April 13, 2016

Brattle Consultants Contribute to Significant Win for the State of California on Energy Crisis Long-Term Contracts

In 2002, the California Public Utilities Commission and Electricity Oversight Board filed complaints with the Federal Energy Regulatory Commission (FERC) to abrogate several long-term wholesale electricity contracts that had been entered into during 2001 amidst a period of market dysfunction in the western United States (known as the “Western Energy Crisis”). All of the power marketers had previously settled but two—Shell Energy North America (US), L.P. (Shell) and Iberdrola Renewables, LLC (Iberdrola).

The primary issue in the current decision was whether the Mobile-Sierra doctrine, holding that a bilateral contract for electric power is presumed to be just and reasonable unless it is contrary to the public interest, applies to the long-term contracts for power that the State of California executed with the two sellers during the Western Energy Crisis of 2000-2001. Based on evidence presented by Brattle Principals Gary Taylor, Rich Goldberg, and Metin Celebi, and Academic Advisor Peter Fox-Penner, FERC Administrative Law Judge (ALJ) Steven Glazer issued a ruling on April 13, 2016 that found that the Mobile-Sierra doctrine does not protect either contract.

Mr. Taylor and Dr. Fox-Penner showed that Shell carried out numerous market manipulations and tariff violations in the electricity spot markets (Taylor) that inflated spot market electricity prices (Fox-Penner). Further, Dr. Goldberg showed that the manipulation of spot market electricity prices inflated the forward market prices, which both Shell and Iberdrola used as a justification for their pricing levels in the contracts at issue in the case. The ALJ concluded that the evidence presented demonstrated “a nexus between unlawful activities affecting spot market prices that, in turn, affect long term contract negotiations” for the Shell contract, proof of which justified a finding that Mobile-Sierra protections did not apply to the contract. Dr. Celebi carried out a “down-the-line” economic analysis, showing that both the Shell and Iberdrola contracts imposed an excessive burden on consumers upon which the ALJ relied to rule that the Mobile-Sierra presumption of just and reasonable contract rates had been overcome with respect to both contracts.

Having successfully shown that the Mobile-Sierra presumption either did not apply to or had been overcome for these contracts, the State of California complainants have removed the major obstacle to their request that the FERC rule the rates in the contract unjust and unreasonable and order refunds of amounts charged to California buyers above just and reasonable levels. The complainants currently await a final decision by the FERC.

To learn more about how Brattle’s experts are assisting clients in matters involving manipulative trading practices in electric power and natural gas markets, please click here.

Associated Experts
Broehm 076
Dr. Broehm is an economic expert in the electric utility industry specializing in the areas of market competition, impacts of regulatory policies on wholesale power markets and power assets and valuation, and the evaluation of power procurement. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Metin 087
Dr. Celebi provides expertise in electricity markets and the analysis of environmental and climate policy. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Webrichgoldberg img 4749
Dr. Goldberg specializes in complex litigation in which careful analysis and modeling of economic, business, or financial data is critical. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Read 050
Mr. Read is an expert in valuation, risk management, and capital budgeting in the energy industry, especially electric power and natural gas. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Taylor 066
Mr. Taylor's areas of expertise include contract and market risks and incentives, antitrust and regulatory economics, and transition markets. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Fox penner 131
Academic Advisor
Dr. Fox-Penner specializes in economic, regulatory, and strategic issues in network industries. His practice centers on energy and environmental policies and electric regulation, planning, and competition issues. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Gresham 145