Ninth Circuit Overrules FERC on Energy Contracts
By TINA BAY, Staff Writer
In upholding future wholesale energy contracts negotiated during the California Electricity Crisis, the Federal Energy Regulatory Commission incorrectly relied on a “public interest” standard of review, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The panel, in a consolidated appeal of FERC rulings, remanded actions by various retail power companies and state agencies to the commission, directing that it make a new determination as to the validity of the challenged contracts.
Numerous local utilities, including the Southern California Water Company and Public Utility No. 1 of Snohomish County in Washington, in 2001 sued for reformation of their forward contract—wholesale energy contracts for future energy supplies—on the basis that the dysfunctional market conditions of the energy crisis resulted in contractual terms that were not just and reasonable.
Under the Federal Power Act, FERC is required to regulate public utilities in order to protect consumers against excessive prices. Where rates are set through privately negotiated wholesale power contracts, FERC must ensure that the rates are “just and reasonable.”
The utilities challenged a June 2003 order in which FERC affirmed the initial decision of Administrative Law Judge Carmen A. Cintron, who had ruled that the “Mobile-Sierra” standard—developed in the U.S. Supreme Court cases of United Gas Pipe Line Co. v. Mobile Gas Serv. Corp, 350 U.S. 332 (1956) and Fed. Power Comm’n v. Sierra Pac. Power Co., 350 U.S. 348 (1956)—applied to the challenged contracts.
Under the Mobile-Sierra doctrine, a wholesale electric power contract is presumed to be just and reasonable, and that presumption can be rebutted only by showing the contract adversely affects the public interest.
The utilities failed to show the circumstances surrounding the negotiations of their contracts sufficiently adversely affected the public interest, Cintron concluded, and the contracts thus did not merit revision under Mobile-Sierra.
In its order denying the complaints, FERC agreed, saying it was not enough to show that forward prices became unjust and unreasonable due to the impact of spot market dysfunctions.
The utilities needed to show that the rates, terms and conditions of the contracts were contrary to the public interest, the commission held, noting that the challenged transactions were the result of the utilities’ “voluntary choices” and that there was “no evidence of unfairness, bad faith, or duress in the original negotiations.”
The appellate panel held that FERC failed to properly apply the Mobile-Sierra presumption.
Writing for the court, Judge Marsha S. Berzon explained that three prerequisites must be satisfied in order to trigger the Mobile-Sierra public interest mode of review.
First, the contract by its own terms must not preclude Mobile-Sierra review.
Second, the regulatory scheme in which the contracts are formed must provide FERC with an opportunity for effective, timely review of the contracted rates.
Third, where FERC is relying on a market-based rate-setting system to produce just and reasonable rates, FERC’s review of a contract must consider all factors relevant to the propriety of its formation.
Focusing on the second prerequisite, Berzon said FERC did not provide sufficient oversight for the contracts to ensure the resulting rates were just and reasonable. FERC’s grant of market-based rate authority did not qualify as sufficient prior review of all contracts made under that authorization.
The judge wrote:
“Market-based rate authority provides a meaningful opportunity for prior review and approval of rates under the FPA…only insofar as FERC implements and uses an effective oversight mechanism after the market-based rate authorization is initially granted. Only then can FERC meet its statutory duty to ensure that all rates are ‘just and reasonable.’”
FERC’s imposition of periodic reporting requirements on sellers with market-based rate authority, to confirm their continued lack or mitigation of market power, did not fulfill its monitoring obligation, Berzon said.
“As demonstrated by what actually happened during the California energy crisis, this sporadic data collection approach is pragmatically unlikely to expose in a timely manner the impact of market changes—in this instance, the impact on the forward market of acknowledged severe market changes within the dysfunctional spot market,” the jurist wrote.
Additionally, she said, FERC failed to consider findings by its staff that “the forward power prices negotiated during 2000-2001 in the western United States were significantly influenced by the then-current spot power prices.” The dysfunctional spot power prices at the time so influenced buyers that they placed great weight on the prices in forming future expectations, the staff reported.
FERC had considered the findings irrelevant because they did not demonstrate the rates in the forward contracts affected the public interests.
But Berzon said the findings were relevant in determining whether the Mobile-Sierra presumption and public interest standard applied in the first place. FERC’s failure to treat market evidence as relevant was fundamental error, she said.
The judge concluded:
“The local utilities’ argument is that when such market dysfunction occurs and there is no opportunity to revisit the propriety of the market-based rate authority in effect when the contract was entered, FERC cannot assume that contractual terms were just and reasonable as between the contracting parties when the agreement was negotiated. As a result, FERC cannot focus only on ‘public interest’ considerations when the rates established are thereafter challenged.”
Judges James R. Browning and Harry Pregerson concurred in the opinion.
A spokesperson for the Public Utility District of Snohomish County told the MetNews the ruling was a “solid victory” that leaves open the possibility, on remand, that energy prices could be recalculated and a refund made to the utility.
A FERC spokesperson yesterday afternoon said the agency was still reviewing the decision and could not comment.
The case is Public Utility District No. 1 of Snohomish County Washington v. Federal Energy Regulatory Commission, 03-74208.
Copyright 2006, Metropolitan News Company