FERC Administrative Law Judge (ALJ) Bobbie McCartney last Thursday ruled that power contracts entered into between four power suppliers — Dynegy Power Marketing, El Paso Merchant Energy, Morgan Stanley Capital Group and Sempra Energy Resources — and the California Department of Water Resources (CDWR) during the state’s 2000-2001 energy crisis should be held to a standard that will make it tougher for California to overturn those contracts.

The California Public Utilities Commission (CPUC) and the California Electricity Oversight Board (CEOB) early last year filed separate, but virtually identical, complaints seeking to modify over 30 long-term power supply contracts that the CDWR entered into with various suppliers, including the four mentioned above.

McCartney in December certified to the full Commission the hearing record for three companies — Allegheny Energy Supply, Coral and Mirant — which have Mobile-Sierra clauses in long-term contracts being challenged by the CPUC and the CEOB.

FERC had previously told the judge not to issue an initial decision on the three companies, but rather to send the record directly to the Commission to render a ruling. By its action, the Commission signaled that it planned to hold California complainants to the higher Mobile-Sierra standard in their drive to overturn the long-term contracts. Commissioner William Massey dissented on the action of bypassing an initial decision.

McCartney was instructed to continue the case and render an initial decision on the other power generator defendants involved in the action.

The order made the distinction between the “just and reasonable” standard versus the Mobile-Sierra “public interest” standard, noting that contrary to complainants’ pleadings, the two were not the same. “The burden of showing that a contract is contrary to the public interest is a higher burden than showing that a contract is not just and reasonable,” FERC said.

For the contracts that did not include an explicit Mobile-Sierra provision, FERC ruled that it needed additional information in order to determine the applicable standard of review for these contracts. The suppliers whose contracts did not contain explicit Mobile-Sierra language included El Paso, Dynegy, Morgan Stanley and Sempra.

“A review of each of the four remaining contracts and of the evidentiary record in this proceeding supports a finding that the parties did not retain the right to unilaterally seek changes to their contracts, nor did the parties intend to do so,” wrote McCartney in a partial initial decision dealing with the applicable standard of review.

McCartney said that the evidence of record indicates that California “had very little confidence in the Commission as an avenue for relief at the time these contracts were negotiated, that CDWR negotiated the subject contracts in a ‘crisis’ environment, and that for various reasons CDWR’s negotiating team focused almost exclusively on the pricing terms of the subject contracts.”

The ALJ pointed out that “at least one witness testified that precluding unilateral application to the Commission for changes in rates, terms and conditions was an issue of importance to the CDWR and that the parties agreed to language to this effect in their executed contract.”

McCartney said that while the CEOB and the CPUC maintain their objection to FERC’s ruling on the applicability of Mobile-Sierra to any of the contracts at issue in this proceeding, the state agencies “concede that there is no basis in the record, under the Commission’s rulings to date in these proceedings, for not applying the Mobile-Sierra standard to the Dynegy, El Paso, Morgan Stanley and Sempra contracts to the same extent it applies to the other contracts already before the Commission for determination.”

The ALJ therefore found that the Mobile Sierra standard applies to the Dynegy, El Paso, Morgan Stanley and Sempra contracts to the same extent that it applies to the Allegheny, Coral and Mirant contracts.

In accordance with a FERC order issued on Jan. 10, McCartney certified the record directly to the Commission “for its determination of all other issues remaining in dispute in this consolidated proceeding.”

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