Opinion ID: 3040019
Heading Depth: 3
Heading Rank: 2

Heading: Contracts at Issue Here

Text: This consolidated appeal involves three separate sets of contracts, all of which were made pursuant to the Western Systems Power Pool Agreement (Power Pool Agreement), an umbrella agreement that established standardized terms for wholesale energy transactions. All the utilities involved in this case are signatories to that agreement.
In response to the extreme spike of spot market prices (reaching as high as $3,300/MWh) during December 2000, Snohomish, a public utility for Snohomish County in WashPUBLIC UTILITY DISTRICT v. FERC 19571 ington, determined that it was no longer viable to rely on the spot markets. On December 22, 2000, Snohomish issued a request for proposals to 17 power suppliers, seeking bids for one-to-three year contracts, providing a total of approximately 75-100 megawatts of electricity for 2001. Snohomish received five bids, but two were unresponsive to Snohomish’s needs. Of the three responsive bids, no supplier would offer more than 25 MW, so Snohomish accepted all three bids and negotiated contracts with each supplier.15 That year, Snohomish’s Board of Commissioners had previously approved an unprecedented thirty-five percent increase in retail rates, allowing for an average contract price of $125/ MWh. Unfortunately, none of the three offers would allow Snohomish to meet this price, and Snohomish chose not to ask its ratepayers for another double-digit rate increase in the same year. Consequently, Snohomish asked Morgan Stanley — an electrical energy commodities dealer — what term would be necessary to secure a $100/MWh price for its contract; Morgan Stanley demanded a ten-year term. The parties ultimately agreed to a nine-year term at $105/MWh. Additionally, Morgan Stanley required Snohomish to accept credit terms articulated in a contractual provision termed the “Collateral Annex.”16 Snohomish claims that it suffered losses between January 2001 and March 2002 in excess of $25.7 million and that those losses will escalate over the term of the contract as market rates remain close to traditional levels. FERC specifically 15 One of the three contracts, signed with Enron Corporation, was terminated in November 2001, as Enron’s credit deteriorated. Snohomish sought reform of the other contract, with American Electric Power, and the parties settled that case. The remaining contract, here at issue, is with Morgan Stanley Capital Group (“Morgan Stanley”). 16 Among other requirements, the “Collateral Annex” required Snohomish to post, on two days notice, specified collateral. This requirement has required Snohomish to post as much as $101 million in collateral. 19572 PUBLIC UTILITY DISTRICT v. FERC found that the Morgan Stanley contracts accounted for an eight percent increase for retail ratepayers over 2001 rates, and other contracts accounted for a fifty-one percent increase. Nev. Power Co. (November 10 Order), 105 F.E.R.C. ¶ 61,185, at ¶ 61,986 (Nov. 10, 2003). Snohomish here challenges the term of the contract and the imposition of the Collateral Annex.
Southern Cal Water owns and operates an electric utility distribution system that serves approximately 21,600 customers in San Bernadino County, California. Southern Cal Water purchases, subject to regulation by the California Public Utilities Commission, an average electric load of about 16.3 MW. The A.B. 1890 requirements that investor-owned utilities purchase in the spot market did not apply to Southern Cal Water, which owned no transmission lines and generated no electricity. To avoid relying entirely on the spot markets, which it viewed as significantly risky, Southern Cal Water executed a one-year contract with Illinova in April 1999, providing for purchase of 12 MW of uninterruptible around-theclock energy at a price of $28/MWh. One year later, Southern Cal Water renewed the contract with Dynegy (Illinova’s successor), to run from May 1, 2000, to May 1, 2001, for the same load, at the increased price of $35.50/MWh. California enacted A.B. 1 on February 1, 2001, allowing the California Department of Water Resources to purchase energy for the then-collapsing large investor-owned utilities and power suppliers. See Act of Feb. 1, 2001, 2001 Cal. Legis. Serv. 1st Ex. Sess. 4 (West). At that point, Dynegy informed Southern Cal Water that it was not interested in renewing its contract with Southern Cal Water, because it could sell its entire generation output to the State of California. With the present contract expiring at the end of April PUBLIC UTILITY DISTRICT v. FERC 19573 2001, Southern Cal Water engaged in a hurried bidding process.17 On March 7, 2001, Southern Cal Water issued a request for proposals for 15 MW of power to six power companies operating in California and requested bids by March 14, 2001. The company requested bids of one to seven years, without specifying a preferred or maximum price. The three bids submitted ranged from $194.50/MWh for a one-year contract to $84/ MWh for a seven-year contract. After receiving firm offers at higher prices, Southern Cal Water accepted Mirant’s offer of $95/MWh for five years, as the offer that best balanced price against contract length. In light of this increase in Southern Cal Water’s wholesale electricity costs, the California Public Utilities Commission allowed the company to recover a portion of the costs of the contract, resulting in a weighted average retail rate of $77/MWh. Southern Cal Water maintains that its ratepayers have seen an overall thirty-eight percent increase in their electric bills. FERC found that there was no rate increase for Southern Cal Water’s ratepayers who are permanent residents, and that the other group of Southern Cal Water ratepayers, those with second homes in certain areas, paid an average monthly electric bill of only $35.13. Order on Rehearing, 105 F.E.R.C. at ¶ 61,986. 17 Noting that, in October 2000, Southern Cal Water rejected an offer by Dynegy to extend its contract on a “blend and extend” basis of between $46.50/MWh to $54.50/MWh depending on the length of the proposed contract, Order on Rehearing, 105 F.E.R.C. at ¶ 61,988 (internal quotation marks omitted), FERC found that Southern Cal Water chose to wait until March 2001 to solicit bids. This statement is misleading. Southern Cal Water could only have become aware that Dynegy would not renew its contract on any terms because of the disincentive to doing so created by A.B. 1 after that law was passed, which was in February of 2001. As noted above, it was Dynegy’s pullout that induced Southern Cal Water’s frenzied bidding process. 19574 PUBLIC UTILITY DISTRICT v. FERC
Sierra Pacific The challenge brought by Nevada Power and Sierra Pacific seeks to modify over two hundred forward market contracts with various energy sellers for supply of 25-100 MW blocks of power.18 These contracts range in price from $33/MWh to $290/MWh, and were entered into in 2000-2001 with ten energy companies. FERC found that these contracts were standard products arranged through independent third-party brokers, and concluded that Nevada Power and Sierra Pacific were price-takers, meaning that those utilities took the price the market yielded rather than bargaining or demanding a certain price. Nev. Power Co. (June 26 Order), 103 F.E.R.C. ¶ 61,353, at ¶ 62,398 (June 26, 2003). According to FERC, the Nevada companies did not pursue purchase of a diverse mix of products and therefore failed to hedge the risk that spot market prices might fall. Id. FERC also found that the Nevada companies pursued an aggressive procurement strategy, purchasing more power than necessary to serve the expected load of their local customers. Id. FERC suggests that the Nevada companies were trying to buy as much power as they could before sellers discovered their precarious financial situation. Id. FERC found that if these contracts are not modified, the resulting increase to ratepayers would be no more than five percent. Id. ¶ 62,397. The Nevada companies recognize that the retail rates have decreased since they agreed to the challenged contracts, but they maintain that Nevada customers will still pay significantly more than they would pay if the contracts were modified to reflect just and reasonable rates. Order on Rehearing, 105 F.E.R.C. at ¶ 61,986. Nevada Power 18 The Nevada companies recently settled their disputes with Morgan Stanley, El Paso Merchant Energy, and Enron Power Marketing. These settlements have no bearing on the legal issues we address. PUBLIC UTILITY DISTRICT v. FERC 19575 and Sierra Pacific therefore seek to modify their contracts with the energy sellers. Nev. Power Co. (April 11 Order), 99 F.E.R.C. ¶ 61,047, at ¶ 61,185 (Apr. 11, 2002). Nevada Power is seeking relief for contracts that had not yet gone to delivery at the refund effective dates set by FERC (between late January and April of 2002, depending on docket number).19 Id. ¶¶ 61,185, 61,192. 19 Upon setting a section 206 complaint for hearing, FERC establishes a “refund effective date,” which is a date establishing the period from which complainants may attain relief should the proceedings extend beyond that established date. In other words, if a party makes a complaint on January 1, 2004, but FERC does not set the complaint for hearing until July 1, 2004, FERC may establish a “refund effective date” of March 1, 2004, so that the complainant will not suffer from the agency’s delay or from continued agency proceedings. PUBLIC UTILITY DISTRICT v. FERC 19577 Volume 2 of 2 19580 PUBLIC UTILITY DISTRICT v. FERC