The Edison Electric Institute (EEI) and several utilities are backing a FERC proposal to utilize the so-called “public interest” standard as the default standard of review for energy contract modifications, but the California Public Utilities Commission (CPUC) opposes FERC’s proposed rule, saying it “contravenes existing statutory law” [RM05-35].

FERC in December issued a proposed rule aimed at reducing the time and expense involved in settling disputes that arise when parties move to change the terms of their jurisdictional wholesale power and natural gas sales contracts. The courts have asked FERC to eliminate the confusion and regulatory uncertainty around these issues by clarifying the default standard of review that will apply when parties fail to adopt a standard in their contracts.

In its notice of proposed rulemaking (NOPR), FERC proposes that the standard of review for modifications to Commission-jurisdictional agreements under the Federal Power Act (FPA) and the Natural Gas Act (NGA) be the public interest standard, in accordance with the Mobile Sierra doctrine, unless such agreements contain specific language incorporating a different standard.

“EEI supports the ‘public interest’ standard as the default standard of review as proposed in the NOPR,” the utility trade association said in Feb. 3 comments filed at FERC. “Contract sanctity is necessary for transacting and investing in the energy markets, both of which provide benefits to customers.”

EEI noted that FERC considers the public interest standard to be stricter than the “just and reasonable” standard. “Consequently, the ‘public interest’ standard provides the greatest protection for the expectations of both buyers and sellers of electricity, while still allowing the Commission to modify agreements in appropriate circumstances. This is consistent with industry views that negotiated agreements between sophisticated counterparties should be held to the ‘public interest’ standard of review.”

In its comments, Portland General Electric (PGE) said it supports the higher threshold required under the public interest standard of review “as a means to preserve Commission-jurisdictional agreements that sophisticated parties entered into voluntarily.”

PGE “does not believe that the Commission is abdicating its statutory authority by adopting the ‘public interest’ standard of review as a default standard where the parties are silent in their agreement, or that the Commission should adopt different standards of review depending on who is seeking the review, i.e. a contracting party or a non-party or the Commission acting sua sponte.”

Similarly, Public Service Co. of New Mexico (PNM) and Texas-New Mexico Power (TNMP) said they support FERC’s proposal “for essentially three reasons”:

In contrast, the CPUC said the NOPR “fails even to acknowledge that it expressly contradicts FERC’s own precedents with respect to the standard of review of complaints made by third parties, let alone to explain why such an about-face is lawful given the language of the FPA and NGA and legal precedent, or even good public policy.”

The CPUC said that under the proposed rule, “non-parties could be exposed to the harms FERC has previously found require the use of the ‘just and reasonable’ standard to prevent, without any explanation of how the proposed rule would prevent such harms. Third parties would be especially vulnerable to unduly discriminatory and preferential rates if they are not involved in negotiations but can only challenge such contracts under a ‘public interest’ standard. Such unsupported, unexplained deviations from precedent would not constitute reasoned decisionmaking.”

FERC’s proposed rule “contravenes existing law and numerous court and FERC precedents with respect to the rights of third parties without any reasoned explanation whatsoever, and violates fundamental principles of contract law and fairness. FERC is obligated to protect consumers from ‘unjust, unreasonable, unduly discriminatory or preferential’ rates, and cannot waive the statutory rights of non-parties to contracts to file complaints at the FERC under this legal standard,” the CPUC added.

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