VICTORIA - Powerex has reached an out-of-court settlement to protect British Columbia from a potential $3.2 billion legal liability.
The settlement with California utilities, the California Attorney General and other California parties (California Parties) resolves claims related to the 2000 - 2001 California power crisis that resulted in rolling blackouts and record-high electricity prices. Powerex was one of over 60 electricity sellers in the California market during the crisis.
Following the power crisis, numerous lawsuits and regulatory proceedings were launched by the California Parties, demanding refunds and penalties. In 2003, the US Federal Energy Regulatory Commission (FERC) concluded the California market was dysfunctional and ordered refunds from all sellers who sold electricity during the crisis. The majority of the settlement provides refunds to the California Parties as previously mandated by that order.
To-date, 47 sellers have settled separately with the California Parties. Although Powerex has won some lawsuits filed by the California Parties, a recent advisory decision by a FERC judge issued in February 2013 went against Powerex and the 15 other sellers who have not yet settled. With another FERC hearing scheduled for Aug. 27, 2013, court appointed mediators approached Powerex regarding a potential settlement.
In addition to protecting British Columbia from a potential $3.2 billion legal liability, the settlement allows Powerex to avoid future legal costs estimated at over $50 million as well as over $125 million per year in interest costs on the claims made by the California Parties.
The settlement also provides an opportunity for Powerex to move forward and enhance its relationship with California, which continues to generate significant income to the benefit of ratepayers in British Columbia. Since 2003, Powerex has sold over $3.5 billion worth of electricity to California.
The settlement, which is subject to approval by the FERC will be achieved by a payment from Powerex to the California Parties of $273 million (US dollars) and a credit for monies owed by the California Parties to Powerex valued at $477 million (US dollars). As a result of the settlement, Powerex will incur a net loss of about $101 million (Canadian dollars) this year.
A 2003 review of Powerex by the FERC concluded that there was no evidence that Powerex engaged in any illegal practices and that Powerex was a valuable and reliable supplier of energy to the California Parties throughout the crisis. Accordingly, this agreement expressly recognizes that Powerex admits to no wrongdoing.
Minister of Energy and Mines Bill Bennett and Minister Responsible for Core Review -
"This was a tough but necessary decision to protect taxpayers. We have learned that the U.S. court system can be unpredictable. When you weigh this settlement versus a potential $3.2 billion legal liability, we determined it was in the best interest of taxpayers to settle and put this long standing dispute behind us."
"Since 2003 we've sold over $3.5 billion worth of electricity to California. This settlement allows us to move forward on a very productive commercial relationship."
Powerex president and CEO Teresa Conway -
"By reaching this settlement with California, Powerex is now in a better position to solely focus on our mandate which is to effectively market our electricity in British Columbia to our customers and to create value for BC Hydro through our broader marketing activities."
"This agreement expressly recognizes that Powerex admits to no wrongdoing. The settlement represents an opportunity to move forward and enhance our relationship with California which will continue to produce benefits for ratepayers in British Columbia."
To find more about Powerex, visit http://www2.powerex.com/AboutUs.aspx
A Powerex backgrounder follows.
Ministry of Energy and Mines and Responsible for Core Review
Powerex settlement reached
What caused the California power crisis?
- The 2000/2001 California power crisis was a result of:
- Electricity market deregulation in 1998.
- Fewer power plants being built in California in the years leading up to the crisis.
- Drought conditions resulting in lower than expected water runoff for power generation.
- Rupture and capacity constraints on natural gas pipelines to the California market.
- Increased demand for electricity.
- Unusually high temperatures and heat waves.
- It was a broken market that led to numerous regulatory and court proceedings alleging unfair practices and claims for damages.
Most power suppliers have settled
- Southern California Edison, Pacific Gas and Electric, San Diego Gas and Electric, the California Attorney General (for the California Department of Water Resources) and the California Public Utilities Commission (California Parties) have now settled with 47 entities.
- Prior to today, Powerex was one of the 16 companies which have not settled.
- In 2003, US Federal Energy Regulatory Commission (FERC) concluded electricity and gas markets were dysfunctional and ordered refunds from all suppliers. The refunds make up the majority of the settlement.
- Powerex today filed a settlement with FERC for the balance of the claims plus interest.
Why Powerex settled
- Chose legal and financial certainty. Agreement removes the risk of adverse decision with the US regulatory and legal system, avoiding US $3.2 billion in potential costs.
- Based on legal advice and financial analysis settling $2.8 billion in claims for 12 cents on the dollar made commercial sense and was at the lower end of similar settlements.
Court proceedings would have gone on for another 5 years resulting in:
- Legal expenses of US $50 million
- Annual interest costs of US $125 million
- To avoid lengthy regulatory hearing set to commence August 27.
- To focus on our business objectives to create value for BC Hydro ratepayers.
- California is an important market for B.C.'s clean energy and for Powerex's broader marketing and trading activities
- Powerex has generated $3.5 billion in revenues with sales to California over the last decade.
- This agreement will provide long-term certainty, enabling Powerex to focus on its business and fulfil its mandate of creating value for BC Hydro ratepayers.
The settlement with the California Parties
- The settlement provides long-term certainty for Powerex. The majority of the settlement is refunds to California ordered by the US Federal Energy Regulatory Commission, or FERC, a decade ago, which are offset by amounts still owing to Powerex from California.
- The balance settles $2.8 billion in claims plus interest for 12 cents of the dollar.
- The settlement agreement expressly recognizes that Powerex admits to no wrongdoing.
- This settlement, filed on Aug. 16, 2013, is subject to the approval of FERC, which is expected within the next six months.
- The California parties were seeking $3.2 billion (US dollars) from Powerex.
- Powerex's settlement with the California parties is for $750 million (US dollars).
- Included in this amount is $406 million (US dollars), which relates to market-wide refunds as part of a previously mandated refund order by FERC in 2003.
US $ millions Original claims against Powerex (including interest) Powerex settlement offer Cents per dollar FERC calculated market-wide refunds $406 M $406 M $1.00 Total of all other proceedings $2,764 M $344 M $0.12 Total $3,170 M $750 M -
Payment to California parties
- Powerex's settlement with the California parties is for $750 (US dollars) million.
- However, Powerex was still owed $477 million (US dollars) ($265 million principal plus interest) by the California parties for power sold during the energy crisis.
- US $ millions Powerex settlement with California Parties $750 M Amount owed (US $265 M to Powerex by California Parties for 2000-2001 (with interest) $477 M Total payment to California parties
(Financial impact: fiscal year 2014) $273 M
Financial impact to Powerex fiscal 2014
- Powerex previously expensed $68 million (US dollars) for future legal costs and other amounts in prior years. The balance owing for fiscal 2014, is about US $205 million.
- Converted into Canadian funds, US $205 million is just under CDN $214 million. This is the fiscal 2014 expense that Powerex will face as a result of the settlement.
- The $214 million (Canadian dollars) settlement expense is greater than Powerex's fiscal 2014 estimated annual net income of $113 (Canadian dollars). The $113 million (Canadian dollars) less the $214 million (Canadian dollars) settlement expense results in an estimated net loss for fiscal 2014 of $101 million (Canadian dollars).
Powerex will pay California parties $273 M USD Powerex expensed future legal and other costs in prior years $68 M USD Settlement expense for fiscal 2014
$205 M USD OR
$214 M CDN Powerex estimated annual net income F2014 $113 M CDN Powerex net loss fiscal 2014 $101 M CDN
Ministry of Energy and Mines and Responsible for Core Review