FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION ON NOTICE OF PROPOSED POLICY STATEMENT ON STANDARD OF REVIEW FOR PROPOSED CHANGES TO MARKET-BASED RATE CONTRACTS FOR WHOLESALE SALES OF ELECTRIC ENERGY BY PUBLIC UTILITIES
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However, EPSA respectfully disagrees with the Commission’s proposed approach to identifying the appropriate standard of review that must be satisfied by persons seeking to change agreed upon contractual terms. In the numerous complaints that have been filed by buyers seeking contract reformation, one of the threshold contested issues concerns whether to apply the “just and reasonable” standard or the “public interest” (Mobile-Sierra) standard. If adopted, the Policy Statement would prospectively require all contracts to expressly include precise language as a precondition for parties to receive the higher contractual protection and certainty that the public interest standard affords.
Alternatively, parties failing to include this exact language in their market-based power sales contracts would be subject to the lower just and reasonable standard. In light of the objective to promote certain and stable markets by respecting fairly negotiated contracts, EPSA urges the Commission to reconsider this counter-productive approach. Inferring the intent to apply a lower standard in the absence of express language is contrary to law, would actually diminish contractual sanctity and, contrary to the Commission’s stated goal, would most likely encourage future complaints.
As Commissioners Brownell and Breathitt note in their concurrence, “[I]nvestors will not participate in a market in which disgruntled buyers are allowed to break their contracts, at least not without charging a significant risk premium—a cost that will ultimately be borne by customers.” The Commissioners go on to express a preference for applying the public interest standard unless the contract contains explicit language calling for a lower standard. EPSA agrees. Rather than establishing a policy that would tend to disrupt contractual relations and markets, EPSA believes that the approach outlined in the Brownell and Breathitt concurring opinion on the Policy Statement is not only much more compatible with the Commission’s stated objectives, it is the only policy that the Commission may adopt that is consistent with case law interpreting the Supreme Court’s decisions in Mobile-Sierra.
The Sierra decision, in conjunction with Mobile, established the precedent that, under the Federal Power Act (FPA), the Commission could only modify or abrogate a previously approved contract rate upon a finding that such modification or abrogation was in the “public interest.” Among the early cases interpreting the Mobile-Sierra doctrine, there was little question that the Commission was required to strictly enforce the application of the “public interest” standard to modification of contracts. Although there has been some ambiguity regarding the applicable standard in some court decisions, recent decisions of the courts of appeals have reaffirmed that, in the absence of clear evidence of the parties’ intentions to the contrary, the “public interest” standard is the default standard of review to be applied by the Commission in assessing whether to modify or abrogate contracts under Sections 205 and 206 of the Federal Power Act. The Policy Statement provides no support for departing from established precedent, which holds that the “public interest” is the default standard.
Moreover, there also are paramount public policy reasons for retaining the “public interest” standard as the default standard, and thus placing the burden of negotiating more favorable terms on the party or parties who desire a less stringent standard of review. First, the Commission recognizes that electric power sales contracts at market-based rates are “just and reasonable” because it has determined, a fortiori, that the seller lacks market power and the relevant markets are competitive. Second, the Commission also recognizes that preserving the sanctity of those contracts promotes market stability and, thereby, ensures a plentiful and reliable supply of electric power for the future. Adopting a lesser default standard of review would necessarily diminish the sanctity of the contract and inject (or be perceived to inject) a greater risk of future regulatory intervention and litigation over the agreed-upon terms of the contract. Certainly a party that desires the option of raising a future challenge to the contract under the “just and reasonable” standard because, for example, it might become uneconomic, ought to be able to negotiate such a term. But parties enter into contracts to give them some degree of certainty about the future. As a matter of public policy, parties that seek to reduce that level of certainty ought to bear the burden of negotiating and paying for that exception.