FERC Filings
MOTION FOR LEAVE TO INTERVENE AND PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION re: SACRAMENTO MUNICIPAL UTILITY DISTRICT V. DUKE ENERGY TRADING AND MARKETING, LLC
PROTEST
On July 24, 2002, Sacramento Municipal Utility District (SMUD) filed a complaint in this docket against Duke Energy Trading and Marketing, LLC (DETM). In that complaint, SMUD alleges that the market-based rates included in four mid- and long-term contracts entered into between February 7, 2001 and March 26, 2001, are now “unjust and unreasonable” and that the Commission should reformulate the contract rates to be observed prospectively from the refund date (to be set sixty days following the date of the complaint). SMUD alleges that, similar to the other western power contract complaint cases that recently have been set for hearing by the Commission, the prices negotiated in the four SMUD/DETM contracts were the product of the dysfunctional California spot energy market. SMUD cites FERC’s April 11, 2002, Order in Nevada Power Co. v. Duke Energy Trading (April 11th Order) setting “similar” cases for hearing “based on the arguments that the dysfunctional spot markets in California caused long-term contracts not to be reasonable.”
Like the many filed this summer, this complaint attempts to piggyback on claims made by Sierra Pacific Power Company, Nevada Power Company and a mounting list of others. In fact, SMUD specifically cites FERC’s action in those cases as the basis for its own complaint. Additionally, while the orders setting the complaints for hearing have delineated a high bar for the burden of proof on the complainants, that does not ameliorate the impact of the implicit, repeated finding by the Commission that the contracts might be unwound and, hence, warrant pursuit before FERC.
The SMUD complaint, in fact, takes the ball and runs with it even farther by including a statement on settlement prospects that says, “SMUD is of the opinion that ADR procedures are not likely to be useful in resolving this case and urges the Commission to establish complaint procedures.” SMUD, by invoking the many cases that FERC has already sent to hearing and its desire to forego either FERC or WSPP mediation processes in favor of a FERC complaint procedure, has underscored the impact of the Commission’s action on these cases. It is becoming standard practice to challenge any power contract entered into before the Commission’s June 19, 2001, West-wide mitigation Order. Not to challenge such contracts may soon be interpreted as irresponsible and a deficiency of a company’s fiduciary responsibility. The floodgate has opened, and it threatens to call into question the sanctity of any contracts in the entire wholesale market entered into by any party in the West. As SMUD’s complaint exemplifies, the Commission’s action suggests it would be irresponsible for any buyer not to challenge their contracts and take their chances before FERC.
This reliance on complaints for abrogation or renegotiation of contracts will result in the decimation of trust in the regulatory system and could lead to dire market consequences. This ever-widening floodgate introduces a level of uncertainty into the wholesale electric market that is untenable in the current financial environment of the energy industry. According to information provided by the New York Mercantile Exchange, the energy merchant sector of the energy industry has incurred market capital losses of approximately $222 billion since May 1, 2001. These losses threaten not only further investment in power supply and transmission, but the very viability of the electricity marketplace. It only takes a review of current corporate stock prices to understand the precarious financial health of many major energy companies. Regulatory uncertainty, especially that which calls binding contracts into question, is intolerable because it is contributing to that financial deterioration. Market uncertainty will grow exponentially as the regulatory uncertainty grows with each contract case that the Commission sets for hearing. Similarly, the actions of the Commission on these contract complaints undermine and run counter to the Commission’s own efforts to instill confidence in the energy markets among the investment community.
As EPSA has argued in the previous complaint cases, the Commission should have dismissed the other complaints and should now dismiss this one. The ripple complaints being filed and any subsequent litigation is 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 SMUD’s complaint is simply incorrect. Referring to similar cases, SMUD argues that after it entered into these four contracts, 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 SMUD would have the Commission believe in its attempt to renegotiate these contracts. Given this reality, SMUD is clearly not entitled to the relief it seeks. In fact, SMUD 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 renegotiate contracts because its superseding mitigation reduced the need for those contracts would send another 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. SMUD 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 renegotiating 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.
Finally, as EPSA has consistently 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.