Commissioner James Danly Dissent Regarding Shell Energy North America (US), L.P.

Commissioner James Danly Statement
March 29, 2023
Docket No. ER21-2382-000

The legal question in this case is whether the Commission can abrogate a contract to sell electricity pursuant to market-based rate authority when the contract price is above a Commission-imposed “soft” price cap absent a finding that the public interest so demands.  The answer is no.  I therefore dissent from today’s order.[1]  I would apply the Mobile-Sierra presumption to the contract sale at issue and not require Shell Energy North America (US), L.P. (Shell) to pay refunds for the “premium” amount above the price index that Shell and the willing buyers freely negotiated because no showing has been made that the public interest is seriously harmed by the contract rate.[2]

California suffered rolling blackouts in August 2020, largely caused by the poor design of the markets administered by the California Independent System Operator (CAISO), sustained artificially low power prices, insufficient generation, an over-reliance on unreliable renewable resources, and continuous government and regulatory meddling.[3]  CAISO again experienced extreme heat and high prices in June, 2021.  The Commission acts here to require individual generators—who helped prevent blackouts by selling emergency power at prevailing market prices that happened to be in excess of a “soft” cap imposed by the Commission—to refund amounts the majority now deems to be too high.  In so ordering, the majority does nothing to remedy California’s ongoing electricity crisis except to perpetuate contract uncertainty and cause even greater price suppression.

But this is merely context.  The issue whether the sales prices of Shell should be abrogated is a legal question.  Market-based rate sales are subject to the Mobile-Sierra doctrine which means that the Commission “must presume that the rate set out in a freely negotiated wholesale-energy contract meets the ‘just and reasonable’ requirement imposed by law.  The presumption may be overcome only if FERC concludes that the contract seriously harms the public interest.”[4]  Sales pursuant to market-based rate authority, such as Shell’s in this case, thus enjoy the Mobile-Sierra presumption.

The majority correctly finds that “the Mobile-Sierra presumption applies to Shell’s sale in this proceeding,”[5] but then incorrectly rules that this “is not dispositive”[6] because by ordering Shell to refund portions of the contract price the Commission is merely “enforcing requirements incorporated into the contracts via the Commission orders establishing the price cap and provisions in Shell’s market-based rate tariff.”[7]  This attempted circumvention of the Mobile-Sierra presumption fails.

First, the majority in fact modifies the first element of any contract, the offer, which in this case was that Shell would sell electricity to the buyer at a premium above the index price.  The Commission modifies the offer by “direct[ing] Shell to refund the amount charged above the index price.”[8]  There is no more fundamental modification of a contract than to change the sales price.

Second, the majority is wrong that a Commission-imposed soft cap is all it takes to eliminate an entire class of market-based rate contracts from the Mobile-Sierra presumption.  The majority reasons that sellers with market-based rate authority must comply with any “requirement” the Commission places on market-based sales, and thus sales above the Commission-imposed soft cap do not enjoy contract law protections.[9]  If that were the case, the Commission could order that any rate above zero in any contract is subject to a “soft” cap, and just like that, the pesky Mobile-Sierra doctrine would be gone forever, and the Commission could simply dictate all seller offers.  Happily, contract law is not so easily circumvented.  There are limits to the “restrictions” the Commission can attach to market-based rate tariffs.

We should remember what the “soft” cap purports to be.  It allows sellers to offer at prices above the cap in recognition that market prices will sometimes exceed the cap.  This could happen, for example, during a period of extreme scarcity, which is exactly what was happening in California in June 2021.  Under a hard cap, sales above the cap are prohibited, and no contract above the cap is enforceable.  Mobile-Sierra never comes into play for an unenforceable contract.

Under the soft cap, however, parties are free to negotiate contracts above the cap.  Unlike with a hard cap, the soft cap regime expressly contemplates a seller’s ability to justify the offered price.  Those contracts above the soft cap, like all market-based rate sales, enjoy the Mobile-Sierra presumption.  There is no precedent to suggest otherwise.  The majority certainly fails to cite any.  The freely negotiated contractual offer price above the cap cannot be modified unless it seriously harms the public interest.

The Commission of course could do away with the soft cap and instead prohibit sales above a hard cap of $1,000 or any other amount found to be just and reasonable.  But the consequence would be that when market prices exceed the cap, some available electricity would not be sold.  During June 2021, the likely result would have been blackouts and an even more severe reliability crisis.  The Commission thus reasonably allows sellers to sell at prices higher than the cap if the prices are justified, but the Mobile-Sierra presumption still must apply.  The Commission can adopt “guidance” for how to analyze the justification,[10] but the final burden is on protesters to demonstrate that the contract rate harms the public interest.

When we apply the correct Mobile-Sierra standard to Shell’s price justification, the question is whether the contract price seriously harms the public interest.  The contract prices are fully explained by Shell.[11]  Buyers willingly purchased power during a reliability crisis at a modest premium above prevailing market index prices.  There is no showing in the record that these prevailing market prices seriously harmed the public interest.  Any such argument appears absurd on its face, particularly when internal CAISO prices are capped at levels much higher than the Shell contract price.  It probably is because the Mobile-Sierra presumption so easily defeats contract modification in this case that the majority grasps for any means to bypass it.

I conclude with a final observation.  It is not like Shell has a real choice not to sell excess power during a reliability crisis.  If they do not sell, the Commission will investigate them for physical or economic withholding and attempt to levy sanctions for manipulating the markets.  It is of course in everyone’s interest for all available power to be available during a crisis.  So the de facto result is that we require Shell to sell, and then we require them to sell at our preferred price.  No wonder there seems to be no end in sight to the supply shortage in California and (increasingly) the western United States.

For these reasons, I respectfully dissent.