[BETA] Fortnightly

Market players like Calpine say standard market design (SMD) and RTO issues "while laudable and important objectives … will do little to enhance wholesale competition if contract sanctity is not assured."

These market players, understandably, will never again want to repeat the experience of having billions worth of long-term contracts challenged, as in the Western power crisis. In fact, some experts worry that allegations of market manipulation, as in California, will become the normal pretext when a buyer realizes he has overpaid and does not want to honor the contract.

Perhaps in an effort to restore confidence in wholesale energy markets, and to deal with an increasing number of contract disputes, FERC has proposed to change the standard of review that must be met to justify proposed changes to market-based rate contracts for wholesale power. At present, FERC determines whether to allow one party or another to abrogate on a case-by-case basis.

But what standard should apply? If two parties stipulate between themselves on what it would take to nullify the deal, should that stipulation bind FERC when a third party complains that the rate is unconscionable, or when the commission opens its own inquiry under Section 206 of the Federal Power Act? In other words, can a clause in a contract usurp the absolute authority given to FERC by Congress? The industry is in deep disagreement.

In its new policy statement, FERC proposed initially to apply a "just and reasonable" Standard in deciding whether to modify contracts, but to allow the contract parties to insert language requiring a stricter "public interest" standard, if they should choose to do so. The just and reasonable standard would require an opponent to show that a price is unreasonable to warrant a contract modification. But this proposal has not found much support.

Electricity Title Fight: A TKO?

Instead, most industry players support a different rule, suggested by Commissioners Nora Brownell and Linda Breathitt. Their idea would impose the stricter public interest standard for all contracts, and make it more difficult for opponents to challenge contract prices. Under their suggestion, a rate contract would stand unless opponents could prove that the contract price does injury to the interests of the general public.

TXU, for example, appears to favor the Brownell/Breathitt plan for a public interest standard, as revealed in comments that the company recently filed at the commission.

According to TXU, a public interest standard would promote "true sanctity" in market-based rate contracts, and "real certainty and stability" in competitive electric energy markets. By contrast, TXU says that the just and reasonable standard should apply only "when explicit language dictating that standard is included in the contract."

As commissioners Brownell and Breathitt have noted, "Competitive markets rely on investors to provide the capital needed to build generation…. [and] will not participate in a market in which disgruntled buyers are allowed to break their contracts, at least without charging a significant risk premium."

TXU claims that caselaw precedent justifies a public interest standard. For that, it points to a pair