In an effort to bring greater certainty to utilities and power suppliers entering into wholesale power contracts, while at the same time hopefully slashing the amount of litigation that has arisen from those contracts, FERC last Wednesday issued a proposed policy statement that would set a standard of review that must be met in order to justify proposed changes to market-based rate contracts for wholesale sales of electric energy by utilities.

The intent of the proposed policy statement is to promote the sanctity of contracts, “recognizing the importance of providing certainty and stability in competitive electric energy markets to provide adequate protection of electric energy customers,” a FERC staff member said.

Power contract sanctity has become a hot button issue among certain energy market participants who see a direct link between uncertainty surrounding whether power contracts can be reviewed and possibly altered and a dampening effect seen in U.S. power markets. Jack Davis, president of Pinnacle West, recently said that one of the factors behind the loss of liquidity in western power markets was the “perceived uncertainty” around the sanctity of contracts.

In its policy statement, FERC is proposing precise language that parties would be required to include in electric power sales contracts with the intent that the Commission apply the public interest standard of review to the contracts. Under the proposed policy, if parties to a market-based power sales contract do not include this exact language in their contract, the Commission would construe the omission as demonstrating the intent of the parties to allow a just and reasonable standard of review.

“I’m in general support of this proposed policy statement,” said FERC Commissioner William Massey. “I think it makes the right call. The default standard of review, in my judgement, should be a just and reasonable standard,” he went on to say. “If the parties want to bind the Commission to a higher standard, the public interest standard, they should say so unmistakably and we propose language that ought to be included in the contract.”

At the same time, Massey said the policy statement would have been stronger “if it had made clear that the Commission would be sensitive to the potential use of market power to actually extract an agreement to a Mobile Sierra clause in a contract.”

“Despite the fact that these market-based rate contracts involve a prior Commission determination on the market power issue, the potential for coercive behavior remains,” Massey added.

He said that a recent decision by the U.S. Court of Appeals for the District of Columbia Circuit recognizes this argument. In that decision, the court, among other things, said that FERC violated the Mobile Sierra doctrine in unilaterally requiring reformation of pre-existing wholesale power contracts.

Massey’s “strong preference” would have been for FERC’s proposed policy statement to refer explicitly to this case and to include language stating that the Mobile Sierra doctrine “presupposes that contracts are entered into voluntarily [and] a seller may not dictate the standard of review specified in a contract through the exercise of market power.”

FERC Chairman Pat Wood said that the policy statement is a recognition by FERC that “we need to provide a vehicle by which contracts can have the measure of certainty that I think most people assumed was there.” Wood added that the “point of this rule is to say ‘Here’s the magic language. If this is what you intend, this is how you should say it.'”

FERC earlier this year 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 asserted 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.

More recently, the agency in June set for hearing a number of complaints filed by PacifiCorp against four energy sellers, claiming the prices set in short-term bilateral contracts for delivery of energy between July 1 and Sept. 30 of this year are unjust and unreasonable.

The Commission is inviting comments on the proposed policy statement to be filed 45 days after it is published in the Federal Register.

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