Eventhough the Western energy crisis of 2000-2001 ended nearly 15 years ago, a FERCadministrative law judge made several key determinations April 12 in a casethat could have important broader ramifications.
Inparticular, Judge Steven Glazer foundthat the widespread outrage over the energy crisis is one of those rareinstances where modifying a bilateral contract would be in the public interest.He further concluded that ShellEnergy North America (US) LP and Iberdrola Renewables LLC should collectively pay morethan $1 billion in refunds for the power they sold to the California Departmentof Water Resources, or CDWR, under long-term contracts signed during the crisis.
Thejudge's initial decision is not final because the full commission will nowconsider his findings.
Atissue are two complaints (EL02-60, EL02-62) filed by the California PublicUtilities Commission and the California Electricity Oversight Board concerningmore than 30 contracts the CDWR signed with numerous energy and capacitysuppliers during the height of the crisis.
TheCDWR was tasked in 2001 by the state of California with purchasing the electricpower needed to make up the shortfall that arose in the state when its threelarge investor-owned utilities no longer had the financial viability topurchase all of the electricity needed to meet their customers' needs.
Accordingto the complainants, the dysfunctional spot power market that was in place atthat time left the CDWR little choice but to sign bilateral power deals atprices far higher than what they would have paid had the markets been fullycompetitive. Based on their assertion that market power tainted the prices andconditions of the deals, the complainants asked FERC to abrogate or reform thecontracts.
Thematter has been in litigation ever since the complaints were filed in 2002.Initially, a divided FERC in June 2003 rejected both complaints along withseveral similar disputes, finding that the Mobile-Sierra's public intereststandard for contract modifications had not been met concerning the contractsat issue. However, after several court appeals and a decision by the U.S.Supreme Court, the U.S. Court of Appeals for the 9th Circuit in December 2008remanded the case to the commission for further proceedings.
Nearlysix years later, FERC in November 2014 acted on that remand and a trial-type,evidentiary hearing before an administrative law judge to supplement theexisting record in the two consolidated cases. In the meantime, all the sellersthat had been targeted in the case agreed to settlements except for ShellEnergy and Iberdrola.
Thecommission specifically wanted a judge to consider whether the contracts atissue imposed an excessive burden on consumers "down the line,"relative to the rates they could have obtained after elimination of thedysfunctional spot market, and whether any of the sellers engaged in unlawfulactivities in the spot market that affected any of the contracts at issue.
FERCalso wanted the judge to determine whether the commission was correct inreasoning that the CPUC's complaint regarding the CDWR's contract withIberdrola should be dismissed because the rate was negotiated after thecommission's West-wide price mitigation went into effect on June 20, 2001, andwas well below the West-wide mitigation cap of $91.87/MWh.
Addressingthe second question first, Glazer said the answer turns on whether thedysfunctional spot market during the crisis affected the negotiations for thecontract between the CDWR and Iberdrola. In doing so, he noted that the SupremeCourt in a related caseinvolving Morgan Stanley said market dysfunctions could have driven prices sohigh during the energy crisis that consumers still paid more under the CDWRforward contracts than they otherwise would have paid.
Giventhat the CDWR-Iberdrola $70/MWh contract price was below the West-widemitigation cap price of $91.87/MWh but still well above the $32/MWh to $34/MWhaverage spot market prices before and after the crisis, the judge determinedthat the crisis impacted the price the CDWR agreed to pay Iberdrola for power.Thus, he said Iberdrola should have not been dismissed from the case.
Thejudge next turned to the larger question of whether the Mobile-Sierra doctrine— which forbids the commission from abrogating a bilateral power contractunless doing so is in the "public interest," a burden some havedeemed to be "practically insurmountable" — applies to the bilateralcontracts at issue.
Glazerfound the answer to be no because the unlawful activities that affected spotmarket prices during the crisis also impacted the CDWR's long-term contractnegotiations. In particular, he recalled that spot market prices in Californiaduring the crisis averaged $201/MWh. The average wholesale price in the spotmarket in January 2001 reached $320/MWh, with prices in on-peak hoursfrequently exceeding $400/MWh and at times exceeding $1,000/MWh.
Moreover,the judge noted that several companies, including Shell Energy, engaged inEnron-type manipulative activities during the crisis that led to the excessiveprices and violated several provisions of the 's tariff, includingthose outlining the appropriate market behavior for participants in theorganized auction market.
Citingthe conclusions of four different analyses of how spot prices impactedlong-term prices, Glazer further determined that dysfunctional spot pricesduring the crisis influenced forward prices for deliveries occurring up to twoyears after that period. "The dysfunctional spot prices undoubtedly amplifiedthe perceived risk for market participants setting forward prices during thecrisis," Glazer said.
Thejudge also concluded that the Western crisis "was a unique and anomalousevent — indeed, an 'extraordinary circumstance' that should impel avoidance"of the Mobile-Sierra presumption that the bilateral forward contracts were justand reasonable.
Whilethe contracts at issue had a very small impact on ratepayers, "it would beunfaithful to the public interest against price manipulation to excuse thedefrauding of millions of people simply by saying that the perpetrator stoleonly a few cents from everybody," the judge said. Moreover, Glazer notedthat the energy crisis generated a huge public outrage and forced consumers toendure many hardships, including high electric bills and rolling blackouts.
Glazeralso recalled that the Supreme Court made clear that avoiding or overcoming theMobile-Sierra presumption occurs only in "extraordinary circumstances"involving "unequivocal public necessity" where the contract "seriouslyharms" the public interest or imposes "an excessive burden onconsumers."
"Remarkably,it is an undisputed fact among all parties that the crisis was unprecedented inthe modern history of the U.S. electric industry in terms of its severity,duration, and consumer impacts," the judge said. "This finding offact alone suffices to dispose" of the Mobile-Sierra presumption in thiscase.
Thatsaid, the judge suggested that he is not taking his decision lightly, citingthe need to maintain the sanctity of contracts. However, noting the publicoutrage over the crisis, Glazer said "it is that public outrage … that the[Federal Power Act] empowers the commission to embody in formulating a justremedy for the extraordinary circumstances presented here." He also saidthat the public outrage "is precisely why the contracts at issue are notentitled to the Mobile-Sierra-Morgan Stanley presumption of justness andreasonableness."
"Asmuch as the facts show that both CDWR and Shell had at their command armies ofadvisors and consultants to assist them in arranging these long term contracts,it would be too kind to call either of them 'sophisticated parties whoweathered market turmoil,' to use the late Justice Scalia's words," thejudge added. "Neither the state nor the respondents come to this forumwith clean hands. They may have had a lot of sophisticated advice and counsel,but in the end they faced an emergency that they had never seen before andcould not cope with. As a result, the public was clearly, palpably, seriouslyharmed. … Hence, these contracts do not deserve a cloak of sanctity justbecause they are contracts."
CitingFERC's duty to "vindicate the public interest," Glazer determinedthat the complainants proved that the Shell contract imposed an excessiveburden on consumers "down the line" in the nominal-dollar amount of$384.8 million ($779 million when FERC interest to May 2015 is included, plusadditional FERC interest from May 2015 to date). The judge further determinedthat the Iberdrola contract imposed an excessive burden on consumers "downthe line" in the nominal-dollar amount of $258.7 million ($371 millionwhen FERC interest to May 2015 is included, plus additional FERC interest fromMay 2015 to date).
ShellEnergy is a subsidiary of RoyalDutch Shell plc, and Iberdrola is a subsidiary of .