High Court Says California Governor Overstepped in Seizing Energy Contracts

High Court Says California Governor Overstepped in Seizing Energy Contracts

By John Woolfolk, San Jose Mercury News, Calif. -- June 4

Jun. 4--Gov. Gray Davis overstepped his authority last year when he seized an estimated $200 million worth of energy contracts to keep electricity flowing to the state at the height of the power crisis, the U.S. Supreme Court decided Monday.

The court let stand an appellate court ruling that the governor's emergency powers did not grant him the authority to take over the Duke Energy contracts, a decision that means the state would be forced to rely on federal regulators for help if a similar situation occurred, said Sandra Michioku, spokeswoman for Attorney General Bill Lockyer.

The decision also raises the possibility that Californians may end up paying even more to a power company at a time when state and federal officials are finding growing evidence that energy merchants manipulated the state's market. Davis has asked federal regulators to order $8.9 billion in refunds from Duke and other power companies.

But whether the court decision means California owes contract holder Duke more money for the electricity contracts, which expired at the end of last year, remains to be determined.

"We're obviously disappointed," Michioku said. "Californians are now left to trust the federal government to protect them from blackouts in an energy crisis, rather than have the governor act to ensure that electricity is delivered to the state." At issue are electric power contracts Duke signed with Pacific Gas & Electric and Southern California Edison in 2000 just before the state's power crisis.

As the crisis peaked in early 2001, the utilities ran into a cash crunch because their rates were frozen by law at a level that fell short of their skyrocketing costs for wholesale power.

With the utilities unable to pay for billions of dollars in power and energy companies threatening to cut off sales, the state stepped in to buy power. Davis declared a state of emergency and seized control of the utilities' power contracts, arguing it was necessary to avoid blackouts and to secure energy at reasonable cost.

Duke sued, contending that the contracts became void when the utilities could not pay their bills and claimed that the company had the right to resell the power at market rates that were then many times higher.

The contracts varied in price from approximately $60 to $130 per megawatt-hour, Duke spokesman Patrick Mullen said. When the state seized them in February 2001, average daily market prices were over $300 per megawatt-hour.

"Under federal law, those contracts should have been liquidated at market rates," Mullen said, calling the state seizure an "unfair taking of our assets." After the 9th U.S. Circuit Court of Appeals agreed in a 2-1 ruling, the state appealed to the Supreme Court, arguing that states are constitutionally immune to such suits.

Lockyer argued that the appellate ruling "has hamstrung the ability of this governor and future governors to respond to a crisis." But in its decision, the appellate court said Duke was entitled to the contracts as "collateral" for breach of contract under Federal Energy Regulatory Commission rules.

"Gov. Davis' commandeering orders deprived wholesale suppliers of their FERC-required collateral for past transactions, and hence of their `assurance of payment,' " the appellate court said.

Whether the state now owes Duke a higher price for the contract power will be decided in a separate claim before a Sacramento County Superior Court judge. A hearing is scheduled June 21.

Mullen said the company has not determined how much it believes the contracts were worth and said the court would decide their value.

The state argues that regardless of whether the contract seizure was legal, the company has already been paid what they were worth.

Duke, which is based in Charlotte, N.C., has not figured in the recent wave of scandals washing over the energy industry in the wake of the Enron bankruptcy, and is not among the power companies that the state has sued alleging unfair business practices.

But Duke, a major energy producer in California, has been under investigation and has come under criticism, particularly over its admission that it tried to sell PG&E power for a record $3,880 per megawatt-hour, about 100 times today's rate.

The company, however, never received payment for the 5,000 megawatts sold at that price.

The Associated Press contributed to this report.

-----

To see more of the San Jose Mercury News, or to subscribe to the newspaper, go to http://www.bayarea.com