1. 2/24/2019
Class 13 Network Industries, Spring, Engineering Electricity Markets
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
Copyright © Randal C. Picker. All Rights Reserved.

2. 2/24/2019
Morgan Stanley
Set Up
FERC concludes that particular markets are not subject to market power and authorizes market-based rate authority (like Diet Coke)
Contracts signed in that context
FERC later concludes that it was mistaken about the status of the markets and revokes the market-based rate authority.
February 24, 2019

3. Morgan Stanley Key Questions
2/24/2019
Morgan Stanley
Key Questions
What is the status of the contracts executed under the market-based rate authority rules?
Are they fully enforceable like ordinary contracts even though FERC was wrong about the context in which the contracts where executed?
February 24, 2019

4. Morgan Stanley Key Questions
2/24/2019
Morgan Stanley
Key Questions
Who bears the risk of a FERC mistake? The power purchaser? The power seller?
February 24, 2019

5. 2/24/2019
16 USC 824(a) [201(a)]
(a) Federal regulation of transmission and sale of electric energy
It is declared that the business of transmitting and selling electric energy for ultimate distribution to the public is affected with a public interest …
February 24, 2019

6. 16 USC 824d(a) [205(a)] (a) Just and reasonable rates
2/24/2019
16 USC 824d(a) [205(a)]
(a) Just and reasonable rates
All rates and charges made, demanded, or received by any public utility for or in connection with the transmission or sale of electric energy subject to the jurisdiction of the Commission, and all rules and regulations affecting or pertaining to such rates or charges shall be just and reasonable, and any such rate or charge that is not just and reasonable is hereby declared to be unlawful.
February 24, 2019

7. 16 USC 824d(c) [205(c)] (c) Schedules
2/24/2019
16 USC 824d(c) [205(c)]
(c) Schedules
Under such rules and regulations as the Commission may prescribe, every public utility shall file with the Commission, within such time and in such form as the Commission may designate, and shall keep open in convenient form and place for public inspection schedules showing all rates and charges for any transmission or sale subject to the jurisdiction of the Commission, and
February 24, 2019

8. 16 USC 824d(c) [205(c)] (c) Schedules
2/24/2019
16 USC 824d(c) [205(c)]
(c) Schedules
the classifications, practices, and regulations affecting such rates and charges, together with all contracts which in any manner affect or relate to such rates, charges, classifications, and services.
February 24, 2019

9. 16 USC 824d(c) [205(d)] (d) Notice required for rate changes
2/24/2019
16 USC 824d(c) [205(d)]
(d) Notice required for rate changes
Unless the Commission otherwise orders, no change shall be made by any public utility in any such rate, charge, classification, or service, or in any rule, regulation, or contract relating thereto, except after sixty days’ notice to the Commission and to the public. …
February 24, 2019

10. 16 USC 824d(c) [205(d)] (d) Notice required for rate changes
2/24/2019
16 USC 824d(c) [205(d)]
(d) Notice required for rate changes
The Commission, for good cause shown, may allow changes to take effect without requiring the sixty days’ notice herein provided for by an order specifying the changes so to be made and the time when they shall take effect and the manner in which they shall be filed and published.
February 24, 2019

11. 2/24/2019
16 USC 824e(a) [206(a)]
(a) Unjust or preferential rates, etc.; statement of reasons for changes; hearing; specification of issues
Whenever the Commission, after a hearing had upon its own motion or upon complaint, shall find that any rate, charge, or classification, demanded, observed, charged, or collected by any public utility for any transmission or sale subject to the jurisdiction of the Commission,
February 24, 2019

12. 2/24/2019
16 USC 824e(a) [206(a)]
or that any rule, regulation, practice, or contract affecting such rate, charge, or classification is unjust, unreasonable, unduly discriminatory or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice, or contract to be thereafter observed and in force, and shall fix the same by order. …
February 24, 2019

13. Rate-Setting Paths Path 1: Tariff Path 2: Contract
Either blessed expressly by FERC or allowed to go into effect
Path 2: Contract
Also can be blessed or allowed to go into effect
February 24, 2019

14. Changing Rates Path 1: Tariff Path 2: Contract
File new one, subject to timing mechanism
Path 2: Contract
Can you file a new tariff exiting from the contract?
Yes, if the contract provides for that (a so-called Memphis clause, after Memphis Light, 358 U.S. 103 (1958))
February 24, 2019

15. Changing Rates
Can you ask FERC to set aside the contract if it results in an unfair rate of return?
Yes, if you put into place the right sort of contract (with the Court citing Papago, 723 F.2d 950 (D.C. Cir. 1985) and Louisiana Power, 587 F.2d 671 (5th Cir. 1979))
February 24, 2019

16. Changing Rates
What happens if the contract is silent on the rights of the parties to ask FERC to have the contract rescinded?
Mobile-Sierra
February 24, 2019

17. Mobile-Sierra Doctrine
2/24/2019
Mobile-Sierra Doctrine
Two 1956 Sup Ct Cases
United Gas Pipe Line Co. v. Mobile Gas Serv. Corp. (Mobile), 350 U.S. 332 (1956)
Natural Gas Act case
Fed. Power Comm’n v. Sierra Pac. Power Co. (Sierra), 350 U.S. 348 (1956)
Federal Power Act case
February 24, 2019

18. Sierra and the Scope of Sec. 206
From the Opinion
“The Commission has undoubted power under § 206 (a) to prescribe a change in contract rates whenever it determines such rates to be unlawful. While this power is limited to prescribing the rate ‘to be thereafter observed’ and thus can effect no change prior to the date of the order, …
February 24, 2019

19. Sierra and the Scope of Sec. 206
From the Opinion
“the Commission's order here, if based on the necessary findings, could have been effective to prescribe the proposed rate as the rate to be in effect prospectively from the date of the order …”
February 24, 2019

20. Sierra and the Scope of Sec. 206
From the Opinion
“The condition precedent to the Commission’s exercise of its power under § 206(a) is a finding that the existing rate is ‘unjust, unreasonable, unduly discriminatory or preferential.’”
February 24, 2019

21. Sierra and the Scope of Sec. 206
From the Opinion
“In short, the Commission holds that the contract rate is unreasonable solely because it yields less than a fair return on the net invested capital. But, while it may be that the Commission may not normally impose upon a public utility a rate which would produce less than a fair return,
February 24, 2019

22. Sierra and the Scope of Sec. 206
From the Opinion
“it does not follow that the public utility may not itself agree by contract to a rate affording less than a fair return or that, if it does so, it is entitled to be relieved of its improvident bargain.”
February 24, 2019

23. Sierra and the Scope of Sec. 206
From the Opinion
“That the purpose of the power given the Commission by § 206(a) is the protection of the public interest, as distinguished from the private interests of the utilities, is evidenced by the recital in § 201 of the Act that the scheme of regulation imposed ‘is necessary in the public interest.’”
February 24, 2019

24. Sierra and the Scope of Sec. 206
From the Opinion
“When § 206(a) is read in the light of this purpose, it is clear that a contract may not be said to be either ‘unjust’ or ‘unreasonable’ simply because it is unprofitable to the public utility.”
February 24, 2019

25. Sierra and the Scope of Sec. 206
From the Opinion
“In such circumstances the sole concern of the Commission would seem to be whether the rate is so low as to adversely affect the public interest—as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory.”
February 24, 2019

26. Snohomish Contract From Process
2/24/2019
Snohomish Contract
From
Exiting spot market given volatility and high prices
Process
Asked 17 suppliers for bids for 1-3 year contracts starting with MW for 2001
Only five bids and 3 that were responsive
February 24, 2019

27. Snohomish Contract Result
2/24/2019
Snohomish Contract
Tried to buy over that time frame at price of no more than $125/MWh
Result
Couldn’t
Did 9 year deal with Morgan Stanley at $105/MWh
February 24, 2019

28. So Cal Water Contract From
2/24/2019
So Cal Water Contract
From
Had exited spot markets for series of one year contracts for 12MW, initial price $28/MWh, later price $35.50/MWh
Dynergy dropped it when it could sell all of its power to the State of California
February 24, 2019

29. So Cal Water Contract Process Result
2/24/2019
So Cal Water Contract
Process
With less than two months, ran proposal process for 15MW
Three bids submitted with different prices and different periods
Result
Signed five year contract at $95/MWh
February 24, 2019

30. The Problem Set Up FERC blessed the market-based tariff regime
2/24/2019
The Problem
Set Up
FERC blessed the market-based tariff regime
Contracts executed in that regime; never filed or approved by FERC directly
FERC later revokes the market-based tariff
February 24, 2019

31. 2/24/2019
The Problem
Where do we stand as to the contracts executed under it? Does the Mobile-Sierra presumption apply to those contracts?
The 9th Circuit said no
The Sup Ct says yes
February 24, 2019

32. Six Possible Approaches
2/24/2019
Six Possible Approaches
1. Market-Based Uber Alles
2. Immediate FERC Review or Else
3. Market Based + Mobile-Sierra
4. Ex Post Monopoly Power Assessment
5. 9th Circuit in Morgan Stanley
6. Sup Ct in Morgan Stanley
February 24, 2019

33. Six Regimes 1. Market-Based Uber Alles
2/24/2019
Six Regimes
1. Market-Based Uber Alles
Once determination is made regarding absence of market power, whatever rate that emerges is “just and reasonable”
February 24, 2019

34. Six Regimes 2. Immediate FERC Review or Else
2/24/2019
Six Regimes
2. Immediate FERC Review or Else
Under a market-based regime, if the purchaser believes that the contract terms offered reflect market power, the purchaser must go to FERC immediately and seek review
FERC reviews instantly and either blesses market-based or revokes it
February 24, 2019

35. 2/24/2019
Six Regimes
If blesses and purchaser signs, stuck with contract; if revokes, ???
February 24, 2019

36. Six Regimes 3. Market-Based + Mobile-Sierra
2/24/2019
Six Regimes
3. Market-Based + Mobile-Sierra
FERC presumes contracts entered into under market-based regime are valid, subject to review under Mobile-Sierra public interest standard
This is what ALJ and FERC did here
February 24, 2019

37. Six Regimes 4. Ex Post Monopoly Power Assessment
2/24/2019
Six Regimes
4. Ex Post Monopoly Power Assessment
Under market-based regime, unhappy party to contract can seek subsequent review of contract based on assertion that counterparty exercised market power in making the contract
If FERC finds market power, FERC can reform the contract
February 24, 2019

38. 2/24/2019
Six Regimes
Applied here?: From the 9th Circuit opinion: “But the local utilities do not allege that the energy companies manipulated their negotiations of the contracts here at issue; the local utilities challenge the context, not the conduct, of those negotiations.”
February 24, 2019

39. Six Regimes 5. 9th Circuit in Morgan Stanley
2/24/2019
Six Regimes
5. 9th Circuit in Morgan Stanley
“We conclude that FERC’s decision to treat the market-function evidence as irrelevant to the question whether Mobile-Sierra applies, and its resulting application of the Mobile-Sierra doctrine, was fundamental error. In a regulatory regime predicated on the grant of market-based rate authority, the decision whether to apply Mobile-Sierra to subsequent contracts formed under that
February 24, 2019

40. Six Regimes 5. 9th Circuit in Morgan Stanley
2/24/2019
Six Regimes
5. 9th Circuit in Morgan Stanley
“authority requires FERC and reviewing courts to determine if the contracts at issue were initially entered into in fully functioning markets. FERC’s application of the Mobile-Sierra doctrine without considering the contract formation issues was error.”
February 24, 2019

41. Six Regimes 5. 9th Circuit in Morgan Stanley
2/24/2019
Six Regimes
5. 9th Circuit in Morgan Stanley
Contract Reform under Sec. 206: Rates Paid by the Public
“FERC must give predominant weight in determining whether to modify a contract under section 206 to the impact of a challenged wholesale contract on the rates paid by the consuming public who use the energy covered by the contract.
February 24, 2019

42. Six Regimes 5. 9th Circuit in Morgan Stanley
2/24/2019
Six Regimes
5. 9th Circuit in Morgan Stanley
Contract Reform under Sec. 206: Rates Paid by the Public
“Tested against this protocol, the agency’s narrow conception of ‘public interest’ review does not suffice.”
February 24, 2019

43. Six Regimes 6. Supreme Court
2/24/2019
Six Regimes
6. Supreme Court
What does the Supreme Court do in Morgan Stanley?
Ans: “… [W]e conclude that the Commission was required under our decision in Sierra, to apply the Mobile-Sierra presumption in its evaluation of the contracts here.”
February 24, 2019

44. 2/24/2019
Six Regimes
Ans: “We hold only that FERC may abrogate a valid contract only if it harms the public interest.”
February 24, 2019

45. 2/24/2019
Latest Wrinkle
NRG Power Marketing, LLC v. Maine Public Utilities Commission (US, Jan 13, 2010)
February 24, 2019

46. 2/24/2019
Latest Wrinkle
“We therefore hold that the Mobile-Sierra presumption does not depend on the identity of the complainant who seeks FERC investigation. The presumption is not limited to challenges to contract rates brought by contracting parties. It applies, as well, to challenges initiated by third parties.”
February 24, 2019