On June 17, 2021, FERC issued an order providing guidance on the means by which sellers in the Western Electricity Coordinating Council (“WECC”) market can demonstrate that sales made above the $1,000/MWh soft price cap were just and reasonable. This guidance has been provided for sellers with pending justification filings, which have been granted 30 days to amend or supplement their filings accordingly, as well as any sellers making prospective justification filings.FERC established WECC bid and price caps beginning in 2002, following the Western energy crisis. FERC clarified that the cap is a “soft” cap, meaning that any bids above the cap are subject to justification and refund, but previously declined to provide guidance regarding what it would consider to be sufficient justifications (see October 15, 2010 edition of the WER). More recently, extreme heat in the West during August 2020 culminated in energy transactions that exceeded the $1,000/MWh WECC soft price cap. In response, FERC staff posted limited guidance and extended the deadline for any necessary justification filings. Various sellers submitted justification filings that are still awaiting FERC action.
Rather than issue any orders on the pending justification filings, FERC determined it was appropriate to provide additional guidance on potential approaches a seller could take to support as just and reasonable sales in excess of the WECC soft price cap. FERC reviewed the kinds of sales reported in the pending justification filings and explained that successful demonstrations are likely to be based on, but are not limited to, one of three frameworks: (1) a production cost-based framework; (2) an index-based framework; and (3) an opportunity cost-based framework. Under a production cost framework, FERC explained that sellers could show evidence of costs associated with production via purchase confirmations, invoices, and affidavits of their actual, short-run marginal costs. Under the index-based framework, FERC stated that sellers should reference a specific price index, explain why it is representative of the seller’s own market opportunities, and demonstrate that the index meets FERC’s index liquidity standards. Under the opportunity cost framework, sellers can demonstrate an opportunity to sell elsewhere, with evidence of timing, location, quantity, price of the alternative sale, and the ability to deliver. FERC also stated that sellers can justify their transactions under other approaches, but that the seller must clearly explain how the alternative approach justifies its transaction. Regardless of which framework is applicable, including any potential alternative, sellers must provide detailed information to support each transaction, such as affidavits, purchase confirmations, and invoices.
FERC also provided clarifications specific to sellers justifying a sleeve transaction, i.e., a transaction where a third-party entity assists in accomplishing a sale between two other counterparties that otherwise cannot transact directly. Any such sellers should provide evidence of the purchase and sale, and nominal fee/margin. Additionally, both the entity providing the sleeve and the original seller are required to make justification filings. Finally, justification filings are also required where the energy is at or below the cap if the nominal fee raises the amount above the cap. With respect to financial transactions that do not result in the delivery of a physical electricity product, FERC clarified that these transactions are not subject to the $1,000/MWh WECC soft price cap and therefore do not require a justification filing.
In light of this guidance, FERC has allowed parties with pending justification filings to supplement or amend their filings within 30 days of the June 17 Order. Commissioner James Danly concurred with the order to emphasize that the Commission should stand by its invitation to permit sellers to use alternative frameworks to justify their transactions.
A copy of the order is available here.
* Sahara Shrestha is a 2021 summer associate with Troutman Pepper and not admitted to practice law.