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It's electric
Texas bankruptcy case could have powerful impact on rates for PEPCO's D.C. customers
(Published October 20, 2003)

By MELISSA FERRARA
Staff Writer

Recent storm-related power outages prompted thousands of irritated consumers to question the reliability of service provided by local power companies. But less public attention has focused on current court and regulatory proceedings that D.C. consumer advocates say could have a much more far-reaching impact on people’s pocketbooks than a few days without power.

"My hope is this thing will be resolved in such a way to not burden the consumer," said Eugene Dewitt Kinlow, first vice president of the Consumer Utility Board, an advocacy group made up of residents defending the interests of D.C. consumers.

The major players in this drama include Potomac Electric Power Co. (PEPCO), the major power provider to D.C. homes and businesses, and Mirant Corp., the company that bought PEPCO’s suburban generating plants and has recently filed for bankruptcy.

PEPCO and the Federal Energy Regulatory Commission (FERC) are trying to hold Mirant to its power contracts, despite its bankruptcy filing.

A U.S. Bankruptcy Court judge in Texas recently issued a temporary restraining order against any FERC actions or any party attempting to incite FERC actions related to Mirant’s contracts. Because of this, FERC needed to rescind its acceptance of the D.C. Office of the People’s Counsel’s (OPC) complaint to investigate this suit on the behalf of D.C. consumers. This also prevents PEPCO from discussing the suit with any representative of the D.C. government whose role is to defend consumer interests.

"The power company that is wholly regulated by the government of the District of Columbia cannot speak to anyone within the government," said D.C. City Councilman Phil Mendelson, D-At Large. "The judge in Texas, in the bankruptcy court, has unilaterally restrained our people’s counsel from exercising its rights and free speech in D.C. jurisdictions."

FERC and the OPC believe forcing Mirant to uphold its contracts is in the best interest of D.C. consumers.

"How people on the street view the situation could be important, but it has no bearing on the situation. What we thought at the time [on the deal to sell to PEPCO at below-market rates] is irrelevant – now we are in bankruptcy court," said Mirant spokesman Steve Arabia.

Mirant "has an obligation to review contracts in all parts of its business and it has a further duty to set aside or reject those contracts that are bad for the company’s business," Arabia said.

Court battles in Texas are the first step in determining whether Mirant, formerly known as Southern Energy Inc., will be held to its energy contracts with PEPCO. The contracts would provide PEPCO with a previously negotiated cost for energy in exchange for four PEPCO generating plants in the D.C. area. PEPCO would receive energy from these plants at a below-market rate, enabling it to provide reasonable energy rates to D.C. residents without producing the power at its own plants, as it had prior to the deal.

Regardless of the bankruptcy court’s decision, PEPCO would still be the District’s major electricity distributor, whether or not Mirant, PEPCO or another company became the energy producer.

FERC, an independent regulatory agency, ensures that power-generating companies – Mirant, in this case – charge power-distributing companies, like PEPCO, fair and reasonable prices for wholesale electricity. Mirant claims that its current financial situation prevents the company from providing PEPCO with the previously negotiated rate. FERC and PEPCO say that the federal agency, not the bankruptcy court, should have jurisdiction over the pending contractual issues because they concern the price of wholesale energy for a utility company.

"It is in the hands of either the bankruptcy judge or the regulator, FERC. The question of the day is: ‘Who has the authority to liquidate the assets?’" Kinlow said.

Since FERC was forced to rescind its acceptance of D.C. People’s Counsel Elizabeth Noel’s complaint, FERC has not taken any further actions, said FERC spokeswoman Barbara Connors.

A hearing to determine jurisdiction is scheduled for Oct. 30 in federal court in Texas.

"The judge has agreed to determine if FERC would have authority to intervene on behalf of customers, as opposed to the bankruptcy court, which is set up on behalf of creditors," said PEPCO spokesman Robert Dobkin.

FERC can only take further action if the federal court finds in its favor; until then, no further action can be taken.

The OPC is an independent agency that advocates for consumers of natural gas, electric and telephone services in the District. Under D.C. law, OPC is a party to all utility-related cases before the D.C. Public Service Commission and represents the interests of rate-payers before regulatory agencies, like FERC. In addition, OPC has the authority to independently investigate utility company issues in the District, like the Mirant and PEPCO issues at hand.

OPC’s attempts to act on behalf of D.C. consumers has led to a lawsuit against the OPC from Mirant. Mirant claims the OPC’s actions violate the Texas judge’s temporary restraining order against FERC and FERC-related activities.

The D.C. Public Service Commission could potentially play a large role in the outcome of the Mirant trial and PEPCO’s subsequent actions. The commission is an independent government agency that regulates the District’s gas, electric and telephone companies through quasi-judicial procedures.

"If they [the courts] don’t decide in our favor, that [increased expense] could find its way down to the ratepayer. But we negotiated a contract in good faith to protect consumers and are trying to fight for that now," said PEPCO spokesman David Morehead.

If PEPCO seeks a rate increase, it would need to have that approved through the Public Service Commission. The commission’s acting general counsel, Richard Beverly, said a rate case is a complicated process that would require volumes of economic data. A typical case takes about nine months to reach its conclusion, but that is without complications. PEPCO could not independently increase rates without approval from the commission.

"If Mirant is successful in getting contracts nullified, PEPCO will either be enormously squeezed or ask to raise rates at the PSC. This will affect PEPCO and the public," said Mendelson, who chairs the council’s Subcommittee on Public Interest.

If the court finds in favor of Mirant, Mirant would no longer pay PEPCO above-market amounts, said Arabia.

"Power plants are still running. The reliability of electric service is not affected by this...It is really a financial issue," Arabia said. "If the court does not find with Mirant, Mirant would have to pay PEPCO at the previously negotiated rate. Part of Mirant’s file for bankruptcy was triggered by the company’s inability to pay the negotiated price determined by PEPCO and Mirant."

Arabia would not speculate on how Mirant would be able to provide service and yet be financially incapable of paying PEPCO.

A finding in favor of Mirant could also bring the D.C. area back to square one on legislative efforts in recent years to deregulate electricity service. There is a possibility that the deal for the sale of PEPCO’s generating plants could be voided, as the deals for the plants and the energy contract are linked to one another.

If PEPCO and Mirant’s deal is nullified, PEPCO has the ability to negotiate with another company.

A new deal "may cost more, but that is why we have contracts and negotiations," PEPCO’s Dobkin said. "Power is plentiful. There is no shortage of power. But, this is speculation. The only certainty is that there won’t be any interuption of power."

Copyright 2003, The Common Denominator