FERC Filings
MOTION FOR LEAVE TO INTERVENE AND PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION re: CITY OF BURBANK v. CALPINE ENERGY SERVICES, DUKE ENERGY TRADING AND MARKETING AND EL PASO MERCHANT ENERGY
PROTEST
On August 12, 2002, the City of Burbank, California, (Burbank) filed a complaint in this docket against Calpine Energy Services, L.P., Duke Energy Trading and Marketing, L.L.C. and El Paso Merchant Energy, L.P. (jointly, the Respondents). In that complaint, Burbank alleges that the market-based rates included in five long-term contracts for the calendar years 2002 through 2004, entered into between March and May, 2001, are now “unjust and unreasonable” due to the dysfunctional California energy market which existed at the time the contracts were signed. Like many other western power contract complaints filed at FERC over the last few months, the Burbank complaint asks the Commission “to abrogate or reform the subject contracts and to refund, with interest, all amounts unlawfully charged to Burbank…” Also, like several of the most recent other complaints, Burbank references the initial cases which have been set for hearing (CPUC and Nevada Power) , and claims that Burbank’s contractual situation is similar to those because the prices negotiated in the five Burbank contracts occurred during the same time period.
Where the Burbank complaint forges new territory is in its request that the Commission set its five contracts for hearing, establish a refund effective date, 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.
With this new tack set out by Burbank, we have moved from the oft-referred floodgate to the possibility of a virtual tidal wave. Complainants no longer have to rely on due process or litigation, but will put in a “placeholder” to see how the other cases fare. Should the contracts in Nevada Power or CPUC be abrogated or renegotiated, all other entities who signed power contracts prior to the Commission’s June 19th, 2001, West-wide mitigation Order will seek contract abrogation. As contracts are unwound by the Commission, the ripple 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. Regardless of the Commission’s declaration that in the Nevada Power and CPUC cases there will be a high bar for the burden of proof on the complainants, it does not ameliorate the impact of the implicit, repeated findings by the Commission that the contracts might be unwound and, hence, warrant pursuit before FERC. Burbank has filed further proof 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 Burbank’s complaint exemplifies, the Commission’s action suggests it would be irresponsible for any buyer not to challenge their contracts, or at least file a placeholder for future action, 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. 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. In addition, this most recent type of “placeholder” complaint is another instrument to ratchet up the level of that uncertainty. 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 contributes 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 copycat “placeholder” complaints being filed and any subsequent litigation is the inevitable result of the Commission’s actions in the prior cases. To attest to this copycat effect, two days after Burbank filed its complaint at FERC, The Kroger Company (Kroger), a major western grocery retailer, filed a complaint against Dynegy Power Marketing, Inc. (Dynegy) to abrogate four wholesale contracts between Dynegy and AES NewEnergy, Inc. (AES). According to Kroger, AES will pass the costs of the Dynegy/AES contracts directly through to Kroger as the retail customer. In light of this, Kroger is filing a complaint because the Commission has “invited parties to file complaints…to seek the modification of market-based contracts that parties believe are unjust and unreasonable.” With this type of second-tier filing , the doors could be opening to another tidal wave that threatens to unravel multiple contracts, putting all western power contracts into question. 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 Burbank’s complaint is simply incorrect. Referring to similar cases, Burbank 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 Burbank would have the Commission believe in its attempt to renegotiate these contracts. Given this reality, Burbank is clearly not entitled to the relief it seeks. In fact, Burbank 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 superceding 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. Burbank 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 19th, 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.