FERC Filings
MOTION FOR LEAVE TO INTERVENE AND PROTEST OUT OF TIME: SIERRA PACIFIC POWER V. ALLEGHENY ENERGY SUPPLY
PROTEST
On December 7, 2001, Sierra Pacific Power Company and Nevada Power Company (collectively Nevada Companies) filed a complaint in this docket against Allegheny Energy Supply Company, L.L.C. In that complaint, the Nevada Companies allege that the market-based prices in certain bilateral sales contracts entered into between December, 2000 and June, 2001 are “unjust and unreasonable” and that the Commission should mitigate the prices therein. The Nevada Companies allege that the prices they negotiated in those contracts were the product of the dysfunctionality of the California spot energy markets that existed when the contracts were entered into.
The Commission should dismiss the Complaint. At the outset, it is important to understand the distinction between bilateral contracts and the California spot market. It is true that the Commission has found that the spot markets in California were “dysfunctional,” leading to prices that the Commission decided, in a long series of Orders, to mitigate. However, the mitigation measures which became effective on June 20, 2001 and are to terminate on September 30, 2002, were implemented on a prospective basis only. In addition, the Commission strongly urged parties in California and elsewhere in the West to enter into longer term contracts through which sophisticated buyers and sellers could manage the risks inherent in any spot market. Unlike an inherently more volatile spot market, a bilateral contract allows parties to balance supply and price risk, adopting a portfolio approach to short-, medium- and longer-term energy purchasing.
In fact, the Commission has repeatedly recognized the distinction between spot markets and forward contracts. As recently as its December 20, 2001 Order on Clarification and Rehearing the Commission expressly rejected the remedy sought by the Nevada Companies, denying requests “to extend price mitigation measures to forward contracts.” The Commission disagreed with the Nevada Attorney General's argument that it was necessary to extend price mitigation to forward markets in order to protect Nevada consumers.
In addition to the theoretical benefits of longer-term contracting over undue reliance on spot purchases, the parties to the contracts at issue here faced radically different choices that those in the California spot market. For a variety of reasons, the California market was designed to encourage buyers and sellers to rely almost exclusively on the spot market, foregoing the risk management available through longer term contracts. When spot prices became high and/or volatile, buyers were overexposed to the risks associated with those short-term markets.
In sharp contrast, the parties to the contracts at issue in this proceeding were sophisticated participants in the energy market, with a long history of involvement in the Western power markets under the WSPP Agreement. Buyers under the WSPP Agreement are not captive to a single supplier, contract term or delivery point. The Western power market is vibrant, robust and competitive, with informed and experienced traders, numerous players and multiple trading hubs. The mere fact that the Nevada Companies are bringing complaints against ten different parties shows that they had numerous choices in entering into these contracts.
Thus, the situation facing the Nevada Companies, when they willingly choose to enter into the contracts at issue here, was very different from that facing the California parties. There is simply no factual basis for linking the situation facing spot market participants in California with the situation facing the parties to the contracts at issue here. The Commission should reject any effort by the Nevada Parties to maintain that they faced a situation similar to that which led the Commission to mitigate prices in California.
In addition to rejecting the Nevada Companies’ Complaint on the basis of the facts, the Commission should reject the Complaint as a matter of policy. As the Commission has long recognized, bilateral contracts, entered into by willing buyers and willing sellers in an effort to manage supply and price risk, form the basis of today’s competitive wholesale bulk power markets. Sophisticated parties, armed with both publicly available and proprietary information, make decisions to buy and sell power on a regular basis. The parties operate under strict corporate guidelines that allow them to manage risk in a variety of creative and innovative ways. These bilateral contracts also form the basis for infrastructure investment in needed generation and transmission facilities vital to the reliability of the nation’s power system and the Commission’s efforts to promote robust markets. If the Commission acceded to the Nevada Companies’ request and put contracts at risk, the basis for future contract sanctity and transactional finality would be at risk, undermining the confidence needed by both market participants and investors for today’s bulk power markets to survive, thrive and thus invest.