2004 Legal Seminar

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When is a Contract Not a Contract?

More lessons from California . . . .

Meg Meiser, William Huang, and Larissa Shamraj

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A Tale of Two ISOs

California and the Midwest: Pre-restructuring transmission arrangements and the transition to restructured electricity markets.

Competing factors Sanctity of contract

Pre-existing transmission contracts as obstacles to effective restructuring

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Overview

Recent California cases on Existing Contracts

Recent Midwest ISO cases on Grandfathered Agreements

Implications for the future

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40 Ways (Minus 36) to Leave Existing Contracts

Abrogation or reformation

Renegotiation by parties

Unilateral modification under FPA §205 or §206

“New service”

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The “New Service” Approach

Existing contract, which previously provided everything necessary for deliveries, no longer adequate

Additional services or products necessary

TO may charge for “new service” on top of existing contract rate

Mobile-Sierra; cost support requirements

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Existing Contracts in the California ISO

1996 – AB1890; 1998, the California ISO began operations

Existing Contracts would continue to be honored. “To the extent that Transmission Losses or Ancillary

Service requirements associated with Existing Rights are not the same as those under the ISO’s rules and protocols, the ISO will not charge or credit the Participating TO for any cost differences between the two.” CalISO Tariff §2.4.4.4.4.5

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TO Tariff Initial Decision

Transmission Owner Tariff Costs to be charged and windfalls credited to TO

Tariff Customers

TO Tariff Initial Decision denied TOs recovery of these charges from TO Tariff Customers

Recovery, if at all, by amending the Existing Contracts

TOs to shoulder costs if they lack rights to amend the contracts

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SCS Tariff Filing

PG&E proposed to recover costs from Existing Contract holders (mostly municipals)

New Service; in the alternative, amendment to Existing Contracts

Filed November 12, 1999; requested retroactive Effective Date: start of Cal ISO operations (March 31, 1998)

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SCS Tariff - Abeyance

Rate conditionally effective March 31, 1998

Abeyance until 2002 Charges continued to accrue

No information provided by PG&E

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Reliability Services Tariff Filing

Reliability Must-Run and Local Out-of-Market Calls PG&E characterized these costs as “Reliability

Services” According to PG&E, the firm transmission service

provided under Existing Contracts did not include Reliability Services

Therefore, PG&E should be allowed to charge for Reliability Services as a new service

Alternatively, amend Existing Contracts

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RS Tariff Decision

The Initial Decision rejected the new service theory According to ALJ, Reliability Services “were not a

gleam in PG&E’s eyes when these contracts were executed.”

Nevertheless, so-called Reliability Services were inherently included in the pre-restructuring firm transmission service

PG&E could seek to amend the Existing Contracts if no Mobile-Sierra protection

FERC affirmed the Initial Decision

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Grid Management Charge Pass-Through Tariff Filing

Sought to pass-through Cal ISO’s GMC

“New service” theory

Partial success at ALJ level: Approximately half of GMC Pass-through

charges treated as a “new service”

Approximately half of GMC Pass-through charges were for functions already covered by Existing Contracts

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GMC Pass-Through Tariff

Commission overturns Initial Decision in part – all administrative costs of ISO new

Existing Contract customers “fail to come to grips with the fundamentally new and different roles that now exist under the California ISO regime.”

Existing Contract Holders not “immune from all change brought about by restructuring”

ISOs/RTOs benefit all

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Other cases in California

Edison is authorized to pass on whole passel of ISO costs to a group of municipals as a contract amendment

Little detailed scrutiny of underlying contract, but Commission goes through the steps of a pro forma analysis

Edison seeks to pass on whole passel of ISO costs as new service for an exchange agreement with LADWP

Commission puts on hold pending “guidance” from GMC rehearing

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GMC Rehearing Order (Opinion No. 463-A)

Retained status quo: GMC costs are costs a new service

Distinguished MISO: Retention of historical control areas

Continued to chastise municipals for failing to come to grips with change

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GMC Rehearing Guidance?

Ammunition for both sides of the argument

Kelliher dissent: policy goal of preventing trapped costs does not justify new service ruling

Case on hold pending guidance still on hold

Reading tea leaves all that was left

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SCS Tariff revived: Initial Decision

Initial decision in SCS Tariff case Phase I Among the issues:

is the SCS Tariff a new service?

Should the SCS Tariff have an effective date of Day 1 of ISO start-up, though it was filed almost 20 months later

Presiding Judge says:

Yes

Yes

No need to look at Mobile-Sierra protections

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Opinion No. 477: The other shoe

October 28, 2004: the Commission affirms the ID in whole on the new service

PG&E’s function as SC for ETCs was not required in contracts and was a new service

Charges can be passed on to ETC holders as costs of a new service

Mobile-Sierra irrelevant Overrules ID on retroactive application: still

an obligation to have tariff on file

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Different standards?

“While it may be true that there has not been a change in the physical characteristics of the ancillary services provided under the Control Area Agreements, it is nonetheless a fact that an entity such as the CAISO will operate under different standards than did PG&E with regard to ancillary services requirements, since it is operating a grid which comprises what were previously three separate control areas.”

Opinion No. 477

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Benefits of Restructuring?

“As a Commission staff witness observed, with the formation of the ISO in California, there have been “massive” and “fundamental changes” in the manner in which electricity is sold and distributed there, so that “the complexities of operating the transmission system have increased exponentially.”

Opinion No. 477 (citing Opinion No. 463-A)

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Competitive Markets?

“Additionally, it is highly significant that the CAISO has established competitive markets for ancillary services and imbalance energy. Thus, the situation is fundamentally different from that in which PG&E procured ancillary services in a non-competitive environment.”

Opinion No. 477

“PG&E hydro units play a key role in the ISO ancillary service markets supplying approximately 70% of the total ancillary services requirement in Northern California, and approximately 85% of the regulation services in Northern California.”

Testimony of Anjali Sheffrin, CAISO Director of Market

Analysis, in PG&E hydro divestiture proceedings

before the CPUC in 2000.

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What’s the real difference? Gleam vs. Twinkle

Contract Amendment: Gleam

“RMR and OOM dispatch calls were not a gleam in PG&E's eyes when these contracts were executed.”

Initial Decision (finding that Reliability Services were nonetheless included in the firm transmission service provided under the ETCs)

New Service: Twinkle

“It is self-evident that PG&E did not obligate itself to perform as a CAISO Scheduling Coordinator under its existing contracts, as the role itself and the responsibilities and obligations that it entails did not exist at the time these contracts were entered into, when the CAISO was not yet a twinkle in the California legislature’s eye.”

Opinion No. 477

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SCS Tariff: How bad is it?

The bad news: All “CAISO-created”

charges are up for grabs Complexity of running

grid increased “exponentially”

Ancillary service standards of CAISO may not be the same as PTOs’ pre-ISO standards; costs can be passed along

Municipals still not coming to grips with restructuring

The less bad news: Many municipals have

left their ETCs behind Can PTO recover for

anything but “incremental” amounts?

Commission declines to make SCS Tariff retroactive: the filed rate doctrine remains binding

Credits must be given for things that were provided under ETCs

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In MISO: A different story?

Imposition of any MISO administrative costs must be done as a contract amendment

Commission: Transmission Owners retain historical control areas

Other possibilities:

Gradual process towards markets, not there yet

Designated Transition Period ending on 1/31/08

Broader group of entities involved in MISO process, including non-jurisdictionals

California a lesson in what not to do

Most costs associated with GFAs don’t flow through Tariff

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Between a rock and a hard place

“A few months ago in the Spring, it looked like we had two star[k] choices, either abrogate 300 contracts o[r] cripple MISO’s energy and transmission markets, and they were pretty unpleasant choices.”

Commissioner KelliherSeptember 16, 2004

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MISO Expedited Hearing & Settlement Process

Carrots, sticks, and a “timeline from hell” Carrots:

Settle if you want the option that comes close to holding you harmless

Sticks:

Extremely expedited timeline

Litigation risk

New service threat

Non-jurisdictionals optional, but what happens if you opt out?

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GFA Resolution

Carve-out does not harm MISO: Between settlements and hearings, amount of GFAs “carved

out” of MISO Day 2 markets only 9.6 percent of peak load

Issues Resolved for GFAs in MISO How does the GFA integrate into the market?

Who is the “Responsible entity”?

What is the standard of review?

How are Schedule 16 and 17 costs passed on?

But what does it really mean? How binding is the resolution on future activities? What happens after 1/31/08?

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Pre-emptive Resolutions: Proactive Commission or Strong-Arm tactics?

GFA expedited proceedings

Sellers Choice Contract settlement negotiations: marketwide attempt to address LMP and conflicts with existing power purchase contracts

FERC-brokered resolutions in termination dockets

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Conflicts between pre-existing (or even recently negotiated) contracts and changing market structure inevitable

Can California’s quarantine hold? No major market blips Enough entities playing the game

New service requires change, but change is easy to find

Are your contracts worth the paper they’re written on?

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Risks of opting out

Loss of control and diminished ability to: Mitigate financial impacts Understand market complexities Participate in market redesign Dispute what’s going on

Retention of all old obligations, potential to add costs of new markets

Hedge can become cost plus (cost under ETC plus various “ISO-created” charges) anyway

Commission losing patience with those who are stuck in the past

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Sanctity of Contract: Yes or No?“Complainants became dissatisfied with their bargains and sought contract modification. The law is quite clear on that point. The fact that a contract becomes uneconomic over time does not render it contrary to the public interest.”

Commission decision in Nevada Power

upholding high-cost power purchase agreements from Western meltdown

“Through these existing transmission contracts, PG&E is obligated to provide firm transmission service. The creation of the CAISO did not relieve PG&E of that obligation…. I would reverse the Initial Decision determination that PG&E is providing a new service and grant the exceptions on this issue.”

Kelliher Dissent in Opinion No. 477