State Attorney General Bill Lockyer on Monday asked federal authorities to force Calpine to honor its long-term energy contracts with California to prevent the state from suffering possible blackouts and surging electricity costs.
But at least one legal expert cast doubt on the state's ability to prevent the San Jose independent power company from shedding the contracts if it files for Chapter 11 protection from its creditors, something Calpine is widely expected to do.
Lockyer's petition to the Federal Energy Regulatory Commission said it's clear Calpine is close to bankruptcy and will likely seek to get out of one or more of its four contracts with the state, which provide about one-fifth of PG&E's peak power needs.
If Calpine is able to cancel the contracts, California would have to purchase that electricity on the spot market or through short-term contracts, where power is relatively expensive. The petition said that could cost the state an additional $700 million or more over the next four years.
``These unexpected electric rate shocks, coming on top of already anticipated natural gas price shocks occurring during the winter of 2005-06, would cause tremendous hardship to PG&E's 9 million electric and gas customers and to the California economy,'' the petition said.
Without a contractual right to Calpine's energy, it added, the state could suffer power shortages, which could ``undermine the reliability of the California electricity grid, particularly during summer 2006.''
Calpine, the nation's largest independent energy producer, is in grave financial trouble. Facing $17 billion in debt, its board last month ousted company founder and Chief Executive Peter Cartwright and Chief Financial Officer Bob Kelly.
On Dec. 5, the New York Stock Exchange suspended trading of Calpine's shares because its stock price had plunged. And on Friday, the Delaware Supreme Court ordered Calpine to repay its bondholders $312 million by Jan. 22, which the firm has warned could force it into bankruptcy.
Calpine spokesman Rick Barraza declined to discuss Lockyer's petition.
``This action is in the hands of our attorneys and I'm unable to comment at this time,'' he said.
Bryan Lee, a spokesman with the Federal Energy Regulatory Commission, also would not comment on the case. Because it is pending before the agency and Calpine has not yet filed for bankruptcy, he said, ``anything I can say at this point would be speculative.''
Even if the federal agency orders Calpine to honor the contracts, it's unclear whether a bankruptcy court judge could overturn that decision. Cases in the past couple of years involving two other bankrupt power companies in other states have left the matter in doubt, several experts said.
When NRG sought relief from some of its power contracts, the federal agency insisted the contracts should remain in force and the courts didn't interfere, the experts said. But in another pending case involving Mirant, an appellate court has concluded the company can shed its contracts in bankruptcy court.
Erik Saltmarsh, executive director of the California Electricity Oversight Board, said it could be difficult sorting out whether a bankruptcy court or the federal agency has the ultimate say in the matter.
However, if the Federal Energy Regulatory Commission orders Calpine to abide by the contracts, it might discourage a judge from letting the company wiggle out of them, he said.
But even with the federal agency's backing, California might have a tough time enforcing those contracts, given the nature of bankruptcy law, said Stanford law professor Marcus Cole.
``There is nothing concrete or chiseled in stone about those contracts,'' he said. ``The bankruptcy court has the power to permit rejection of those.''
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