FERC told PacifiCorp this week that it must repay premiums it earned on wholesale electricity sales during the August 2020 Western heat wave that forced CAISO to order rolling blackouts and pushed prices sky-high in other parts of the West (ER21-60).

PacifiCorp received premiums on top of the spot market’s average index prices at Arizona’s Palo Verde trading hub on Aug. 18-19, 2020, when CAISO was struggling to prevent more blackouts like those it ordered Aug. 14-15, and the Western grid was strained by record triple-digit temperatures. (CAISO Blames Blackouts on Inadequate Resources, CPUC.)

Palo Verde wholesale prices on the Intercontinental Exchange (ICE) reached a record $1,515/MWh on Aug. 18 and $1,750 on Aug. 19, according to data posted by the U.S. Energy Information Administration. (The average price at Palo Verde from June to August 2020, excluding the high prices of Aug. 18-19, was $52/MWh, Southern California Edison and Pacific Gas & Electric said in FERC filings.)

Prices outside CAISO in the West fall under the Western Electricity Coordinating Council’s (WECC) soft price cap of $1,000/MWh, which requires sellers to justify prices above the cap to FERC or to issue refunds. The process, instituted in response to the California energy crisis of 2000-01, is meant to avoid the exercise of market power.

Prices above the cap can be justified based on three frameworks — a production cost-based framework, an opportunity cost-based framework or an index-based framework — FERC said in guidance it issued in June 2021. (See FERC Offers Guidance on Exceeding Western Price Caps.)

FERC found that PacifiCorp had justified its prices on Aug. 18-19 using the index-based framework, in which a seller cites an index at a specific trading hub to justify prices that exceed WECC’s soft cap. But FERC said the utility had failed to justify premiums it received above the index prices.

PacifiCorp defended the premiums by arguing it had seven bilateral spot market sales in August 2020 that exceeded the $1,000/MWh price cap. Four were brokered day-ahead transactions, with the price set by the buyer based on the Palo Verde day-ahead ICE index, and three were “direct transactions with counterparties that contacted PacifiCorp,” the commission said.

“PacifiCorp [contended] that, to the extent the prices reflect a premium over the prevailing index price, the premium was set by the customer, and PacifiCorp had no visibility into the prevailing index price for these transactions until after the ICE day-ahead market closed,” FERC wrote. “PacifiCorp notes that it served as a price-taker, which it argues the commission has recognized addresses any concern about the legitimacy of price formation.”

The premiums, which raise the cost of wholesale electricity marginally above the index price, usually are added by customers to “secure energy during times of scarcity,” the utility said.

FERC rejected the argument that the adders were justified.

“The Palo Verde price index already reflects scarcity conditions,” it said. “PacifiCorp’s attempt to justify prices above the soft cap by arguing it was a price-taker is insufficient.”

“In these circumstances, the index-based framework only justifies prices up to the index price and … any premiums above the index must be justified in other ways, which PacifiCorp failed to do,” FERC said. “Accordingly, we find that PacifiCorp has not provided adequate justification for the premiums above the index price.”

The commission directed the utility to refund the premiums to buyers within 30 days and report back to the commission in another 30 days. The decision did not cite specific amounts of the premiums or the total amount that could be at stake.

Four of the five FERC commissioners signed the order.

Commissioner James Danly issued a dissent in which he said FERC was meddling with contracts to sell electricity at market-based rates.

“I would … not require PacifiCorp to pay refunds for the ‘premium’ amount above the price index that PacifiCorp and the willing buyers freely negotiated because no showing has been made that the public interest is seriously harmed by the contract rate,” Danly wrote.

With its decision, FERC was putting sellers in an unworkable position, he said. The commission requires wholesalers to sell electricity, or it will investigate them for withholding and market manipulation, but then it negates market-based prices, he said.

“The de facto result is that we require PacifiCorp to sell, and then we require them to sell at our preferred price,” Danly said. “No wonder there seems to be no end in sight to the supply shortage in California and, increasingly, the Western United States.”