In an omnibus order issued at its June 17 Open Meeting, the Federal Energy Regulatory Commission (“FERC” or “Commission”) provided guidance for sales above the Western Electricity Coordinating Council’s (“WECC”)  $1,000/MWh soft price cap (“WECC Guidance Order”). In the order, the Commission describes three frameworks that sellers may use to provide the required cost justification for sales above the $1,000/MWh WECC soft price cap: (1) Production Cost-Based Framework; (2) Index-Based Framework; and (3) Opportunity Cost-Based Framework.  Sellers, however, are not limited to using one of these three frameworks.  Further, using one of these frameworks is not prima facie evidence that a price above the soft cap is justified.

Key Take Away:

The WECC Guidance Order provides necessary guidance for market-based rate sellers in WECC.  Extreme heat and other weather events are already occurring throughout the western United States and are likely to increase in frequency throughout the summer. As such, it is critical that sellers in WECC incorporate this guidance into their procedures for transacting in excess of the soft offer cap in WECC – and consider the implications of this guidance on market conduct in other regions in which they transact.

Background:

There has been a $1000/MWh soft price cap in WECC since 2010.  The soft cap permits sales in excess of the $1000 cap, but requires the seller to file the cost justification for such sales with FERC (“Justification Filings”).  The WECC Guidance Order stems from the August 2020 extreme heat event that impacted the western United States, which culminated in energy transactions in excess of the $1,000/MWh WECC soft price cap. Following the event, sellers whose prices exceeded the WECC soft price cap submitted Justification Filings.  FERC described the Justification Filings as covering four general types of transactions: (1) physical forwards; (2) physical index transactions; (3) financial transactions; and (4) sleeve transactions. The Commission characterized the Justification Filings as reflecting two primary arguments in support of prices in excess of the soft price cap – that the sales reflect prevailing market conditions and are protected under the Mobile Sierra Doctrine.

Findings from the WECC Guidance Order:

Without addressing the merits of the Justification Filings, the Commission provided additional guidance regarding sufficient cost justifications for sales in excess of the WECC soft price cap:

1. Cost Justification Frameworks.  Justification for sales above the $1,000/MWh soft price cap may be based, but is not limited to, a demonstration using at least one of three frameworks:

• Production cost-based framework-  Under a production cost-based framework, a seller could demonstrate that sales above the cap were just and reasonable by providing evidence of costs associated with the production of electricity from physical supply resources.  Under this framework, sellers would demonstrate that their actual, short-run marginal cost of production exceeded $1,000/MWh.  Sellers may demonstrate actual short-run marginal costs (i.e., fuel, O&M costs for generation resources) using documentation including purchase confirmations, invoices, and affidavits. 
  
  
• Index-based framework-  Under an index-based framework, a seller would use price indices to justify its transaction.  To rely on this framework, sellers must provide the following information: (1) reference to a price index at a specific hub; (2) an explanation of the relevance of the specified price index to the transaction requiring justification, including locational and temporal relevance, and published index price; and (3) a demonstration that the price index met conditions for adequate liquidity at the location based on the Commission’s index liquidity standards during the time period relevant to the transaction. 
  
  
• Opportunity cost-based framework-  The Commission typically recognizes two types of opportunity costs: (1) locational, describing the opportunity to sell in other markets; and (2) intertemporal, describing limits on starts, operating hours, and energy over a given timeframe.  Under an opportunity cost-based framework, sellers would justify their sales price above the WECC soft price cap by documenting an opportunity to sell elsewhere.  The seller would demonstrate it had an opportunity to sell power above the cap that it declined to make in favor of the sale reported to the Commission.  Invoking the opportunity cost framework requires evidence of alternative sales options, including details on the timing, location, quantity, and likely price of the alternative sale.  Examples of evidence sellers could provide include offers for resale received, invoices of power resold, or evidence that the seller had an ability to sell into a centrally cleared energy and ancillary services market (e.g., RTO/ISO or an energy imbalance market).

While a seller is not required to use one of these frameworks to justify prices in excess of the soft price cap, it must demonstrate how the methodology it uses justifies the transaction(s).

1. Sleeve Transactions.  A justification filing for a sleeve transaction should include an explanation of the transaction, along with supporting documentation of the purchase, the nominal fee/margin, and the subsequent sale.  Sellers should also submit justifications following the above guidance for sleeve transactions where the energy price is at or below $1,000/MWh but the nominal fee raises the total price of the sleeve transaction to an amount exceeding the WECC soft price cap. 

    

2. Case-by-Case Consideration. The Commission will continue to consider justifications for sales above the $1,000/MWh soft price cap on a case-by-case basis, finding that this approach balances the need to deter potential market abuse while allowing for justified sales above the cap.

If you have any questions regarding the impact of the WECC Guidance Order, please contact Michael Yuffee or Ryan Norfolk

 

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