FERC Filings
MOTION FOR LEAVE TO INTERVENE AND PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION re: KROGER CO. V. DYNEGY POWER MARKETING, INC.
PROTEST
On August 14, 2002, The Kroger Co., (Kroger) filed a complaint in this docket against Dynegy Power Marketing, Inc. (Dynegy). In that complaint, Kroger alleges that the market-based rates included in four executory wholesale contracts between Dynegy and AES NewEnergy, Inc. (AES) were unjust and unreasonable, and that the costs of those contracts will be passed directly through to Kroger via its contract with AES. Though the exact commencement dates for deliveries under the contracts were not available in the public version of the Kroger complaint, Kroger states, “the purported market-based prices in the subject confirmations result directly from the dysfunctional and non-competitive California and Western markets, as the Commission has already determined....” Kroger then asks the Commission, for the applicable dysfunctional market period defined by Kroger as “approximately 2001 through 2002,” to set the prices retroactively “at a level comporting with market prices that would have then existed, but did not so exist due to the gross dysfunctionality of the market,” and to void the contracts for the remaining duration of the contract term. Kroger claims that, but for the dysfunctional market, the company would have entered into annual contracts only, not multi-year contract arrangements. Kroger requests that FERC establish a refund effective date sixty days from the filing date of the complaint and to set the complaint for hearing.
Once again, bilateral, long-term western power contracts are called into question. In this case, the retail end user is attempting to abrogate a contract between its power supplier, AES, and another power supply entity, Dynegy. This complaint is yet another indicator of the coming tidal wave of contract abrogation complaints. As EPSA has stated in numerous similar cases, it’s possible that eventually all other entities who signed power contracts prior to the Commission’s June 19th, 2001, West-wide mitigation Order will seek contract abrogation. Regardless of the Commission’s declaration in Nevada Power and CPUC that there will be 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. Kroger has filed further evidence of this supposition.
As stated in previous EPSA protests to these complaints, not to challenge such contracts may soon be interpreted as irresponsible and a deficiency of a company’s fiduciary responsibility. The coming tidal wave threatens to call into question the sanctity of any contracts in the entire wholesale market entered into by any party in the West. As Kroger’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.
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 – or more dire consequences as the case may be today. This possible tidal wave introduces a level of uncertainty into the wholesale electric market that is untenable in the current financial environment of the energy industry. As a result, many energy companies are experiencing crippling capital losses. 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 before, the Commission should have dismissed the other complaints and should now dismiss this one. The complaints being filed, and any subsequent litigation, are the inevitable result of the Commission’s actions in the prior cases. To attest to a resultant copycat phenomenon, two days prior to Kroger’s filing, the City of Burbank, CA (Burbank) filed a complaint at FERC requesting that the Commission set five power contracts for hearing, set an effective refund date sixty days from the date of Burbank’s filing, and then hold the hearing in abeyance pending the outcome of the CPUC and Nevada Power cases . Burbank is upfront about its intention, stating:
Burbank underscores the fact that this complaint is being filed for the primary purpose of establishing a refund effective date as early as possible, so that if the complainants in Nevada Power or CPUC are successful, or if Burbank and the complainants here can negotiate a settlement, Burbank will have the opportunity to obtain relief commencing at the earliest possible time.
EPSA has pointed out in its protest to the Burbank complaint, filed concurrently to this protest, that complainants no longer have to rely on due process or litigation, but will put in a “placeholder” complaint to see how the other cases fare.
In the case of the Kroger complaint, Kroger explains that the Commission has “invited parties to file complaints…to seek the modification of market-based contracts that parties believe are unjust and unreasonable.” As multiple contracts are unraveled by FERC, the effects will be staggering as Respondents who have lost the security of their contracts will be forced to file ripple claims seeking relief from other entities that the Respondents may have secured power from to hedge their own power sales. By setting those first cases for hearing, the Commission may have set in motion an overwhelming wave of contract litigation. For example, Dynegy quite possibly hedged its obligations to AES with contracts in the wholesale market. If Dynegy’s contract to sell power to AES is abrogated, Dynegy may well file its own ripple claim to abrogate the contract it has with another wholesale market participant. The Commission, having erred by setting the first cases for hearing, must not compound that error here.
In addition, as with the other western contract complaint cases, the factual predicate of Kroger’s complaint is simply incorrect. Referring to similar cases, Kroger relies on the CPUC’s and Nevada Power’s arguments that, after the contracts in question were signed, 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 many factors, a major factor being increased supply and reduced demand. As such, the Commission-imposed mitigation did not have the direct result of lowering prices that Kroger would have the Commission believe in its attempt to renegotiate these contracts. Given this reality, Kroger is clearly not entitled to the relief it seeks. In fact, Kroger 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 or 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. Kroger 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 or voiding 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.