Duke Energy evaluating California appellate decision

By the OGJ Online Staff

HOUSTON, Sept. 24, 2001 — Duke Energy Corp. is still "evaluating" the effect of an appeals court ruling that reversed a lower court decision allowing California Gov. Gray Davis to seize private power contracts last February.

In overturning the lower court, the US Court of Appeals for the Ninth Circuit in San Francisco agreed with Duke that Gov. Gray Davis was out of line when he "commandeered" contracts from the California Power Exchange (PX). The PX was liquidating the contracts to pay California electricity wholesalers such as Duke for power the company had delivered to California utilities. With their losses mounting, the utilities were defaulting on their obligations.

The PX, which acted as a clearinghouse for power sold to the state's utilities, was driven into bankruptcy when Southern California Edison Co., a unit of Edison International, Rosemead,and Pacific Gas & Electric Co, a unit of PG&E Corp., San Francisco, defaulted on millions of dollars of payments for power.

The utilities used long-term contracts for firm power as collateral for purchases in the spot market. As the utilities financial problems mounted, their unpaid bills to the PX skyrocketed. To stay afloat, the PX began liquidating the contracts to pay its creditors, mostly wholesale power suppliers.

Davis seized the contracts Feb. 2 to prevent the PX from cashing them. The contracts gave the utilities rights to buy electricity through December 2001 at prices well below prevailing market rates. Because the spot price for electricity was considerably higher at the time, the value of the utility positions in those contracts exceeded $200 million. Duke held 43% of all those contracts, according to the written opinion.

"We would have been paid what we were owed and substantially more," said Tom Williams, spokesman for Duke Energy Corp.

The state argued the emergency declared by Davis allowed him to confiscate the contracts to "rescue them from the auction block and preserve their low-cost value for consumers." But the appeals court ruled Davis's action "directly interfered" with the security and default provisions of the Federal Energy Regulatory Commission approved rate schedule.

It said the state action crossed the line between state and federal jurisdiction established by the Federal Power Act.

"The contracts were within FERC's authority and Gov. Davis could not simply have decreed that the IOU's [investor-owned utilities] debts to their wholesale suppliers be forgiven. And yet his orders frustrated the wholesale suppliers' ability to receive at least partial payment for past purchases of electricity," according to the opinion.

Duke and other electricity wholesalers in California are still owed millions of dollars by the utilities for past purchases of electricity. Pacific Gas & Electric filed for bankruptcy Apr. 6. In a recently filed reorganization plan, it said all creditors would eventually get paid.

Financially strapped Southern California Edison is still waiting for a state bailout, but many observers believe the chances of legislative are fading fast. Both utilities were caught between high wholesale power costs and fixed retail rates.

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