FERC made no decision Wednesday on whether billions of dollars in long-term western wholesale power contracts negotiated in 2000 and early 2001 should be scrapped or altered because of market manipulation in the short-term or spot market. The Commission vaguely indicated that the contracts should be sent back to a settlement judge.

The complaints in question were filed against numerous western power suppliers by the state of California, Sierra Pacific Power and Nevada Power, Snohomish PUD, and Puget Sound Energy.

Commissioner William Massey, the lone Democrat on the panel, urged the Commission to take decisive action on the matter to let the market know that it would step in and fix dysfunctional prices or rates at any time if called upon. However, Chairman Patrick Wood and Commissioner Nora Brownell, both Republican appointees, sided with FERC staff in favor of sending the complaints back to a settlement judge and upholding the sanctity of the contracts despite indications that they contained prices that were influenced by market manipulation.

“I do think that having these contracts be maintained where they are is appropriate, is consistent with the law,” Wood said.

“For me the sanctity of contracts is not some dry legal doctrine forced down on the Commission by the Supreme Court,” said Brownell. “Bilateral contracts entered into by buyers and sellers in an effort to manage supply and price risk serve as the basis of today’s wholesale power market. Indeed, they are the very basis of our economic system in this country.” She balanced FERC staff’s finding that prices in the (manipulated) spot market affected those in long term contracts, particularly one to two years, with other analytic reports in the case that came to different conclusions.

“Investors simply will not participate in a market in which disgruntled buyers are allowed to break their contracts, at least not without charging a significant risk premium — a premium I believe that we’ve seen in some of the markets lately — at a cost that ultimately is borne by customers,” she said.

FERC staff recommended the Commission either deny the complaints or have an administrative law judge resolve them.

However, Commissioner Massey asked, “What is going to be the future of competitive markets if market participants don’t believe this Commission will step in to reform long-term contracts that are unjust and unreasonable? Isn’t that a foundation for a competitive market as well?”

All the Commissioners agreed that the details in one of the cases involving Puget Sound Energy’s complaint deserved a closer look because it involved shorter term agreements that were more likely to be impacted by the dysfunctional California spot market and because Puget acted much quicker than the other complainants in filing its complaint at the same time it signed the contracts.

Wood, however, noted that because the many of the sellers involved in the Puget Sound case are non-jurisdictional, there would be a limit to what FERC could do.

Wood recommended the Commission maintain a hands-off approach in the other cases. “In weighing that totality there [in the Nevada case], I can’t determine that the contract should be reformed or abrogated.”

In contrast to Massey’s conclusion, Wood said he didn’t think the clear connection between a dysfunctional spot market and the long-term market was enough to “offset the other factors that in weighing the public interest would urge me to abrogate these contracts.”

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