Commissioner James Danly Statement
June 16, 2022 
Docket No. ER21-61-000

The 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.  I therefore dissent from today’s order.[1]  I would apply the Mobile-Sierra presumption to the contract sale at issue and not require El Paso Electric Company (El Paso) to pay refunds for the “premium” amount above the price index that El Paso and the willing buyers freely negotiated because no showing has been made that the public interest is seriously harmed by the contract rate.[2]

California suffered rolling blackouts in August 2020, largely caused by the poor design of the markets administered by the California Independent System Operator (CAISO), sustained artificially low power prices, insufficient generation, an over-reliance on unreliable renewable resources, and continuous government and regulatory meddling.[3]  Since August 2020, CAISO has sought and obtained stopgap relief on an emergency basis in numerous proceedings,[4] but the majority of the Commission rejected my call for a section 206 investigation,[5] and real market reforms have not been proposed.  Now the Commission acts by requiring individual generators—who helped prevent further blackouts by selling emergency power at prevailing market prices that happened to be in excess of a “soft” cap imposed by the Commission—to refund amounts the majority now deems to be too high.  In so ordering, the majority does nothing to remedy California’s ongoing electricity crisis except to now introduce contract uncertainty into the mix and to cause even greater price suppression.

But this is merely context.  The issue whether the sales prices of El Paso should be abrogated is a legal question.  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.”[6]  Sales pursuant to market-based rate authority, such as El Paso’s in this case, thus enjoy the Mobile-Sierra presumption.

The majority correctly finds that “the Mobile-Sierra presumption applies to these contract sales,”[7] but then incorrectly rules that it “is not dispositive”[8] because by ordering El Paso to refund portions of the contract price the Commission is not modifying the contracts, as would trigger application of the Mobile-Sierra presumption.  Instead, the Commission is enforcing requirements incorporated into the contracts via the Commission orders establishing the price cap.[9]

First, it is incorrect that the Commission is not modifying the contracts.  The Commission in fact modifies the first element of any contract, the offer, which in this case was that El Paso would sell electricity to the buyer at a premium above the index price.  The Commission modifies the offer by “direct[ing] El Paso to . . . refund the premiums above the average index price for the sales at issue.”[10]  There is no more fundamental modification of a contract than to change the sales price.

Second, a Commission-imposed soft cap cannot eliminate an entire class of market-based rate contracts from the Mobile-Sierra presumption.  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,[11] 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 El Paso’s price justification, the question is whether the contract price seriously harms the public interest.  The contract prices are fully explained by El Paso.[12]  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 El Paso contract price.  It probably is because the Mobile-Sierra presumption so easily defeats contract modification in this case that the majority grasps for any means to bypass it.

I conclude with a final observation.  It is not like El Paso has a real choice not to sell excess power during a reliability crisis.  If they do not sell, the Commission will investigate them for physical or economic withholding and attempt to levy sanctions for manipulating the markets.  It is of course in everyone’s interest for all available power to be available during a crisis.  So the de facto result is that we require El Paso to sell, and then we require them to sell at our preferred price.  No wonder there seems to be no end in sight to the supply shortage in California and (increasingly) the western United States.

For these reasons, I respectfully dissent.

 

 

[1] El Paso Elec. Co., 179 FERC ¶ 61,191 (2022) (El Paso).

[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] See Transcript of the 1073rd Meeting, FERC, at 31 (Dec. 17, 2020) https://www.ferc.gov/news-events/events/december-17-2020-virtual-open-meeting-12172020 (“Overall, the August heat storm brought to life several potential shortcomings associated with the California planning processes, operating protocols, and market design.”) (December 2020 Meeting Transcript); see also Cal. Indep. Sys. Operator Corp., 176 FERC ¶ 61,159 (2021) (Danly, Comm’r, dissenting at P 1) (“CAISO seeks this latest emergency relief because of the ongoing and persistent failure of its markets to attract and retain adequate resources to maintain reliability.”); id. (Danly, Comm’r, dissenting at PP 16-18).

[4] See, e.g., Dep’t of Energy, Order No. 202-21-2 (issued Sept. 10, 2021) (emergency order issued pursuant to Federal Power Act (FPA) section 202(c), 16 U.S.C. § 824a(c), determining that an emergency exists in California due to a shortage of electric energy, a shortage of facilities for the generation of electric energy, and other causes and authorizing specific electric generation resources located within California to test and operate at their maximum generation output levels when directed to do so by CAISO notwithstanding air quality or other permit limitations through Nov. 9, 2021); Dep’t of Energy, Order No. 202-20-2 (issued Sept. 6, 2020) (FPA section 202(c), 16 U.S.C. § 824a(c), emergency order was issued to CAISO authorizing specific electric generating units located within the CAISO balancing authority area to operate at their maximum generation output levels due to an ongoing “Extreme Heat Event” and to preserve the reliability of bulk electric power system through Sept. 13, 2020); see also Cal. Indep. Sys. Operator Corp., 176 FERC ¶ 61,159 (granting waiver to allow CAISO to immediately interconnect two generating units to address potential capacity shortfalls and maintain reliability); Cal. Indep. Sys. Operator Corp., 175 FERC ¶ 61,245 (2021) (order accepting tariff revisions subject to further compliance filing to modify load, export, and wheeling priorities in the day-ahead and real-time optimization process and establish related market rules); Cal. Indep. Sys. Operator Corp., 175 FERC ¶ 61,168 (2021) (order on tariff revisions to enhance CAISO’s resource adequacy rules by: (1) adopting a minimum state of charge requirement for storage resources that provide resource adequacy capacity; (2) requiring substitute capacity for all maintenance outages of resource adequacy resources; (3) clarifying that extending the scope or duration of an existing outage requires a new outage request; and (4) updating the local capacity technical study criteria and permitting CAISO to designate capacity under the backstop capacity procurement mechanism if there are deficiencies relative to the revised criteria); Cal. Indep. Sys. Operator Corp., 175 FERC ¶ 61,167 (2021) (order on tariff revisions regarding the import capability allocation process); Cal. Indep. Sys. Operator Corp., 175 FERC ¶ 61,160 (2021) (order on tariff revisions to ensure CAISO has the appropriate operational tools and market rules to address tight supply conditions).

[5] See December 2020 Meeting Transcript at 47 (FERC Secretary Bose stated “[a]ccordingly, Item E-3 [CAISO Show Cause Proceeding] is not approved by the Commission.”); see also Staff Presentation on California Independent System Operator (EL21-19-000), FERC (Dec. 17, 2020), https://www.ferc.gov/news-events/news/staff-presentation-california-independent-system-operator-el21-19-000.

[6] 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)).

[7] El Paso, 179 FERC ¶ 61,191 at P 31 n.50.

[8] Id.

[9] See id.

[10] Id. P 1.

[11] See ConocoPhillips Co., 175 FERC ¶ 61,226 (2021) (Danly, Comm’r, concurring).

[12] See El Paso, 179 FERC ¶ 61,191 at PP 6-8, 19 (recounting El Paso’s evidence).

 

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