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 of cases decided decades ago by the U.S. Supreme Court, known collectively as the Mobile-Sierra doctrine. The doctrine requires a public interest standard when a seller attempts unilaterally to modify a firm rate.
Others echo TXU's claim that FERC should place contract certainty at the top of its wish list. One such company is Calpine, which faults FERC's proposed rule as not doing enough to protect the sanctity of wholesale power contracts.
"Although the [public policy statement] can be viewed as a modest step in the right direction," says Calpine, "as a practical matter [it] is tantamount to applying a 'band-aid' to a gaping wound."
And There's more at stake here than just the power price. Back in February, when the California Public Utilities Commission filed a massive complaint at FERC, saying the state's Department of Water Resources (DWR) paid $14 billion too much under some 32 contracts with power producers, the PUC offered at least five reasons other than price for killing the deals. Those reasons stemmed largely from an inequality of bargaining strength between buyer and sellers:
These are the sorts of questions that FERC might face, regardless of the standard of review.
Some experts seemingly oppose any standard, but argue instead that congress gave FERC the power, so only congress can take it away. In FERC filings, a group called the Indicated Shippers, comprised of BP America Production, Burlington Resources, Chevron, Shell, and Aera Energy, explain why they believe the commission cannot be bound by the whims of contracting parties.
"The proposed policy statement provides that the commission intends to be bound, on a prospective basis, by the negotiated terms in the contract as to which standard the review applies." This concept, they say, suffers from three flaws:
First, a "policy statement" does not have the binding effect of regulation or statute. It merely expresses a preferred policy as to how contracts are to be reviewed.
Second, parties cannot bind this commission to a review standard that is not otherwise provided under the governing statutes (NGA and FPA) and related law interpreting those statutes. The contract can express the intent of the parties, but not control the outcome.
Third, this commission cannot bind future commissions. Changes in circumstances justify changes in regulatory policies and regulations, and the courts have held that an administrative agency "retains the discretion and the authority to change its position-even abruptly-in any specific case because a change in policy does not affect the legal norm."
In fact, the American Public Power Association, in filings, says that even if FERC adopts the "public interest" standard, that Mobile-Sierra affirms its authority.
"The Supreme Court's Mobile-Sierra decisions did not deprive the commission of its authority to protect the public interest by ensuring that rates are just, reasonable and not unduly discriminatory… On the contrary, Mobile made a point of emphasizing that 'denying to natural gas companies the power unilaterally to change their contracts in no way impairs the regulatory powers of the commission.'"
As the D.C. Circuit recently explained, the commission may not take away rights granted by statute. Only the contracting parties may bargain away their "rights." So, it appears this whole debate has served to review one very important point about today's FERC authority-it has not changed.
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