Allegheny Energy moves to dismiss California complaint

October 31, 2002|by JULIE E. GREENE

Allegheny Energy is trying to get federal energy officials to dismiss a California complaint about two supply contracts because the matter is "inflicting significant financial harm" on the utility and its energy trading subsidiary, according to a federal filing.

The subsidiary, Allegheny Energy Supply Company, filed an emergency motion late Tuesday asking the Federal Energy Regulatory Commission to uphold the contracts and dismiss complaints filed in February by the California Department of Water Resources and the California Electricity Oversight Board, Allegheny Energy Supply spokeswoman Janice Lantz said from the Monroeville, Pa., office.

The filing states that the "fruitless proceeding is inflicting significant financial harm" on Allegheny Supply and Allegheny, the latter of which has "lost approximately $4.6 billion in shareholder value" since the commission set a December hearing date for the California complaints.


The hearing date was set in April. Allegheny's stock has fallen from $43.86 in April to $5.42 on Wednesday.

Allegheny wants the commission to "expeditiously dismiss" the complaints rather than wait for a judge to hear the matter, the motion states.

FERC spokeswoman Barbara Connors said there usually is a 15-day comment period from the filing date before the commission decides whether to act on the motion. Commission members could say nothing, she said.

The uncertainty concerning what action the commission will take on the complaints was cited by Moody's Investors Service and Standard & Poor's when those two rating agencies downgraded Allegheny Energy's debt rating to "junk" status, according to an affidavit by Allegheny Energy Supply President Michael Morrell. The affidavit was filed with the Oct. 29 motion.

That uncertainty also has affected Allegheny's efforts to "negotiate favorable terms and amounts of secured loans," Morrell's statement says.

Allegheny Energy is trying to get financing to sustain agreements with some energy trading partners. The utility received authorization from the Securities and Exchange Commission almost two weeks ago to borrow up to $2 billion on a secured basis.

The California contracts include an 11-year contract for up to 1,000 megawatts at $61 per megawatt hour, according to Morrell's statement.

California is trying to get power contracts with almost 24 suppliers, including Allegheny, restructured to a lower price or voided, said Erik Saltmarsh, director and chief counsel for the California Electricity Oversight Board. Those contracts obligate the state to buy $43 billion of electricity during the next 20 years.

The current market for power on the West Coast is $30 to $40 a megawatt hour, Saltmarsh said.

The contracts with California are "very, very valuable," Lantz said.

When asked what the effect would be on Allegheny Energy Supply if the FERC voided the contracts, Lantz said, "That would be a very critical thing for Allegheny Energy Supply. I don't know the ramifications. I don't want to speculate."

In Morrell's affidavit, he states Allegheny Energy Supply bought power in the west market in 2001 at an average price significantly higher than $200 per megawatt hour. The company "suffered a multi-hundred dollar realized cash loss in its trading operations" that year, he said.

According to Allegheny's 2001 annual report to the SEC, the utility's energy trading activities resulted in $223.2 million of net realized losses. The report states those losses were mainly related to the California contracts and related hedges.

Because Allegheny does not own power generation equipment in the west it bought the power from other companies to sell to customers such as California. In the months following the collapse of Enron and the energy trading market, Allegheny officials announced this summer the utility would be scaling back its energy trading business.

Morrell was not available for comment on Wednesday, Lantz said.

At the time the California contracts were signed in March 2001, the West Coast market for a megawatt hour was $250 to $350, Lantz said.

Allegheny's motion states the $61 per megawatt hour is below the benchmark of $74 that FERC set when the agency was encouraging companies to supply power to California during its energy crisis.

Saltmarsh said Allegheny is making "invalid comparisons" and misstating the purpose of the FERC benchmark price. The benchmark was intended for short-term supply contracts during the energy crisis, he said.

Connors said the benchmark was set in another case involving California markets in an attempt to control the volatility of 2000's price spikes.

Saltmarsh said power agreements with the $250 to $350 prices are being recalculated because the market was "dysfunctional." Refunds of billions of dollars are expected, he said.

In a separate filing on Oct. 21, Allegheny has asked FERC to allow Allegheny Energy Supply to transfer the two California contracts to a new subsidiary, Allegheny Trading Finance Company.

California officials also oppose this request, Saltmarsh said.

By moving those contracts to a separate company with no other assets, Allegheny could default on the contracts leaving California with no recourse, Saltmarsh said. If the contracts are voided, the issue is moot, he said.

Lantz said setting up a separate subsidiary for the contracts makes it easier for Allegheny to sell the contracts or use them to secure collateral for other loans.

At Allegheny's request, an abbreviated comment period was set for that matter, Connors said. Comments will be accepted until Monday.

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