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. AMERICAN ELECTRIC POWER SERVICE CORPORATION
PROTEST
On June 17, 2002, Public Utility District No. 1 of Snohomish County, Washington (Snohomish) filed a complaint in this docket against American Electric Power Service Corporation, as agent for the Operating Companies of American Electric Power Company, Inc. (AEP). In that complaint, Snohomish alleges that the market-based prices and long contract terms provided for in a five-year forward contract entered into December 22, 2000, for delivery beginning February 1, 2001, are now “unjust and unreasonable” and that the Commission should terminate the contract. Snohomish alleges that the prices it negotiated in those contracts were the product of the “wildly dysfunctional” California spot energy market that existed when the contracts were entered into and that the essential economic purpose of the long-term forward contract has been frustrated by the subsequent regulatory reforms made by FERC that imposed a west-wide mitigation. According to the Snohomish complaint,
The Commission’s actions have finally forced the Western markets to function more like competitive markets, but the Commission has done nothing to mitigate the harmful effect on consumers of long-term contracts that were entered into during the period of sever market dysfunction in late 2000 and early 2001, despite the fact that the Commission urged market participants to enter into long-term contracts in order to escape the extreme conditions of short-term markets.
The Complaint attempts to piggyback on claims made by Sierra Pacific Power Company and Nevada Power Company in ten cases, and numerous others filed since those cases. Following this wave of complaints which attempt to abrogate western contracts is the Commission’s response to the first set of cases. In a series of Orders, the Commission has set the issues raised by those parties for hearing, finding that the parties seeking to overturn voluntary, market-based bilateral contracts 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 the sanctity of any contracts in the entire wholesale market entered into by any party in the West. In fact, the Commission’s action suggests it would be irresponsible for any buyer not to challenge their contracts and take their chances before FERC.
The extent of this burgeoning floodgate is underscored by the fact that the Snohomish contract with AEP includes in Section 16 of the Power Supply Agreement a provision specifically limiting the parties’ rights to seek a change in the rate, including through application to FERC pursuant to the provisions of Section 205 or 206 of the Federal Power Act. However, Snohomish argues that the Commission must not accept this one provision of the contract in order to abrogate the full contract. Interestingly, in its complaint, Snohomish states, “Unless the Commission acts now to protect consumers from the unjust and unreasonable rate charged by AEP, consumers will lack confidence in FERC’s regulatory system.” It is, in fact, the possible abrogation or required renegotiation of binding contracts, even those which specifically contain rate certainty clauses, that will result in the decimation of trust in the regulatory system and could lead to dire market consequences.
Another aspect of the Snohomish complaint that is of particular interest is the attempt to focus on the Commission’s June 19, 2001, Mitigation Order as unfairly favoring customers of the spot market. According to Snohomish, the spot market dysfunctions preceding, June 19, 2001 were addressed by the Commission in its Mitigation Order and those customers received rate relief. However, companies like Snohomish that were left before the Mitigation Order with “no realistic alternative but to seek long-term contracts in order to mitigate its exposure to the short-term market,” are now being unfairly penalized. Snohomish argues,
…whatever benefits, if any, Snohomish might have received from rate stability during the first few months of the AEP contract were vitiated by FERC when the Commission finally took action, in June of 2001, to mitigate Western spot market process and impose a must offer requirement on sellers. As a result of the Commission’s belated actions to remedy spot market prices and its failure to remedy prices under long-term contracts executed before such action took place, the benefits, if any, of Snohomish’s bargain were destroyed.
While explaining that the FERC mitigation took place “months after the contract was executed,” Snohomish goes on to argue that FERC cannot grant relief only to those consumers dealing in the spot market, but also to those like Snohomish who, heeding the Commission’s advice, signed forward contracts that are now unjust and unreasonable because the current prices fall far below those of the contracts in question.
Another new aspect to the Snohomish complaint is the request, without any explanation or showing of market power abuse by AEP, that the Commission revoke AEP’s market-based rate authority. Snohomish’s argument centers on the fact that only three power suppliers responded to its December 22, 2000 Request for Proposals to 17 potential sellers seeking 75- 100 MW of power. According to the complaint, this response “forced” Snohomish to contract with those three responding sellers, including AEP. This fact, along with Snohomish’s alleged “lack of bargaining power” and the dysfunctionality of the California and West-wide market in late 2000, are posited as the only proof that AEP engaged in anti-competitive behavior and exerted market power over Snohomish.
As EPSA has strenuously argued in the prior cases, the Commission should have dismissed the other complaints and should now dismiss this one. Ripple claims are already being filed and more litigation will be a direct 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.
In addition, as with the other western contract complaint cases, the factual predicate of Snohomish’s complaint is simply incorrect. The essence of the Snohomish complaint is that, after it entered into this five-year contract, the Commission’s June 19th Mitigation Order lowered prices in the spot market, which then impacted forward market prices such that those contained in the original contract are no longer just and reasonable. That is simply not true. Today prices in the West are well below the mitigated cap as a result of increased supply and reduced demand. As such, the Commission-imposed mitigation did not have the direct result of lowering prices that Snohomish would have the Commission believe in its attempt to abrogate these contracts. Given this reality, Snohomish is clearly not entitled to the relief it seeks. In fact, Snohomish 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. Snohomish 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 continuously attempt to look to FERC to correct any risk management scenario that does not result in low prices, attempting to utilize Commission intervention rather than properly manage risk on behalf of their customers. The Commission needs to break this cycle.
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 here by Snohomish and earlier 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.
It is important for the Commission to recognize that, with respect to the contracts at issue here, Snohomish 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 Snohomish 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 Snohomish 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.