FERC judge finds Northwest electricity refunds unwarranted

By the OGJ Online

HOUSTON, Sept. 26, 2001 – Pacific Northwest wholesale power buyers and municipal utilities are not entitled to refunds as a result of high electricity prices earlier this year, a Federal Energy Regulatory Commission administrative law judge said.

Judge Carmen Cintron called the Northwest market “competitive and functional” and recommended FERC commissioners deny the $1.9 billion in refunds sought by the Northwest power purchasers. The case is separate from the California’s demand for $9 billion in refunds for wholesale power purchases.

Cintron ruled the high prices were the result of shortages, excess demand, drought, high natural gas prices, and price signals from the California market, and could not be considered “unreasonable or unjust.” The transactions involved in the proceedings resulted from bilateral agreements, not spot market purchases, she noted.

Compared to California where buyers were effectively prevented from hedging risk or balancing their portfolio through forward contracts, Northwest buyers faced no such constraints, she said. Pacific Northwest buyers have been free to enter into short, medium, and long-term transactions to achieve balanced portfolios for many years, she said.

Buyers are not captive to a single market or a single point of entry, she noted. “Participants in the Pacific Northwest had a vast number of alternatives for purchases that were not available in the California market,” Cintron said in a 200-plus ruling released Tuesday. “The PNW [Pacific Northwest] is a competitive market and has been for a long time.”

The judge said Seattle chose to base its supply plan on overly optimistic assumptions of water levels rather than the conservative assumptions available to it. Power buyers such as Seattle and Tacoma “chose to take the risk of high spot market prices,” she added.

Of the total $1.9 billion in refunds, about $461.5 million was claimed by the cities of Seattle and Tacoma, the Port of Seattle, the Northern Wasco Utility District, the Clark Public Utility District, and Eugene Water & Electric Board.

Relieved of consequences
The judge emphasized if the position of the refund claimants were accepted, “they would be relieved of the consequences of their conscious economic decisions at the expense of a functioning competitive market in which a vast majority of the PNW purchasers during this period accept responsibility for the choices they made.”

As a result of fully predictable market responses, Cintron said, supply and demand were restored to balance in short order after prices successfully allocated a scarce resource. “To accommodate the shortage, prices rose dramatically, but that is what they are supposed to do,” she observed.

Higher prices provoked a drop in demand and an increase in alternative supplies. The western power crisis was alleviated due to a significant drop in consumption, she said. Industrial customers shut down production and sold power back into the market.

“Once it was clear that the function of supply and demand would accommodate the projected shortfall, prices collapsed with extraordinary speed,” the judge said. Unlike California, Cintron concluded there was no evidence, allegation, or finding of a flawed market structure.

FERC intervention in the market would have a “chilling effect on trading and drive marketers out of the region,” Cintron said. “This business relies on finality of deals and reliance on your trading partner.” Cintron said the public interest doesn’t provide for such regulatory intervention.

Moreover, she concluded calculating refunds would have been extremely difficult and involved a review of some 500,000 market transactions. Cintron said the numbers made it impossible to calculate “ripple claims” or countersuits brought by energy buyers that sold them the power they in turn sold to Northwest parties.

She noted Powerex, the marketing arm of Canada’s BC Hydro engaged in about 30,000 power transactions between December and June. Furthermore, Cintron said only some parties would have shouldered the brunt of any refunds because so many sellers in the Pacific Northwest such as Powerex and Bonneville Power Authority are not subject to FERC jurisdiction.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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