A recent set of decisions from the United States Court of Appeals for the Ninth Circuit raises the prospect that market-based rate transactions, including billions of dollars worth of wholesale power contracts, entered into during the US West power crisis may be modified now, more than six years down the road. This may set a precedent for regulatory intervention and modification of wholesale power transactions by the Federal Energy Regulatory Commission (FERC) with much broader implications for the US power sector.
The Ninth Circuit decisions include vague, subjective standards for FERC market-based rate intervention, including rate revision in long-term power contracts, should market conditions suddenly change. But sudden market changes are normal in an industry characterized by large capital requirements, volatile price patterns, and multiyear business cycles. Contracts are an important mechanism used to mitigate these inherently risky pricing dynamics and encourage investment. A lack of reliable contracting will inhibit investment and could set the stage for future power crises. Implications include
- Higher prices. Less reliable wholesale power contracts will make investments more risky, add billions of dollars per year to the costs of the power business, and force increases to future power prices.
- Underinvestment. A reduction of reliability in wholesale power contracts, especially long-term contracts, may limit the flow of capital into a sector that needs capital expenditures in the next fifteen years of about $900 billion.
- Re-regulation. Using simplistic static criteria to judge and adjust complex and dynamic power markets is likely to cause underinvestment and poor power system performance in the future-conditions not likely to be tolerated for long. A political backlash and a move back to cost-of-service regulation may well be the end result.
