Allegheny Energy Inc. asked federal regulators yesterday for an emergency decision upholding a disputed $1 billion energy contract with California, saying that it needs cash from the deal to help get through its current debt crisis.
The Hagerstown, Md., power company is in technical default on major loans after failing to make cash collateral payments on energy trades. Its debt has been downgraded to junk-bond status, and it is asking its bankers to refinance $1.3 billion in loans and provide $700 million in cash to fund its operations.
The company's largest single energy sale is its contract to provide electricity to California through 2011, signed in March 2001, at the peak of California's energy crisis. The California Department of Water Resources, which was buying power for the state's insolvent public utilities, agreed to pay Allegheny $61 an hour per megawatt of power it supplied, much less than power companies were charging for spot sales.
But power prices fell sharply that summer, and this February, California authorities asked the Federal Energy Regulatory Commission to nullify long-term supply contracts with 22 power companies, including Allegheny. California officials alleged that the companies took advantage of the state's electricity regulations, using their market power to obtain unjustly high prices.
Allegheny replied that it did not rig the California power market and that its contract was less than the $74-per-megawatt-hour price cap FERC had set as a reasonable price.
The contract proved to be a big financial setback for Allegheny initially. Because it didn't have enough surplus power, it purchased electricity for California in the spring of 2001 at prices of $100 a megawatt hour and more, losing several hundred million dollars in 2001 and 2002.
Allegheny expects to make money on the contract after this year because it can begin buying power at much lower prices. But it can't count on that revenue as long as the contract is in dispute.
The contract "is a very bankable asset if people believe they can count on $61 an hour through 2011," said Michael P. Morrell, president of Allegheny Energy Supply Co., the company's unregulated merchant energy provider.
Morrell said its bid to raise $2 billion in new secured loans is not dependent on winning its argument before FERC. "This is not being driven by the banks," he said. "It would help us explain to the banks where our future cash is coming from," he added.
Under the current timetable, FERC would not decide the case until next summer. "Allegheny simply cannot wait another half a year" for a ruling, it said yesterday in its petition to FERC.