marketing & Trading.

S. David Freeman, the state's chief negotiator on long-term power contracts who was recently named head of the Consumer Power and Conservation Financing Authority, said the clause needed to be understood in the context of the energy crisis.

At the time the contracts were negotiated, the state's two largest utilities, Pacific Gas & Electric and Southern California Edison, had already failed to pay energy companies hundreds of millions of dollars for power purchases.

"Our reputation as a state for sticking by what we said and having credit was not all that great in January," he said. "They were asking, 'Is this a serious deal? Is the state of California committed to it?' What are you going to say--no? [Then] you're not going to get a deal."

The state began a hurried effort to negotiate long-term contracts in January after energy prices on the spot market spiraled to unprecedented heights. The costs threatened to bankrupt the state's utilities, which were unable to buy power on their own for their customers.

State officials negotiated dozens of contracts, some lasting as long as 10 years, which offered prices ranging from $58 to $249 per megawatt-hour--a far cry from the $500 per megawatt-hour the state was frequently paying on the spot market at the time.

But by summer, the wild energy market stabilized and prices dropped. California suddenly found itself paying more under the long-term contracts than the $15-to-$30 per megawatt-hour offered on the spot market.

"Look at the context in which the state was entering into these contracts. They were pretty much desperate," said Mike Florio, senior attorney for the Utility Reform Network in San Francisco.

"We were talking about windfall profits, taxes and seizing power plants, and I think the generators started putting in their contracts anything they could think of to keep the state from undoing the deal once things calmed down, which they have."

Michael J. Niggli, president of Sempra Energy Resources, said the clauses provided "the kind of reassurance that allows the financial community to say we're willing to invest in California."

"It's not that we're superseding anything, frankly, it's that we've said we don't want the party we've done the transaction with to try to derail it," Niggli said.

He acknowledged that the contract clause cannot prevent the state from asking for federal review.

"The question becomes, 'Will FERC accept that or consider that?' " he said. "And then, 'Do we consider that a breach of the contract in any way shape or form?' "

Bowen and Freeman predicted that the clauses would not stand up to court scrutiny. "Frankly, I wasn't too concerned about the clause," Freeman said. "I don't think it's enforceable."

Enforceable or not, Bowen said, the clauses would complicate any state efforts to seek FERC review.

"The very fact that they were able to get that kind of language in the contracts tells you it wasn't an evenhanded situation," she said. "I believe the state in negotiating the contracts did the best possible job it could under the circumstances, but that doesn't excuse [officials] from the responsibility of trying to improve the situation now." 
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