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FERC Sets Paper Hearing, Settlement Talks on Western Power Contracts

December 22, 2008
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FERC last Thursday set a paper hearing on a remand of a long-running case centered on millions of dollars in Enron-era wholesale power contracts that western power companies protested tied them to artificially high prices. The Commission action came just 14 days after it officially received the remand of its decision to uphold the contracts. The paper hearing will be held in abeyance, however, while parties attempt a settlement of the seven-year old case.

The Federal Energy Regulatory Commission (FERC), which first set the case involving power companies in Nevada, California and Washington state for hearing in 2002, has seen its decision to uphold the contracts overturned by first the U.S. Ninth Circuit Court of Appeals and then by the U.S. Supreme Court in a 5-2 decision in June (see NGI, Dec. 8; June 30; April 15, 2002). The case involves contracts signed by the Snohomish County Public Utility District (PUD) in Washington state and by Las Vegas, NV-based Nevada Power Co. (now NV Energy), which is owned by NV Energy Inc. (formerly Sierra Pacific Resources), with marketers Morgan Stanley Capital Group and American Electric Power Service Corp.

Chairman Joseph T. Kelliher said he was encouraged that a number of parties were interested in participating in a settlement conference. The Commission decided on the short form type of hearing to expedite the case and because there already is a "voluminous" record. Kelliher expressed the hope that even the paper hearing would be unnecessary if the parties could come to an agreement. If a hearing is held, only comments on the two issues raised by the highest court will be heard.

The Commission had based its decision to uphold the contracts on the Mobile-Sierra doctrine on the sanctity of contracts established by the high court in historical cases. That doctrine holds that a contract cannot be breached unless it fails to meet the public interest standard. That standard requires the challenger to prove that the contract would impair the financial ability of a public utility to continue service, cast upon other customers an excessive burden, or be unduly discriminatory.

The Supreme Court said FERC did not do an adequate job of evaluating harm to consumers, nor in reviewing the possible role of alleged unlawful market manipulation, in its decision to uphold long-term contracts signed by utilities with power suppliers.

The Commission looked at the rates under the contract compared to then-current rates to determine whether the consumer burden was excessive, but it did not look at how the rates would compare against market rates several years into the contract, the court said. If there is a significant disparity between the contract rates and market rates that consumers would have paid in later years after the market stabilized, "that disparity, past a certain point, could amount to an 'excessive burden,'" the opinion stated. Here FERC's analysis "was flawed -- or at least incomplete."

Since it had determined that the contracts could not be challenged under the public interest standard, FERC then said it did not need to consider charges by the utilities that their contracts were influenced by market manipulation. The Supreme Court, however, said a contract could not be considered valid if it is not the product of fair, arms-length negotiation. "Like fraud and duress, unlawful market activity that directly affects contract negotiations eliminates the premise on with the Mobile-Sierra presumption rests..."

Also on Thursday FERC withdrew its proposed rule that would have established a default "public interest" standard of review that would apply unless a contract specifically stated otherwise. Because the court decision in the western contracts case addressed the default standard of review, FERC concluded that it no longer was necessary to adopt the proposed rulemaking, which initially was issued in 2005, and terminated the proceeding.

"FERC issued the proposed rule because the federal courts had asked the Commission to clarify the default standard," Kelliher said. "Since the Supreme Court clarified the law in the same manner proposed by the Commission, namely in favor of the public interest presumption, the proposed rule is no longer necessary."

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