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

"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