FERC Rejects Rehearing Requests To Modify Forward Energy Contracts
December 1, 2003
In a series of recent orders, the U.S. Federal Energy Regulatory Commission (FERC) affirmed its prior holdings dismissing complaints seeking to void or amend forward wholesale energy contracts entered into during the so-called “Western Energy Crisis.” 1 Public Utility District No. 1 of Snohomish County, Washington, Nevada Power Company, the State of California and PacifiCorp had complained to the FERC that the prices in their forward contracts were too high because of market dysfunction in the California spot (near term) energy markets during the period when they executed the forward contracts. After separate evidentiary hearings, three FERC administrative law judges (ALJs) independently held that the complainants failed to prove that California spot energy prices had any adverse impact on the challenged forward contracts. In June 2003, the FERC adopted the ALJs’ findings and dismissed the complaints.
In its November orders, the FERC addressed requests for rehearing, as well
as requests for clarification regarding its prior orders in the cases. The commission rejected the requests for rehearing and upheld the validity of all of the challenged contract terms. The FERC made short work of claims that the California energy crisis was caused by “rampant and widespread market manipulation.” It found that there was no evidence of market manipulation “specific to” the long-term contracts at issue in the cases, and although evidence of fraud, duress or bad faith during contract formation could be an alternative basis to modify a contract, there was no evidence of such behavior in the negotiations regarding the challenged contracts. The FERC concluded, based on the record, “that market fundamentals such as increased demand, reduced generation and increased fuel costs were variables that contributed significantly to the escalation in market prices.” (CDWR Order at P 86.)
The FERC also addressed the Mobile-Sierra doctrine. That doctrine, when applicable, prohibits the FERC from modifying a contract unless it finds that the contract’s rates, terms and conditions are contrary to the public interest. The FERC upheld its prior finding that the Mobile-Sierra doctrine applies to market-based contracts, such as the challenged contracts. In reaching this conclusion, the FERC explained that a grant of market-based rate authority fulfills the Federal Power Act’s initial review requirements, under which the FERC must determine that rates will be just and reasonable. The FERC further held that the Mobile-Sierra doctrine applies regardless of whether the contract includes a rate term that is challenged as being too high or too low.
Applying the Mobile-Sierra doctrine, the FERC found that the complainants did not show that the challenged contracts adversely affected the public interest. The FERC noted that “[o]ur finding that changes to the challenged contracts should be evaluated under the public interest standard does not equate to a finding that the underlying rates are not just and reasonable.” (PacifiCorp Order at P 31.) Moreover, complainants did not show that the challenged contracts embody unjust and unreasonable rates. The FERC also held that third parties (e.g., ratepayers) are bound by the public interest standard of review when it applies to a particular contract.
The orders noted that the FERC may remedy situations where market-based rate contracts have become unjust and unreasonable because a seller has acquired market power. However, complainants did not show that the respondents exercised market power in these cases.
The FERC did not find any policy concerns sufficient to justify contract modification. Indeed, it remarked that contract modification is contrary to its policy of respecting contract sanctity and creating regulatory certainty.
Finally, the FERC found no merit in the complainants’ assertions that the Mobile-Sierra doctrine “is not intended to protect the sanctity of contracts entered into by wrongdoers” or that it is against the public interest for sellers to retain the benefit of contracts entered into by “abuse” of market-based rate authority. (CDWR Order at P 53.) The orders stated that the complainants had not cited any precedent for their position, nor did the record provide any evidence that the respondents engaged in market manipulation specific to the negotiations that resulted in the challenged contracts.
Several parties to the proceedings have appealed the FERC’s orders in the U.S. Court of Appeals for the Ninth Circuit.
On a related note, the proposed energy bill pending currently before the U.S. Congress includes specific language regarding the Mobile-Sierra public interest standard. (See Energy Policy Act of 2003, section 1286, Sanctity
of Contract. If passed, the legislation would apply to contracts entered into
or amended after the effective date of the legislation.) The bill provides that the FERC has no authority to modify or abrogate market-based rate contracts without making a public interest finding unless the contract expressly provides for a standard of review other than the public interest standard.
1. Nevada Power Company, et al. v. Enron Power Marketing, Inc., et al., 105 FERC 61,185 (November 10, 2003); PacifiCorp v. Reliant Energy Services, Inc., et al., 105 FERC 61,184 (November 10, 2003) ; Public Utilities Commission of the State of California, et al. v. Sellers of Long Term Contracts to the California Department of Water Resources, et al., 105 FERC 61,182 (November 10, 2003).
2. The doctrine arose from concurrently issued Supreme Court opinions in United Gas Pipe Line Co. v. Mobile Gas Service Corp., et al., 350 U.S. 332 (1956) and Federal Power Commission v. Sierra Pacific Power Co., 350 U.S. 348 (1956).
