WSPP Operating Committee Spring 2008 LEGAL UPDATE Arnie Podgorsky Wright & Talisman, PC This educational presentation states no legal opinion of WSPP or its legal counsel, and is not legal advice

FERC Order 890  FERC affirmed 890 finding that the Schedule C formulaic damages provision required sufficient “firmness” for designation as a network resource.  Reasoning: LD was a remedy for a failure to perform and not an alternate form of performance.

More Order 890  WSPP had sought rehearing concerning requirement of un-designations by 10 a.m. the day before. FERC noted that it had deferred effectiveness of this requirement.  Denied Sempra Global clarification request that transmission providers be obligated to offer reserves to support deliveries outside their control areas. FERC reasoned that the generator could obtain the service from the sink BA or third parties.

Still FERC= WSPP Up-To Case  FERC’s 206 Investigation of WSPP’s cost-based rates Impact on demand charge, not energy. Not just and reasonable for seller to use the WSPP “up to” demand charge as a ceiling rate where seller lacks market- based rate authority, unless the seller justifies use of the “up to” demand charge based on its own fixed capacity carrying costs.

More on “Up-To” FERC directed that each WSPP seller file, by April 21, 2008, justification that WSPP “up to” demand charge is just and reasonable for that seller. On a showing of just and reasonable, seller would be permitted to continue to use the WSPP Agreement cap. Otherwise, seller required to file a separate stand-alone cost-based demand rate schedule.

So Cal Water Company  So, what does forecasted incremental cost mean? On remand from D.C. Cir, FERC addressed how SoCal Water should set a cost-based rate for a sale to Mirant during California energy crisis. FERC found that SoCal Water had lacked market-based rate authority (so was setting a cost-based rate.) DC Cir offered 2 possible meanings:  1. Cost of the last unit sold, in which case the cost of the last unit would be applied to all units sold under the contract (much like centralized markets in determining price at single bus and time). OR  2. Weighted average of total forecasted cost of all additional units sold above some base amount, not just the cost of the last unit.

And the Answer Is… FERC-adopted interpretation of “additional increment of energy” - which establishes the “forecasted incremental cost” under the WSPP -, is the weighted average cost per mw of the entire sale. Id. at P 19. FERC noted that WSPP Agreement not contemplate resale (as in SoCal W deal) and in resale deals the “cost” of the units sold must be derived from the purchase of power under a separate transaction. So, SoCal Water’s sale price was capped at the actual unit purchase price of power it acquired under other contracts.

Morgan Stanley, Snohomish, and MOBILE SIERRA at the Supremes  th Cir. Decision: FERC could not rely on Mobile- Sierra in determining that these power crisis contracts did not affect the public interest. 3 criteria are required for Mobile-Sierra presumption: (1) contract by its own terms must not preclude the limited Mobile-Sierra review; (2) regulatory scheme must provide FERC with an opportunity for effective & timely review of the rates; and (3) if market-based rates, review must include consideration of all factors relevant to contract formation.  9 th Cir found that two of the criteria were not met. US Supreme Ct. agreed to hear the case. (There they go grabbing headlines again!!)

Justice Scalia as Marketeer  Argument was February 13, Justice Scalia:  “Didn’t your clients know that the market was chaotic at the time they entered into this long-term contract?... Now that you’re paying more than market price is, you want to kick over a long-term contract you entered into? What has changed? Did you not know that the market was chaotic? Wasn’t that the very reason you entered in the long-term contract?”  “But so long as it’s a factor extrinsic to the parties to the contract, what difference does it make to the buyer whether the flukishness (sic) of the market is caused by the weather or by manipulation by somebody other than the seller?”

Power Crisis, Power Crisis, Power Crisis  What will we talk about when they’re all resolved? Does Bankruptcy Code preempt FPA to allow rejection of LT jurisdictional contracts? When FERC doesn’t regulate markets, should a contract still have Mobile-Sierra protection? How else would we have learned what reasonable credit assurances really means?  A bit more in the materials. THANKS for hanging in there!!!!!