Allegheny Energy faces suit

January 31, 2003|by JULIE E. GREENE

A California agency that is trying to get two contracts with Allegheny Energy Supply restructured filed a breach of contract lawsuit against the utility on Wednesday concerning the same contracts, officials said.

The California Department of Water Resources filed the suit in the Superior Court of California in Sacramento County on Wednesday, according to the court's civil division office.

The suit and a dispute the two sides have before the Federal Energy Regulatory Commission (FERC) center around two energy contracts signed in March 2001 during California's energy crisis. The larger contract is a $1.3 billion asset for Allegheny Energy. When the contract was signed, the company stated it would be worth $4.5 billion during its 11-year term.


California officials want the contracts voided or restructured because energy prices were much higher when the contract was signed. Current energy prices in the West Coast market are more normal, historically.

In early December, FERC granted Allegheny Energy's energy trading subsidiary, Allegheny Energy Supply, permission to transfer the two contracts to a new Allegheny Energy subsidiary, Allegheny Trading Finance Co.

The California Department of Water Resources contends that when Allegheny transferred the two contracts to that new subsidiary on Dec. 23 it violated the master power purchase and sale agreement between the two sides, the lawsuit states. California filed Wednesday's lawsuit against both subsidiaries.

California officials have said moving those contracts to a separate company with no other assets could allow Allegheny to default on the contracts and leave California with no recourse.

California essentially seeks the same remedies in the lawsuit that it has asked FERC for - to terminate the contracts or to have Allegheny compensate the state for the cost difference between energy prices now and in March 2001.

In a prepared statement, Allegheny Energy Supply President Michael P. Morrell said the lawsuit is a "show of bad faith" and an attempt at an "end run" around the FERC.

Allegheny officials still await FERC's decision.

News of the lawsuit comes as Allegheny officials are once again up against a deadline - today - to get a financing deal done, get waivers extended from bank lenders, or file for Chapter 11 bankruptcy.

Allegheny officials have been negotiating with a syndicate of banks to secure up to $2 billion in financing.

Allegheny Energy Supply spokeswoman Janice Lantz said the California contracts were not the focus of the negotiations.

However, Lantz said uncertainty concerning the FERC case about the California contracts affected Allegheny's credit ratings.

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