Problems with energy financings incorporating letters of credit (L/Cs) have been well documented by D C World for more than a year. Many of these have concerned Enron related deals that have gone wrong for a range of stakeholders - from US banks to credit and credit insurers to electricity consumers and governments concerned with the Dabhol Power Plant in India.

Disputes over the use of L/Cs in energy deals are however by no means confined to transactions related to the US energy sector's largest corporate failure.

Preferential Bidding

The US Federal Energy Regulatory Commission (FERC) is currently questioning eight long-term contracts signed by Entergy Corporation, saying that this large US utility may have given improper preferential bidding treatment to its affiliates.

New Orleans-based Entergy's power supply agreements "have not been shown to be just and reasonable, and may be unjust, unreasonable, unduly discriminatory or preferential, or otherwise unlawful," FERC said in a 21-page ruling issued at the end of May 2003.

Unfair L/C

The agency said it was "increasingly concerned about affiliate transactions and their potential impact on wholesale competition." Non-affiliated players, including California-based Calpine Corporation, have complained too.

"This has been a real issue that merchant companies have been facing around the country -- apparent preferential treatment with utility affiliates," according to Jolly Hayden, a vice president at Calpine.

Calpine said an Entergy affiliate unfairly demanded that it post a US$104 million L/C to secure its payment obligations for a three-year, 605-megawatt contract, FERC said. Entergy claims its contracts are just and reasonable, and says it awarded just 20 per cent of their capacity to affiliates.

No collateral release

Meanwhile several companies are trying to persuade FERC to release collateral held by the bankrupt California Power Exchange. Amongst these is Powerex, the trading arm of Canada's B C Hydro, which asked the regulators if it can get back a US$67 million L/C held by the entity that once ran California's wholesale electricity market.

FERC commissioners said in March that Powerex could not have its collateral returned until the agency had determined how much the company might have to refund to California for alleged overcharges during the power crisis of 2000-01.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.