Commissioner James Danly Statement
December 2, 2022
ER21-2396-000
The Commission applies the wrong legal analysis but still reaches the right result in this proceeding, upholding certain sales made by Guzman Energy LLC (Guzman) at contract prices above a Commission-imposed “soft” price cap.[1] I therefore concur in the result.
The foundational legal question in this case is whether the Commission can abrogate a contract to sell electricity pursuant to market-based rate authority when the contract price is above a Commission-imposed “soft” price cap absent a finding that the public interest so demands. The answer is no. The majority reaches the opposite conclusion but nevertheless finds that Guzman has justified its sales above the soft cap. I would apply the Mobile-Sierra presumption to the contract sale at issue and still not require Guzman to pay refunds for the “premium” amount above the price index that Guzman and the willing buyers freely negotiated because no showing has been made that the public interest is seriously harmed by the contract rate.[2]
Market-based rate sales are subject to the Mobile-Sierra doctrine which means that the Commission “must presume that the rate set out in a freely negotiated wholesale-energy contract meets the ‘just and reasonable’ requirement imposed by law. The presumption may be overcome only if FERC concludes that the contract seriously harms the public interest.”[3] Sales pursuant to market-based rate authority, such as Guzman’s in this case, thus enjoy the Mobile-Sierra presumption.
The majority correctly finds that “the Mobile-Sierra presumption applies to Guzman’s sales in this proceeding,”[4] but then incorrectly rules that this “is not dispositive”[5] because by ordering Guzman to refund portions of the contract price the Commission is merely “enforcing requirements incorporated into the contracts via the Commission orders establishing the price cap and provisions in Guzman’s market-based rate tariff.”
[6]
The majority is wrong that a Commission-imposed soft cap is all it takes to eliminate an entire class of market-based rate contracts from the Mobile-Sierra presumption. The majority reasons that sellers with market-based rate authority must comply with any “requirement” the Commission places on market-based sales, and thus sales above the Commission-imposed soft cap do not enjoy contract law protections.[7] If that were the case, the Commission could order that any rate above zero in any contract is subject to a “soft” cap, and just like that, the pesky Mobile-Sierra doctrine would be gone forever, and the Commission could simply dictate all seller offers. Happily, contract law is not so easily circumvented. There are limits to the “restrictions” the Commission can attach to market-based rate tariffs.
We should remember what the “soft” cap purports to be. It allows sellers to offer at prices above the cap in recognition that market prices will sometimes exceed the cap. This could happen, for example, during a period of extreme scarcity and rolling blackouts, which is exactly what was happening in California in August 2020. Under a hard cap, sales above the cap are prohibited, and no contract above the cap is enforceable. Mobile-Sierra never comes into play for an unenforceable contract.
Under the soft cap, however, parties are free to negotiate contracts above the cap. Unlike with a hard cap, the soft cap regime expressly contemplates a seller’s ability to justify the offered price. Those contracts above the soft cap, like all market-based rate sales, enjoy the Mobile-Sierra presumption. There is no precedent to suggest otherwise. The majority certainly fails to cite any. The freely negotiated contractual offer price above the cap cannot be modified unless it seriously harms the public interest.
The Commission of course could do away with the soft cap and instead prohibit sales above a hard cap of $1,000 or any other amount found to be just and reasonable. But the consequence would be that when market prices exceed the cap, some available electricity would not be sold. During August 2020, the likely result would have been more extensive blackouts and an even more severe reliability crisis. The Commission thus reasonably allows sellers to sell at prices higher than the cap if the prices are justified, but the Mobile-Sierra presumption still must apply. The Commission can adopt “guidance” for how to analyze the justification,[8] but the final burden is on protesters to demonstrate that the contract rate harms the public interest.
When we apply the correct Mobile-Sierra standard to Guzman’s price justification, the question is whether the contract price seriously harms the public interest. The contract prices are fully explained by Guzman.[9] Buyers willingly purchased power during a reliability crisis at a modest premium above prevailing market index prices. There is no showing in the record that these prevailing market prices seriously harmed the public interest. Any such argument appears absurd on its face, particularly when internal CAISO prices are capped at levels much higher than the Guzman contract price.
The majority misapplied the Mobile-Sierra presumption but still found that Guzman justified prices above the soft cap.
For these reasons, I respectfully concur in the result.
[1] Guzman Energy LLC, 181 FERC ¶ 61,170 (2022) (Guzman).
[2] See United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956); FPC v. Sierra Pac. Power Co., 350 U.S. 348 (1956).
[3] NRG Power Mktg., LLC v. Me. Pub. Util. Comm’n, 558 U.S. 165, 174 (2010) (citing Morgan Stanley Capital Grp. Inc. v. Pub. Util. Dist. No. 1 of Snohomish Cty., 554 U.S. 527, 530 (2008)).
[4] Guzman, 181 FERC ¶ 61,170 at P 22.
[5] Id.
[6] Id. (footnote omitted).
[7] Id. PP 22-25.
[8] See ConocoPhillips Co., 175 FERC ¶ 61,226 (2021) (Danly, Comm’r, concurring).
[9] See Guzman, 181 FERC ¶ 61,170 at PP 6-10, 17 (recounting Guzman’s evidence).