By Robert Mullin

Iberdrola Renewables last week struck back at a FERC judge’s April ruling that could subject the company to more than $370 million in penalties over an electricity contract signed with California near the end of the Western Energy Crisis.

In a brief on exceptions filed with FERC on May 27, the Spanish energy giant contends that Administrative Law Judge Steven Glazer’s initial decision “contradicts” a landmark Supreme Court ruling, “undermines” commission precedent and “ignores” the commission’s directive when the case was sent to the judge (EL02-62-006, EL02-60-007).

“The [initial decision’s] misapplication of [the Supreme Court decision in] Morgan Stanley reflects a results-driven approach that permeates the entire opinion,” Iberdrola wrote.

Iberdrola’s filing attempts to poke holes in the complex legal reasoning underpinning Glazer’s ruling, which relied on the application of the Mobile-Sierra rule “as reinterpreted by Morgan Stanley.” In addition to finding that the contract imposed an excessive “down the line” burden on California residents based on an examination of comparable marginal production costs, Glazer also reinstated the company as a party to the proceeding following a previous dismissal. (See FERC ALJ: Shell, Iberdrola Owe California $1.1B over Energy Crisis.)

Iberdrola is contesting both findings, arguing first that FERC should once again dismiss any claims against the company and — barring that — asking the commission to uphold the company’s contract rates as “just and reasonable.”

Shell also Responds

Shell North America, which Glazer said imposed an “excess burden” of $779 million on California consumers, submitted a brief contesting the judge’s ruling that Mobile-Sierra protections were both “avoided” and “overcome” in the company’s contract with CDWR. Glazer based that determination on the finding that Shell traders manipulated the spot market through practices such as false exporting, false load scheduling and “anomalous” bidding strategies — all designed to drive up market clearing prices.

The company — like Iberdrola — contended that its contract did not impose an excessive burden on California consumers, saying that “even the most pessimistic economic assessment credited by the [initial decision]” showed the agreement added no more than 9 cents to the average $75 residential bill in the state.

Shell also attempted to root its appeal to the commission in FERC’s historical support for market-based rates and the Mobile-Sierra presumption of the “integrity of contracts.” The company argued that CDWR “carefully evaluated” the company’s proposal before signing, and that the weighted average price of the contract “sat well below the commission’s own just-and-reasonable benchmark.”

“Rejecting the [initial decision] is therefore essential to the continued viability of the commission’s market-based-rate program and, more generally, of the country’s energy markets,” Shell said.

[Editor’s Note: An earlier version of this story incorrectly reported that Shell had not filed a brief before the May 27 deadline.]

2006 Acquisition

Iberdrola’s connection to the energy crisis-era case is a complicated one. In 2006, the company acquired Scottish Power, previously the parent of Portland-based utility PacifiCorp. During the previous year, Scottish Power had sold PacifiCorp to Warren Buffet’s MidAmerican Energy Holdings but retained ownership of merchant affiliate PacifiCorp Power Marketing (PPM), which was absorbed by Iberdrola — renamed Avangrid in February 2016 — in the 2006 buyout.

As the energy crisis abated in summer 2001, PPM signed a long-term tolling agreement with the California Department of Water Resources (CDWR) to ensure power supplies to constrained areas in the northern part of the state. Capacity would be supplied by PPM’s gas-fired Klamath Falls plant in southern Oregon.

By that time, the department had assumed the role of electricity buyer of last resort after widespread manipulation drove Pacific Gas and Electric and the now-defunct California Power Exchange into bankruptcy. The state’s other two investor-owned utilities (IOUs) teetered on the brink of insolvency because of soaring wholesale power costs.

After the crisis passed, the California Public Utilities Commission initiated proceedings to recover the state’s costs for sustaining operation of the IOUs. Shell Energy North America and Iberdrola are the only suppliers involved that have not settled with the state or renegotiated the terms of their contracts, which expired in 2011 and 2012. The ALJ’s April decision also determined that Shell’s long-term agreement saddled California consumers with an “excess burden” of $779 million.

Novel Interpretation

Glazer’s decision to overturn the companies’ agreements with CDWR was rooted in a novel interpretation of Mobile-Sierra, the Supreme Court doctrine that holds that bilateral energy contracts can be voided only when shown to adversely affect the public interest.

In 2003, FERC ruled that it was not in the public interest to break the contracts, a decision that California appealed to the 9th Circuit Court of Appeals. A 2008 Supreme Court decision in Morgan Stanley Capital Group Inc. v. Public Utility District No. 1 of Snohomish County ultimately boosted the state’s prospects for cost recovery. That decision required the commission to apply an additional standard to Mobile-Sierra, testing whether the terms of a contract were the result of market manipulation.

Glazer’s decision against Shell rested on evidence that the company manipulated spot electricity prices during the crisis employing many of the same strategies as Enron, practices that directly influenced the forward prices forming the basis for the company’s CDWR contract. For that reason, Shell’s contract “avoided” Mobile-Sierra protections as reinterpreted through Morgan Stanley.

While Glazer determined that Iberdrola — then PPM — had engaged in its own manipulation during the crisis, he also found that CDWR had not relied on forward prices to negotiate the contract, as the department by that time no longer found forward price curves to provide a reliable benchmark for setting prices. Still, the ALJ decided the Mobile-Sierra doctrine was “overcome” because of the long-term costs of the contract carried by California, which was forced to issue bonds to fund the capacity purchases.

Iberdrola Reinstatement

Key to Glazer’s ruling was the decision to reinstate Iberdrola as a party to the proceeding. The company had been previously dismissed from the case largely because its contract was signed July 6, 2001, two weeks after FERC imposed price caps across the state, ending the crisis. Glazer reasoned that, regardless of the signing date, the contract was still negotiated during the height of the crisis, which resulted in rates far exceeding those even in September of that year.

Iberdrola’s rebuttal takes up the issue of the contract date as evidence of what it called the flawed reasoning behind the ALJ’s decision. The company contends that it is “undisputed” that the energy crisis ended with FERC’s June 19, 2001, order instituting price caps and that “spot market volatility had ended and forward prices had largely returned to pre-crisis levels” by early July.

“Yet, so as to sweep up the Iberdrola contract into the group of energy crisis contracts that should be abrogated for no reason other than the timing of their execution, the [initial decision] pronounces that the energy crisis ran through July 6, 2001,” Iberdrola wrote.

‘Peanut Buttering’ Analogy

The company also contests Glazer’s use of a “fundamentals-based” price standard that calculates the “excessive burden” on California consumers by comparing the contracts pricing with assumed marginal costs of production.

“In so doing, the [initial decision] contradicts Morgan Stanley, which holds that ‘a presumption of validity that disappears when the rate is above marginal cost is no presumption of validity at all, but a reinstitution of cost-based rates,’” Iberdrola said.

Iberdrola further contends that the ALJ — and the California complainants — failed to provide convincing evidence for how the contract constituted an “excessive burden” on California consumers through increased electricity rates, an explicit requirement of FERC’s order on remand. The company objected to Glazer’s adoption of Commissioner Mike Florio’s “peanut buttering” analogy, which says that a burden analysis that focuses on consumer rates spreads costs too thinly.

“But, of course, the question of whether a rate impact on individual consumers is excessively burdensome is the very inquiry that Morgan Stanley requires, and that the commission has evaluated in each of the cases on remand post-Morgan Stanley,” the company countered.

Having provided that context, Iberdrola noted that its contract produced an average rate impact of 5 cents/month for residential customers of PG&E. FERC had previously ruled that a 27-cent impact wasn’t excessive.

Still, Iberdrola’s strongest appeal to the commission might be an argument that moves from the specific to the general, contending that the ALJ’s reliance on a marginal cost test undermines FERC’s “historic market-based rate program.”

“[U]nless the commission intends to alter the nature of the energy industry, marginal cost simply cannot be where the commission draws the line in determining whether an excessive burden exists,” Iberdrola said.

CPUC Weighs In

The California PUC filed its own brief with FERC largely supporting the ALJ’s ruling and the conclusion that Shell and Iberdrola overcharged the state by more than $1 billion through the energy crisis contracts. The brief did contest a handful of other conclusions, however, including the finding that Mobile-Sierra protections were “overcome” rather than “avoided” in the case of the Iberdrola contract. The agency contended that PPM’s manipulation “altered the playing field for the Iberdrola contract negotiations such that the Mobile-Sierra presumption is avoided.”

“Still, the initial decision sent a powerful message that anti-competitive and manipulative behavior that imposes an undue burden on consumers will not be tolerated,” the PUC said.

Briefs opposing exceptions must be submitted to FERC by June 27.