Rather than make the lower just and reasonable standard the default measuring stick used in reviews of wholesale power contracts, FERC should instead adopt an approach touted by FERC Commissioners Nora Brownell and Linda Breathitt that would apply the more stringent public interest standard by default to such situations, a number of industry participants recently told the Commission.

The issue of power contract sanctity has become a major burr in the saddle of some 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.

Under its notice of proposed policy statement [PL02-7-000], FERC would prospectively require all contracts to expressly include precise language as a precondition for parties to receive the higher contractual protection and certainty that would result from a public interest standard. Alternatively, parties failing to include this exact language in their market-based power sales contracts would be subject to the lower just and reasonable standard.

“In light of the objective to promote certain and stable markets by respecting fairly negotiated contracts, EPSA [the Electric Power Supply Association] urges the Commission to reconsider this counter-productive approach,” the power supply association told FERC in comments filed on Sept. 23. “Inferring the intent to apply a lower standard in the absence of express language is contrary to law, would actually diminish contractual sanctity and, contrary to the Commission’s stated goal, would most likely encourage future complaints.”

EPSA expressed support for the position taken by Brownell and Breathitt that the public interest standard should be the default unless there is explicit language in a contract inviting FERC to apply a lower standard. The two commissioners detailed their thoughts on the subject in a concurrence related to the proposed policy statement.

EPSA said there are “paramount public policy reasons” for retaining the public interest standard as the default standard “and thus placing the burden of negotiating more favorable terms on the party or parties who desire a less stringent standard of review.”

The Brownell-Breathitt approach also drew praise from a group called the Contract Certainty Coalition. The group’s members include El Paso Merchant Energy, Merrill Lynch Capital Services, Morgan Stanley Capital Group, Coral Power and Bank of America, which has an application for market-based rate authority pending at FERC.

The coalition said that applying the public interest standard “is the most effective manner in which to promote contract certainty.” The group argued that as currently crafted, the proposed policy statement is unlikely to reduce significantly the legal uncertainty created by “unilateral attempts to modify a contract due to post-contract changes in market conditions.”

Indeed, the coalition thinks that the policy statement “may actually create new opportunities for contracting parties to take one position during negotiations and later complain to the Commission that the contract is unjust and unreasonable.”

The coalition said that FERC’s proposal to use the just and reasonable standard as a default “essentially gives buyers a ‘regulatory hedge’…by allowing them to enter into contracts for a variety of reasons, including to protect them against price volatility or to meet a resource planning timetable, and then, if the market changes, file complaints with the Commission seeking contract reformation.”

Similarly, Constellation Power Source said that the position staked out by Brownell and Breathitt offers a “more compelling legal position, accurately reflecting the case law on the subject.” Constellation Power Source told FERC that invoking the public interest standard of review by default is “consistent with the Commission’s policy objective of preserving contractual sanctity, promoting competition and reducing future disputes.”

For its part, Edison Electric Institute (EEI) said that the Brownell-Breathitt approach is “commercially preferable in that it affirms the sanctity of contracts and provides greater certainty to the parties as they enter into a contract.”

The association of investor-owned electric utilities noted that it concurs with Brownell and Breathitt “that the policy they propose will provide needed certainty to competitive markets and the investors who provide capital to those markets.”

EEI said that throughout the energy industry “the viability of markets, capital for expansion and the ability to have infrastructure projects approved all depend on the sanctity of contracts. This principle carries even more weight today as the Commission introduces competition into the industry.”

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