Despite clear evidence of western spot power and gas market manipulation, FERC made no decision last week on whether billions of dollars in long-term western wholesale power contracts negotiated in 2000 and early 2001 should be scrapped or altered. The Commission vaguely indicated that the contracts would be upheld and sent back to a settlement judge, and that suggestion angered western senators, who said the Commission is not meeting its responsibility under the Federal Power Act.

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?”

At a Senate Energy and Natural Resources Committee hearing on Thursday that was ostensibly held to examine various electricity-related legislative proposals, senators from the Pacific Northwest blasted FERC for indicating that it intended to uphold the contracts. “Let me just say to the folks at FERC that yesterday’s decision was more horrendous news for western ratepayers, and if you look at what California and Washington and Oregon have been through, the three of us all have ratepayers who have just been hammered by overpriced contracts that resulted from market manipulation,” said Sen. Ron Wyden (D-OR). Sens. Maria Cantwell (D-WA) and Dianne Feinstein (D-CA) also sit on the committee and were present at the hearing.

“Energy traders were caught on tape talking about deliberate market manipulation strategies, that manipulation caused long-term prices to go up and those higher prices were reflected in the contracts that Northwest utilities, that western utilities, were induced to sign,” Wyden said. “But somehow, for some reason, the FERC can’t see the connection between those caught in the act — smoking gun memos and transcripts — and the higher energy prices that our constituents are now paying because of the market manipulation that has been detailed in these transcripts.”

FERC on Wednesday released a huge batch of evidence it has collected as part of its probe of alleged manipulation of western energy markets on the same day that it rolled out an exhaustive report detailing its staff’s findings as a result of that investigation (see related story this issue).

Wood pointed out that the staff report “is not the final action…on everything that we’re doing.” As a matter of process, he said, “what we’re doing now is public, but what we’re doing now is not complete and we’ve got some further investigation to do.”

“To me, there’s absolutely no question based on what I’ve seen so far, but that manipulation of the market, which staff described as epidemic, had a huge impact on long-term contract prices,” Massey told Wyden. “There’s simply no question about it in my mind.”

Massey is “inclined to believe that some of these contracts are going to have to be reformed to meet our obligation under the Federal Power Act to ensure that only just and reasonable prices are charged in all contracts.”

Cantwell, noting that Wood previously said that FERC was “the cop on the beat,” told the FERC chairman that “I can guarantee you, after seeing this report, that any policeman on this beat seeing this kind of corruption would be relieved of their duty if they did not respond.”

Cantwell focused her comments on the debate of whether power contracts in dispute at FERC should be held to a “just and reasonable” standard or the higher Mobile-Sierra “public interest” standard. “Count me as one legislator who is not going to be fooled by these hijinks of a higher legal standard,” Cantwell said. “I don’t care if we go all the way to the D.C. [circuit court of appeals] or the Supreme Court on this.

“We passed a law in this country to protect consumers. It was called the Federal Power Act. It set out your specific responsibilities. It said that those responsibilities were to determine whether rates were unjust and unreasonable. You, Mr. Wood, have agreed in testimony before this committee on two occasions that you believe that that’s the standard. Please apply it.”

There was at least some consensus among the FERC commissioners last week that the details in one of the cases involving Puget Sound Energy’s complaint deserved a closer look and potential action by the Commission. Puget’s complaint involved shorter term agreements that were more likely to be impacted by the dysfunctional California spot market, and Puget acted much quicker than the other complainants in filing its complaint after it signed the contracts.

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