Petition for a Writ of Certiorari - Snohomish. - ISDA

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III.16The Ninth Circuit’s New Standards Will Harm ConsumersBy Impeding The Efficient Operation Of TheWholesale Power MarketThe market dysfunction that will arise from the NinthCircuit’s decisions can be prevented only by this Court. If thosedecisions are not reviewed and corrected, FERC may or may notdetermine that the rates in these contracts should be reduced. Itmay read the decisions broadly, to permit or require more aggressiveinterference with market forces, or narrowly, to upholdthe rates in these contracts. But, regardless of how FERCapplies the decisions to resolve these particular disputes, theNinth Circuit’s decisions, if uncorrected, will create substantialuncertainty about the extent to which parties can rely oncontractual commitments. The risk that contract rates may bemodified – if not by FERC as currently constituted, perhaps byFERC when it is controlled by different commissioners; if notthese contract rates, perhaps the rates that will be negotiatedwhen prices rise again; if not because of this market“dysfunction,” perhaps because of another – is a risk that marketparticipants must reckon with, regardless of FERC’s immediateresponse to the decisions. That risk will remain even if no othercourt ultimately follows the Ninth Circuit’s approach, and evenif the Ninth Circuit does not act as drastically in future cases asit has done in these cases. The uncertainty created by having theNinth Circuit’s opinions on the books as valid precedents willin and of itself undermine the parties’ incentives to enter intomutually and publicly beneficial contracts.The Ninth Circuit’s revisionist interpretation of Mobile-Sierra will injure consumers of electric power in several specificways. First, the Ninth Circuit’s standards will discourage theuse of long-term contracts. Under those standards, the degree offinancial risk to sellers will increase in proportion to the durationof the contract. That is because of the risk that, if marketprices decline over the duration of the contract, the seller maylose the benefit of the contract price, because the buyer may beable to obtain a reduction in the contract price from FERC under
17the Ninth Circuit’s standards; but, if market prices rise over theduration of the contract, under Mobile and Sierra themselves theseller will be locked into the unfavorable contract terms for along period, and will be unable to obtain contract price modifications.Moreover, if a contract locks in a price for a very shortperiod of time, there will be little opportunity for market pricesto move dramatically in either direction, and therefore littlefinancial exposure to the seller as a result of the buyer’s “headsI win, tails you lose” advantage. There is a much greater likelihoodthat market prices might move dramatically, and in an unfavorabledirection, over the course of, for example, a ten-yearcontract, than over the course of a ten-day contract.The large element of risk that the Ninth Circuit has added tolong-term contracts will have many undesirable effects. Longtermcontracts play an important role in promoting investmentin new productive assets. A power producer consideringwhether to undertake a major capital investment to increase itsgenerating capacity (or a bank that is considering whether to financethat investment) is more likely to do so if it can securelong-term contracts to sell power at a price that would ensure anadequate return on its investment. Indeed, petitioner Semprainvested more than $1 billion in new generating capacity inreliance on a long-term contract that the Ninth Circuit has putat risk. Testimony of Michael R. Niggli, Exh. SER-1 at 37-38,FERC Docket No. EL02-60-003 (filed Oct. 24, 2002). Withoutthe ability to rely on buyers’ long-term commitments, potentialinvestors in new generation capacity may be reluctant to risktheir capital. See Mobile, 350 U.S. at 344 (parties cannot beexpected to make “substantial investments * * * without longtermcommitments” and such commitments are impossible if“supply contracts are subject to unilateral change”); Memphis,358 U.S. at 113 (Without legal protection of producers’ contractrights, “the maintenance and expansion of their systems throughequity and debt financing would become most difficult, if notimpossible.”). Long-term contracts similarly play an importantrole in facilitating investments by buyers, who may rely onlong-term price commitments as insurance that their invest-
Page 4: iiiTABLE OF AUTHORITIES—continued
Page 7 and 8: 3function that will impose enormous
Page 9 and 10: 52purchase electricity in the Unite
Page 13: 9promoted the Act’s purposes, as
Page 17 and 18: 13that affected the contracts. See,
Page 19: 15The Ninth Circuit’s new rules d
Page 23 and 24: 19The Ninth Circuit’s standard ma
Page 25: 21Respectfully submitted.ROY T. ENG

Petition for a Writ of Certiorari - Snohomish. - ISDA

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