Appendix — Semopora Generation Generation v. Public Public Utilities Utilities Commission Commission Commission of California (Nos. 06-1454, 06-1468)

061454 MAY 3 - 2007

No. OFFICE OF THE CLERK

IN THE

Supreme Court of the Anited States

SEMPRA GENERATION ETAL.,

PETITIONERS,

———-——— - “= — Vv a a

PUBLIC UTILITIES COMMISSION OF THE STATE OF

CALIFORNIA ET AL.,

RESPONDENTS.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

APPENDIX TO PETITION FOR A WRIT OF

CERTIORARI

JEFFREY D. WATKISS RICHARD P. BRESS

BRACEWELL & GIULIANI Counsel of Record

LLP MICHAELJ. GERGEN

200 K STREET, NW STEPHANIE S. LIM

SUITE 500 BARRY J. BLONIEN

WASHINGTON, DC 20006 LATHAM & WATKINS LLP

(202) 828-585 1 555 11" STREET, N.W.

Attorney for Petitioner SUITE 1000

Coral Power, L.L.C. WASHINGTON, DC 20004

(202) 637-2200

Attorneys for Petitioner

Sempra Generation

JAMES N. WESTWOOD

STOEL RIVES LLP

900 SW FIFTH AVENUE

Surrr 2600

PORTLAND, OR 97204

(503) 294-9187

Attorney for Petitioner

PPM Energy, Inc.

aa ’

TABLE OF CONTENTS

Public Utilities Commission of California v. FERC,

Se ee Ce GA Bd eesnniccesinsinnreseerisecsesntatnccncsavicnes la

Public Utilities Commission of California v. Sellers

of Long Term Contracts to the California

Department of Water Resources,

99 FERC 4 61,087 (Apr. 25, 2002) ........cccccecccoscsscccosceesees 16a

Public Utilities Commission of California v. Sellers

of Long Term Contracts to the California

Department of Water Resources,

100 FERC 4 61,098 (July 23, 2002)... ecscccsesseesteeees 49a

Public Utilities Commission of California v. Sellers

of Long Term Contracts to the California

Department of Water Resources,

102 FERC 4 63,013 (Jan. 16, 2008) .............ccccccceseeseeees 66a

Public Utilities Commission of California v. Sellers

of Long Term Contracts to the California

Department of Water Resources,

103 FERC 4 61,354 (June 26, 2008) ........ccccecccseeeseeseenenee 9la

Public Utilities Commission of California v. Sellers

of Long Term Contracts to the California

Department of Water Resources,

105 FERC 4 61,182 (Nov. 10, 2008) .........ccccccceceeseeseees 215a

Public Utility District No. 1 of Snohomish County v.

FERC,

Be I AP IID ct cnarecctensstsninsacosansniesnicinniocien 268a

Statutory Provisions

SRE eee er Me Re ce 330a

I a I od si sania an shina nnensennnslienieneanibianinin 334a

iia

TABLE OF CONTENTS—Continued

Page

Be Ee i co soacicccdinotscuipsttiosnicoudhsecsamenniicn cece 339a

Pe I iiss its ineides Sovichescestncostioreainsannsci.oscge 344a

16 U.S.C. § 8251

la

~ UNITEDSTATES COURT OF APPEALS

NINTH CIRCUIT

PUBLIC UTILITIES COMMISSION OF the STATE OF

CALIFORNIA; California Electric

ebideaher Board, Petitioners,

‘Pacific ‘eas and Electric cnanasiie Meanie Bivieny

Company; Southern California Edison Co. (“Edison”);

Department of Water and Power of the City of Los Angeles,

Public Service Department of the City of Burbank, Public

Service Department of the City of Glendale, and Water and

Power Department of the City of Pasadena (Collectively

“LADWYP, et al.”); Sempra Energy; Mirant Americas

Energy Marketing, L.P.; Coral Power; PPM Energy;

Public Utility District No. 1 of Snohomish County,

Washington; Dynegy Power Marketing Inc., Intervenors,

V.

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent.

California Electric Oversight Board; California Public

Utilities Commission, Petitioners,

Nevada Power Company; Southern California Edison Co.

(“Edison”); Department of Water and Power of the City of

Los Angeles, Public Service Department of the City of

Burbank, Public Service Department of the City of

Glendale, and Water and Power Department of the City of

Pasadena (Collectively “LADWP, et al.”); Sempra Energy;

Mirant Americas Energy Marketing, L.P.; PPM Energy;

Public Utility District No. 1 of Snohomish County,

Washington; Dynegy Power Marketing Inc., Intervenors,

ws

Federal Energy Regulatory Commission, Respondent.

2a

Nos. 03-74207, 03-74246.

Argued and Submitted Dec. 8, 2004.

Filed Dec. 19, 2006.

Before BROWNING, PREGERSON, and BERZON,

Circuit Judges.

BERZON, Circuit Judge.

As in Public Utility District No. 1 v. FERC (“PUD “),

Nos. 03-72511, et al. (9th Cir. Dec. __, 2006), a related case

also decided today, the petitioners—here, the California

Public Utilities Commission (“PUC”) and the California

Electric Oversight Board (“CEOB”) (collectively, “Public

Utilities Commission”)—challenge the statutory validity of

electric power rates in certain wholesale power contracts.

Again as in PUD, that challenge hinges on whether the

Federal Energy Regulatory Commission (“FERC”) was

correct to apply the Mobile-Sierra! “public interest”

doctrine or whether in doing so it failed to meet its statutory

obligation to provide “just and reasonable” review. See 16

U.S.C. § 824e(a).

In PUD, we explained that Mobdile-Sierra represents a

presumption “that private parties to a wholesale electric

power contract have negotiated a ‘just and reasonable’

contract over a designated period of time, lawful under the

FPA throughout that period.” PUD, Slip Op. at 19554.

That presumption, however, “can be rebutted by

1 This shorthand takes its name from two Supreme Court cases decided

on the same day: United Gas Pipe Line Co. v. Mobile Gas Service Corp.

(Mobile ), 350 U.S. 332, 76 S.Ct. 373, 100 L.Ed. 373 (1956), and Federal

Power Commission v. Sierra Pacific Power Co. (Sierra ), 350 U.S. 348, 76

S.Ct. 368, 100 L.Ed. 388 (1956).

3a

establishing that the contract adversely affects the public

interest.” Jd., Slip Op. at 19554. We concluded that, to

establish the Mobile-Sierra presumption, “three

prerequisites are necessary: (1) the contract by its own

terms must not preclude the limited Mobile-Sierra review;

(2) the regulatory scheme in which the contracts are formed

must provide FERC with an opportunity for effective,

timely review—of-the contracted rates; and (3)-where,as-

here, FERC is relying on a market-based rate-setting

system to produce just and reasonable rates, this review

must permit consideration of all factors relevant to the

propriety of the contract’s formation.” Jd., Slip Op. at

19555-56. In PUD we found two of these prerequisites

lacking and remanded to FERC for it to consider the

propriety of applying the Mobdile-Sierra mode of review to

the contracts at issue. We held, in the alternative, that even

if Mobile-Sierra properly applied, FERC’s “finding that the

challenged contracts do not affect the public interest was

based on a substantively erroneous mode of analysis.” Id.,

Slip Op. at 19549.

Applying PUD to the challenged contracts in this case,

we grant the petition to review and remand to the agency to

apply the modes of review outlined in PUD.

I.

Much of the relevant background to this case is

described in PUD. See id., Slip Op. at 19567-8383. We

therefore will summarize only those facts relevant to the

present case.

A. California Energy Crisis

California responded to the energy crisis outlined in

PUD in several ways, although not until after “rolling

blackout” became a household phrase and several of

California’s largest utilities bordered on_ insolvency.

Governor Gray Davis declared a state of emergency on

January 17, 2001, and ordered the California Department of

Water Resources (“CDWR”) to purchase forward power “as

expeditiously as possible.” On February 1, 2001, the

4a

California Legislature passed Assembly Bill 1 of the 2001-

2002 First Extraordinary Session (“AB1X”), which

authorized CDWR to purchase power through the end of

December 31, 2002.

Between February 6 and August 23, 2001, CDWR

executed 57 forward contracts with 28 suppliers. Some of

these contracts explicitly called for applying the relatively

stringent Mobile-Sierra “public interest” test, rather than

the relatively relaxed “just and reasonable” test to judge

the rates included in the contracts. Other contracts were

silent regarding the test to apply. The 57 contracts include

32 agreements with the intervenor-respondents in this

case:2

e Coral Power, for prices from $169 to $249/MWh, for

delivery in 2001 and 2002;

e Dynegy Power Marketing, Inc., for $119.50/MWh, for

delivery from January 1, 2002 through December 31,

2004;

e Mirant Americas Energy Marketing, for

$148.65/MWh, for delivery between June 1, 2001 and

December 31, 2002;

e PacifiCorp (“PPM”), for $70/MWh, for delivery

between July 29, 2001 and June 30, 2002; and

e Sempra Energy Resou.*es, for $189/MWh, for

delivery between June 1, 2001 and September 30, 2001.

Under AB1X, the people of California must pay the cost

of these contracts through their electricity rates. See CAL.

WATER CODE § 80104 (West) (“Upon the delivery of power

to them, the retail end use customers shall be deemed to

have purchased that power from the department. Payment

for any sale shall be a direct obligation of the retail end use

customer to the department.”). Raymond Hart, who

testified for the Public Utilities Commission, described this

statutory provision as ensuring that costs of CDWR

contracts would “be passed on to the retail end-users of the

2 These energy companies are all intervenors on behalf of FE.RC in this

case.

RTE NE STN AE gts 3. ha Oa Nt a ICN Se ty ‘ eas ie “2

5a

10Us_ [investor-owned utilities) through their retail

electricity rates.” In other words, CDWR passed the costs

of the power it purchased to local utilities—such as Pacific

Gas and Electric—which, in turn, passed it on to California

consumers. FERC questions whether the challenged

contracts call for rates above long-run competitive prices,

Pub. Utils. Comm’n v. Sellers of Long Term Contracts, 103

F.E.R.C. 4 61,354, at 9 62,415 (2003), but does not contest

that the cost of those contracts is passed on to California

consumers.

On June 19, 2001, FERC issued a price mitigation order

for spot markets regarding several western states, which

went into effect the following day. Subsequently, prices

generally returned to pre-crisis levels in both spot and

forward markets, completing a downward cycle that had

begun about a month prior to the June 19 Order.

B. Procedural Background

On February 25, 2002, PUC filed complaints under

section 206(a) of the Federal Power Act,? 16 U.S.C.

§ 824e(a), seeking modification of all power contracts signed

by CDWR in 2001.4 The only contracts at issue on this

appeal are those listed above, which PUC alleges

3 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, or that

any rule, regulation, practice, or contract affect 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.

16 U.S.C. § 824e(a) (emphases added).

4 Much of the parties’ disagreement hinges on whether the identity of

the parties—state agencies other than those that entered into the

challenged agreements—affects the application of Mobile-Sierra to those

agreements. As we decide, applying PUD, that FERC erred for other

reasons by applying Mobile-Sierra, we need not reach the question of the

impact of the parties’ identity.

BE Lee EE OR EM Se te Mae ETT EOE Sie NAMIE Ot RT ite ME RDN: MERIT PERLE WON CL ee Pe

6a

overcharge CDWR and California consumers by a total of

$1.4 billion. In the process of adjudicating and ultimately

denying these complaints, FERC issued a series of orders:

On April 25, 2002, FERC ordered a hearing to determine

“whether the dysfunctional California spot markets

adversely affected the long-term bilateral markets, and, if

so, whether modification of any individual contract at issue

[was] warranted.” Pub. Utils. Comm’n v. Sellers of Long

Term Contracts, 99 F.E.R.C. § 61,087, at 9 61,384 (2002)

(footnote omitted). FERC announced that it would review

all contracts explicitly calling for “public interest” review

under Mobile-Sierra,® while setting for hearing the question

of whether it would also apply that standard to contracts

that were silent on the issue® Jd. 961,283. FERC

dismissed the complaints with regard to all contracts

executed on or after June 20, 2001, the date its final price

mitigation order went into effect, including the CDWR

contract with PPM, which had been negotiated before but

signed after that date. Finally, the April 25 order held that

19625 both the PUC and CEOB “ ‘stepped into the shoes’ of

CDWR,” which is not a party in this case, because they are

all state agencies. Jd. | 61,382. Accordingly, the petitioners

would both be treated as if they were the same entity as

CDWR. Id.

Before the Administrative Law Judge (“ALJ”), PUC

sought discovery regarding the sellers’ ability to exercise

market power in the spot markets. The ALJ denied this

request, reasoning that “the hearing order in this case takes

as a given the proposition that the California spot markets

were dysfunctional.” Additionally, the ALJ excluded some

evidence, in the form of testimony by PUC’s expert

witnesses, that related to the sellers’ market power in the

forward markets.

® These included the Coral and Mirant contracts.

6 These included the Dynergy, Sempra, and PPM contracts.

7a

At the conclusion of the ALJ’s hearing, FERC created a

two-track process. For contracts that had explicit

provisions calling for the “public interest” test, FERC

instructed the ALJ not to rule on those cases and instead to

certify the record directly to the Commission. For the other

contracts, the ALJ was directed to decide only whether the

parties intended the public interest test to apply. Pub.

Utils. Comm’n v. Sellers of Long Term Contracts, 101

F.E.R.C. ¢ 61,293, at 4 62,173 (2002).

On February 10, 2008, FERC, on remand from this

court, Pub. Utils. Comm’n of Cal. v. FERC, Order of

August 21, 2002, (9th Cir. Docket Nos. 01-71051, et al.),

issued an order in a separate case relating to spot market

manipulation, permitting discovery for over 100 days

regarding such manipulation and requiring parties in that

case to provide an index of discovered material “for each

other pending or proposed proceeding” where the parties so

request. San Diego Gas & Elec. Co. v. Sellers of Energy &

Ancillary Servs., 102 F.E.R.C. ¥ 61,164, at 9 61,446 (2003).

Through this “100 Days Proceeding,” PUC discovered

additional evidence regarding sellers’ spot market

manipulation.

On March 26, 2003, FERC staff issued its “Final Report

on Price Manipulation it: Western Markets.” STAFF OF THE

FEDERAL ENERGY REGULATORY COMMISSION, FINAL

REPORT ON PRICE MANIPULATION IN W © 3 FERN MARKETS:

FACT-FINDING INVESTIGATION OF POTENTIAL

MANIPULATION OF ELECTRIC AND NATURAL GAS PRICES

(“Staff Report”) (2003), available at http://www-ferc.gov/

legal/maj-ord-reg/land-docs/PA RT-1I-3-26-03.pdf (Staff

Report). The Staff Report concluded that the spot market

dysfunction had “significant” adverse effects on the forward

markets. Jd. at V-12.

FERC issued an initial decision on June 26, 2003,

rejecting all of PUC’s claims. Pub. Utils. Comm’n, 103

F.E.R.C. $61,354 (2008). Most importantly, FERC

concluded that the “public interest” test would apply to all

contracts at issue, upholding the ALJ’s opinion that parties

8a

to all contracts intended to trigger that test. Jd. | 62,409.

Accordingly, evidence regarding the spot markets’ adverse

effect on forward markets—the very issue FERC initially

deemed to be the purpose of the hearings—was deemed not

“relevant,” as the “just and reasonable” test did not apply.

Id. | 62,415. “Under the ‘public interest’ standard, to justify

contract modification it is not enough to show that forward

prices became unjust and unreasonable due to the impact of

spot market dysfunctions; it must be shown that the rates,

terms and conditions are contrary to the public interest.”?

Id. Further, FERC concluded that PUC failed to satisfy

any of the three prongs of the public interest test

established by Supreme Court precedent (described below)

or “any other factor” that might go to public interest. Jd.

FERC found “no credible record evidence that the contracts

at issue are placing Complainants in financial distress.” Jd.

FERC based this conclusion on a comparison of CDWR’s

goal of “a portfolio that yielded a weighted average price no

higher than $70/MWh” with its actual portfolio, 19627 which

averaged a price of $84/MWh for 2001-2005. Ia.

Commissioner Massey dissented, calling application of the

“public interest” test inappropriate. Commissioner Massey

also concluded that PUC proved a strong “nexus between

the California spot market and the forward contract

market,” and that PUC met both the just and reasonable

and public interest standards for contract reformation. /d.

94 62,448-49 (Massey, Comm’r, dissenting).

FERC denied rehearing on November 10, 2003. Pub.

Utils.Comm’n v. Sellers of Long Term Contracts, 105

F.E.R.C. § 61,182 ¢ 2003). One week later, PUC and CEOB

filed petitions for review with this court.

7 This language appears verbatim in FERC’s PUD orders. See Nev.

Power Co. v. Enron Power Mktg., Inc., 103 F.E.R.C. 4 61,353, at 4 61,397

(2003).

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9a

C. Standard of Review

We review FERC’s legal decisions de novo. Am. Rivers

v. FERC, 201 F.3d 1186, 1194 (9th Cir.1999). “Our review of

a FERC decision is limited to whether the decision was

arbitrary, capricious, an abuse of discretion, unsupported by

substantial evidence, or not in accordance with the law.”

Cal. Dep’t of Water Res. v. FERC, 341 F.3d 906, 910 (9th

Cir.2003); see also 5 U.S.C. § 706(2)(A). The court reviews

factual findings for substantial evidence, 16 U.S.C. § 825) (b),

and will uphold them so long as the agency considered all

relevant factors and did not make a clear error of judgment,

Cal. Dep’t of Water Res., 341 F.3d at 906. When an agency

makes an informed choice to rely on one expert opinion

among competing expert opinions, the agency is entitled to

deference. Bear Lake Watch, Inc. v. FERC, 324 F.3d 1071,

1076-77 (9th Cir.2003). FERC “is not obligated to justify

deviations from an approach suggested by its own staff’

unless “the conceptual underpinnings of the staff's approach

[are] critical to a reasoned resolution of the problem”; in

such cases FERC must address staff recommendations.

Pub. Utils. Comm’n v. FERC, 817 F.2d 858, 862

(D.C.Cir.1987).

II.

Application of Mobile-Sierra

We hold in PUD, decided today, that FERC may apply

the Mobile-Sierra “public interest” mode of review only if

three conditions are present: “(1) the contract by its own

terms must not preclude the limited Mobile-Sierra review;

(2) the regulatory scheme in which the contracts are formed

must provide FERC with an opportunity for effective,

timely review of the contracted rates; and (3) where, as

here, FERC is relying on a market-based rate-setting

system to produce just and reasoneble rates, this review

must permit consideration of all factors relevant to the

propriety of the contract’s formation.” PUD, Slip Op. at

19555-56. Here, it is undisputed that the contracts at issue

either explicitly call for Mobile-Sierra review or do not

ee a de

10a

preclude it. Cf PUD, Slip Op. at 19589-93. Thus, resolution

of the present case turns on whether the second two Mobile-

Sierra prerequisites were met, permitting FERC to rely on

the doctrine’s presumption of just and reasonable rates.

‘1, Timely and Effective Review of Rates

In PUD, we hold “that although market-based rate

authority can qualify as sufficient prior review to justify

limited Mobile-Sierra review, it can only do so when

accompanied by effective oversight permitting timely

reconsideration of market-based authorization if market

conditions change.” /d., Slip Op. at 19593. Here, as in PUD,

“the fatal flaw in FERC’s approach to ‘oversight’ is that it

precludes timely consideration of sudden market changes

and offers no protection to purchasers victimized by the

abuses of sellers or dysfunctional market conditions that

FERC itself only notices in hindsight.” /d., Slip Op. at

19603.

Energy company intervenors and amici argue here, as

FERC did in PUD, that petitioners or CDWR should have

challenged the sellers’ market-based rate authority before

entering into the forward contracts, rather than agree to

and subsequently challenge the contracts. This argument

fails for the same reasons it failed in PUD. See id., Slip Op.

at 19601-02 (“Any such challenge, even if successful, could

not have been a basis for reforming the challenged

contracts ....’’).

Dynegy raises an argument unique to its contract, which

it did file with FERC, effective March 6, 2001, and which

FERC opened to the public for comments.8 Dynegy Power

Mktg., Inc., 95 F.E.R.C. 4 61,371 (2001). Dynegy asserts

that PUC had an opportunity, during the public comment

8 Dynegy’s argument on this point refers only to the prior review

prerequisite to application of Mobile-Sierra. Even if its argument

succeeded on this point, it would not be sufficient to overcome the other

portions of our opinion which provide independent reasons for granting

PUC’s petition for review.

lla

period, to raise a substantive challenge to this contract but

declined to do so.

Nothing about this circumstance, however, justifies a

contrary result from that reached with regard to all the

other contracts. FERC explicitly noted that accepting the

filing of the Dynegy contract did “not constitute approval of

any ... rate ...; and such action is without prejudice to any

findings or orders which ... may hereafter be made by the

Commission in any proceeding now pending or hereafter

instituted by or against Dynegy.” Jd. { 62,401. FERC,

therefore, did not give prior approval to the Dynegy

contract any more than it did for any of the other contracts

challenged here. Further, any challenge to the contract at

the time FERC sought public comments would have been

hampered by limited information: At the time Dynegy filed

its contract, the full scale of spot market manipulation and

forward market dysfunction was not nearly as fully known

as it is today.

For these reasons, we hold here that FERC “cannot use

[its] choice [of regulatory regime] to excuse its duty to

maintain effective oversight [of rates] and then invoke

Mobile-Sierra as a ground for precluding ordinary rate

review, including review of the propriety of market-based

rate authority at the time the contracts became effective.”

PUD, Slip Op. at 19603.

2. Meaningful Review of Contract Formation

Even if the agency had not committed “(t)his

fundamental procedural error[,] ... FERC’s substantive

adherence to Mobile-Sierra without regard to the market

conditions in which the contracts at issue were formed” was

error. Id., Slip Op. at 19604. In particular, FERC refused to

consider evidence of forward market dysfunction caused by

the spot market, asserting that such evidence was not

“relevant” unless the “just and reasonable” test applied.

Pub. Utils. Comm’n, 103 F.E.R.C. at 9 62,415. Because

“Mobile-Sierra cannot apply without a determination that

the challenged contract was initially formed free from the

12a

influence of improper factors, such as market manipulation,

the leverage of market power, or an otherwise dysfunctional

market,” PUD, Slip Op. at 19604, FERC’s reliance on the

“public interest” mode of review here was improper.

As in PUD, FERC failed to respond to the Staff Report.

See PUD, Slip Op. at 19604-06. Rather than consider its

discussion of the dysfunction in the forward market, FERC

treated the Staff Report’s conclusions as only relevant if it

was first determined that just and reasonable review is

applicable, the same way it treated other evidence of market

dysfunction. Pub. Utils. Comm’n, 103 F.E.R.C. at 4 62,415

& n.38. This was error. See PUD, Slip Op. at 19606 (“[TJhe

questions raised by the Staff Report—whether and how the

manipulated spot market influenced the forward markets—

are relevant to determining whether the Mobile-Sierra

doctrine applies, because they raise questions about the

market conditions at the time of contract formation and thus

about the propriety of relying on a regime of market-based

rate authority at that time to produce just and reasonable

rates.”).

FERC also affirmed the ALJ’s exclusion of some of

PUC’s other evidence—including testimony of expert

witnesses—regarding the effect of spot market

manipulation on forward prices. As PUD makes clear, such

evidence is essential to the question of whether the forward

energy market was sufficiently well-functioning to apply

Mobile-Sierra. See id., Slip Op. at 19605-06.

On remand, FERC~--should consider the excluded

evidence, as well as all other relevant evidence--whether

part of the “100 Day Proceeding” or not--before determining

whether the Mobile-Sierra presumption applies.

3. Effect on the “Public Interest”

Consistent with PUD, “FERC’s error in its approach to

deciding whether to apply the Mobile-Sierra presumption

was compounded by it use of an erroneous standard for

determining whether the challenged contracts affect the

public interest.” Jd., Slip Op. at 19606-07. “In its efforts to

13a

determine the impact on the public interest under Mobile-

Sierra .. FERC relied on the wrong legal standard,

applying factors taken from the context of a low-rate

challenge rather than those relevant to the high-rate

challenge present in this case.” /d., Slip Op. at 19607.

FERC determined that the challenged contracts in this

case did not affect the public interest because PUC:

presented very little evidence relevant to the Mobile-

Sierra standard of review. Based on the record, we

conclude that Complainants have failed to demonstrate

that any of the three prongs announced in the Sierra

case has been met or that any other factor introduced

into evidence warrants a finding that any of the

contracts is contrary to the public interest and should be

modified.9

Pub. Utils. Comm’n, 103 F.E.R.C. at 7 62,415. FERC

determined that because consumers did not face an

“excessive burden” whether consumers endured any burden

was inapposite. Pub. Utils. Comm’n, 105 F.E.R.C. 61,182,

at 79 66-67. As we explained in PUD, this determination

fundamentally misunderstands the public interest inquiry in

the context of a high-rate challenge. See PUD, Slip Op. at

19607-11.

Under California law, all costs of the challenged

contracts were passed on to consumers. See CAL. WATER

CODE § 80104. The parties debate whether retail power

rates in fact increased after the parties signed these

contracts, but this dispute is not determinative. Even if

rates did not increase in the months after CDWR signed the

contracts, the retail rates charged consumers because of

9 In such circumstances [when the public interest test satisfies the

Commission’s duty to ensure just and reasonable rates) 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.

Sierra, 350 U.S. at 355, 76 S.Ct. 368.

l4a

these contracts might have been higher than they would

have been had the wholesale contract rates been lower. See

PUD, Slip Op. at 19609 (“{I]f a challenged contract imposes

any significant cost on ultimate customers because of a

wholesale rate too high to be within a zone of

reasonableness, that contract affects the public interest.”

(citations omitted)).

ITI.

Finally, we grant PUC’s petition as it relates to FERC’s

dismissal of its complaint regarding CDWR’s contract with

PPM. FERC’s decision to dismiss the case against the PPM

contract without a hearing may be affirmed only if FERC

addressed all “relevant factors in dispute and ... a formal

hearing was unnecessary for the Commission to reach its

conclusion.” Pac. Gas & Elec. Co. v. FERC, 746 F.2d 1383,

1386 (9th Cir.1984). We believe FERC failed to address all

relevant factors here.

FERC dismissed the PPM challenge because the parties

entered the contract after FERC’s June 19 Order. Pwb.

Utils. Comm’n, 99 F.E.R.C. 4 61,087, at9 7 61,383-84 (2002).

FERC did not consider, however, whether some market

dysfunction may have lingered after that order took effect.

PPM, intervening in this case, argues that the chronology of

its contract factually distinguishes it from the other

challenged contracts. We disagree.

It is not at all clear that the forward markets had

stabilized by the date when the parties entered the PPM

contract. On the contrary, FERC’s Staff Report concluded

that contracts entered after June 19, 2001, “generally show a

persistence of the effects found during the crisis, i.e.,

statistically significant positive elasticities of the forward

price with respect to the spot price.” Staff Report at V-14.

While the Staff Report qualified its conclusion regarding

post-June 19 effects of market power, noting that, “{o]n

average,” post-June 19 contracts demonstrated a lesser

effect from the spot markets than pre-June 19 contracts,

FERC should have at least considered the possibility that ill

15a

effects remained. Therefore, the agency’s dismissal of the

chailenge was inappropriate.

iV.

For the foregoing reasons, we determine that a remand

is necessary so that FERC can apply the proper statutory

standards to determine, first, whether Mobile-Sierra

review of the challenged contracts is appropriate; second, if

so, to apply the modified form of Mobile-Sierra review

outlined in PUD and referenced in this opinion; and finally,

if not, to apply full just and reasonable review to the

challenged contracts.

PETITION FOR REVIEW GRANTED AND

REMANDED.

16a

FEDERAL ENERGY REGULATORY COMMISSION

Public Utilities Commission of the State of California

v.

Sellers of Long Term Contracts to the California

Department of Water Resources

Docket No. EL02-60-000

California Electricity Oversight Board

v.

Sellers of Energy and Capacity Under Long-Term

Contracts With the California Department of Water

Resources

Docket No. EL02-62-000 (Consolidated)

ORDER SETTING COMPLAINTS FOR HEARING,

ESTABLISHING HEARING PROCEDURES, AND

CONSOLIDATING PROCEEDINGS

(Issued April 25, 2002)

99 FERC J 61,087

Before Commissioners: Pat Wood, III, Chairman; William L.

Massey, Linda Breathitt, and Nora Mead Brownell.

On February 25, 2002, the Public Utilities Commission of

the State of California (CPUC) and the California

Electricity Oversight Board (CEOB) filed two separate,

almost identical, complaints against a group of sellers of

energy under long-term contracts with the California

Department of Water Resources (CDWR) alleging that the

17a

prices, terms, and conditions of such contracts are unjust

and unreasonable and, to the extent applicable, not in the

public interest. The complaints also allege that the

respondents obtained the prices, terms, and conditions in

the contracts through the exercise of market power, in

violation of the Federal Power Act (FPA), and the

respondents’ actions are causing injury to the citizens and

ratepayers of California on whose behalf the CPUC is

statutorily entitled to act.

To ensure that the complainants have a full and fair

opportunity to present their cases and that the Commission,

in turn, has a complete record on which to base its ultimate

decision, we are setting these complaints for an evidentiary

hearing. During this hearing, the complainants will bear the

burden of proving that modification of contracts is justified.

This burden is a heavy one and one that the evidence

contained in the complaints taken alone does not meet.

Moreover, to aid the parties in settling their disputes

without the burden and expenses of litigation, we will hold

the hearing in abeyance pending the outcome of settlement

judge procedures. For each complaint, we also establish a

refund effective date pursuant to Section 206(b) of the

Federal Power Act (FPA).!

I. COMPLAINTS

The complaints seek to modify over 30 contracts? with

numerous sellers.2 These contracts were entered into in

2001. Some of the contracts have concluded and others are

1 16 U.S.C. § 824e(b) (1994).

2 Not all of these contracts may be potentially subject to refund. For a

detailed list of contracts being addressed in this order, see Appendix A.

According to the announcement on the CDWR’s official website, CDOWR

has renegotiated some of the contracts that the instant complaints seek to

modify. The contracts that appear to have been renegotiated and

superseded are not addressed in this order and instead will be addressed

in a future order, to the extent necessary. http://wwweers.water.ca.gov/

newContracts.html (April 23, 2002).

3 Fora complete list of the respondents see Appendix B.

18a

yet to become effective and will continue through year 2021.

The contract prices range from a low of $25.16 to a high of

$249.

The complainants request that these contracts be

abrogated as unjust and unreasonable and that the

Commission establish a refund effective date at the earliest

time permitted by law. In the alternative, they ask that the

Commission reform the contracts to provide for just and

reasonable rates, reduce their duration, and strike certain

non-price terms and provisions from:the contracts.

The complaints state that CDWR was forced to pay

unjust and unreasonable prices and to agree to onerous,

unjust and unreasonable non-price terms,‘ in order to secure

the power necessary to ensure that the lights stayed on in

California. The complainants allege that the prices, terms,

and conditions in each challenged contract are tainted with

the exercise of market power.

Both CPUC and CEOB argue that the applicable

standard of review in the instant case is whether the rates

are just and reasonable and that the complaints are not

barred by the Mobile-Sierra doctrine.5 They contend that

because neither the complainants nor the consumers they

represent are signatories to any of the challenged contracts,

they are not bound by a “public interest” standarc. CEOB

also argues that the “public interest” standard does not

apply to contracts that are, as they are here, being reviewed

by the Commission for the first time.

In the alternative, CPUC and CEOB argue that even if

the “public interest” standard is applicable, the challenged

contracts must be abrogated as contrary to the public

4 CPUC and CEOB challenge non-price terms concerning: (1) priority

over bond repayment; (2) dispatchability of block contracts; (3) evasion of

the effect of Commission review; (4) asymmetrical credit. treatment; (5)

“most-favored nation” treatment; (6) mitigation and termination; and (7)

asymmetrical allocation of future governmental action.

5 United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332

(1956) (Mobile); FPC v. Sierra Pacific Power, 350 U.S. 348 (1956) (Sierra).

19a

interest. Citing Northeast Utilities Service Co. v. FERC, 66

FERC § 61,332 (1994), aff'd, 55 F.3d 686 (D.C. Cir. 1995) and

PJM Interconnection, LLC, 96 FERC 61, 206 (2001), the

complainants contend that the “public interest” standard

can be met in a Section 206 complaint by third parties who

are “threatened by possible ‘undue discrimination’ or

imposition of an excessive burden.” CPUC believes that the

contract rates are excessively burdensome on California

customers not only because they are “catastrophically

uneconomic,” but also because of the highly asymmetrical

distribution of burdens and benefits in the contract terms

and conditions.

CPUC further argues that the contract rates can be

determined to be unlawful without a finding of market

power abuse. It explains that the contracts at issue were

negotiated when the energy markets were dysfunctional.

CPUC believes that CDWR made excessive contract

payments as measured against market benchmarks,

estimated cost of service, and the Commission-proposed

benchmark.§

Additionally, CPUC requests that the instant complaints

be set for hearing before the same judge who will conduct a

hearing in Docket No. EL02-26-000, et al.7 and that the

Commission take official notice of all pleadings and evidence

filed to date in those dockets.

II. RESPONSIVE PLEADINGS

Sunrise Power Company, LLC (Sunrise), Pacificorp

Power Marketing, Inc. (PPM), Morgan Stanley Capital

Group, Inc. (Morgan Stanley), and Colton Power, L.P.

6 See San Diego Gas & Electric Company v. Sellers of Energy and

Ancillary Services, 93 FERC 461,294, at pp. 61,994-95 (2000), reh’g

denied, 97 FERC 4 61,275, at p. 62,229 (2001) (setting a benchmark for

five-year contracts for supply around-the-clock at $74/MWh).

7 Nevada Power Company and Sierra Pacific Power Company v.

Duke Energy Trading and Marketing, L.L.C., et al., 99 FERC 4 61,047

(2002).

oe

20a

(Colton)® filed motions requesting dismissal of the

complaints. In addition, Coral Power, L.L.C. (Coral) and

PG&E Energy Trading-Power, LP (PG&E) argue that the

instant complaints should be dismissed for failure to state a

claim because most of the complainants’ allegations are

directed either at the Commission or CDWR and that the

complaints fail to allege any specific violation of the Federal

Power Act, Commission orders or regulations.

Sunrise, PPM, Morgan Stanley, Calpeak Project

Companies (Calpeak), Constellation Power Source, Inc. and

High Desert Power Project, LLC (collectively,

Constellation), Sempra Energy Resources (SER),

Clearwood Electric Company, LLC (Clearwood), GWF

Energy LLC (GWF), Fresno Cogeneration Partners, LP,

Wellhead Power Gates LLC and Wellhead Power Panoche

LLC (collectively, Wellhead Companies), and Calpine

Energy Services, L.P. (Calpine) argue that the complainants

lack standing and/or authority under the California law to

challenge the contracts in question because CDWR is the

only party authorized under the California law to determine

whether its power purchase contracts are just and

reasonable. Sunrise adds that the complainants cannot even

be considered third-party beneficiaries because the

contracts at issue were negotiated by representatives of the

State of California for the benefit of the State of California,

not the complainants.

In response, CEOB argues that Rule 206 of the

Commission’s Rules of Practice and Procedure, 18 C.F.R.

§ 385.206, permits any person, including state or state

entity, to file a complaint even where that person does not

possess a direct interest in the transactions, so long as the

person is adversely affected by the actions that are subject

to the complaints. It further states that the Commission

8 Colton is a successor in interest to Alliance Colton LLC.

9 16 U.S.C. § 796 et seg. (1994).

Z2la

cannot be required to interpret the scope and powers

granted to the CEOB by the California legislature.

Furthermore, Clearwood, Sunrise, Morgan Stanley,

Constellation, Calpeak, SER, GWF, Calpeak, Calpine,

Wellhead Companies, Williams Energy Marketing &

Trading Company (Williams), and Mirant America Energy

Marketing, LP (Mirant), El Paso Merchant Energy, L.P. (E]

Paso), Dynegy Power Marketing, Inc. (Dynegy),!° Colton,

and Imperial Valley Resource Recovery Company, L.L.C.

and Primary Power International (collectively, IVRRC),

and Allegheny Energy Supply Company, LLC (Allegheny)

argue that the complainants have failed to meet the

“practically insurmountable” Mobdile-Sierra public interest

standard. Morgan Stanley, Williams, and GWF contend that

the ._Mobile-Sierra standard cannot be met by the

complainants pursuant to the equitable principle of “unclean

hands,” since the complainants themselves created the

dysfunctional market conditions that led to the shortages

and high spot prices they now seek to use as justification for

abrogating the contracts at issue. Williams, Dynegy, and E]

Paso further state that in accordance with Commission and

court precedent, the fact that the challenged contracts have

allegedly become uneconomic to the State does not render

these contracts contrary to the public interest. Calpine

asserts that a mere showing of a disparity between contract

and market rates does not satisfy the Mobile-Sierra

standard. Certain respondents also disagree with the

complainants’ claim that the contracts in question are being

reviewed by the “‘ommission for the first time, when in fact,

the long-term contracts have been filed with the

Commission and the short-term transactions have been

submitted in quarterly transaction summaries. In response,

the complainants state that the contracts at issue should be

reviewed under the just and reasonable standard because

10 Dynegy filed an answer to the complaints jointly with El Segundo

Power LLC, Long Beach Generation LLC, and Cabrillo Power LLC.

22a

the Commission has not substantively reviewed the COWR

contracts.

Moreover, in response to the complainants’ argument

that they are not bound by the public interest standard

because they represent third-party interests in these

proceedings, Constellation and Morgan Stanley argue that

the Commission should not permit the State of California to

evade the Mobile-Sierra requirement by executing binding

contracts through one agency and then, later, attacking

those contracts through another agency ostensibly

representing the same interests. Coral states that the

complainants’ participation in this proceeding should be

deemed in the same capacity as CDWR, not as a

disinterested party. Williams also argues that CDWR acted

as an agent of the State in negotiating and executing the

contracts at issue and that the complainants, which also

represent the State, are not third parties to the CDWR

contracts and thus are bound by these contracts. In

Williams’ opinion, the fact that the complaints are submitted

by sister agencies is immaterial.

In response, the CPUC argues that it is not a party to

the CDWR_ contracts and as =an_ independent,

constitutionally established state agency, it is neither liable

for nor bound by CDWR’s actions in signing the contracts at

issue. The CPUC and CEOB further assert that the

respondents’ argument that one state agency can

contractually bind other state agencies is not supported by

legal authority.

Calpeak, SER, and Morgan Stanley also argue that the

Commission’s statement that any party believing that

forward contract rates are unjust and unreasonable could

file a FPA Section 206 complaint does not operate to excuse

the complainants from the Mobile-Sierra public interest

standard. In addition, Mirant, Williams, Wellhead

Companies, and Calpine state that their contracts with

CDWR contain an explicit Mobile-Sierra clause, which

precludes CDWR from unilaterally seeking changes to the

contract terms under either Section 205 or 206 of the FPA,

23a

as, well as makes the Mobile-Sierra public interest standard

applicable to challenges by third parties, including this

Commission, the State of California, any of its agencies, or

any other governmental entity.!! ——

Morgan Stanley, GWF, Calpine, Dynegy, Colton, and

Constellation further argue that. the Commission’s failure to

uphold the contracts in question would chill participation in

forward markets, deter generation investment, and result in

filing of ripple claims by numerous market participants

seeking to mitigate their refund exposure. Mirant and SER

also assert that by abrogating the contracts at issue, the

Commission will send the CDWR straight back to the spot

market, which is bound to experience steep price increases

and renewed volatility due to the return of all of the power

needs currently covered by the long-term contracts.

Sunrise, Clearwood, PPM, Calpeak, Morgan Stanley,

Constellation, Mirant, GWF, SER, Calpine, Williams,

Dynegy, IVRRC, Allegheny, and El Paso further argue that

the complainants did not offer evidence showing that the

contracts at issue are unjust and unreasonable or otherwise

unlawful and that the respondents exercised market power.

Allegheny challenges the complainants’ inference that

market prices were unjust and unreasonable because after

the Commission imposed the West-wide price mitigation by

its June 19, 2001 Order (June 19 Order),!* they started

declining. It argues that the prices had already declined by

the time of issuance of the June 19 Order and that the

decline was attributable to the actions of the State of

1l See Answer of Calpine Energy Services, L.P., Docket No. EL02-

60-000, at 20 (March 26, 2002); Answer of Mirant-Americas Energ,

Marketing, LP to Complaints, Docket Nos. EL02-60-000 and EL02-62-

000, Attachment A, Exhibit A, 46 (March 22, 2002); and Answer of

Williams Energy Marketing & Trading Company, Docket Nos. E L02-60-

000 and E L02-62-000, at 24 (Marci 22, 2002).

12 San Diego & Electric Co. v. Sellers of Energy and Anciliary

Services, 95 FERC 4 61,418 (2001).

; 24a

California in moving to longer-term contracts, to

conservation efforts and decline in natural gas prices.

Additionally, PPM, Calpeak, SER, El Paso, and Morgan

Stanley assert that the rates offered by sellers with market-

based pricing authority are presumed to be just and

reasonable, and that the complainants failed to overcome

this presumption. GWF and SER add that challenging

individual contracts entered into pursuant to market-based

tariffs is inconsistent with the underlying principles upon

which the Commission grants market-based rate authority.

Moreover, Coral states that the prices in its contracts with

CDWR are lawful because they were authorized by and

complied with rate schedules accepted by the Commission.!8

Thus, it concludes, the contract prices are protected by the

filed rate doctrine.'4

Furthermore, Calpeak argues that the comparison

offered by the complainants of contract rates with various

market benchmarks, including the Commission’s advisory

benchmark,!®5 does not prove that the contracts at issue are

unlawful. In SER’s and Allegheny’s opinion, the

complainants’ comparison of contract rates in question with

the after-the-fact, cost-based benchmarks constitutes a

collateral assault on the Commission’s market-based rate

regime. Mirant further states that the Commission adopted

the advisory benchmark in order to encourage the use of

forward contracts, not to set a cap on long-term forward

market rates. Williams, Allegheny, and PG&E, however,

state that the rates in the CDWR contracts fall within or are

below the Commission’s advisory benchmark for long-term

contracts. Allegheny concludes that the rates in its

13° Coral Power, L.L.C., Answer in Opposition to Complaint, Docket

No. E L02-62-000, at 17 4 47 (March 22, 2002).

14 Arkansus Louisiana Gas Co. v. Hall, 453 U.S. 571, 577 (1981)

(explaining that the filed rate doctrine forbids a regulated entity from

charging rates for its services other than those properly filed with the

appropriate regulatory authority).

15 See supra n.6.

25a

contracts with CDWR are thus presumptively just and

reasonable.

In addition, SER argues that it could not have exercised

market power because it owns no generation in the relevant

geographic area and that it would be in no position to

exercise market power against CDWR, the largest power

purchaser in California. Calpine asserts that it also lacks

market power because its sales to CDWR are sales of

capacity from new generating facilities constructed after the

effective date of Order No. 888.16 According to Calpine,

sales from capacity for which construction has commenced

on or after Order No. 888 are presumed to lack generation

dominance. In addition, GWF and Calpine assert that

CDWR was ably represented, had significant bargaining

advantages, and proposed many terms that were eventually

included in its contract with GWF. Constellation, El Paso,

and Mirant state that certain non-price provisions being

challenged in the complaints were specifically requested by

CDWR and adopted virtually unchanged.!7 Soledad

16 Promoting Wholesale Competition Through Open Access Non-

discriminatory Transmission Services by Public Utilities; Recovery of

Stranded Costs by Public Utilities and Transmitting Utilities, Order No.

888, 61 Fed. Reg. 21,540, at pp. 31,664-65 (1996), FERC Statutes and

Regulations, Regulations Preambles January 1991-June 1996 J 31,036

(1996), order on reh’g, Order No. 888-A, 62 Fed. Reg. 12,274 (1997), FERC

Statutes and Regulations, Regulations Preambles July 1996-December

2000. 4 31,048 (1997), order on reh’g, Order No. 888-B, 81 FERC 4 61,248

(1997), order on reh’g, Order No. 888-C, 82 FERC ] 61,046 (1998), aff'd in

relevant part, remanded in part on other grounds sub nom.

Transmission Access Policy Study Group, et al. v. FERC, 225 F. 3d 667

(D.C. Cir. 2000), aff'd, New York v. FERC, 122 S.Ct. 1012 (2002).

17 £g., Mirant identifies the following provisions as having been

requested by CDWR: the bond priority provision, creditworthiness

provision, and the Mobile-Sierra clause. Answer of Mirant-Americas

Energy Marketing, LP to Complaints, Docket Nos. EL02-60-000 and

EL02-62-000, at 34-36 (March 22, 2002). Further, according to El Paso,

CDWR proposed the inclusion of the bond priority clause, the “most-

favored nation” provision, and an asymmetrical credit treatment clause.

Answer of El Paso Merchant Energy, L.P. to Complaint, Docket No.

E L02-62-000, at 15 (March 22, 2002).

en oS a ee

26a

Energy, LLC (Soledad) asserts that its contract with

CDWR was essentially dictated in its entirety by CDWR.

Moreover, it adds, certain non-price terms of its contract

were unilaterally changed by CDWR after the parties had

reached a final agreement. SER also states that its contract

with CDWR was the product of nearly three months of

negotiations. Wellhead Companies also state that the

complainants had many bidders to choose from and selected

the most favorable bids and entered into contracts after

further negotiations. According to Allegheny, Constellation,

and GWF, the Commission has determined that during the

same period of time when the CDWR was negotiating the

contracts at issue, it enjoyed an undue competitive

advantage, given its level of access to non-public material

information unavailable to other market participants.!8 In

addition, Williams and Allegheny argue that the risk and

benefits of the contracts at issue should be examined over

their respective terms because these contracts, as all other

risk management products, are designed to accommodate

Swings in market prices, both up and down.

The CPUC counters the respondents’ allegations that

the CDWR exerted monopsony power in the long-term

contract negotiations. It states that while the CDWR was

certainly a large buyer, it was not the only one during the

relevant time period. It also adds that the respondents

were under no obligation to offer power to the CDWR,

which at the time was faced with serving many thousands of

MW of demand or see the lights to go out in California.

Clearwood, PPM, Calpeak, GWF, SER, Calpine, PG&E,

Colton, Allegheny, and Constellation also challenge the

complainants’ assertion that the contract prices were the

result of the dysfunctional spot market, which caused

volatility and dysfunctions in the forward markets. They

contend that this statement is inconsistent with the

18 They cite San Diego Gas & Electric Company v. Sellers of Energy

and Ancillary Services, 96 FERC 461,120, at p. 61,515 (2001) (July 25,

2001 Order).

27a

Commission’s prior orders limiting the mitigation to spot

markets.!9 Mirant argues that when the Commission

identified “critical interdependence” between spot and

forward markets in the June 19 Order,”° it, in fact,

recognized that price mitigation in spot markets “will, over

time, impact bilateral and forward markets.” Moreover,

Morgan Stanley argues that the CPUC and CEOB have

failed to demonstrate that spot market prices are the

predominant factor driving forward contract prices and

other terms and conditions. It explains that many factors

play a role in establishing a forward price curve, including

the cost to build new generation, expected power supplies,

economic conditions and weather forecasts. Allegheny also

states that the complainants offered no evidence in support

of their claim that forward markets were not competitive.

According to Allegheny, the fact that CDWR has contracts

with 23 suppliers demonstrates robust competition in the

long-term bilateral market. Wellhead Companies also argue

that contrary to the complainants’ allegations, the bilateral

markets are functional and competitive. They explain that

the long-term forward contracts executed by CDWR were a

primary cause of the spot price stability and of the addition

of new generating capacity into the California markets.

Sunrise, PPM, Soledad, and Calpeak request that the

Commission establish separate proceedings for the

complaints against them.2! Sunrise, PPM, and Calpeak

explain that their contracts with CDWR were entered into

19 They cite San Diego Gas & Electric Company v. Sellers of Energy

and Ancillary Services, 97 FERC 4 61,257 (2001) (December 19 Order)

and San Diego & Electric Co. v. Sellers of Energy and Ancillary Services,

95 FERC ¥ 61,418 (2001) (June 19 Order).

20 San Diego & Electric Co. v. Sellers of Energy and Ancillary

Services, 95 FERC ¥ 61,418 (2001).

21 Sunrise Power Company, LLC filed separately a Motion to

Establish a Separate Proceeding for Complaints against Sunrise and for

Consolidation, Docket Nos. EL02-60-000 and EL02-62-000 (March 19,

2002). PPM’'s Answer to Complaints also contains a motion to bifurcate.

28a

after the issuance of the June 19 Order imposing mitigation

on West-wide markets.22 Soledad states that its facility is

unique in its small size and impact on the market. Sunrise

and Soledad also contend that their contracts with COWR

have cost-based, not market-based pricing. PPM argues that

the Commission should establish separate proceedings for

contracts with each seller because these contracts have no

factual commonality.

Constellation and Coral filed an answer in opposition to

PPM’s motion to bifurcate stating that such an approach

would be wasteful and cause delay, since the complaints are

flawed and can easily be dismissed without reaching any

specific conclusions regarding individual contracts. The

complainants also oppose the requests to bifurcate the

complaints into multiple proceedings. In addition, they

argue that the Commission should not exclude from the

instant proceeding the contracts entered into after June 20,

2001. They explain that each of the challenged contracts

was negotiated prior to the imposition of the West-wide

mitigation by means of an initial “letter of intent” that set

forth the terms and conditions of a transaction.

Sempra filed an answer to the CPUC’s request that the

instant complaints be consolidated with the ongoing

proceedings in Docket Nos. EL02-26-000, et al. Sempra

asserts that such consolidation would serve no useful

purpose because those proceedings involve transactions

subject to the Western States Power Pool Agreement.

Additionally, El] Paso requests that if the Commission

institutes a FPA Section 206 investigation, it must establish

a refund effective date at the latest time permitted by law.

El Paso explains that if it were to file ripple complaints, the

refund effective date for those complaints could be no sooner

than mid-June, leaving FE! Paso with close to two months of

refund exposure without potential offset from its own

suppliers. El] Paso also states that the Commission should

%2 See supra n.20.

29a

de-link the Staff Investigation established by the February

18, 2002 Order. It reasons that the Staff Investigation

centers on alleged activities of a single market participant,

while the instant proceedings are predicated on allegations

of potentially unjust and unreasonable rates in long-term

power Sales contracts.

1. Comments

Independent Energy Producers Association, Electric

Power Supply Association, and Western Power Trading

Forum (collectively, Joint Parties) argue that the instant

complaints should be dismissed because under the California

law and Commission precedent, the complainants have no

authority to evaluate wholesale rates in CDWR’s contracts.

Reliant. Energy Power Generation, Inc. and Reliant Energy

Resources (collectively, Reliant Companies) further argue

that the complaints are barred by the Mobile-Sierra

doctrine. They state that regardless of whether

Commission review is sought by a contracting party or a

third party, the applicable standard is whether modification

of the contract is required by the public interest.

In addition, Indigo Generation LLC, Larkspur Energy

LLC and Wildflower Fnergy, LP, and Joint Parties state

that abrogating these contracts could plunge California into

a new round of crisis that would further destabilize the

regional marketplace. Joint Parties also claim that granting

the requested remedies will dissuade future suppliers from

entering the market and doing business in California and

will disrupt current contract negotiations underway

recently imposed by the CPUC. Reliant Companies add

that abrogation of the contracts would essentially convert

long-term contracts into a “call” option from which a

purchaser may alter its forward contracts according to a

contemporary view of the market.

Reliant Companies and Joint Parties also argue that

contrary to the complainants’ assertion that CDWR was

forced into signing any deal, the CDWR was fully capable of

‘negotiating terms and conditions, and that the State actually

30a

touted the contracts at issue as highly beneficial. Also, Joint

Parties suggest that, when examining the contracts at issue,

the Commission should not ignore the market conditions

that were in effect at the time the contracts were entered

into, namely that there was a scarcity of available

generation in the region.

The California State Assembly (Assembly) supports the

complaints. It states that the complainants have established

a prima facie case. The Assembly also claims that the

respondents’ actions are causing injury to the citizens of

California and that the contracts should be abrogated or, in

the alternative, reformed in accordance with the mandates

of the FPA.

III. NOTICE, INTERVENTIONS, COMMENTS,

AND PROTESTS

Notice of the CPUC’s complaint in Docket No. EL02-60-

000 was published in the Federal Register, 67 Fed. Reg.

9,728 (2002), with comments, protests, or interventions due

on or before March 4, 2002. Notice of the CEOB’s complaint

in Docket No. EL02-62-000 was published in the Federal

Register, 67 Fed. Reg. 9,727 (2002), with comments, protests,

or interventions due on or before March 4, 2002. The

comment period in both dockets was subsequently extended

until March 22, 2002.

Timely motions to intervene were filed by entities listed

in the Appendix C to this order. Pursuant to Rule 214 of the

Commission’s Rules of Practice and Procedure, 18 C.F.R.

§ 385.214 (2001), the filing of a timely motion to intervene

that has not been opposed makes the movant a party to the

proceeding. Certain parties filed late motions to intervene in

this proceeding. Given the lack of undue prejudice and the

parties’ interests, we find good cause to grant under Rule

214 of the Commission’s Rules of Practice and Procedure, 18

C.F.R. § 385.214 (2001), the unopposed, untimely motions to

intervene in this proceeding.

CPUC and CEOB files answers to certain motions and

to other responsive pleadings. Sempra also filed an answer

3la

to the complainants’ answers. We will allow these filings, as

the Commission permits parties to respond to answers only

when doing so, as here, will assist the Commission’s

understanding of the issues raised.23

IV. DISCUSSION

Certain respondents contend that under the California

law, CPUC and CEOB do not have the authority to review

rates in CDWR’s contracts. We find these contentions to be

irrelevant in this proceeding because CPUC and CEOB

request Commission review of the CDWR contract rates,

rather than attempt to examine the same on their own.24

We therefore believe that CPUC and CEOB have standing

to submit the instant complaints pursuant to Section 306 of

the FPA,2> which states in pertinent part:

Any person, State, municipality, or State commission

complaining of anything done or omitted to be done by

any licensee or public utility in contravention of the

provisions of this chapter may apply to the Commission

We, however, find that in the instant proceeding, CPUC

and CEOB act in the same capacity as CDWR. Based on the

fact that in negotiating and executing the contacts at issue,

CDWR represented the State of California, CPUC and

CEOB, which are also State representatives, “stepped into

the shoes” of CDWR by bringing these complaints. Thus,

the same standard of review applies to these complainants

as would apply to a similar complaint filed by CDWR.

23 See, e.g., Atlantic City Electric Co., 90 FERC 4 61,268, at 61,898

(2000) and New York Independent System Operator, Inc., 91 FERC

{ 61,128 (2000).

24 We believe that a state court is the proper forum to address the

issue of whether the CPUC and CEOB have the authority under the

California law to challenge rates in CDWR’s contracts and/or take other

action in regard to those contracts.

25 16US.C. § 825e (1994).

eB

4

:

E

32a

In their complaints, CPUC and CEOB seek the

extraordinary remedy of contract modification. The

Commission’s long-standing policy, consistent with a

substantial body of Supreme Court and other judicial

precedent, has been to recognize the sanctity of contracts.

Rarely has the Commission deviated from that policy, and

then only in extreme circumstances, such as_ the

fundamental industry-wide restructuring under Order No.

888 and the reorganization of a bankrupt utility.26

Preservation of contracts has, if anything, become even

more critical since the policy was first adopted. Competitive

power markets simply cannot attract the capital needed to

build adequate generating infrastructure without regulatory

certainty, including certainty that the Commission will not

modify market-based contracts unless there are

extraordinary circumstances.

As discussed below, the Commission has determined

that, based on the unusual circumstances presented, it is

appropriate to set the contracts listed in Appendix A for

hearing. As an initial matter, in these dockets, parties have

argued extensively over whether the complainants should

be bound to a Mobile-Sierra “public interest” burden of

proof or a “just and reasonable” burden of proof to support

reformation of the contracts. Certain contracts identified by

the complainants appear to have a specific contractual

provision which addresses FPA Sections 205 and 206 rights

of the parties-to these contracts, as well as the Section 206

rights of third parties.27 For these contracts (listed under a

26 See Order No. 888, supra n.16, at pp. 31,664-65; and Northeast Util.

Serv. Co., 66 FERC 4 61,332, reh’g denied, 68 FERC 4 61,041 (1994).

27 E.g., Section 10.13(¢) of CDWR’s contract with Allegheny states:

“The Agreement should not be subject to change by application of either

Pariy pursuant to the provisions of Section 205 or 206 of the Federal

Power Act ..., absent the agreement of both Parties in a written)

amendment executed by both parties.” Also, Section 10.14 of the

CDWR/Williams contract states: “The terms and conditions and the rates

for service specified herein shall remain in effect for the term of each

Transaction hereunder, and shall not be subject to change through

wi i a ah Cas Fa eat Ba a

33a

separate subheading in Appendix A) the complainants must

satisfy the public interest standard to justify contract

modification.

As for the contracts that do not contain an explicit

Mobile-Sierra provision, we do not believe that we have a

sufficient record to address the Mobile-Sierra issue

definitively and, accordingly, we will set for hearing the

issue of whether the complainants must bear the burden of

showing that a challenged contract is contrary to the public

interest, or whether they will bear the burden of showing

that the contract is not just and reasonable. However, it is

our view that even under a “just and reasonable” burden of

proof standard, parties who seek to overturn market-based

contracts into which they voluntarily entered will bear a

heavy burden. In the evidence presented thus far, the

complainants have failed to show that the dysfunctional

California Independent System Operator (ISO) and Power

Exchange (PX) spot markets had an adverse effect on the

long-term, bilateral markets in California. To meet any

burden of proof to reform these market-based contracts,

complainants will need to demonstrate that there was such

an adverse effect and, if there was, that the effect was of a

magnitude warranting modification of contracts entered into

in the bilateral markets. Given the importance of these

questions, we have decided it is appropriate to order a full

evidentiary hearing. This hearing is designed to ensure that

the complainants have a full and fair opportunity to present

their cases, and that the Commission in turn, has a complete

record on which to base its ultimate decision.

application to the Federal Energy Regulatory Commission by either

Party, including any Governmental Agency, pursuant to the provisions of

Section 205 or 206 of the Federal Power Act. Each Party expressly

agrees that it will not make any filings under either Section 205 or 206 of

the F'ederal Power Act to revise this rate schedule.

28 By order issued on February 13, 2002, the Commission directed a

staff investigation of potential manipulation of electric and natural gas

prices in the West. We are setting the instant contracts for hearing

under Section 206 of the FPA based on the arguments that the

34a

Therefore, we set for hearing the contracts listed in

Appendix A to this order. These include only those

contracts that were entered into before June 20, 2001, the

date on which the Commission’s West-wide mitigation went

into effect.29 CEOB argues that all of the contracts included

in its complaint should be set for hearing because each of the

challenged contracts was negotiated prior to the imposition

of West-wide mitigation. CEOB, however, offers no

evidence showing that CDWR was bound to proceed with

execution of the contracts after the West-wide mitigation

went into effect. Contracts entered into after the date the

West-wide mitigation went into effect are not set foi

hearing, since the effect of the West-wide mitigation was to

stabilize prices. Also, we set for hearing only those

contracts that have not yet concluded. The Commission in

this context has no authority to order refunds for contracts

or transactions that conclude prior to the refund effective

date. Our authority to modify the long-term contracts at

issue here is only from the refund effective date forward.

The hearing is limited to the question of whether the

dysfunctional California spot markets®° adversely affected

the long-term bilateral markets, and, if so, whether

modification of any individual contract at issue is warranted.

The hearing will not address issues concerning the

Commission’s policies on granting market-based rate

authority or on regulation of sellers with such authority.

dysfunctional spot markets in California caused long-term contracts not

to be reasonable, whereas the investigation is looking at whether there

was improper behavior by sellers that may have caused prices not to be

reasonable.

29 San Diego & Electric Co. v. Sellers of Energy and Ancillary

Services, 95 FERC 4 61,418 (2001).

30 Spot markets or spot market sales are sales that are 24 hours or

less and that are entered into the day of or day prior to delivery. See San

Diego Gas & Electric Company v. Sellers of Energy and Ancillary

Services, 96 FERC 4 61,120, at p. 61,515 (2001); San Diego Gas & Electric

Company v. Sellers of Eneryy and Ancillary Services, 95 FERC 4 61,418,

at p. 62,545 n.3 (2001).

35a

Further, if the judge concludes that modification of one or

more of the contracts is warranted, the judge should not

attempt at this stage to determine how those contracts

should be modified.

We expect the parties to present evidence on and direct

the judge to consider the totality of purchases and sales and

the conditions present at the time the contracts were

entered into. In particular, the judge’s review should

include, but is not limited to, consideration of: CDWR’s

overall portfolio as well as its own sales, if any (e.g., pattern,

duration, price); whether CDWR’s transactions were

physical or financial in nature and designed to serve

CDWR’'s load or the net short position of Southern

California Edison Company and Pacific Gas and Electric

Company; the terms, conditions and rate over the entire

duration of each contract (e.g., whether the contract is front-

end loaded); the risks and benefits of the contracts at issue

over their respective terms; what other alternatives were

available to buyers and sellers; whether, at the time, it was

a reasonable decision to enter into these contracts (e.g.,

duration, scope and time period, and the participants’

expectations as to the duration of dysfunctions in the

California [SO and PX markets); previously submitted

testimony by CDWR on the justness and reasonableness of

the contracts at issue; the terms and conditions of any

request for proposals, and the process and procedures

CDWR used to evaluate the contracts, including any

changes in offered rates, terms, and conditions mandated or

negotiated by CDWR; whether any non-price terms were

adopted upon CDWR’s request; whether CDWR had access

to inside information from the ISO or had a market position

that it could potentially use to gain advantage in contract

negotiations, and whether it in fact used that information;

the relation of the contract rates to the Commission’s

previously identified benchmark for long-term contracts. 3!

31 See San Diego Gas & Electric Company v. Sellers of Energy and

Ancillary Services, 93 FERC 461,294, at pp. 61,994-95 (2000), rehg

36a

In addition, the parties may present evidence on: the

effect of the contracts on the financial health of California

and other states; the effect of the contracts on wholesale and

retail customers; the impacts contract modification may

have on the nation’s energy markets, including, but not

limited to, impacts on investment in new generation and

transmission infrastructure, and effect on confidence in

competitive markets; the impact of contract modification on

California spot market prices; the willingness of market

participants to enter into long-term contracts in the future

and the prices and terms and conditions of such contracts;

and the potential modification of other existing energy

contracts.

That being said, we want to strongly encourage all

parties involved in disputes arising from the California crisis

to seriously negotiate settlements. The uncertainty and

expense of continued litigation over these disputes serves

the interests of neither the parties to those disputes nor the

public. For this reason, we will hold the hearing in abeyance

and direct settlement judge procedures pursuant to Rule

603 of the Commission’s Rules of Practice and Procedure.*2

The Chief Judge shall appoint a settlement judge in this

proceeding within 15 days of the date of issuance of this

order. The settlement judge shall report to the Chief Judge

and the Commission within 30 days of the date of this order

concerning the status of settlement discussions. Based on

this report, the Chief Judge shall provide the parties with

additional time to continue their settlement discussions or

provide for commencement of a hearing by assigning the

case to a presiding judge.

In cases where, as here, the Commission institutes an

investigation on complaint under Section 206 of the FPA,

Section 206(b) requires that the Commission establish a

refund effective date that is no earlier than 60 days after the

denied, 97 FERC 461,275, at p. 62,229 (2001) (setting a benchmark for

five-year contracts for supply around-the-clock at $74/M Wh).

32 18C.F-.R. § 385.603 (2001).

2

i eS

37a

filing of the complaint, but no later than five months

subsequent to the expiration of the 60-day period.

Consistent with our general policy of providing maximum

protection to customers,®* we will set the refund effective

date as of the date 60 days after the date of the filing of each

complaint, 2.e., on April 26, 2002. :

Section 206(b) also requires that, if no final decision is

rendered by the refund effective date or by the conclusion of

the 180-day period commencing upon initiation of a

proceeding pursuant to Section 206, whichever is earlier, the

Commission shall state the reasons why it has failed to do so

and shall state the best estimate as to when it reasonably

expects to make such a decision. Ordinarily, to implement

that requirement, we would direct the presiding judge to

provide a report to the Commission in advance of the refund

effective date. Here, given that the refund effective date for

all the complaints has already passed, the Commission

cannot follow its normal procedure.

Although we do not have the benefit of the presiding

judge’s report, based on our review of the record, we expect

that, assuming the cases do not settle, the presiding judge

should be able to render a decision within eight months of

the commencement of hearing procedures. If the presiding

judge is able to render an initial decision by December 31,

2002 and assuming the cases do not settle, we estimate that

we will be able to issue our decision within approximately

three months of the filing of briefs on and opposing

exceptions or by May 31, 2003.

Given the overlap of issues and factual inquiries, we will

consolidate the instant complaints for purposes of hearing.

In addition, we will leave it to the discretion of the Chief

Administrative Law Judge to determine whether, when and

to what extent it may be appropriate to consolidate the

33 See, ¢.g., Seminole Electric Cooperative, lié-0- Florida Power &

Light Company, 65 FERC 4 61,413, at p. 63,139 (1993), Canal Electric

Company, 46 FERC 461,153, at p. 61,539, reh’g denied, 47 FERC

q 61,275 (1989).

38a

instant complaints with the ongoing proceeding in Docket

Nos. EL02-26-000, EL02-28-000, EL02-29-000, EL02-30-000,

EL02-31-000, EL02-32-000, EL02-33-000, EL02-34-000,

EL02-48-000, EL02-39-000, EL02-43-000, and EL02-56-

000.34

The Commission orders:

(A) Pursuant to the authority contained in and subject to

the jurisdiction conferred upon the Federal Energy

Regulatory Commission by Section 402(a) of the

Department of Energy Organization Act and the Federal

Power Act, particularly Section 206 thereof, and pursuant to

the Commission’s Rules of Practice and Procedure and the

regulations under the Federal Power Act (18 C.F.R.

Chapter 1), the captioned dockets are consolidated, and an

expedited public hearing shall be held concerning the

complaints in these proceedings. As discussed in the body of

this order, we will hold the hearing in abeyance to give the

parties time to conduct settlement judge negotiations, as

discussed in Paragraphs (B) and (C).

(B) Pursvant to Rule 603 of the Commission’s Rule of

Practice and Procedure, 18 C.F.R. § 385.603 (2001), the

Chief Administrative Law Judge is hereby directed and

authorized to appoint a settlement judge in this proceeding

within fifteen (15) days of the date of this order. Such

settlement judge shall have all powers and duties

enumerated in Rule 603 and shall convene a settlement

conference as soon as practicable after the Chief Judge

designates the settlement judge.

(C) Within thirty (30) days of the date of this order, the

settlement judge shall file a report with the Commission and

the Chief Judge on the status of the settlement discussions.

Based on this report, the Chief Judge shall provide the

parties with additional time to continue their settlement

discussions, if appropriate, or assign this case to a presiding

44 18C.F.R. § 385.503 (2001).

39a

judge for a trial-type evidentiary hearing, if appropriate. If

settlement discussions continue, the settlement judge shall

file a report at least every sixty (60) days thereafter,

informing the Commission and the Chief Judge of the

parties’ progress toward settlement.

(D) If the settlement judge procedures fail, and a trial-

type evidentiary hearing is to be held, a presiding judge, to

be designated by the Chief Judge, shall convene a

conference in this proce ling to be held within

approximately fifteen (15) days of the date the Chief Judge

designates the presiding judge, in a hearing room of the

Federa] Energy Regulatory Commission, 888 First Street,

NE, Washington, DC 20426. Such conference shall be held

for the purpose of establishing a procedural schedule. The

presiding judge is authorized to establish procedural] dates

and to rule on all motions (except motions to dismiss), as

provided in the Commission’s Rules of Practice and

Procedure.

(E) The refund effective date established pursuant to

Section 206(b) of the Federal Power Act is April 26, 2002.

(F) Motions to dismiss filed by Sunrise Power Company,

LLC, Pacificorp Power Marketing, Inc., Morgan Stanley

Capital Group, Inc., and Colton Power, L.P. are hereby

denied for the reasons discussed in the body of this order.

(G) Pacificorp Power Marketing, Inc.’s motion to

bifurcate is hereby denied for the reasons discussed in the

body of this order.

(H) Sunrise Power Company’s motion to establish a

separate proceeding for the complaints against it and for

consolidation is hereby denied for the reasons discussed in

the body of this order.

Commissioner Massey dissented in part with a

separate statement attached.

Commissioner Brownell concurred with a separate

statement attached.

40a

Appendix A

List of Contracts Set for Hearing

Public Utilities Commission of the State of California v.

Sellers of Long Term Contracts to the California

Department of Water Resources

Docket No. EL02-60-000

I. Contracts for which the issue of the applicable standard of

review has been summarily decided

Selier’s Name-Contract Date

Williams Energy Marketing & Trading Company-

2/21/2001

Allegheny Energy Supply Company, LLC-3/23/2001

Allegheny Energy Supply Company, LLC-4/20/2001

Soledad Energy, LLC-4/28/2001

GWF Energy, LLC-5/11/2001

Mirant Americas Energy Marketing, LP-5/22/2001

Coral Power, L.L.C.—5/24/2001

II. Contracts for which the issue of the applicable standard

of review has been set for hearing

Seller’s Name—Contract Date

El Paso Merchant, L.P.-—2/13/2001

Morgan Stanley Capital Group, Inc.—2/14/2001

Dynegy Power Marketing, Inc.-3/2/2001

Imperial Valley Resource Recovery Company, L.L.C.

3/13/2001

4la

Alliance Colton, LL.C-4/23/2001

Sempra Energy Resources~5/4/2001 ;

PG&E Energy Trading-Power, L.P.-5/31/2001 ;

California Electricity Oversight Board v. Sellers of ‘

Long Term Contracts to the California Department of ’

Water Resources |

Docket No. ELO2-62-000

I. Contracts for which the issue of the applicable standard

of review has been summarily decided

Seller’s Name-—Contract Date .

Williams Energy Marketing & Trading Company-

2/21/2001

Allegheny Energy Supply Company, LLC-3/23/2001

Allegheny Energy Supply Company, LLC-4/20/2001

Soledad Energy, LLC-4/28/2001

GWF Energy, LLC-5/11/2001

Mirant Americas Energy Marketing, LP-5/22/2001

Coral Power, L.L.C. -5/24/2001

II. Contracts for Which the issue of the applicable standard

of review has been set for hearing

Seller’s Name—Contract Date

El] Paso Merchant, L.P.—2/13/2001

Morgan Stanley Capital Group, Inc.—2/14/2001

Dynegy Power Marketing, Inc.-3/2/2001

Imperial Valley Resource Recovery Company, L.L.C.-

3/13/2001

42a

Alliance Colton, LLC—4/23/2001

Sempra Energy Resources—5/4/2001

PG&E Energy Trading-Power, L.P. -5/31/2001

Appendix B

List of Respondents

Allegheny Energy Supply Company, LLC

Calpeak Project Companies _

Calpine Energy Services, L.P.

Clearwood Electric Company, LLC

Colton Power, L.P.

Constellation Power Source, Inc.

Coral Power, L.L.C.

Dynegy Power Marketing, Inc.

El Paso Merchant Energy, L.P.

Fresno Cogeneration Partners, LP

GWF Energy LLC

High Desert Power Project, LLC

Imperial Valley Resource Recovery Company, L.L.C.

Mirant America Energy Marketing, LP

Morgan Stanley Capital Group, Inc.

PacifiCorp Power Marketing, Inc.

PG&E Energy Trading-Power, LP

Sempra Energy Resources

Soledad Energy, LLC

~

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43a

Sunrise Power Company, LLC

Wellhead Power Gates LLC

Wellhead Power Panoche LLC

Williams Energy Marketing & Trading Company

Appendix C

Public Utilities Commission of the State of California v.

Sellers of Long Term Contracts to the California

Department of Water Resources, et al.

Docket Nos. ELO2-60-000 and Docket No. EL02-62-000

Aquila Merchant Services, Inc.

BP Energy Company

California Independent System Operator, Inc.

California State Assembly*

Cities of Anaheim, Azusa, Banning, Colton, and Riverside,

California

City of Burbank, California

City of Santa Clara, California

Cogeneration Association of California and the Energy

Producers and Users Coalition

Commonwealth Edison Company

Duke Energy North America, LLC and Duke Energy

Trading & Marketing, LLC

Electric Power Supply Association”

protest and/or comments

44a

Exelon Corporation on behalf of Exelon Generation

Company, LLC, PECO Energy Company, and

Commonwealth Edison Company”

Independent Energy Producers Association”

Lassen Municipal Utility District

Modesto Irrigation District

Nevada Attorney General’s Office, Bureau of Consumer

Protection

Nevada Power Company and Sierra Pacific Power Company

Occidental Energy Ventures Corporation

Pacific Gas and Electric Company

Portland General Electric Company

Public Utility District No. 1 of Snohomish County,

Washington

Reliant Energy Power Generation, Inc. and Reliant Energy

Resources”

Sacramento Municipal Utility District

Southern California Edison Company

Southern California Water Company

Turlock Irrigation District

Universal Studios, Inc.

Western Power Trading Forum*

Wildflower Entities (Indigo Generation LLC, Larkspur

Energy LLC, and Wildflower Energy, LP)*

motion to intervene out-of-time

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William L. MASSEY, Commissioner, dissenting in part:

This order establishes hearing procedures to develop a

record upon which the Commission will decide whether to

modify the terms of a series of long term contracts

negotiated when the California spot markets were wildly

out of control. Consistent with our policy regarding

investigations under Section 206 of the Federal Power Act,

the order establishes a refund effective date. And

consistent with the our precedent, the order finds that a

party that seeks to modify a contract bears a heavy burden.

I agree with those basic decisions reached in this order. We

need to give these contracts a good, hard look.

Yes, the complainants bear a heavy burden in

demonstrating that the contracts should be modified, but

the Federal Power Act says that any contract that is not

just and reasonable is unlawful. I understand there is a

concern that investigating these contracts may create

uncertainty for long term contracting and investment.

Nevertheless, this Commission is simply not meeting its

statutory responsibilities if we rubber stamp contracts just

because they are long term contracts. Any uncertainty in

the market is caused by the Federal Power Act itself, not

because we are setting these contracts for hearing.

There are, however, two aspects of today’s order with

which I disagree. First, I disagree with the order’s

conclusion that the complainants have not shown that the

dysfunctional spot market had an adverse effect on the long

term contract market. It seems obvious to me that the

soaring prices in the spot market had a dramatic effect on

both the negotiations and the contracts that were ultimately

negotiated. Certainly no buyer would agree to pay $249 per

Mwh if spot market prices, and expectations of future spot

market prices, were not also in that range. The Commission

46a

has recognized this relationship between spot market prices

and long term contract prices.!

Second, I disagree with the order’s erroneous conclusion

that the California Public Utilities Commission (CPUC),

which is not a party to any of the contracts at issue, is bound

by the Mobile-Sierra language of the contracts. The

reasoning seems to be that the entire California state

government in some way functions as a monolith, making

joint decisions on power procurement issues. Thus, under

this flawed reasoning, a clause in the contracts signed by the

California Department of Water Resources (CDWR)

somehow binds the CPUC.

Such a conclusion is unprecedented. The CPUC points

out that it did not participate in the negotiations leading to

the signing of these contracts. The CPUC is an independent

regulatory body responsible for regulating utilities and

charged with protecting consumers. It is thus similar to this

Commission. This Commission would bristle at the idea that

some executive branch official in the Department of the

Interior, or even the Department of Energy, could bind us

in some way that is inconsistent with our statutory

responsibility. That would be unprecedented and wrong.

What is the limit of this line or reasoning? Is any creature

or institution of the California state government bound by

the clauses in the CDWR contracts, even if they had no role

in the negotiations?

The order does not cite any precedent for the conclusion

binding the CPUC to the Mobilie-Sierra clauses in the

contracts. And, I believe, it is because none exists. In fact,

our precedents cut the other way. Our precedents generally

support the position that a signatory to a contract cannot

ba. (m)aintaining an accurately priced spot market is the single most

important element for disciplining longer term transactions.” AEP

Power Marketing, 97 FERC 4 61,219 (2001) at p. 61,972 (2001).

47a

bind non-parties to a certain standard of review.2 For

example, less than one year ago we made the following

statement in an order:

Mobile-Sierra does not speak to situations such as this,

where a non-party to the RAA (such as PJM, which is

not a party to the RAA) seeks changes under Section

206. [fn 13 omitted] Under PPL’s interpreta‘ion,

parties to a contract who agree among themselves not

to seek rate changes would be able to bind not only one

another, but also other entities who are not parties to

that contract (and did not receive the contractual

benefits in exchange for which the parties traded away

their right to seek rate changes). This result is not

what the Supreme Court intended in Mobile-Sierra.3

For these reasons, I dissent in part from today’s order.

Nora Mead BROWNELL, Commissioner, concurring:

I would like to extend the comments in my concurrence

in Nevada Power Company and Sierra Pacific Power

Company v. Duke Energy Trading and Marketing, L.L.v.,

et al., 99 FERC J 61,047 (2002), to these cases. First, I

would like to note that in another context, I might have

concluded that dismissal of the complaints was appropriate,

given the lack of evidence offered. However, in this context,

I have concluded that a greater airing of the evidence for

and against modification of these contracts is more likely to

resolve the controversy that plagues these markets.

Second, I see nothing in the Mobile-Sierra case law that

bars the Commission from ruling that a market-based

2 See, for example, Southern Company Services, Inc., 67 FERC

4 61,080 (1994) and Florida Power & Light Company, 67 FERC { 61,141

(1994).

3 PJM Interconnection, LLC, 96 FERC 4 61,206 at p. 16,878 (2001).

48a

contract’s silence on a buyer’s rights to seek unilateral

changes under Section 206 of the Federal Power Act

triggers the public interest standard.! Moreover, I believe

that such a ruling may be appropriate, as policy matter.

However, I am comfortable deferring judgment on the

standard to be applied to those contracts that do not contain

explicit Section 206 waivers, pending a determination at

hearing of whether there is any extrinsic evidence of the

parties’ intent.

For these reasons, I respectfully concur with this order.

1 See, e.g., Texaco Inc, v. FERC, 148 F.3d 1091, 1096 (D.C. Cir. 1998)

(“The law is quite clear: absent contractual language susceptible to the

construction that the rate may be altered while the contract subsists, the

Mobile-Sierra doctrine applies.”); Boston Edison Co. v. FERC, 233 F.3d

60, 67 (ist Cir. 2000) (“{T]he specification of a rate or formula by itself

implicates Mobdile-Sierra (unless the parties negate the implication).”);

and San Diego Gas & Electric Company v. Public Service Company of

New Mexico, 91 FERC { 61,233, at pp. 61,851-53 (2000) (buyer held to

public interest standard notwithstanding contract’s silence as to section

206 rights and evidence “that the parties did not ever discuss either

Section 206 or the applicable standard of review were a Section 206

complaint to be filed.”).

Pg TEPER SIR. ne OE PON whl tbe fers che SUD OL ee ee teat he OP enn we Se ne cue i. en oe ae ers

— 49a 7

. FEDERAL ENERGY REGULATORY COMMISSION

. Public Utilities Commission of the State of California

v.

Sellers of Long Term Contracts to the California

Department of Water Resources,

Docket No. E102-60-001

California Electricity Oversight Board

v.

Sellers of Energy and Capacity Under Long-Term

Contracts With the California Department of Water

Resources

Docket No. E L02-62-001 (Consolidated)

ORDER ON REHEARING

(Issued July 23, 2002)

100 FERC 4 61,098

a Before Commissioners: Pat Wood, III, Chairman;

William L. Massey, Linda Breathitt, and Nora Mead

Brownell.

1. This order addresses various requests for rehearing

and clarification of an order issued on April 25, 2002 (April

25 Order)! setting for hearing complaints filed by the Public

Utilities Commission of the State of California (CPUC) and

1 Pub. Utilities Com'n of the State of California, et al. v. Sellers of

Long-Term Contracts to the California Dep't of Water Resources, et al.,

99 FERC 4 61,087 (2002), reh'g pending (April 25 Order).

50a

the California Electricity Oversight Board (CEOB) against

a group of sellers of energy under long-term bilateral

contracts with the California Department of Water

Resources (CDWR). In this order, we clarify that the

complaints are dismissed as they relate to the contracts

entered into after June 20, 2001, the date on which the

Commission’s West-wide mitigation went into effect.2 We

also grant requests for rehearing submitted by two

qualifying facilities (QF's) and dismiss the complaints as they

relate to those entities. We, however, deny other requests

for rehearing and clarification.

2. This order reaffirms our decision in the April 25

Order to set CPUC’s and CEOB’s complaints for hearing.

The evidentiary hearing established by the April 25 Order is

in the public interest because it ensures that the customers

have a full and fair opportunity to present their cases and

that the Commission, in turn, has a complete record on

which to base its ultimate decision.

Background

3. On April 25, 2002, the Commission issued an order

addressing two almost identical complaints filed by the

CPUC and CEOB against a group of sellers of energy under

long-term bilateral contracts with the CDWR. The

complaints alleged that the prices, terms, and conditions of

such contracts are unjust and unreasonable and; to the

extent applicabie, not in the public interest, and that the

respondents obtained the prices, terms, and conditions in

the contracts through the exercise of market power, in

violation of the Federal Power Act (FPA).2 The April 25

Order set those complaints for an evidentiary hearing, but

held the hearing in abeyance pending the outcome of the

settlement judge procedures. The Commission limited the

scope of the hearing to the examination of the contracts that

2 See San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary

Serv., 95 FERC ¢ 61,418 (2001).

3 16 U.S.C. 88 796, et seg. (1994).

,

" as a;

a eno eS ee se ee Oe

5la

were entered into before June 20, 2001, the date on which

the Commission’s West-wide mitigation went into effect,

since the effect of the West-wide mitigation was to stabilize

prices.

4. In the April 25 Order, the Commission also held that

the complainants must satisfy the Mobile-Sierra public

interest standard‘ to justify modification of the contracts

containing a specific contractual provision which addresses

FPA Sections 205 and 206 rights of the parties to these

contracts, as well as the Section 206 rights of third parties.

As for the contracts that did not contain an explicit Mobile-

Sierra provision, the Commission ruled that it did not have a

sufficient record to address the Mobile-Sierra issue

definitively and set for hearing the issue of whether the

complainants must bear the burden of showing that a

challenged contract is contrary to the public interest, or

whether they would bear the burden of showing that the

contract is not just and reasonable. The Commission also

noted that even under a just and reasonable burden of proof

standard, parties who seek to overturn market-based

contracts into which they voluntarily entered would bear a

heavy burden.

Respondents’ and Interveners’ Requests for Rehearing

5. Allegheny Energy Supply Company, LLC

(Allegheny), El Paso Merchant Energy, L.P. (El Paso),

Sempra Energy Resources (Sempra), Williams Energy

Marketing & Trading Company (Williams) and GWF

Energy LLC (GWF) argue that the Commission erred in

not dismissing the CPUC’s and CEOB’s complaints on the

ground that the complainants failed to establish a prima

facie case. Allegheny also contends that the complaints

constituted an impermissible attack on the Commission’s

prior orders encouraging market participants to move load

4 See United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332

(1956) (Mobile); FPC v. Sierra Pacific Power, 350 U.S. 348 (1956) (Sierra);

and United Gas Pipe Line Co. v. Memphis Light, Gas and Water Div., 358

U.S. 108 (1958).

52a

out of the spot market and enter into forward contracts and

that the relationship between the spot market and forward

market has been addressed by the Commission in its prior

orders and investigations.

6. We disagree with these assertions. The April 25

Order found that the complainants established a prima facie

case. The summary of the complainants’ allegations, which

is set forth in the April 25 Order at 61,377-78, is extensive

and is adequate to support the Commission’s initiation of a

proceeding under Section 206 of the FPA® to determine

whether the allegations are valid. | Therefore, we

established an evidentiary hearing’ to address the question

of whether the dysfunctional California Independent

System Operator (ISO) and California Power Exchange

(PX) spot markets adversely affected the long-term

bilateral contract prices so as to render them unjust and

unreasonable or contrary to public interest. Contrary to

Allegheny’s contentions, this issue has not been examined

by the Commission in its prior orders.

7. Public Utility District No. 1 of Snohomish County,

Washington (Snohomish), on the contrary, believes that the

complainants have shown the nexus between the

dysfunctional California spot markets and the forward

bilateral contracts. We disagree. Prior to issuance of the

April 25 Order, the Commission carefully examined all the

materials on record and concluded that “{iJn the evidence

presented thus far, the complainants have failed to show

that the dysfunctional [ISO] and [PX] spot markets had an

5 16 U.S.C. § 824e (1994).

6 See, generally, Panhandle Eastern Pipe Line Company, 37 FERC

4 61,199, at p. 61,479 (1986).

7 We note that the decision as to whether to conduct an evidentiary

hearing is in the Commission’s discretion. See, eg., Woolen Mill

Associates v. FERC, 917 F.2d 589, 592 (D.C. Cir. 1990) (citing Cerro Wire

& Cable Co. v. FERC, 677 F.2d 124, 128 (D.C. Cir. 1982).

53a

adverse effect on the long-term, bilateral markets in

California.”8

8. Williams, El Paso, and Allegheny argue that by

setting the complaints for hearing, the Commission violated

established legal precedent in favor of upholding the

sanctity of contracts and also disregarded other important

factors militating against reformation of the contracts in

question. In particular, they state that the Commission has

failed to consider that the prices in the CDWR contracts

were within the Commission prescribed benchmark,? and

that the complainants made no showing of market power

abuse, which, in Williams’, El Paso’s, and Allegheny’s

opinion, is necessary to justify contract modification.

Furthermore, Williams contends that the Commission

disregarded the extreme hardships that suppliers may

suffer should their contracts be abrogated or reformed.

9. In the April 25 Order, we _ recognized the

Commission’s long-standing policy to uphold the sanctity of

contracts and stated that the Commission would not modify

market-based contracts absent extraordinary

circumstances. However, we found that based on the

unusual circumstances presented, it was appropriate to set

the complaints for hearing, to ensure that the complainants

have a full and fair opportunity to present their cases and

that the Commission, in turn, has a complete record on

which to base its ultimate decision. We also provided the

parties with an opportunity to present a wide range of facts

and data in support of their cases, including those pertaining

to negotiations of contract terms and the availability of

other alternatives to both buyers and sellers, as well as the

relation of the contract rates to the Commission’s previously

8 See April 25 Order at p. 61,383.

9 See San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary

Serv., 93 FERC 4 61,294, at pp. 61,994-95 (2000), reh’g denied, 97 FERC

q 61,275, at p. 62,229 (2001) (setting a benchmark for five-year contracts

for supply around-the-clock at $ 74/MWh).

54a

identified benchmark for long-term bilateral contracts.!0

Regarding the contention that a showing of market power

abuse is necessary to justify contract modification, the April

25 Order addressed this issue. We made it cléar that the

instant contracts were set for hearing based on the

arguments that the dysfunctional spot markets in California

adversely affected forward bilateral markets.

10. We also note that the April 25 Order did not address

the merits of the complaints; it set the complaints for

hearing and directed the presiding judge to consider

evidence on a wide variety of topics. The outcome of that

hearing, as well as the Commission’s final decision cannot be

predicted at this point. Thus, we believe that the parties

requesting rehearing cannot claim at this time that they will

not be able to obtain all the relief that they seek in these

proceedings.

11. Allegheny, GWF, Mirant Americas’ Energy

Marketing, LP (Mirant), Sempra, and E] Paso further argue

that the Commission should have ruled as a matter of law

that the complainants must satisfy the public interest

standard with regard to all of the contracts set for hearing,

which should have led to dismissal of the complaints for

failure to meet this standard of review. Mirant and Sempra

add that in accordance with court precedent,!! the public

interest standard is also applicable to the CDWR contracts,

which are silent as to the reservation of section 206 rights.

Sempra further states that the Commission should have

found that its contract with CDWR contains an explicit

Mobile-Sierra clause.!* Snohomish, on the contrary, argues

10 See April 25 Order at p. 61,384.

11 Mirant cites to United Gas Pipe Line Co. v. Memphis Light, Gas

and Water Div., 358 U.S. 103 (1958).

12 Sempra refers to Section 10.3 of the agreement which states: “The

Parties acknowledge that: (i) this Agreement provides for wholesale

power sales subject to the jurisdiction of the FERC under the FPA; and

(ii) the rates, terms and conditions of this Agreement are “just” and

“reasonable” within the meaning of the FPA and that changes in market

55a

that the Commission should have applied the just and

reasonable standard of review to all of the contracts.

12. We find that these contentions are without merit.

The Commission needed additional information in order to

determine the applicable standard of review for contracts

that did not contain explicit Mobile-Sierra language. The

evidentiary hearing was established to, among other things,

interpret the terms of such contracts and to ascertain the

intent of the parties at the time these contracts were signed.

As we have previously observed, contract interpretation is

often a complex process, involving the scrutiny of the

contract. itself, related documents, and at times parol or

extrinsic evidence. We have explained that, where the

contract) at issue contains ambiguous language, it is

appropriate for us to consider extrinsic evidence.!3 With

respect to the contracts that appeared to have a specific

contractual provision which addresses FPA Sections 205

and 206 rights of the parties, the Commission explicitly

ruled that the complainants must satisfy the public interest

standard to justify contract modification. We, however,

were not persuaded that the Sempra contract was explicit

with regard to the parties’ Section 206 rights. Sempra will

have an opportunity to present additional evidence to

support its interpretation of the contract language at the

hearing.

13. El Paso further argues that the Commission erred in

prescribing a “laundry list” of factual considerations to be

taken into account without providing any guidance to the

parties and the presiding judge as to how these evidentiary

requirements relate to the applicable legal standard.

Snohomish, on the contrary, argues that the complainants

conditions will not render such rates, terms and conditions “unjust” or

“unreasonable” for purposes of Section 206 of the FPA.”

13 See Oglethorpe Power Corporation v. Georgia Power Company, 69

FERC 61,208, at 61,825 (1994), order on reh’g, 72 FERC 4 61,065 (1995);

Delmarva Power & Light Company, 69 FERC 461,144, at 61,525-26

(1994).

: x, +e AT Soe

56a

should be afforded an opportunity to present additional

evidence not identified in the April 25 Order. Snohomish

also believes that the evidentiary factors listed in the April

25 Order unjustifiably focus on the buyer’s actions rather

than the sellers’ actions and that this focus “blames the

victim.”

14. Contrary to El Paso’s assertions, the instructions to

the presiding judge in the April 25 Order are specific and

will assist the judge in focusing on the main issue that the

hearing is intended to resolve, ie., whether the

dysfunctional California spot markets adversely affected the

long-term bilateral markets, and, if so, whether modification

of any individual contract at issue is warranted. However,

the list of evidentiary requirements is not exclusive. The

parties are free to offer other evidence deemed by the

presiding judge to be relevant to the Commission-

prescribed scope of the hearing. We also believe that the

April 25 Order’s evidentiary requirements are applicable to

both the sellers and the buyer and are not biased toward the

complainants.

15. GWF argues that CPUC’s and CEQB’s complaints

against it are barred by the doctrine of res judicata and the

Commission’s long-standing policy against relitigating

matters that are already decided.14 GWF explains that the

contract at issue has been previously filed with and accepted

by the Commission, despite the objections by CPUC and

CEOB.!5 Subsequently, the Commission rejected CPUC’s

requests for rehearing of the December 19 Order, stating

that “if the California Commission believes that the facts

warrant Commission action, the California Commission

should file a complaint bringing those facts to our attention

and challenging the reasonableness of the underlying

14 GWF cites Panhandle E. Pipe Line Co., 38 FERC 63,030, at p.

65,201 (1987) (citing Delmarva Power & Light Co., 14 FERC 4 63,074

(1981)).

15 See GWF Energy LLC, 97 FERC 4 61,297 (2001), reh’g denied 98

FERC @ 61,330 (2002) (December 19 Order).

eats,

57a

market-based rate authority.”16 GWF concludes that the

Commission has already determined that the GWF contract

is just and ,reasonable and thus this issue may not be

relitigated in accordance with the doctrine of res judicata.

16. We disagree that the Commission has determined

the justness and reasonableness of the GWF contract. The

GWF contract was accepted by the Commission as an

informational filing. In the December 19 Order, we

emphasized that informational filings were not traditional

FPA Section 205 filings and that we were not required to

find that the agreements submitted for filing were just and

reasonable, since we had already authorized the sellers to

make sales at market-based rates. We also noted that the

filing of such agreements does not serve as a vehicle to

challenge the justness and reasonableness of either the

agreements themselves or the underlying market-based

rate authority.!7 Moreover, the issue set for hearing by the

April 25 Order is whether the dysfunctional California spot

markets adversely affected the long-term bilateral markets,

and, if so, whether modification of any individual contract at

issue is warranted. In that order, we also stated that “(t]he

hearing will not address issues concerning the Commission’s

policies on ... regulation of sellers with [market-based rate]

authority.”18

17. In addition, El Paso argues that while the

Commission acknowledged certain requests submitted by EF]

Paso in its answer to the complaints, the Commission never

addressed them. In particular, El Paso requested that if the

Commission instituted a FPA Section 206 investigation, it

establish a refund effective date at the latest time permitted

by law. El] Paso explained that if it were to file ripple

complaints, the refund effective date for those complaints

16 See GWF Energy LLC, 98 FERC 461,330, at p. 62,291 (2002)

(March 27 Order).

17 See December 19 Order at pp. 62,390-91.

18 See April 25 Order at p. 61,384.

be, AY

f

58a

could be no sooner than mid-June, leaving El Paso with close

to two months of refund exposure without potential offset

from its own suppliers.

18. As we stated in the related order addressing similar

complaints filed by Nevada Power Company, pursuant to

Section 206(b) of the FPA, the Commission can establish a

refund effective date only when it institutes a proceeding

upon a complaint or its own motion. We cannot set refund

effective dates for possible future complaints.19 We note

that El] Paso has not, to date, filed a complaint.

19. Imperial Valley Resource Recovery Company,

L.L.C. and Primary Power International (collectively,

IVRRC) and Soledad Energy LLC (Soledad) request

rehearing of the April 25 Order on the grounds that IVRRC

and Soledad are QF's and their contracts with CDWR are

exempt from the reach of section 206 of the FPA.20

Unfortunately, neither IVRRC nor Soledad informed the

Commission of its QF status prior to the issuance of the

April 25 Order.2! We grant IVRRC’s and Soledad’s

requests for rehearing. CPUC’s and CEOB’s complaints are

hereby dismissed as they relate to [VRRC and Soledad.

Complainants’ Requests for Rehearing

20. CEOB and CPUC argue that the Commission erred

in excluding from hearing contracts that were entered into

after June 20, 2001, the effective date for the West-wide

mitigation. They explain that those contracts were only

signed after June 20, 2001, while the terms were negotiated

before the Commission imposed the West-wide mitigation

designed to stabilize prices. CEOB and CPUC assert that

19 Nevada Power Co. and Sierra Pacific Power Co. v. Duke Energy

Trading and Mktg, L.P., et al., 99 FERC 4 61,047, at p. 61,192 (2002),

reh’g pending.

20 See 16 U.S.C. § 824a-3(e)(1)(1994) and 18 C.F.R. § 292.601(c) (2002).

21 See Soledad Energy Partnership, 47 FERC 4 62,125 (1989) and

Imperial Valley Resource Recovery Association, L.P., 45 FERC § 62,184

(1988).

59a

an option of renegotiating the contracts term after June 20,

2001 was not available to CDWR because it signed letters of

intent and Memoranda of Understanding (MOUs) and was

bound to continue the negotiations in good faith to finalize

the agreements. Moreover, CEOB and CPUC state that if

CDWR had attempted renegotiations, it would have run a

risk of missing delivery dates set for late August and

September. In regard to the contract with Sunrise, CEOB

and CPUC state that the pricing terms in the MOU for the

Sunrise Project were not subject to renegotiation, but could

only be withdrawn and reopened for discussion if the MOU

is terminated. CEOB states that CDWR was in no position

to postpone execution of the agreement with Sunrise until

after the December 31, 2001, the termination date of the

MOU, because it would have prevented the Sunrise Project

from being put in service by August 15, 2001 and could have

resulted in penalties being assessed against CDWR.

21. We do not find CEOB’s and CPUC’s arguments

persuasive. Letters of intent and MOUs are used for the

purpose of providing direction for the negotiation process

and are not the equivalent of signed contracts. CDWR could

have postponed execution of the contracts and demanded

renegotiation of contract terms after it learned of the

Commission-directed implementation of the West-wide

mitigation. We recognize that CDWR might have had

certain concerns: regarding the possibility of renegotiating

the proposed terms and conditions. These concerns,

however, were not made known to us prior to the time the

April 25 Order was issued.22 We will not consider new

22 In their replies to answers to the complaints as permitted by the

April 25 Order, CPUC and CEOB did mention that the negotiation of all

of the contracts took place prior to June 20, 2001. CPUC and CEOB,

however, failed to state the possible implications of not following through

with signing of these contracts. See Answer of the CPUC to Motions to

Dismiss and for Other Forms of Affirmative Relief, and Motion for Leave

to Submit This Answer to Protests and Answers, Docket No. EL02-60-

QUO, at 6 (April 15, 2002) and Response of the California Electricity

Oversight Board to Answers Opposing and Motions to Dismiss Long-

60a

evidence presented for the first time at the rehearing stage

of Commission proceedings. The Commission has discretion

to reject evidence that was available but not proffered for

consideration at the time of the decision.23

22. CEOB and CPUC assert that the Commission erred

in ruling that CEOB and CPUC “stepped into the shoes” of |

CDWR and thus are bound by the same standard of review -

as would apply to CDWR. CEOB and CPUC explain that

pursuant to the doctrine of equitable estoppel, the contract

terms restricting the parties’ Section 205 and 206 rights do

not apply to the State of California (which CEOB or CPUC

represent), since it acts in its sovereign capacity in this

proceeding.”4

23. In the Apri! 25 Order, we stated that:

... In the instant proceeding, CPUC and CEOB act in the

same capacity as CDWR. Based on the fact that in

negotiating and executing the contracts at issue, CDOWR

represented the State of California, CPUC and CEOB,

which are also State representatives, “stepped into the

shoes” of CDWR by bringing these complaints. Thus,

the same standard of review applies to these

complainants as would apply to a similar complaint filed

by CDWR.?°

CPUC and CEOB’s argument is misplaced. The State of

California entered into the contracts at issue through one of

its many agents, CDWR. We do not believe that a different a

standard of review should apply because these contracts are

now being challenged by other agents of the State of

California, namely CEOB and CPUC. The Commission is

Term Contract Complaint, Docket No. EL02-62-000, at 18-19 (April 15,

2002).

23 See, ¢.g., Philadelphia Electric Company, 58 FERC 4 61,060, at

p. 61,133(1992); Arkansas Power & Light Company, 52 FERC { 61,029, at

p. 61,156 (1990).

24 CEOB cites Molton, Allen, and Williams v. Harris, 613 F.2d 1176,

1179 (D.C. Cir. 1980).

25 April 25 Order at p. 61,383.

6la

charged with administering the Federal Power Act and in

performance of this duty, the Commission views the State of

California, CDWR, CPUC, and CEOB as one and the same

entity that, in this case, acted as a buyer in the energy

markets.

24. CEOB also believes that by ruling that the Mobile-

Sierra standard of review applies to certain contracts, the

Commission deprived the complainants of an opportunity to

present evidence that the Mobdile-Sierra provisions, much

like other contract terms being challenged, resulted from an

uncompetitive market and thus should not be enforceable.

We disagree. Nothing prevents the complainants from

making this argument before the presiding judge. The April

25 Order directs the judge to consider evidence on whether

any non-price terms were adopted upon CDWR’s request.

25. CEOB and CPUC also raise a number of argument ;

that have been examined by the Commission prior to issuing

the April 25 Order. In particular, they argue that the

Commission’s prior findings in regard to interdependence of

the spot and forward markets warranted the granting of the

complaints. We disagree. In prior orders, the Commission

did in fact recognize interdependence between the spot and

forward markets, but it has never made the determination

that the dysfunctions in the spot market rendered forward

contract prices unjust and unreasonable. This question was

set for hearing in the April 25 Order because we did not

believe that we had sufficient evidence to decide this issue

summarily.

26. CPUC also argues@6 that the Commission introduced

a new standard of review when it characterized the burden

of proof under the just and reasonable standard as a heavy

one. CPUC also adds that the Commission created an

additional standard of review when it found that the

complainants must demonstrate the adverse effect of the

~ + 26 Snohomish raises the same argument in its intervention as CPUC.

62a

spot market dysfunctions was of a magnitude warranting

modification of the contracts in question.

27. Contrary to CPUC’s assertion, in the April 25 Order

we did not introduce a new standard of review. Section 206

complaints can be reviewed only under either the just and

reasonable standard or the public interest standard. By

emphasizing that a complainant bears a heavy burden of

proof and the adverse effect must be of sufficient magnitude,

we stated the obvious that the sanctity of contracts is

presumed and that the Commission will not lightly undo the

terms of existing contracts regardless of the applicable

standard of review.

Requests for Clarification

28. Several parties request that the Commission clarify

that the complaints against them are dismissed, since their

contracts with CDWR were entered into after June 20, 2001.

These parties are Clearwood Electric Company, LLC.

(Clearwood), Fresno Cogeneration Partners, LP, Wellhead

Power Gates, LLC, and Wellhead Power Panoche LLC

(collectively, Wellhead Companies), PacifiCorp Power

Marketing, Inc.(PPM), and Sunrise Power Company, LLC

(Sunrise). We grant these requests for clarification and

clarify that CPUC’s and CEOB’s complaints are hereby

dismissed with prejudice as they relate to Clearwood,

Wellhead Companies, PPM, and Sunrise.

29. Mirant and Sempra requests that the Commission

clarify that the Commission’s finding that the CPUC and

CEOB have standing to bring the complaints does not

preclude the parties from arguing during the proceeding

that the views of the CPUC and CEOB should be afforded

less weight than the views of CDWR because CDWR to

date continued to support the justness and reasonableness

of each of the CDWR contracts.

30. Mirant’s and Sempra’s requests for clarification are

granted. In the April 25 Order, we held that the same

standard of review applies to CPUC’s and CEOB’s

complaints as would apply to a similar complaint filed by

CDWR. Thus, all arguments as well as any inconsistent

63a

statements by the three state agencies can be considered at

the hearing.

31. Sempra also requests that the Commission clarify

that CDWR will be subject to discovery in this proceeding.

Pursuant to Rule 504(b)(5) of the Commission’s Rules of

Practice and Procedure,2’ the presiding judge will rule on

discovery issues.

Procedural Matters

32. On May 14, 2002, CPUC submitted an answer to

requests for clarification filed by Clearwood, Wellhead

Companies, Sunrise, and PPM. On June 11, 2002, Sunrise

also filed a response to CPUC’s and CEOB’s requests for

rehearing. Pursuant to Rule 713(d) of the Commission’s

Rules of Practice and Procedure,2® the Commission will not

permit answers to requests for rehearing. For this reason,

we reject CPUC’s and Sunrise’s answers to the requests for

rehearing and clarification.

The Commission orders:

(A) Request for rehearing and clarification filed by

Allegheny Energy Supply Company, LLC; El Paso

Merchant Energy, L.P.; Williams Energy Marketing &

Trading Company; Public Utility District No. 1 of

Snohomish County, Washington; GWF Energy LLC; Public

Utilities Commission of the State of California; and the

California Electricity Oversight Board are hereby denied, as

discussed in the body of this order.

(B) Request for rehearing filed by Imperial Valley

Resource Recovery Company, L.L.C. and Primary Power

International, and Soledad Energy LLC are hereby

granted, as discussed in the body of this order.

(C) Requests for clarification filed by Clearwood Electric

Company, LLC; Fresno Cogeneration Partners, LP; Mirant

Americas Energy Marketing, LP; Sempra Energy

Resources; Wellhead Power Gates, LLC and Wellhead

27 180.F.R. § 285.504(b)\(5) (2002).

28 18C.F.R. § 385.713(d) (2002).

64a

Power Panoche LLC; PacifiCorp Power Marketing, Inc.;

and Sunrise Power Company, LLC are hereby granted, as

discussed in the body of this order.

William L. MASSEY, Commissioner, dissenting in part:

This order largely denies rehearing of the Commission’s

April 25 Order setting for hearing two complaints filed by

the Public Utility Commission of California (CPUC) and the

California Energy Oversight Board (CEOB). The hearing

will determine whether the Commission should modify the

terms of a series of long term bilateral contracts negotiated

by the California Department of Water Resources (CDWR)

during the time when the California spot markets were

wildly out of control.

While I continue to support the decision to set these

contracts for hearing, I write separately and dissent in part

because I would have granted rehearing on two issues.

First, | remain convinced that the April 25 Order erred in

concluding that the CPUC and CEOB, which were not

parties to the contracts at issue, “stepped into the shoes” of

the CDWR and are thus bound by the same standard of

review as would apply to CDWR. Today’s order maintains

the flawed reasoning that a relationship under agency law

concepts may be imputed to all parts of the California state

government. Thus, the order would deem a clause in the

contracts signed by the CDWR to bind the CPUC and

CEOB. As I said in my previous partial dissent to the April

25 Order, the Commission’s precedents generally support

the position that a signatory to a contract cannot bind non-

parties to a certain standard of review.! Today’s order does

not persuade me to alter my views. Thus, I would have

granted rehearing on this issue.

The second concern I have with today’s order is that it

refuses to consider important evidence in the CPUC and

CEOB requests for rehearing. The Memorandum of

1 See, for example, Southern Company Services. Inc, 67 FERC $61,080

(1994) and Florida Power & Light Company, 67 FERC ¢ 61,141 (1994).

65a

Understanding (MOU) governing Edison International’s

Sunrise Project was executed prior to June 20, 2001 and set

in place all of the essential elements for the purchase of

power, including price terms. On rehearing, the CPUC and

CEOB assert that the CDWR was legally cbligated to

proceed under the price terms already established in the

MOU. The pricing terms could only be withdrawn and

renegotiated if the MOU terminated. If CDWR had

reneged on the MOU, it would have jeopardized the

completion of this important generation project, slated for

an in-service date of August 15, 2001, and could have

resulted in penalties being assessed against CDWR.

Today’s order concedes that the Commission has

discretion to consider this new evidence. Nevertheless, the

Commission rejects the evidence because it was available

but not proffered prior to the issuance of the April 25 Order.

It appears reasonable to me that this evidence was not

proffered until rehearing because the CPUC and CEOB

may not have anticipated that the Commission would

exclude contracts finalized after June 20, 2001. CPUC and

CEOB argue that to exclude the MOU from consideration

under the terms of the April 25 Order elevates form over

substance. I agree, and I would have granted rehearing on

this point. The hearing process should sort through all of

the evidence related to the negotiation of this MOU,

including whether it was binding prior to the June 20, 2001

cutoff date.

For these reasons, I dissent in part from today’s order.

De ES ee ee CT OT ee ee

66a

FEDERAL ENERGY REGULATORY COMMISSION

Public Utilities Commission of the State of California

Vv.

Sellers of Long Term Contracts to the California

Department of Water Resources,

Docket No. EL02-60-003

California Electricity Oversight Board

v.

Sellers of Energy and Capacity Under Long-Term

Contracts with the California Department of Water

Resources

Docket No. EL02-62-003 (Consolidated)

5 PARTIAL INITIAL DECISION ON THE ISSUE OF

a THE APPLICABLE STANDARD OF REVIEW

(Issued January 16, 2003)

102 FERC 4 63,013

F Introduction

7 1. By Order dated January 10, 2003 (January 10

Order),) the Commission directed the undersigned presiding

administrative law judge to determine the applicable

standard of review for the contracts at issue in this

consolidated proceeding not containing explicit Mobdile-

Sierra language, and as to the contracts for which the

undersigned ALJ finds the applicable standard of review to

1 Public Utils. Comm'n of California v. Sellers of Long Term

Contracts, 102 FERC 4 61,025 (2003). (January 10 Order).

67a

be the “public interest” standard, to certify the record

directly to the Commission for consideration of all remaining

issues in the case. In accordance with the Commission’s

January 10 Order, this is a partial initial decision limited to

the single threshold issue of the applicable standard of

review for the subject contracts.

Background

2. Commission Trial Staff's Initial Brief, which has been

filed with the Commission and served on all parties on the

Restricted Service List, contains a good summary of the

procedural history of this case and is adopted and

incorporated herein in pertinent part.

3. On February 25, 2002, the Public Utilities

Commission of the State of California (CPUC) and the

California Electricity Oversight Board (CEOB) (jointly

referred to as “Complainants” or “the State) filed separate,

but virtually identical, complaints seeking to modify over 30

contracts.* The contracts at issue are long-term contracts

between the California Department of Water Resources

(CDWR) and numerous sellers? of energy. The

Complainants claimed that the prices, terms and conditions

of these contracts are unjust and unreasonable and, to the

extent applicable, not in the public interest. The

Complainants also alleged that these sellers obtained the

prices, terms, and conditions in the contracts through the

exercise of market power in violation of the Federal Power

Act (FPA), and the sellers’ actions are causing injury to the

citizens and ratepayers of California.

4. On April 25, 2002, (April 25 Order), the Commission

issued an order dismissing the complaints as to contracts

that were entered into after June 20, 2001, “the date on

which the Commission’s West-wide mitigation went into

2 A list of the contracts which the Complainants sought to modify is

contained in Appendix A to the April 25, 2002 Order.

3 A list of the sellers is contained in Appendix B to the April 25, 2002

Order.

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effect,... since the effect of the West-wide mitigation was to

stabilize prices,” but setting the complaints for hearing as to

those contracts entered into before June 20, 2001.4 As to

those contracts, the Commission established an evidentiary

hearing to address:

whether une dysfunctional California spot markets

adversely affected the long-term bilateral markets, and,

if so, whether modification of any individual contract at

issue is warranted. The hearing will not address issues

concerning the Commission’s policies on granting

market-based rate authority or on regulation of sellers

with such authority. Further, if the judge concludes that

modification of one or more of the contracts is

warranted, the judge should not attempt at this stage to

determine how those contracts should be modified.

99 FERC at p. 61,384 (footnote omitted).

5. Furthermore, the Commission specifically limited the

scope of the evidentiary hearing to matters other than

market manipulation and the exercise of market power by

noting that it had previously issued an order on February

18, 2002, directing a full staff investigation of potential

manipulation of electric and natural gas prices in the West.

In explaining the difference in the two proceedings, the

Commission stated:

We are setting the instant contracts for hearing «© ider

section 206 of the FPA based on the arguments that the

dysfunctional spot markets in California caused long-

term contracts not to be reasonable, whereas the

investigation is looking at whether there was improper

behavior by sellers that may have caused prices not to

be reasonable.

Id. at p. 61,383, n.28.

6. Following the Chief Judge’s Order dated September

6, 2002, designating the undersigned as the presiding

administrative law judge (ALJ) in this proceeding and

4 See April 25, 2002 Order.

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establishing hearing procedures, the undersigned ALJ

convened a number of pre-hearing conferences to address

discovery disputes, motions to strike, and related issues

regarding the scope of the evidentiary hearing, consistently

ruling that , based on the Commission’s Orders, the issue of

alleged exercise of market power was not within the scope

of the issues set for hearing in this proceeding. Tr. at 207:7-

10. These rulings were further clarified during a pre-

hearing conference held on November 19, 2002, reflecting

the view of the undersigned ALJ that, by excluding the

issue of alleged exercise of market power in the instant

proceedings, the Commission sought to provide the State

with an opportunity for expedited review of the subject

contracts based on the less arduous showing that the

dysfunctional spot markets in California caused long-term

contracts not to be reasonable; that is, to pursue their

complaint allegations without the added burden of having to

prove allegations of exercise of market power as the basis

for seeking modification of the subject contracts. Tr. at

547:7-551:17.

7. In point of fact, on November 20, 2002, the

Commission issued an order allowing the State to conduct

discovery into market manipulation by various sellers

during the Western power crises of 2000 and 2001.5 In the

view of the undersigned ALJ, this Order underscored the

need to limit the scope of the subject proceedings to that

proscribed by the Commission to ensure that this expedited

proceeding would not interfere with the ongoing Staff

investigation in Docket No. PA02-2-000. Accordingly, this

point was reiterated on the record the first day of the

hearing, which commenced on December 2, 2002, as follows:

JUDGE: “I, for the life of me, cannot understand why

the state insists on trying to create a burden for itself

5 San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary

Services into Markets Operated by the California Independent System

Operator Corp. and the California Power Exchange, 101 FERC @ 61,186

(2062) (November 20 Order).

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that it does not have in this case. The state does not

have to prove that there has been the exercise of market

power to establish the threshold issue of whether the

dysfunctional California spot market adversely impacted

long-term bilateral markets. I do not know why the

state continues to try at every turn to insinuate into this

hearing exercise of market power issues when the

Commission has specifically proscribed that area with

respect to this proceeding. The state is well aware that

there is a full investigation ongoing that is going to

address that specific issue. Tr. at 797: lines 4-16.

8. Nevertheless, the parties were permitted to have any

evidence excluded from the record as a result of these

rulings considered by the Commission as an offer of proof.

Further, in accordance with the Commission’s April 25

Order, the parties were provided with an opportunity to

present a wide range of facts and data in support of their

eases, including evidence pertaining to negotiations of

contract terms and the availability of other alternatives to

both buyers and sellers, as well as the relation of the

contract rates to the Commission’s previously identified

benchmark for long-term bilateral contracts. Jd. at p.

61,384.

9. In addressing the standard of review to be applied to

the contracts at issue given the extraordinary remedy of

contract modification sought by the Complainants, the

Commission reiterated its long-standing policy of upholding

the sanctity of contracts and stated that it would not

modify market-based contracts absent extraordinary

circumstances. 99 FERC at p. 61,383. The Commission then

made an initial determination that for certain contracts that

contained explicit Mobile-Sierra language, the Complainants

would have to satisfy the Mobile-Sierra public interest

standard® to justify modification of the contracts. 99 FERC

6 United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332

(1956) (Mobile); FPC v. Sierra Pacific Power Co., 350 U.S. 348 (1956)

(Sterra).

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at o, 61,383. The parties whose contracts contained the

explicit Mobile-Sierra language included: Allegheny Energy

Supply Company, L.L.C. (Allegheny); Mirant Americas

Energy Marketing, L.P. (Mirant); and Coral Power, L.L.C.

(Coral).?

10. For the contracts that did not contain an explicit

Mobile-Sierra provision, the Commission ruled that it

needed additional information in order to determine the

applicable standard of review for these contracts. Id. The

sellers whose contracts did not contain explicit Mobile-

Sierra language included: E] Paso Merchant Energy, L.P.

(EPME); Dynegy Power Marketing, Inc. (Dynegy); Morgan

Stanley Capital Group, Inc. (MSCG); and Sempra Energy

Resources (Sempra).8

11. On July 23, 2002, (July 23 Order), the Commission

issued its Order on Rehearing, reaffirming its decision to

dismiss the complaints related to contracts entered into

after June 20, 2001, granting rehearing and dismissing

complaints as to two qualifying facilities, and denying all

7 Other contracts in this category included: Williams Energy

Marketing & Trading Company (Williams); Soledad Energy, LLC

(Soledad); and GWF Energy, L.L.C. (GWF). .These contracts are no

longer at issue in this proceeding because the parties have reached a

settlement and the complaints against these parties have been

withdrawn. Notice of withdrawal regarding the Soledad contract was

filed on July 12, 2002, and a notice of withdrawal regarding the GWF

contract was filed on September 4, 2002. By Order of the Chief Judge

dated November 26, 2002, the proceeding as to Williams was suspended

pending finalization of the parties’ settlement agreement.

8 Other contracts in this category included: Imperial Valley Resource

Recovery Company, L.L.C. (Imperial Valley) whose contract was

dismissed in the Commission’s Order on Rehearing (100 FERC 4 61,098,

at P 19); Alliance Colton, L.L.C. (Alliance Colton); and PG&E Energy

Trading-Power, L.P. (PG&E Energy Trading). Notices of withdrawal of

the complaint as to Alliance Colton and PG&E Energy Trading were filed

on September 30, 2002 and October 3, 2002, respectively.

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other requests for rehearing and clarification. In this

Order, the Commission reiterated its position that it needed

additional information in order to determine the applicable

standard of review for contracts that did not contain explicit

Mobile-Sierra language. According to the Commission,

“(t]he evidentiary hearing was established to, among other

things, interpret the terms of the contracts at issue and to

ascertain the intent of the parties at the time the contracts

were signed.” 100 FERC 4 61,098 at P 12.

12. The parties simultaneously filed their direct

testimony and exhibits on October 17, 2002. The Staff filed

its direct testimony and exhibits on November 8, 2002, and

the parties filed their rebuttal testimony and exhibits on

November 14, 2002. Pre-hearing Briefs were filed on

November 25, 2002. The hearing began on December 2,

2002 and concluded on December 12, 2002.

13. On October 29, 2002, Allegheny filed an emergency

motion for summary dismissal of the State’s complaints as to

its contracts. By Order dated December 17, 2002

(December 17 Order) the Commission denied Allegheny’s

emergency motion; however, to expedite resolution of the

proceeding as to Allegheny and other parties whose

contracts contained explicit Mobile-Sierra provisions, the

Commission directed the undersigned ALJ to omit the

initial decision on this issue, and certify the record directly

to the Commission.!9 In accordance with the Commission’s

December 17 Order, on December 24, 2002, the undersigned

ALJ certified the record for this proceeding directly to the

Commission as to Allegheny, Coral, and Mirant and

proceeded to evaluate the record for the purpose of

9 Public Utilities Commission of the State of California, et al., v.

Sellers of Long Term Contracts, et al., 100 FERC 4 61,098 (2002) (July 23

Order).

10 Public Utilities Commission of the State of California, et al., v.

Sellers of Long Term Contracts, et al., 101 FERC 461,293 (2002)

(December 17 Order).

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preparing an initial decision regarding the contracts for the

_ remaining sellers.11

14. By motion filed on December 19, 2002, Dynegy,

EPME and SER, and MSCG by motion filed on December

26, 2002, (together, Indicated Respondents or Sellers),

moved for partial summary disposition on the standard of

review applicable to their long-term contracts with the

CDWR, (together, the Indicated Contracts).!2

15. By Order dated January 10, 2003 (January 10

Order),}3 the Commission ruled on the subject motions by

directing the undersigned ALJ to determine the applicable

standard of review for the contracts not containing explicit

Mobile-Sierra language, and as to the contracts for which

the undersigned ALJ finds the applicable standard of

review to be the “public interest” standard, to certify the

record directly to the Commission for consideration of all

remaining issues in the case.

Position of the Parties and Staff

16. In their joint Prehearing Brief submitted on

November 25, 2002,14 the Complainants attempted to argue

that the “public interest” standard and the “just and

reasonable” standard are indistinguishable for the purpose

11 Public Utilities Commission of the State of California, et al., v.

Sellers of Long Term Contracts, et al., 101 FERC {61,034 (2002). See

also Errata Notices dated 12/31/02 and 1/10/08.

vv Specifically, the Indicated Contracts are: (a) the Energy Purchase

Agreement (the SER Agreement), dated May 4, 2001, by and between

CDWR and SER, Exh. SER-2; (b) the February. 13, 2001 Contract

between EPME and CDWR (EPME Contract), Exh. EPME-29; (c) the

System Contingent Capacity Purchase and Sale Agreement (the Dynegy

Agreement), dated March 2, 2001, by and between CDWR and Dynegy,

Exh. DYN-2, and (d) the February 14, 2001 Contract between MSCG and

CDWR (MSCG Agreement), Exh. MSC-2.

13 See Public Utils. Comm'n of California v. Sellers of Long Term

Contracts, 102 FERC $ 61,025 (2003). (January 10 Order).

14 Trial Brief on Behalf of the California Electricity Oversight Board

and the California Public Utilities Commission, Docket Nos. EL02-60, et

al. (November 25, 2002).

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of this proceeding. Complainants’ Prehearing Brief at 44,

47-49. However, in the December 17 Order, the Commission

rejected this position stating:

The fact that a contract may be found to be unjust and

unreasonable under sections 205 and 206 of the Federal

Power Act does not in and of itself demonstrate that the

contract is contrary to the public interest under the

Supreme Court cases. Accordingly, we instruct the

parties to apply the correct legal standards in

developing this case and making their arguments.!5

17. Complainants further propound that the holdings in

Mobile and Sierra precluded the sellers from seeking

damages in contractually agreed upon prices for their own

benefit, but left intact the paramount duty of the

Commission to protect the public interest. Id.

Complainants conclude that applying the “correct legal

standard” under Mobile-Sierra thus’ requires’ the

Commission to determine whether the challenged contracts

adversely affect the public interest. I.B. at 16.

18. Further, Complainants attempt to distinguish

between the “low” rates in Sierra and the “high” rates

alleged in the instant case, and the fact that the “buyer” is a

state agency purchasing power solely for the benefit of the

public. Jd. at 16-17. Thus, the State claimS that under

Mobile-Sierra, where the rates are borne directly by the

public, the “just and reasonable” standard and the Mobile-

Sterra “public interest” standard effectively merge, because

it is contrary to the public interest to charge unlawful rates

to the public. /d. at 19.

19. The joint position of the Indicated Respondents is

that, like the sellers with explicit Mobile-Sierra language

contained in their contracts, they too are protected under

the Mobile-Sierra doctrine and may have their contracts

modified “only if the public interest so requires.”

Respondents Joint I.B. at 7-8. Respondents cite extensive

15 1g. at 6.

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Se nib ic heheh Bitricss weal 4 date

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precedent for the proposition that the law is clear that,

absent contractual language preserving a parties’ right to

unilaterally seek a change in the contract, the Mobile-Sierra

doctrine applies. Jd. at 9-10. Respondents also cite the

recent Nevada Power ID, where Judge Cintron found that

fixed forward contracts were to be reviewed under the

Mobile-Sierra public interest standard. Jd. Respondents

note that none of the subject contracts contain provisions for

the State to seek unilateral changes to the contracts under

section 206, and therefore argue that the public interest

standard of review applies to these contracts. Jd. at 11.

Respondents also note that Staff Witness Natalie Tingle-

Steward reviewed the challenged contracts and found that

none of the contracts permit unilateral application to the

Commission for rate changes. Id.

20. Respondents cite the unrebutted testimony of

Respondents’ witnesses who testified that in each contract,

either the Seller or the State insisted on language that

would ensure that either the State would not seek

abrogation of the contract or that the Commission would be

precluded from changing rates considered “just and

reasonable.” Jd. at 11-12.

21. Further, the Respondents dispute the State’s

position that the public interest standard and the just and

reasonable standard impose the same burden. /d. at 13.

Respondents emphasize that the Mobile-Sierra doctrine

protects the public at large rather than the direct benefit of

the seller and purchaser, which applies the just and

reasonable standard, and therefore it cannot be waived or

eliminated by agreement of the parties. Jd. Moreover,

Respondents opine that applying the public interest

standard of review is fully consistent with the statutory

requirements of the Federal Power Act (FPA) because a

contract with a mutually agreed-upon fixed rate satisfies the

just and reasonable standard unless the challenging party

can show that the public interest compels a contrary result.

Id. at 14.

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22. Intervenor, Universal Studios, took the position that

the State has only the burden of showing, in the next phase

of the case, that the contracts are not “just and reasonable.”

U.S. LB. at 13. Universal Studios submits that a private

contract no matter how valid, can never “trump” the FPA,

which requires that all rates and charges be “just and

reasonable.” Jd. Universal Studios cites the testimony of

several Sellers’ witnesses and Staff who concluded that the

Commission has the power to review contracts to determine

whether they are just and reasonable. /d. 15-16. Universal

Studios concludes that no credible evidence supports a

finding that the State, as surrogates for the consumers of

California, have any higher burden than to show that the

rates and charges under the Seller’s contracts are not “just

and reasonable.” Jd. at 16. Universal Studio argues that for

market-based rates to be just and reasonable, they must be

“within the same ‘zone of reasonableness’ as cost-based

rates,” citing Farmers Union Cent. Exch. Inc. v. FERC, 734

F.2d 1486, 1530 (D.C. Cir. 1984), cert. denied sub nom.

Williams Pipe Line Company v. Farmers Union Central

Exchange, Inc., 469 U.S. 1034 (1984); and San Diego Gas &

Elec Co v. Sellers of Energy, 93 FERC ¥ 61,294, at p. 61,99?

(2000), order on reh’g, 95 FERC { 61,418 at p. 62,559 n.52

(2001). Exh. US-1 at 11:7-24.

23. Commission Trial Staff explains that where a

contract fails to specifically provide that the contract may be

altered, Mobile-Sierra requires that proposed changes meet

the public interest standard. Jd. at 14. Staff cites recent

Commission findings that hold that the public interest

standard applies to both buyer and seller, and that language

restricting the seller’s right to seek certain unilateral

changes under Section 205 was an implicit waiver of the

buyer’s right to do so under Section 206. /d. at 16. Staff

points out that the Commission has recently emphasized

that it does not take contract modification lightly, which was

also asserted in Commission Orders granting the hearings

on both the Nevada Power and the instant dockets. Jd.

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24. Trial Staff disputes the Complainants’ public/private

distinction in the Mobile-Sierra line of cases, pointing out

that even as recently as the December 17 Order, the

Commission stated that just because a contract may be

found to be unjust and unreasonable under the FPA, does

not without more, demonstrate that the contract is contrary

to the public interest. Jd. at 19. Staff concludes that, after a

review of each of the four remaining contracts and the

record, the Mobdile-Sierra “public interest” standard applies.

Id. at 20.

Discussion and Findings

25. Commission Trial Staffs Initial Brief, which has

been filed with the Commission and served on all parties on

the Restricted Service List, contains an excellent summary

of the case law and evolution of the Commission’s policy

regarding the Mobile-Sierra doctrine and is adopted and

incorporated herein in pertinent part.

1. Applicable Case Law and Commission Precedent

26. The Federal Power Act provides two methods for

changing wholesale electric rates and related terms and

conditions. Under Section 205, a utility may initiate rate

changes by making a filing with the Commission. Under

Section 206, any party (or the Commission on its own

motion) may request a prospective change in an existing

rate upon a finding by the Commission that the existing rate

is unjust, unreasonable, unduly discriminatory or

preferential.

27. The Federal Power Act, however, does not preclude

utilities and their customers inter se from prescribing

rates contractually. The interplay between the rights

of parties to set rates among themselves and the

Commission’s power to change those rates was first

examined in 1956 by the Supreme Court in separate

decisions under the Federal Power Act and the Natural

Gas Act. In Mobile, a supplier of natural gas sought to

unilaterally increase the rate of a contract filed with

the Commission. The Supreme Court held that the Natural

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Gas Act does not empower natural gas companies

unilaterally to change their contracts. This Court went on

to say that by “preserving the integrity of contracts, it

permits the stability of supply arrangements which all agree

is essential to the health of the natural gas industry... The

contracts remain fully subject to the paramount power of

the Commission to modify them when necessary in the

public interest.”46© In Sierra, the Court extended to

proceedings under the Federal Power Act its holding that

fixed-price contracts could not be unilaterally modified.

However, in light of the allegations that the contractual rate

produced less than a fair return to the utility, the Court

added that the Commission was empowered under Section

206 to modify a contract rate despite express provisions

prohibiting such changes if it “is necessary in the public

interest.”17 Two years later, the Court further delineated

the relationship between the Commission’s power to change

rates and the parties’ rights to set them contractually in

United Gas Pipe Line Co v. Memphis Light, Gas and Water

Div., 358 U.S. 103 (1958) (Memphis) making it clear that just

as parties may enter into contracts which specifically

contemplate unilateral rate change filings, as in Memphis,

they may contractually eliminate the parties’ right to make

rate changes during the life of the contract.

28. Further, and perhaps more importantly for purposes

of determining the applicable standard for the subject

contracts, the case law is now clear that where a

contract fails to specifically provide that the contract may

be unilaterally altered, Mobile-Sierra requires that

proposed changes meet the public interest standard. In

Texaco Inc v. FERC, 148 F.3d 1091, 1096 (D.C. Cir.

1998), the court held that notwithstanding the fact that

the agreement was silent on the issue, the Commission was

16 United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 US. 332

(1956).

17 FPC v. Sierra Pacific Power Co., 350 U.S. 348, 355 (1956).

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precluded from ordering alterations of rate design for

reasons other than the public interest. The court also

clarified its position with respect to its prior ruling in

Papago:

The court [in Papago] did not suggest that the parties’

failure to explicitly foreclose the Commission’s authority

to replace rates [under Section 206] would leave it intact.

The law is quite clear: absent contractual language

“susceptible to the construction that the rate maybe

altered while the contract subsists,” the Mobile-Sierra

doctrine applies.

148 F.3d at 1096 (footnotes omitted).

29. More recently, in Boston Edison Co v. FERC, 233

F.3d 60 (ist Cir. 2000), the court affirmed the position that,

in the absence of clear contractual language allowing

contract modifications under Section 206, the Commission is

bound by the public interest standard:

{Tihe specification of a rate or formula by itself

implicates Mobile-Sierra (unless the parties negate the

implication) and that a generally framed boilerplate

clause ... does not constitute such a negation.

** *

.. FERC should stop trying to rewrite deals that the

parties have already made under the aegis of Mobile-

Sierra unless it properly makes the public interest

standard .

Id. at 67 and 68 (footnotes omitted).

30. The Commission has also applied the same standard

whether it’s a buyer or a seller. For instance, in San Diego

Gas & Electric Company v. Public Service Company of New

Mexico, 91 FERC 4 61,233 (2000), the Commission held a

buyer to the public interest standard, notwithstanding the

fact that the contract was silent as to the buyer’s Section

206 rights and “the evidence introduced at the hearing

similarly reflected that the parties did not ever discuss

either Section 206 or the applicable standard of review were

a Section 206 complaint to be filed.” 91 FERC at p. 61,852.

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The Commission in essence interpreted the language in the

contract as restricting the seller’s right to seek certain

unilateral rate changes under Section 205 as an implicit

waiver of the buyer’s right to do the same under Section

206. Id.

31. While it is important to recognize that the Mobile-

Sierra doctrine arose in the context of a completely

regulated environment, where, as here, the contracts were

entered into under the parties’ market-based rate authority,

the Commission has stated that “[pJreservation of the

contracts has, if anything, becorne even more critical.” 99

FERC at p. 61,383.

2. Mobile-Sierra “Public Interest” Standard Applies to

these Contracts

32. The Commission is, of course, already fully aware

that under current case law where a contract fails to

specifically provide that the contract may be unilaterally

altered, Mobile-Sierra requires that proposed changes meet

the public interest standard. As Commissioner Brownell

noted in her concurring opinion setting this matter for

hearing:

I see nothing in the Mobile-Sierra case law that bars the

Commission from ruling that a market-based contract’s

silence on a buyer’s rights to seek unilateral changes

under Section 206 of the Federal Power Act triggers the

public interest standard.

99 FERC at p. 61,388.

33. Nevertheless, with respect to the _ contracts

involving Dynegy, EPME, MSCG, and Sempra that did not

contain an explicit Mobile-Sierra provision, the Commission

established an evidentiary hearing to, among other things,

“interpret the terms of the contracts at issue and to

ascertain the intent of the parties at the time the contracts

were signed.” 100 FERC { 61,098 at P 12. Accordingly, it is

clear to the undersigned ALJ that the Commission is

attempting to provide the State with every opportunity to

establish through extrinsic evidence that the parties

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intended a different standard to apply to the subject

contracts.

34. The evidentiary record in this proceeding closed on

December 12, 2002. The parties filed Initial Briefs on

January 10, 2003. But the State just now acknowledges that

it has not been able to justify the application of a different

standard to the Indicated Contracts based on the absence of

an explicit Mobile-Sierra provision in the remaining four

contracts.18 = Nevertheless, as a convenience to the

Commission, a summary of the evidence of record on this

issue may still be helpful. 7

35. The evidence of record proffered by the contracting

parties regarding intent of the parties as it pertains to

unilateral filing rights under the subject Indicated

Contracts, other than the express language of the Indicated

Contracts themselves, has been summarized by the Sellers

in their January 10, 2003 Joint Initial Brief as follows: Exh.

SER-1 at 34:6-36:14 (Niggli); Exh. SER-32 at 6:17-7:5

(Niggli); Exh. SER-34; Exh. SER-35; Exh. SER-55; Exh.

SER-56; Exh. DYN-1 at 12:10-12, 26:15-18, 31:23-32:24,

33:10-34:5 (Lednicky); Exh. DYN-40 at 16:3-6 (Lednicky);

Exh. MSC-1 at 9:12-18 (Hamdan); Exh. S-1 at 6:15-8:17, 11:1-

11, 15:12-19:2 (Forman); Exh. S-4 at 6:11-15:14 (Tingle-

Stewart); Exh. CAL-181 at 308:12-25 (Freeman); Tr. at

1633:8-1637:6 (Hart); Tr. at 2292:16-2293:6 (Smith); Tr. at

2476:5-2482:6 (Forman); Tr. at 2486:8-21 (Forman). In

addition to the contracting parties, Sellers note that

intervenor Universal Studios submitted testimony on

Universal’s understanding of its rights regarding this issue,

Exh. US-1 at 13:3-14:16 (Thomas), and sought to elicit

testimony on cross-examination of certain witnesses for the

Sellers and the Staff as to whether they thought the

contracts authorized sellers to charge unreasonable rates

under Section 205 of the Federal Power Act, see, e.g., Tr. at

18 January 14, 2003, Answer of California Public Utilities Commission

and California Electricity Oversight Board to Motion to Hold Brefing in

Abeyance.

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2143:13-2149:11 (Lednicky); Tr. at 2293:8-15 (Smith); Tr. at

2458:4-7 (Forman).

36. A complete discussion of the cited evidence of record

is also provided by the Sellers in their Joint Initial Brief, but

will not be repeated here. However, Commission Trial

Staffs analysis of each of the four remaining contracts

considered in the context of this record evidence provides a

useful framework for the Commission’s consideration of the

issue of the applicable standard of review and is therefore

adopted and incorporated herein as follows:

a. Dynegy Contract

37. The Dynegy contract with CDWR, dated March 2,

2001, was established pursuant to the Edison Electric

Institute Master Power Purchase and Sale Agreement (EEI

Master Agreement),!9 and filed with the Commission on

November 21, 2001 in Docket No. ER0O1-1718-000. Exh.

CAL-32. It was accepted for filing on January 18, 2002.

Exh. S-4 at 10:16-19. There is no provision in this contract

which specifically addresses the parties’ sections 205 and

206 rights. However, Section 8, Paragraph F of the System

Contingent Capacity Purchase and Sales Agreement, which

is a subpart of the contract, appears to limit CDWR’s right

to take any action which is inconsistent with the just and

reasonable nature of the rates:

CDWR acknowledges and agrees that all payments to

[Dynegy] hereunder, ... are “just and reasonable” within

the meaning of section 451 of the Public Utilities Code

and that CDWR shall not take any action or fail to take

19 As Staff witness Ms. Tingle-Stewart explains, the EEI Master

Agreement is a standardized agreement developed by Edison Electric

Institute and the National Energy Markets Association. It generally

consists of a form agreement, a cover sheet and a confirmation letter. The

cover sheet is often used by parties to elect certain options and to modify

the terms of the form agreement if so desired. The Pro Forma EEI

Master Agreement is not filed with the Commission. The Commission has

accepted for filing a Pro Forma short-form market-based tariff and

umbrella service agreement, which is intended to be used in conjunction

with the EEI Master Agreement. Exh. S-4 at 5:18-6:4.

83a

any action which is inconsistent with the just and

reasonable nature of such payments.

Exh. DYN-2 at EOB-DYN-1-0005286. Mr. Lednicky

explains that given the statutory scheme and the CDWR

funding mechanism established by the emergency California

Assembly Bill (AB 1X),29 Dynegy insisted on this provision,

otherwise Dynegy would not have had any assurance of

payment and no assurance that CDWR would not later seek

to devise a way to abrogate the contract. Exh. DYN-1 at

33:6-9. He also states that Section 8.F was not intended to

allow CDWR to seek relief from the Commission to reform

or abrogate the contract under Section 206 of the FPA

under a just and reasonable standard of review. Exh. DYN-

1 at 33:15-34:5. According to Mr. Lednicky:

It seems clear to me that any argument advanced by, or

on behalf of CDWR, that the FERC can or should

review and determine whether the Agreement, or

payments under the Agreement are “just and

reasonable” is the taking of an action “inconsistent with

the just and reasonable nature of the payments” and is

expressly prohibited by the Agreement. Jd.

38. While this Commission’s determination regarding

whether a rate is just and reasonable is not governed by

Section 451 of the Public Utilities Code, this provision does

suggest that the parties agreed that they would not take

any action which is inconsistent with the presumed just and

reasonible nature of the rates in this contract. Accordingly,

and because the contract is otherwise silent with respect to

the parties’ sections 205 and 206 rights, as Ms. Tingle-

Stewart explains, the Mobile-Sierra “public interest”

standard should be applied in this instance. Exh. S-4 at

10:15-12:10.

b. EPME Contract

39. The EPME contract with CDWR was established

pursuant to the EEI Master Agreement and entered into on

20 Exh. CAL-15.

tng he ee eed ke, > Seal ae te

84a

February 13, 2001. Exh. CAL-34. The contract states that

the rates, terms and conditions are provided in accordance

with the general terms and conditions under EPME’s

market-based rate authority—FERC Rate Schedule 1. No

evidence was presented regarding whether and to what

extent the parties discussed either limiting or preserving

their rights to make unilateral changes to the rates, terms

or conditions of the contract. Absent specific language to

the contrary and considering Commission precedent in favor

of protecting the integrity of contracts, Ms. Tingle-Stewart

concluded that the Mobile-Sierra “public interest” standard

applies. Exh. S-4 at 10:1-14.

ce. MSCG Contract

40. The MSCG contract was also e

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