In a win for California consumers, an appeals court ruled Tuesday that federal regulators must consider cutting the cost of billions of dollars in power contracts that state officials believe were overpriced because they were signed during the state's energy crisis and based on market rates that were rigged.

The decision by the U.S. 9th Circuit Court of Appeals reinstates a case that could yield California electricity customers $1.4 billion or more in credits or refunds from 2001 contracts that are either still in force or in dispute. One of the largest is a 10-year contract with Sempra Energy of San Diego that runs until September 2011.

In its decision, the appeals court concluded that the Federal Energy Regulatory Commission "relied on the wrong legal standard" when it dismissed complaints about the cost of the energy contracts in 2003.

In 2003, federal regulators said they could not revise power contracts that were based on market prices in force at the time of the deal. The appeals court judges ruled that the commission must review the contracts because market gaming artificially inflated electricity prices when California was signing long-term power contracts.

The California Public Utilities Commission and the state Electricity Oversight Board, both charged with protecting consumers from unreasonable rates, asked the appellate court to overrule the federal regulators and argued their case before the three-judge panel at the end of 2004.

"The ruling puts another $1.4 billion back on the table for California's consumers and should motivate the parties who have not settled with California, such as Sempra, to seriously re-engage in settlement discussions," PUC President Michael R. Peevey said.

Tuesday's decision sends the case back to the federal energy commission. The agency could appeal Tuesday's ruling to the Supreme Court or begin new proceedings on the issue.

Bryan Lee, spokesman for the federal energy commission, said the agency was reviewing the court's ruling and would respond "in due course."

Sempra, parent of San Diego Gas & Electric Co. and Southern California Gas Co., said the contract at issue was between subsidiary Sempra Generation and the state Department of Water Resources and worth an estimated $7 billion. Under the deal, Sempra provides power to the state, which passes it on to customers of PG&E Corp.'s Pacific Gas & Electric Co., Rosemead-based Edison International's Southern California Edison and SDG&E, and those customers foot the bill.

Power contracts between the state and Dynegy Inc., Coral Power and PacifiCorp also are affected by Tuesday's ruling, the PUC said. Mirant Corp. has settled a dispute over its power contract with the state.

"We believe the contracts were and are beneficial to the state of California and should be upheld," Sempra said in a statement.

"It's a very promising decision, and it calls [federal regulators] on the carpet," said Michael Shames, executive director of San Diego-based Utility Consumers' Action Network. "But I'm not ready to count the money yet. When the issue has to go back to the same entity that has proven so dismal in terms of its protection of California consumers, one does not get one's hopes up."

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