Energy supply setback: Big generator can't be forced to sell emergency power to the state, a U.S. court rules.

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By Denny Walsh and Carrie Peyton, BEE STAFF WRITERS (Published April 6, 2001)

In a development that does not bode well for California's energy supply, a federal appellate court Thursday halted enforcement of a lower court order that a big electricity generator must sell emergency power to the state without guarantee of payment.

State energy officials said the ruling wouldn't have any immediate effect but could precipitate a power emergency if the generator decided to take a plant off-line for maintenance.

On March 21, citing "rolling blackouts (that have) darkened the California landscape," U.S. District Judge Frank C. Damrell Jr. imposed an injunction against Reliant Energy Services Inc., one of the nation's major generators.

Houston-based Reliant controls approximately 3,800 megawatts, or about 20 percent, of the gas-fired generation capacity in the state, and Damrell found that loss of that production "poses an imminent threat."

But Thursday, a three-judge panel of the 9th U.S. Circuit Court of Appeals granted an emergency stay of the injunction, saying Reliant has shown "a high likelihood of success on the merits" of its appeal. While not spelling it out, the panel apparently bases its finding on the question of the courts' jurisdiction over the energy market. The panel directed that a hearing on the appeal be scheduled for the second week in July.

The decision leaves California's electric grid more fragile, at least temporarily, according to the state Independent System Operator, which maintains and controls power transmissions. It gives the agency no immediate recourse if Reliant chooses to shut down any of its plants for maintenance, said ISO Vice President Jim Detmers.

"It's not going to change anything overnight, and it's not going to change anything over the weekend," said Detmers. "But if Reliant decided on a unilateral action to take their units off for maintenance ... we definitely could have a system emergency."

Reliant officials, when told of the ruling, took a conciliatory tone but declined to specify their next move. "Reliant ... has pledged to keep the lights on in California," said company lobbyist Marty Wilson, and "is still of a mind to want to cooperate."

Without further comment, the appeals court judges cited a 1980 U.S. District Court decision. In that case, 14 cities sued Florida Power and Light Co., alleging that it was violating a number of laws in its sales of power and production of electricity.

The judge found, however, that the Federal Power Act reserves oversight of interstate utilities exclusively to the Federal Energy Regulatory Commission. He ruled that only the commission may bring an action involving energy sales into federal court -- unless it is a request to review a commission order, and that goes directly to an appellate court.

The lawsuit before Damrell was brought by the ISO to force Reliant and two other generators to respond to ISO's emergency orders for power, even though the agency is buying on behalf of two retailers that are broke and hopelessly in debt. Because Pacific Gas and Electric Co. and Southern California Edison can't pay their bills -- about $14 billion -- some wholesalers want to cut off sales to the utilities.

The other three defendants in the ISO's suit -- Dynegy Power Corp. of Houston and Tulsa-based AES Corp. and its marketer, Williams Energy Marketing & Trading Co. -- have entered into written agreements with ISO to continue supplying emergency power until the FERC decides whether they are required to sell to companies that are not creditworthy.

But Charles Robinson, ISO general counsel, points out that the generators can rescind those agreements with 48 hours' notice. "My hope is this is a temporary setback," said Robinson. He added, however, that the practical effect is "at least for now, we don't have a tool to compel them to do what we believe they're obligated to do" -- respond to emergency demands for power.

Reliant has insisted since the suit was filed Feb. 6 that Damrell has no jurisdiction over the rate schedules that govern dealings between generators and the ISO, and that the Federal Power Act mandates that the FERC must settle any disputes about terms of those tariffs.

In issuing the injunction, Damrell acknowledged that the FERC has special expertise concerning agreements between generators and ISO. "Absent the extreme exigencies of the California power crisis, the court agrees that a stay pending further action by the FERC would be proper," he said. "But those are not the facts here. Electricity is in critically short supply. The health and safety of the people of California are potentially at risk."

Immediately upon receiving the 9th Circuit's order Thursday, attorneys for the ISO asked Damrell to set an accelerated schedule for its motion to amend the suit. The agency apparently has crafted a new complaint stressing its view that the matter is an ordinary contract dispute over which the judge has jurisdiction.

Damrell scheduled a hearing on the motion for Thursday.

In a further development that could complicate the state's dire need for energy, an alternative supplier won a court fight Thursday to bypass the big utilities and sell its power on the open market.Timber giant Sierra Pacific Industries, which operates four biomass plants that produce power for PG&E, obtained a temporary restraining order in Sacramento Superior Court that says Sierra Pacific is not required to sell its power to PG&E.

The ruling means PG&E and Southern Edison could lose power as alternative energy generators, fed up with months of nonpayment, sue to be able to sell their comparatively cheap product elsewhere, including outside the state.

The Bee's Denny Walsh can be reached at (916) 321-1189 or dwalsh@sacbee.com.

Bee staff writer Dale Kasler contributed to this report.

-- Swissrose (cellier3@mindspring.com), April 06, 2001