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OPC Protects D.C. Consumers From Expensive Energy Supply Contracts

 

In an effort to prevent District ratepayers and consumers from being saddled with costly energy supply agreements that provide no tangible benefits for district consumers, OPC successfully fought Mirant’s efforts to have a bankruptcy court absolve it from financial responsibility under such agreements. Without such effort, district ratepayers were facing $541 million in energy supply contract costs.

In June 2000, Mirant purchased Pepco’s power plants for approximately $2.65 billion. As part of that purchase agreement, Pepco was allowed to assign its entire energy supply contracts, known as purchase power agreements (“PPA”) to Mirant, however, a number of the PPAs contained contract language that required Pepco to obtain the PPA supplier’s consent before it could assign that particular PPA. A PPA is an agreement under which Pepco was obligated to purchase power from outside suppliers at a fixed rate. The parties agreed to reduce the power plant purchase price by almost $260 million if Pepco could not obtain consent to assign certain PPAs.

To get around a contract provision that requires supplier consent to an assignment, Mirant and Pepco entered into a “back-to-back” agreement under which Mirant was obligated to purchase energy at the same FERC-approved rates as Pepco. The PPA required Mirant to pay higher than market rates for energy supply. Mirant filed for chapter 11 bankruptcy in July 2003. In its petition, Mirant sought, inter alia, to reject the back-to-back agreement because such agreements were causing Mirant to suffer financial losses. Mirant also sought, and received, an ex parte temporary restraining order preventing the federal energy regulatory commission (“FERC”) or Pepco from taking any actions to require or coerce Mirant to abide by the terms of the back-to-back agreement OPC intervened in the bankruptcy proceeding. Mirant engaged in an aggressive litigation campaign to shed its obligations and to impose costs on D.C. ratepayers and consumers.

A Texas federal court found that the only business justification supporting Mirant’s request to reject the back-to-back agreement was the losses it suffered because the rate for electricity that FERC approved for that agreement exceeds the market rate. Based upon this analysis, the court found that Mirant’s rejection request was a prohibited attempt to avoid their electric energy purchase payment obligations under the back-to-back agreement at the filed rates FERC has found to be just and reasonable. The court then held that the bankruptcy code does not provide an exception to FERC’s authority under the federal power act and that Mirant must seek relief from the filed rate in the back-to-back agreement in a FERC proceeding. Based upon this analysis, the court denied Mirant’s motion to reject the back-to-back agreement as well as its request for permanent injunctive relief. In a subsequent order, the court vacated the bankruptcy court’s injunctive relief because it would interfere with the performance of FERC’s regulatory oversight functions. The court then dismissed the case for failure to state a claim upon which relief could be granted. Mirant appealed the lower court actions.

On April 16, 2004, as the only party representing D.C. electric consumers’ interests, OPC filed a “friend of the court” brief with the united states court of appeals for the fifth circuit to protect Pepco’s interests in $541 million worth of energy supply contracts. On the same day, people’s counsel Elizabeth A. Noël publicly stated “... To save D.C. consumers, OPC must first save Pepco’s interests in these contracts.”

While the United States Court of Appeals for the Fifth Circuit concluded that the lower court acted inappropriately in dismissing the case, it declined to decide whether Mirant could reject the back-to-back agreement since the lower court and bankruptcy court failed to render a decision on the rejection request. The Mirant-Pepco matter was subsequently settled in 2006 thus relieving Pepco and its customers of all obligations under the PPAs. The settlement was a good result for consumers who would have paid millions under the rejected PPAs. Pepco shared proceeds from the Mirant settlement and the transfer of a PPA with its District of Columbia residential customers in the form of a one-time credit of $16.84.