FERC Filings
MOTION FOR LEAVE TO INTERVENE AND PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION re: PACIFICORP V. MORGAN STANLEY CAPITAL GROUP, INC.
PROTEST
On May 2, 2002, PacifiCorp filed a complaint in this docket against Morgan Stanley Capital Group Inc. In that complaint, PacifiCorp alleges that the market-based prices in certain short-term bilateral sales contracts entered into for delivery during the summer of 2002 are “unjust and unreasonable” and that the Commission should mitigate the prices therein. PacifiCorp alleges that the prices it negotiated in those contracts were the product of the dysfunctionality of the California spot energy market that existed when the contracts were entered into and that the essential economic purpose of the bilateral contracts for the summer of 2002 has been frustrated by the June 19th, 2001 Order imposing a west-wide mitigation.
The Complaint attempts to piggyback on claims made by Sierra Pacific Power Company and Nevada Power Company in ten cases, the Public Utility District No. 1 of Snohomish County, Washington, Southern California Water Company, the Public Utilities Commission of the State of California and the California Electricity Oversight Board. In a series of Orders, the Commission has set the issues raised by those parties for hearing, finding that the parties seeking to overturn market-based contracts into which they voluntarily entered will have a “heavy burden.” The Commission also concluded that, based on the evidence contained in the complaints, the parties had failed to meet that burden. As EPSA and others have warned, it is now apparent that the Commission has opened a floodgate that threatens to overwhelm the resources of the Commission and the industry and calls into question all contracts in the western wholesale market entered into by any party in the West prior to June 19, 2001. Ripple claims are already being filed and more litigation, like the PacifiCorp filing, is likely as a result of the Commission’s approach. These floodgate concerns are now a reality -- the inevitable result of the Commission’s actions in the prior cases. That error should not be compounded here.
As EPSA has strenuously argued in the prior cases, the Commission should have dismissed the other complaints and should now dismiss this one. At the outset, the factual predicate of PacifiCorp’s complaint is simply incorrect. The essence of PacifiCorp’s complaint is that after it entered into these contracts for the summer of 2002, the Commission’s June 19th Mitigation Order lowered prices in the summer of 2002, such that the original contracts are no longer just and reasonable. That is simply not true. Today, and for this summer, prices in the West are well below the mitigated cap as a result of increased supply and reduced demand.
The fact is that prices this summer in the West are a function of supply and demand and are not the result of the Commission imposed mitigation which would, at best, dampen any price increases. As such, the Commission-imposed mitigation did not have the direct result of lowering prices that PacifiCorp would have the Commission believe in its attempt to abrogate these contracts. Given this reality, PacifiCorp is clearly not entitled to the relief it seeks. In fact, PacifiCorp is in the same position as any other party that enters into a forward contract and then finds spot market prices lower than they expected. Certainly in that situation, the Commission would not abrogate any contracts.
Assuming arguendo that the Commission’s Orders did lower prices in the West, for the Commission to abrogate contracts because its superseding mitigation reduced the need for those contracts would send a terrible signal to the market. Time and time again in a competitive market, the Commission has urged market participants to hedge risk in the marketplace by securing a balanced portfolio of supplies. PacifiCorp is essentially telling the Commission that it would not have done anything to reduce its risk if it would have known that the Commission was going to issue the June 19, 2001 Order. For the Commission to agree by abrogating those contracts—particularly when there is no factual predicate that the mitigation actually resulted in lower prices—is exactly the type of free regulatory hedge EPSA has repeatedly warned would delay the development of appropriate risk management. This, in turn, creates a vicious cycle where parties that fail to manage risk and rely on Commission intervention are rewarded at the expense of those who took the necessary steps to properly manage risk on behalf of their customers. The Commission needs to break this cycle.
Second, 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 PacifiCorp, 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. This fact alone shows that the complaints filed to date do not raise disputed issues of material fact that warrant hearing. The effect of spot prices on bilateral sales, if any, has been exhaustively studied and reviewed by the Commission in numerous cases and investigations. Certainly, the voluminous record developed to date is sufficient for the Commission to resolve the outstanding issues and further hearings are unnecessary.
Third, it is important for the Commission to recognize that, with respect to the contracts at issue here, PacifiCorp faced radically different choices than 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. When PacifiCorp willingly chose to enter into the contracts at issue here, it faced a very different situation than the California parties. The Commission should reject any effort by PacifiCorp to maintain that they faced a situation similar to that which led the Commission to mitigate prices in California.
Finally, as EPSA has longed pointed out, the Commission should reject these complaints 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 continues to sow confusion and uncertainty in the bilateral market by putting additional contracts at risk, confidence in the Commission’s long-standing policy of ensuring contract sanctity, and providing transactional finality, will be further eroded. This, in turn, undermines the confidence needed by both market participants and investors for today’s bulk power markets to invest in needed infrastructure and create the workably competitive markets that we all envision.