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Snohomish PUD Embarks on Crusade to Recover Costs

by Steve Ernst
Puget Sound Business Journal, December 13, 2002

The West Coast energy crisis has been over for more than a year, but Snohomish County Public Utility District is still fighting mad about what it sees as a huge scam.

Snohomish PUD is on a crusade to force power marketers, and any company that profited from the West Coast energy crisis, to cancel many long-term power contracts signed during the crisis and refund profits made between May 2000 and June 2001.

Snohomish PUD and Tacoma Power have been the state's two most vocal activists in battling power marketers.

The mysterious spike in power prices that started in May 2000 and lasted until June 2001 forced Snohomish PUD to raise its rates by 59 percent. The rate increase, coupled with the sagging economy, is taking a toll on many of the PUD's customers. Through October, a record 13,633 of Snohomish customers have had their electricity shut off, a 43 percent increase over last year.

The PUD believes its customers are victims of power traders manipulating the West Coast power markets.

"We believe there was a horrendous manipulation of markets in the Western United States in 2000 and 2001," said Mike Gianunzio, general counsel for Snohomish PUD.

"A group of energy marketers that were operating illegally and unethically took hundreds of millions of dollars out of the Western United States," he said. "This was a horrible tragedy that nearly wrecked the Western economy, and we have to do everything we can to recover what those people took from us."

During the crisis, Snohomish PUD bought about $625 million worth of long-term contracts.

Snohomish has asked the Federal Energy Regulatory Commission to void two of its long-term contracts one with Morgan Stanley Capital Group and another with American Electric Power Co. Inc. valued at $350 million. The PUD has also filed suit in California, claiming that 11 energy traders and generators colluded to create artificially high prices. The California suit could expand to include any power company or utility that profited by selling power into the California market.

A five-year, $200 million deal with Enron Corp. was scrapped in November 2001, after Enron's credit rating was lowered to junk-bond status.

All of the power contracts were signed at the height of the energy crisis, when there appeared to be no end in sight to high prices.

In January 2001, Snohomish signed an eight-year, $200 million deal with Morgan Stanley Capital Group Inc. That same year it entered into a five-year, $150 million deal with American Electrical Power Co. Inc.

The crisis started in May 2000 prices when prices on the wholesale electricity market began a mysterious and unprecedented climb, at times reaching levels near 1,000 times their historic averages.

At the time, the PUD, which generates only about 10 percent of its own power, was relying on power purchased on the open market and from hydroelectricity generated by the Bonneville Power Administration.

While prices began to climb, the Northwest's massive hydroelectric system was being hamstrung by the worst drought the region had seen in decades, leaving the BPA unable to supply its typical amount of power.

During the 13 months of high prices, utilities up and down the West Coast complained to the Federal Energy Regulatory Commission that the markets were being rigged and begged the federal government to do something. FERC's advice was to avoid buying in the spot-market and purchase long-term contracts.

Finally, in June 2001, FERC enacted a price cap in both markets and prices suddenly returned to normal.

But the damage had already been done.

Two of California's largest utilities were teetering on the brink of bankruptcy, while dozens of utilities on the West Coast were forced to borrow money and raise rates.

An analysis done by the Bonneville Power Administration indicated that the crisis siphoned $35 billion in potential gross regional product from the West.

"Outside of a few foreign-policy decisions, this was the worst public policy blunder in the history of the United States," said Eric Christensen, associate general counsel for Snohomish PUD.

Snohomish is one of about 10 utilities in the West fighting power marketers. The fight against power marketers received a boost recently after a former Enron power trader pled guilty to wire fraud charges and agreed to help with a federal investigation into the energy crisis.

Also, Tulsa-based Williams Co. agreed to settle charges that it manipulated power markets in California. Williams agreed to pay $400 million in damages to the state of California, and $15 million apiece to the states of Washington and Oregon.

An administrative law judge in the Morgan Stanley case could make a final ruling as early as next year, but the case is likely to linger for years to come.

"You can probably count on an appeal and there may be a Supreme Court case lurking under all this mess," Gianunzio said.

Steve Ernst
Snohomish PUD Embarks on Crusade to Recover Costs
Puget Sound Business Journal, December 13, 2002

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