FERC last Wednesday set for hearing a series of complaints filed by power companies in Nevada, California, and Washington state asking the commission to modify contracts entered into with generators in late 2000 and early 2001. The complaints assert that prices for long-term wholesale power in the contracts were the result of dysfunctional western markets and should be modified to reduce the prices of the contracts to current market levels.

The bulk of the complaints were filed by Sierra Pacific Power and Nevada Power last year. A Southern California water company and a Washington state public utility district also filed similar complaints at FERC.

Nevada Power and Sierra Pacific Power had secured near and intermediate-term power contracts in late 2000 and early 2001 as the California energy crisis worsened, to protect their customers from unreliable supplies and rapidly escalating short-term prices. The FERC, however, unexpectedly imposed price caps in June of last year, but only applied them to spot power markets, the more volatile markets when California was most active, the companies said.

Each of the complaints asserted that alleged dysfunctions in western spot markets in late 2000 and early 2001 tainted prices for sale into forward markets, making the rates in the challenged contracts unjust and unreasonable because they are higher than forward market prices after mid-2001.

With respect to the contracts entered into by Sierra Pacific Power and Nevada Power, some of the contracts have concluded and others are yet to become effective and will continue through 2006. The utilities indicated that they are seeking relief for contracts that have not yet gone to delivery. The contract prices range from a low of $33 to a high of $290.

Generators targeted by the complaints are:

Several of these generators responded to the complaints, arguing that the utilities had failed to show that the contract rates in question adversely affect the public interest as required under the Mobile-Sierra doctrine. Under the Mobile Sierra doctrine, unless there is a specific contractual provision allowing unilateral changes in rates, one party to the contract is not permitted to unilaterally seek a modification of the contract rate provisions under section 206 of the Federal Power Act.

Wednesday’s order sets the complaints for evidentiary hearing. “The complainants will bear the burden of proving the contract modification is justified,” a FERC staff member said. The order notes that this burden is a heavy one and that the evidence contained in the complaints alone does not meet that burden.

FERC Commissioner William Massey pointed out at the Commission’s regular agenda meeting that “the atmosphere in which these contracts were negotiated was unprecedented.” He said that the spot markets were “out of control” and noted that the Commission had declared those markets to be dysfunctional.

“There was a perceived need to get load off the spot market and into forward contracts,” Massey continued. “Yet, it must have been extraordinarily difficult for the contracting parties to negotiate long-term contracts under these circumstances.” He pointed out that the most influential benchmark used in negotiating forward contracts, “which is the spot market and expectations of future spot prices, was dysfunctional.”

Massey clearly had problems with some of the language included in the Commission’s order setting the complaints for hearing. Specifically, he cited the following wording from the order: “In the evidence presented thus far, the complainants have failed to show that the dysfunctional California ISO and Power Exchange spot markets had an adverse effect on the long-term bilateral market in California, Nevada and Washington.”

“I think what it’s saying is the complainants haven’t yet proved their case to our satisfaction and that is true,” Massey went on to say. “Yet, I disagree with the tone of this stark declaration that they have failed to show that the dysfunctional spot market had an adverse effect on the long-term bilateral markets in California.”

Massey said he was “surprised” with the tone of this statement, “especially given Commission precedent.” The Commissioner said that the relationship between the spot market price and the long-term contract price “seems to me to be rather obvious.”

From Massey’s point of view, the primary focus of the hearing “should be how this out of control spot market and the parties’ expectations of future spot market conditions affected the negotiations of the contract.”

Massey took issue with the fact that the order sets for hearing whether the complainants should be bound to a Mobile-Sierra public interest burden of proof or a just and reasonable burden of proof. “I don’t think a hearing is necessary to resolve this point,” Massey said. The just and reasonable standard should cover these proceedings, he argued.

“Given the many complexities of these cases that we’re consolidating, the level of information that we are asking the judge to collect and sort through and all of the contracts at issue, the Commission has set quite an ambitious date for issuing a final decision of May 30, 2003,” Commissioner Linda Breathitt said. But she also agrees that FERC needs to “get these issues resolved and put to bed for a lot of reasons.”

Meanwhile, Commissioner Nora Brownell said that she was “surprised and dismayed” that some of the parties that had agreed to enter into talks to resolve the issues arising from the contracts subsequently “refused to come to the table.” Such a move is “not something, I think, that this Commission approves of,” Brownell said. “In fact, we’ve encouraged parties, who after all know their own businesses better than we do, to avail themselves of that opportunity.”

The order directs the parties in the case to comply with the mediation requirements of the Western Systems Power Pool agreement and urges them to make every effort to resolve their differences during mediation.

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