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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385017_1636%3A02

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 2007

## Text

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.

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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

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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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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

~
Sa ‘
5 : ¢ a

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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45a
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 Inter

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385017_1636%3A02. Public record. Not legal advice.