Feb. 25, 2002 — Regulators with the California Public Utilities Commission (PUC) said they will ask the Federal Energy Regulatory Commission (FERC) to overturn 32 high-priced power contracts the it made last year with 22 major suppliers. The stock market reacted to the news by sending the value of Calpine shares back to 1999 levels.

“Last year, FERC’s indifference unnecessarily cost Californians billions of dollars for energy. Now, federal regulators say they cannot give relief to California unless it files a complaint. Tomorrow’s filing by the PUC and EOB will put FERC to the test,” said Governor Gray Davis.

The timing of the complaint may be helped by the collapse of Enron and its subsequent investigations; if the governor succeeds in reducing contract prices and electricity rates for consumers, he may have an easier time getting reelected.

Calpine’s shares fell 83 cents or about 12 percent to a low of $6.26 on the New York Stock Exchange in midday trading.

Also, analysts were nervously awaiting the closure of a $1 billion unsecured working capital credit facility, a critical step to funding the company’s further construction plans, Reuters News Service reported. Analysts said that Calpine has a strong legal case and FERC probably won’t overturn the contracts.

Shares of AES Corp. (NYSE: AES) had fallen 12 cents to $4.01, Mirant Corp. (NYSE: MIR) shares were down 17 cents to $7.73 and NRG Energy (NYSE: NRG) shares had slipped 6 cents to $11.27, Reuters reported.

The long-term contracts, which came on the heels of the collapse of the retail energy market in California, require the state to pay double to triple today’s prices for electricity. The California Department of Water Resources handled the contracts for the state.

The PUC’s complaint addresses 44 transactions embodied in 32 contracts with 22 sellers. The state is claiming that it is being overcharged by about $21 billion counting all the contracts, the PUC said.

The complaints filed Monday by the PUC claim that the electricity market was being manipulated by power suppliers, but do not provide new evidence of market manipulation, the Wall Street Journal reported.

The complaints include units of Calpine Corp. (NYSE: CPN), Mirant Corp., Williams Cos (NYSE: WMB) and Dynegy Inc.

The state is arguing in its claim with FERC that the contracts are neither “just” nor “reasonable” as required by the Federal Power Act in Section 206; but at the same time during the recent establishment of the power bonds to repay the DWR that the same costs are “just and reasonable,” the Wall Street Journal reported.

In addition to its objections to unreasonable pricing, the PUC said the terms and conditions of each contract are unjust and unreasonable, including provisions providing for payment priority over bond repayment; attempted evasion of FERC review of the contracts; asymmetrical credit treatment that calls for DWR to remain creditworthy, but not the seller of the contract; “most-favored nation” treatment with respect to credit and security provisions; requiring DWR to offer the most favorable credit terms offered to any other seller to sellers with these provisions in their contracts; and asymmetrical mitigation and termination treatment, which, for example, call for termination payments in the event of a DWR breach, but not in the event of a seller’s breach.

In bringing this complaint, the PUC seeks abrogation of the contracts, which will enable California to obtain replacement contracts as necessary at reasonable prices and on reasonable terms. In the alternative, the PUC asks the FERC to reform the challenged contracts to provide for just and reasonable pricing, reduce the duration of the contracts, and strike from the contracts the specific contract terms and conditions found to be unjust and unreasonable.

“It is our hope that the FERC moves expeditiously on this matter to give much-needed justice to ratepayers,” said Loretta Lynch, President of the PUC. “When these contracts were negotiated, the sellers had California over a barrel. Now it’s time for the FERC to recognize last year’s out of control market prices and lower California’s power costs.”

The Electricity Oversight Board (EOB) said it will also make a Section 206 complaint to the FERC.