Regulators face a daunting task in sorting out power refunds in the Pacific Northwest.
Fortnightly Magazine - October 1 2001


Ripple Effects


Regulators face a daunting task in sorting out power refunds in the Pacific Northwest.

When the Federal Energy Regulatory Commission (FERC) agreed last summer to set a price cap and start collecting evidence and preliminary findings on possible refunds to customers who were forced to buy electricity in California through the Power Exchange (PX) and the Independent System Operator (ISO), it got itself into real trouble by extending the cap and the refund process across the West to cover power transactions conducted in "spot markets" in the Pacific Northwest. So far, at least four key issues have emerged in the Pacific NW case:

  • Contract Disclosure. Can the FERC force municipal utilities or public power agencies to disclose the terms of one-on-one bilateral deals?
  • Market Terminology. How do you define a "spot market" in the Pacific Northwest? What length of contract qualifies: hour-ahead, day-ahead, year-ahead, two years out?
  • Price Benchmark. What's the price level that triggers a refund? Do you look at the average, rolled-in cost of an entire portfolio, or just the last, most-inefficient (marginal) unit?
  • Ripple Effects. If I owe a refund to my immediate power customer, can I cross claim and seek a complementary refund from the supplier who sold the power to me? Where does this loop end?

You have the "Transaction Finality Group," led by Enron and Washington lawyer Dan Watkiss, of Bracewell and Patterson. TFG parties include power marketers and generally favor the idea of a short-term "spot market"-the perspective of a day trader-which would tend to produce a higher benchmark price. TGF parties oppose broad scale refunds, and generally believe it will be difficult, or near-impossible, to untangle the complicated web of contract relationships and wade through the endless "ripple" claims.

Fighting on the other side is the "Net Purchasers Group," including various power customers in the Pacific NW, led by lawyer Philip Chabot, of McGuireWoods, who represents the Port of Seattle and the city of Tacoma, Wash. NPG parties want a more forgiving definition of "spot market." A third group, the California parties, sees the world in terms of generator market power and favors a price benchmark keyed to average cost of service.

Each group has offered some heavy-hitting witnesses to bolster its cause. You have testimony from the likes of Frank Wolak, Richard Tabors, and recent Fortnightly authors Robert McCullough and Samuel Van Vactor. In particular, I love McCullough's argument against setting a price benchmark according to the cost of the least-efficient dispatched unit. McCullough suggests that high prices could encourage a lumber mill to chip finished lumber and shovel it into the boiler, along with the wood waste, creating an absurd example of a least-efficient generator.

EES North America

"When market distortions in California were at their height," says McCullough, "Roseburg Lumber might have responded by burning furniture."

IN ONE EXAMPLE, EL PASO MERCHANT ENERGY SAYS that if it must pay out refunds in the Pacific NW covering power transactions running from Dec. 25, 2000, to June 20, 2001, it "would have total aggregate ripple claims of $290 million against 33 counter parties."

And therein lies a key problem: The FERC procedure invites all parties to disclose deals and assert all possible refund claims, even at the risk of alienating clients. Listen to Dan Watkiss, speaking at a hearing on Aug. 27 before FERC Administrative Law Judge Carmen Cintron:

"What that is, your Honor, is over the weekend ... it became apparent that for those of us in the Transmission Finality Group that are both buyers and sellers and because of that a lot of us would have ripple claims as purchasers, that the way we would ... introduce our offer of proof ... would take the form of affidavits by people in charge of accounting-here's our bill, who we did the deal with, who we made the purchases with.

"You go and ruin all of your commercial relationships [with] the people you don't want refunds against, but you tell them that you're going to seek refunds against them."

IN CALIFORNIA, FERC WAS DEALING WITH A KNOWN ENEMY. The consensus opinion against the PX allowed the commission to assert authority over municipal utilities (like Los Angeles) or irrigation districts (Modesto, Turlock, etc.) to force them to disclose their power dealings to help build a record on refunds, since everybody who traded power in California-jurisdictional or not-had to dance to the tune of the PX and the ISO in one way or another. The feds created this mess of a market, so they felt obliged to offer relief. The only way to do it was to include all the parties in the workout, including muni's and the like.

By contrast, there was no PX or ISO in Oregon or Washington state. Instead, in the Pacific Northwest, the FERC must deal with a market long accustomed to bilateral one-on-one bargaining. Also, the region is dominated by governmental entities, such as the Bonneville Power Administration (BPA). Hydropower rules the fuel mix, so natural gas costs and turbine heat rates have little relevance to any possible price cap. And hydropower changes the flow of the market; snowmelt and reservoir conditions tend to dictate deals. The water year is either "good" or "bad." That lengthens planning horizons. Utilities deal less in real time. Many bilateral contracts span a year or more. Forward contracting is the norm, not an impossible dream.

In short, the FERC isn't fixing a "broken" market in the Pacific NW. Any proof of price gouging must delve deep-to consider motive, intent and opportunity.

But that makes for a great show.

A Letter to Readers

With this issue, I step down as all-everything editor of , after a span of seven unbroken years and a string of more than 150 continuous magazine issues. I will hand over the reins to Richard Stavros, our new executive editor, who returns to our staff after a 12-month hiatus in the publishing and banking industries.

That means that Richard will take over the job of formulating and editing content for each issue, beginning Oct. 15. It also means that Richard, at the same time, will take over as author of this column, beginning Oct. 15. However, it is quite possible that I may make an occasional appearance from time to time, either in this slot or in a new kind of column or publication.

Of course, Richard should be no stranger to Fortnightly readers. He appeared in print just last month with interviews and analysis on the financial outlook for electric generation (".) He contributed numerous other feature articles in 1999 and 2000. Please extend a warm welcome to Richard as he settles into the job.

As for me, I thank you for giving me seven thrilling years in a very demanding job. I plan to stay on with the Fortnightly as editor-in-chief, but also make time to invent a new professional life in the realm of energy regulation and trade press journalism. Above all, I still think of myself always as a student-always wanting to learn more about this business and to share with you the thrill of discovery.


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