FERC Filings
MOTION FOR LEAVE TO INTERVENE AND PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION re: PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY V. MORGAN STANLEY CAPITAL GROUP, INC.
PROTEST
On February 11, 2002, the Public Utility District No. 1 of Snohomish County, Washington (Snohomish) filed a complaint in this docket against Morgan Stanley Capital Group, Inc. In that complaint, Snohomish alleges that the terms of its bilateral sales contract executed in January, 2001 for service commencing April 1, 2001 are “unjust and unreasonable” and that the Commission should mitigate those terms. Snohomish alleges that the length of the contract negotiated was 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 and were not meant to modify transactions entered into prior to that time. Moreover, the Commission’s remedy for this dysfunctional market was to reduce reliance on spot markets, which is exactly what parties did by entering into the bilateral contracts Snohomish now seeks to void. 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 addition to the theoretical benefits of longer-term contracting over undue reliance on spot purchases, the parties to the contract at issue here 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.
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.
In rejecting refund claims for spot market sales in the West, Administrative Law Judge Cintron recognized the vibrant nature of the WSPP market. In her Recommendations and Proposed Findings of Fact in Puget Sound Energy v. All Jurisdictional Sellers, 96 FERC 63,044 (2001), the Judge concluded that:
Buyers who wanted to hedge in the Pacific Northwest could have done so. There were various tools available. Exh. IE-2 at 14.
Therefore, in light of the above I recommend that the Commission not order refunds in this case because the prices were not unreasonable and unlike the California ISO/PX, the market is a competitive market. Furthermore, the prices in the California ISO/PX were not the only factor driving the prices. There was a drought, which limited supply, the price of natural gas rose and demand increased. Spot market bilateral sales constituted only a small percentage of the total volume of transactions in the region because forward contracts are heavily relied on. Spot market sales took place under diverse prices, terms and conditions. Most market participants were both buyers and sellers. In reaching my recommendations I am cognizant of prior Commission orders establishing market based pricing to foster competitive markets. In the case before me, where all transactions are bilateral transactions under the aegis of the WSPP Agreement this is more compelling. The prices were agreed to between willing buyers and willing sellers. (Slip Op. at pp. 223-224)
Thus, the situation facing Snohomish, when it willingly chose 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 Snohomish to maintain that it faced a situation similar to that which led the Commission to mitigate prices in California.
In addition to rejecting Snohomish’s 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 Snohomish’s 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. Indeed, that is why in the almost twenty years since the Commission has been promoting competitive markets in both natural gas and electricity, through Order Nos. 436, 636, 888 and 2000, the Commission has refused to abrogate private existing contracts. No doubt, that is because, as the Court of Appeals said in the first Associated Gas Distributors decision, “contract abrogation is an extreme measure.” Associated Gas Distributors v. Federal Energy Regulatory Commission, 824 F.2 981, at 1016 (D.C. Cir. 1987).