FERC Suspension of Market-Based Rate Authority May Affect Existing Power Supply Arrangement

by Davis Wright Tremaine LLP
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[author: Vidhya Prabhakaran]

From our colleague Jim Mitchell in DC:

The authority of J. P. Morgan Ventures Energy Corporation (“JP Morgan”) to sell electric energy, capacity, and ancillary services at market-based rates for six months, beginning in April 2013, was recently suspended by the Federal Energy Regulatory Commission (the “FERC”) for violation of certain FERC rules.

Although the Order only affects the market-based rate authority of JP Morgan, the FERC is currently conducting an investigation of other alleged violations of FERC rules that may result in further suspension of market-based rate authority of JP Morgan and its affiliates.

In the Order, the FERC concluded that JP Morgan had provided false or misleading information and omitted material information in communications with the FERC and with the California Independent System Operator, Inc., in violation of Section 35.41 of the FERC’s regulations, 18 CFR § 35.41(b). The FERC explained that the effectiveness of the suspension was being deferred until next April in part to afford JP Morgan time to make alternative arrangements to fulfill any existing contractual obligations that may be affected.

The Order indicates that JP Morgan will not be permitted to charge market-based rates for electricity supplied during the suspension period, even where contracts containing market-based rates were negotiated prior to the effective date of the suspension. Instead, JP Morgan may file for cost-based rates pursuant to which it could sell energy, capacity, and ancillary services during the suspension period. Although JP Morgan is also permitted to bid capacity and energy into organized wholesale power markets, the rates at which such electricity is offered will be restricted.

However, market-based rates for sale of electricity pursuant to a market-based rate power sales tariff on file at the FERC generally are deemed to be just and reasonable. Montana Consumer Counsel v. FERC, 659 F. 3d 910 (9th Cir. 2011). The Supreme Court ruled in Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1 of Snohomish County, Washington, 554 U.S. 527 (2008), that the mere fact that a party engaged in unlawful activity in the spot market would not deprive its forward contracts of the benefit of the Mobile-Sierra presumption that such contracts are just and reasonable, and that “[t]here is no reason why FERC should be able to abrogate a contract [on the grounds of unlawful activity] without finding a causal connection between unlawful activity and the contract rate.” Because there is no indication of a causal connection between the alleged violation of the FERC’s rules which resulted in the suspension and negotiated rates being charged by JP Morgan, it is at least arguable that JP Morgan should be able to continue to collect market-based rates established in existing contracts which were negotiated prior the suspension of its market-based rate authority.

JP Morgan may file a request for rehearing of the Order (under the FERC’s rules, JP Morgan has 30 days from issuance of the Order in which to file a request for rehearing), and thereafter seek appellate review of the Order. Unless there is a stay of the Order, the Order presumably will remain in effect at least until the conclusion of the appellate review process. Therefore, the final outcome of the suspension process may not be known for many years.

In order to resolve any uncertainty regarding rates to be charged by JP Morgan during the suspension period under contracts containing market-based rates that were negotiated prior to the effective date of the suspension, JP Morgan and the counter-parties to those contracts may desire to negotiate a mutually-acceptable accommodation. Failure of the parties to do so may result in potentially costly litigation regarding the continued effectiveness of a power sales agreement once the suspension becomes effective, and/or regarding damages to be paid for premature termination of a contract.

One possibility might be for the parties to agree to modify the rights and obligations of the parties to engage in power sales transactions during the suspension period and/or to specify revised rates at which such electricity would be sold by JP Morgan. Such an accommodation would provide each party with certainty regarding the role of JP Morgan as a power supplier during the suspension period, and would enable purchasers to make alternative power supply arrangements if the supply of electricity from JP Morgan was to be reduced. Another possibility might be for the parties to negotiate arrangements under which JP Morgan will continue to supply power during the suspension period at cost-based rates permitted by the FERC, but to provide for a retroactive adjustment of such rates in the event that the Order is modified or reversed during the appellate process. Finally, if purchasers have long-term market-based rate contracts with JP Morgan that they believe are particularly advantageous, they may desire to have the FERC exempt such contracts from the suspension requirement.

 

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