An administrative law judge (ALJ) last week recommended that the Federal Energy Regulatory Commission throw out the complaints filed by PacifiCorp against four power brokers, saying the complaints attempting to break contracts worth about $67 million are “in essence an attack on the validity of market-based rates… If [PacifiCorp] is correct, no contract made under market-based rate authority is valid,” and “no reasonable seller of electricity at wholesale in interstate commerce would seek or use market-based rate authority.”

Citing the Mobile and Sierra precedents, ALJ Isaac D. Benkin upheld the contracts against the PacifiCorp attack, and blasted the northwestern utility for unproven allegations and insinuations against the marketers: Reliant Energy Services, Morgan Stanley Capital Group, Williams Energy Marketing & Trading and El Paso Merchant Energy.

Based on the record in the case, Benkin said “the respondents did not violate any operative norm in their dealings with PacifiCorp. They did not mislead PacifiCorp. They did not defraud PacifiCorp. They did not collude to increase prices in the marketplace. They did not unduly exercise market power. True, they…sought to maximize their profits through every lawful device they could. But that is exactly what businessmen are supposed to do and what the Commission contemplated they would do when it authorized the respondents to sell electricity at wholesale and in interstate commerce at market-based rates.”

Under a heading “Just Desserts,” the judge said: “There is, in short, no valid reason I can find to clamp upon the backs of these respondents the burden of PacifiCorp’s losses on these transactions. PacifiCorp was a large and knowing player in this business, and it understood what it was getting into when it purchased power in the then-prevailing forward markets. Having voluntarily strolled into the jungle, it cannot be heard to complain that it found tigers there.”

The 12 contracts that PacifiCorp sought to abrogate were entered into during April, May and June 2001 for deliveries between July 1, 2002 and Sept. 30, 2002 at stated prices ranging from $126/MWh to $262/MWh with a weighted average of $181/MWh. The contracts used were master contracts developed by the Edison Electric Institute and the Western Systems Power Pool.

The judge noted the market price decline that followed, saying that “in hindsight, PacifiCorp had made a very bad deal.” The company petitioned FERC to either reduce the contract prices to the mitigated price level set by the Commission in its June 19, 2001 order or set an appropriate “reformed” rate level.

Absent a finding that the public interest would be harmed, the Mobile-Sierra cases decided by the U.S. Supreme Court essentially prohibited a federal agency from infringing on a private contract, the judge said. A public interest finding could only be triggered where it might “impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory.”

Benkin said it is “well-established” that contracts do not have to reference the Mobile-Sierra precedent. In the absence of any language providing for contract alterations, parties understand contracts are “firm, at least in the absence of some catastrophic occurrence in the nature of a world war.” There is no provision in the contracts for alterations.

Since the marketplace in which the transactions occurred was “a busy place,” with PacifiCorp purchasing power from 80 different suppliers and selling to 98 different buyers in the year from May 2000 to June 2001, there could be no finding that the marketers possessed market power.

Benkin said it would be up to a state commission to say whether PacifiCorp’s actions were prudent and whether the costs of its contracts should be passed through to ratepayers.

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