A recently issued Commission staff report finding pervasive manipulation of California’s energy markets in 2000-2001 shouldn’t be made a part of the evidence in an ongoing case at FERC involving PacifiCorp’s challenge to several power contracts the utility entered into with four power suppliers, a Reliant Energy Services Inc. attorney told FERC Commissioners on Thursday.

A FERC administrative law judge (ALJ) earlier this year recommended that the Federal Energy Regulatory Commission throw out the complaints filed by PacifiCorp against Reliant Energy Services, Morgan Stanley Capital Group, Williams Energy Marketing & Trading and El Paso Merchant Energy L.P. ALJ Isaac D. Benkin said in his ruling that the power suppliers “did not violate any operative norm in their dealings with PacifiCorp. They did not mislead PacifiCorp. They did not defraud PacifiCorp. They did not collude to increase prices in the marketplace. They did not unduly exercise market power.”

The 12 contracts that PacifiCorp is seeking to abrogate were entered into during April, May and June 2001 for deliveries between July 1, 2002 and Sept. 30, 2002 at Palo Verde at stated prices ranging from $120/MWh to $262/MWh. The contracts used were master contracts developed by the Edison Electric Institute and the Western Systems Power Pool.

All three FERC Commissioners on Thursday heard oral arguments on the squabble from attorneys representing PacifiCorp and the four power suppliers.

FERC Commissioner William Massey asked Randolph McManus, counsel for Reliant Energy Services, whether he thinks evidence included in the FERC staff report should be made a part of the record in the PacifiCorp proceeding. The report’s primary author was FERC staff member Donald Gelinas (see NGI, March 31).

Under this scenario, the evidence included in the report would be subject to examination and cross-examination by both sides in the case. “Should the case be remanded to the judge for that purpose?,” asked Massey. “It’s always seemed to me odd that somehow we would resolve these cases without that evidence, which we have all touted and relied so heavily on in many ways. How can we resolve these matters without that being a part of this record?”

“We would argue that the case need not be remanded and that that so-called evidence, or the conclusions of a portion of your staff in the March 26 report, should not be included in the record,” McManus responded. “It helps PacifiCorp not a whit,” the Reliant Energy Services attorney argued. “It’s irrelevant. It doesn’t improve, and can’t help them improve upon, their failed case,” he said.

“Judge Benkin listened and heard and examined carefully the evidence of four expert witnesses — economists — presented by PacifiCorp and he examined carefully their highly sophisticated model, a model with all due respect to the staff, that was more sophisticated than that in the Gelinas report,” McManus said.

“And Judge Benkin found that, at best, that model demonstrated correlation between high spot prices and futures prices — that’s what the staff model shows,” the attorney said. “But as Judge Benkin correctly found, correlation does not establish causation. In fact, PacifiCorp’s failed evidence, just like the staff report, failed to demonstrate the element of purported dysfunction in the spot market that affected futures prices.”

McManus argued that PacifiCorp “failed to distinguish between market fundamentals and dysfunction, as those may have related to futures prices. In fact, PacifiCorp’s failed model, just like the staff’s model, failed even to establish the extent to which dysfunction was the cause of high spot prices.”

There’s another reason why the FERC staff report shouldn’t be made a part of the record in PacifiCorp’s challenge of the power contracts, McManus went on to say. “Its authors think it would be inappropriate,” McManus told the FERC Commissioners. The authors of the staff report “said that it should be used only in contract cases in which the standard of review was the just and reasonable standard, and that’s not this case. This case, as Judge Benkin correctly found, is governed by the public interest standard of review.”

In contrast, Paul Nordstrom, counsel for PacifiCorp, said that “the evidence, with respect to market manipulation, should be a part of the record if the Commission rules that a demonstration of market power, market power abuse or market manipulation is determinative in this case.”

Not surprisingly, a good chunk of Thursday’s oral arguments turned on whether the contracts in dispute should be subject to the higher Mobile Sierra “public interest” standard or the “just and reasonable (J&R)” standard of review.

Contracts may be deemed not J&R, but still be acceptable under the public interest standard, which has been characterized as practically insurmountable. According to the courts, that standard can be overcome only in extreme circumstances, such as when the existing terms of the contract might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory.

Nordstrom argued that the just and reasonable standard, and not the public interest standard, must be the controlling standard for FERC’s review of the contracts. “The Mobile Sierra doctrine, from which the public [interest] standard arises, arises in the pre- market-based rate era, in which challenged rates had earlier been filed with the Commission,” he said. As such, FERC had a prior opportunity for review of contracts for justness and reasonableness, he noted.

“In contrast, the market-based rates in the summer 2002 contracts were never filed with the Commission and had no prior opportunity for Commission review,” Nordstrom said. “Where contracts are silent with respect to [Federal Power Act] section 206 — as everyone in this case agrees that they are — it would be an abdication of the Commission’s responsibility under section 206 to decline to apply the just and reasonable standard.”

But Gregory Lawrence, counsel for Morgan Stanley Capital Group, asserted that the public interest standard of review should apply to the contested contracts. “The standard of review to determine whether a price in a forward contract is appropriate is the public interest standard of review,” he said. “To imply otherwise would be contrary to the law.”

Lawrence argued that “all roads lead” to the public interest standard of review and what he said was PacifiCorp’s “failure” to meet that standard. “A bilateral, fixed price forward contract, as we have here on the record of the case, that is silent to the standard of review and does not create a unilateral right for modification, is subject to the public interest standard,” Lawrence said.

Nordstrom said that even if the public interest test were to be applied to the PacifiCorp case, “the public interest in this case compels the modification of the rates in the summer 2002 contracts. The overwhelming public interest considerations here are that the rates were outrageously high, that they were the product of a noncompetitive market and that that market was subject to widespread abuse by major sellers including the respondents.”

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