The long fallout from the fall of Enron’s illegal electricity market manipulations early this century continues. The D.C. Circuit Court of Appeals Tuesday (July 9) overturned a Federal Energy Regulatory Commission refund order to sellers of electricity during an August-September 2020 California heat wave. FERC ordered the refunds to distribution utilities based on California Independent System Operator rules put in place in 2002 to respond to Enron’s manipulation of the wholesale electric market.
In an overall order in 2021 and a series of identical individual orders in 2022, FERC found that many competitive wholesale energy providers unjustly violated $1,000/MW price caps California put in place earlier to prevent Enron-style price manipulations. The commission ordered refunds and the sellers predictably sued. The California Public Utilities Commission and Southern California Edison, representing buyers, also sued, claiming that the refunds FERC ordered were inadequate.
The appeals court in a unanimous, unsigned (per curiam) decision three-judge opinion, upheld the sellers and ruled that the buyers’ complaint was moot.
Th court noted that for “over two decades, the Commission has maintained a ‘soft’ price cap for certain short-term electricity sales in parts of the western United States. That soft cap limits the price at which electricity sellers can offer electricity for sale in certain markets and requires “justification and refund” of above-cap sales….”
When FERC reviewed August 2020 sales above the soft cap, the commission concluded 4-1 that the sellers failed to justify the high prices, ordering refunds.
The case at the appeals court hinged on the arcane but important role of the Sierra-Mobile doctrine. The opinion pointed out that “under that doctrine, 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.”
In considering the refund order, the commission concluded that it need not conduct a Sierra-Mobile review of the market-based, above cap, rates because the sellers failed to adequately justify them. The sellers disagreed.
So did the court: “We agree with the Sellers that the Commission should have conducted the Mobile-Sierra analysis prior to ordering refunds, and so we grant the Sellers’ petitions for review, vacate the orders they challenge, and remand for further proceedings.”
The court added, “Because of that holding, the Commission necessarily will need to change its refund analysis for above-cap sales going forward, and any decision by this Court on the validity of that framework would be purely advisory.” So the appeals court rejected the petition by the CPUC and Southern California Edison “as moot.”
The D.C. court’s decision was vindication for former FERC general counsel and subsequently commissioner James Danly, who was the sole dissenting vote in the commission’s refund orders. The appeals court quoted his dissent, which questioned “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.” His answer and the court’s was “no.”
“It is not like Shell Energy has a real choice not to sell excess power during a reliability crisis. If it does not sell, the Commission will investigate it for physical or economic withholding and attempt to levy sanctions for manipulating the market.” — former FERC commissioner James Danly
In a Twitter comment on the decision, NRG Energy executive and former Montana utility regulator Travis Kavula highlighted more of Danley’s dissent: “It is not like Shell Energy has a real choice not to sell excess power during a reliability crisis. If it does not sell, the Commission will investigate it for physical or economic withholding and attempt to levy sanctions for manipulating the market. It is of course in everyone’s interest for all available power to be available during a crisis. So the de facto result is we require Shell Energy to sell, and then require them to sell at our preferred price. It is no wonder there seems to be no end in sight to the supply shortage in California and (increasingly) the western United States.”
In the same Twitter thread, Harvard Energy Law Initiative Director Ari Pesko pointed to a June 28 Shell Energy filing at FERC challenging a June 7 rehearing order involving power sales transactions with the California Department of Water Resources. Pesko commented, “Shell Energy just filed something at FERC about what I believe is the last outstanding case from the original CA energy crisis.”
–Kennedy Maize