On January 4, 2013, FERC granted a petition for declaratory order filed by the California Independent System Operator Corporation ("CAISO") in late November asking FERC to find that consent by BE CA, LLC, a subsidiary of JP Morgan Ventures Energy Corporation (collectively, "JP Morgan"), is unnecessary for certain plant conversions at a generation facility owned by AES Huntington Beach LLC ("AESHB"), or for a related reliability must-run ("RMR") agreement between CAISO and AESHB to become effective. FERC determined that certain agreements at issue in this case form an integrated agreement within FERC's jurisdiction. FERC also determined that such agreements do not establish the consent rights JP Morgan claims exist. By separate order, FERC also conditionally accepted the RMR agreement between CAISO and AESHB, effective January 9, 2013.
Copies of FERC's orders can be found at: http://www.ferc.gov/EventCalendar/Files/20130104184626-EL13-21-000.pdf and http://www.ferc.gov/EventCalendar/Files/20130104184607-ER13-351-000.pdf
Background:
AESHB owns a generating facility comprised of four natural gas generating units (Units 1 – 4). Units 1 and 2 are the subject of a tolling agreement (the "Tolling Agreement") initially executed between AESHB and Williams Energy Services Company ("Williams"), and later assigned by Williams to BA CA, LLC. Contemporaneously with execution of the Tolling Agreement, the parties executed a supplemental agreement (the "Supplemental Agreement") which addresses generating capacity within a specified geographic area that includes Units 3 and 4.
Since October 2012, Units 3 and 4 have not operated because emissions permits needed to operate these units without violating air emissions regulations were transferred to Edison Mission Hunting Beach ("Edison") as part of a separate sale and leaseback transaction. To address reliability concerns resulting from these units not operating, CAISO elected to designate Units 3 and 4 as RMR units, and entered into an RMR agreement with AESHB under which these units will provide reactive power and voltage support (ancillary services) for the 2013 contract year. As part of this arrangement, CAISO proposed that Units 3 and 4 be converted into "synchronous condensers" capable of providing the ancillary services contemplated under the RMR agreement. Conversion to synchronous condensers would enable Units 3 and 4 to operate without a combustion source, thereby eliminating the need for the previously transferred emissions permits.
CAISO explained in its November 19, 2012 request to FERC that AESHB was unwilling to proceed with converting Units 3 and 4 due to concerns that it might breach existing agreements with JP Morgan. The RMR agreement contains a condition precedent that JP Morgan provide all necessary consents prior to the RMR agreement becoming effective. According to CAISO, JP Morgan had been unwilling to grant such consents or alternatively stipulate that its consent was not required. CAISO requested that FERC assert jurisdiction over the Supplemental Agreement (where certain JP Morgan consent rights exist) and determine that such consent rights are not implicated by the conversion project.
JP Morgan protested CAISO's petition and argued among other things that the Supplemental Agreement is outside of FERC's jurisdiction because it is separate from the Tolling Agreement and addresses construction and infrastructure issues. JP Morgan argued that treating the Supplemental Agreement as FERC-jurisdictional would impact may other agreements (such as construction agreements, supply agreements, operation and maintenance agreements and labor agreements, etc.). JP Morgan also took issue with CAISO's reliability analyses, claiming that CAISO did not properly justify its reliability claims or its RMR designation of Units 3 and 4. JP Morgan further argued that its consent rights in the Supplemental Agreement cannot be abrogated under the Mobile-Sierra doctrine, which JP Morgan claims does not authorize the abrogation of nonjurisdictional contracts.
FERC's Findings:
FERC determined that the Supplemental Agreement and Tolling Agreement, form a single, FERCjurisdictional agreement, thereby making the Supplemental Agreement—and the consent terms contained therein—within the scope of FERC's jurisdiction. Declining to accept JPMVEC's argument, FERC found the Tolling Agreement involves the sale of capacity and energy at wholesale, and therefore is squarely within FERC's jurisdiction under the Federal Power Act. FERC reasoned that because the Supplemental Agreement was executed by the same parties contemporaneously with the Tolling Agreement, it is properly considered "part of the Tolling Agreement." FERC points to an integration clause contained in the Supplemental Agreement as indicative of the parties' intent to have the two agreements considered as an integrated whole. FERC also reasoned that because the Supplemental Agreement cannot be enforced or interpreted without reference to the Tolling Agreement, the two agreements are sufficiently integrated. FERC points to prior cases which it believes supports reading the two agreements as a single FERCjurisdictional agreement because each pertains to the same transaction.
In addition to finding that the Supplemental Agreement is within FERC's jurisdiction, FERC also determined that exercising primary jurisdiction in this case is appropriate under the Arkla test, a guideline FERC uses to determine whether to exercise its primary jurisdiction. FERC reasoned that exercising primary jurisdiction would be appropriate here because this case raises "significant reliability issues," involves "matters and terminology squarely within the Commission's expertise," and the "circumstances require an urgent decision." FERC's decision to address the Arkla test is interesting given that the issues are not currently being considered in any other venue—a circumstance usually underlying recourse to the Arkla analysis.
Based on its review of the two agreements at issue, FERC determined that JP Morgan's consent is not required for either the conversion of AESHB Units 3 and 4, or consequently, for the RMR agreement between AESHB and CAISO to become effective. The Supplemental Agreement grants each party consent rights over the other party before either may add new generation infrastructure within a specified geographic area, which includes Units 3 and 4. FERC observed, however, that this provision addresses the term "capacity," which FERC determines applies to the megawatt (MW) output of a generating facility, and not to the output produced by synchronous condensers, an ancillary services product measured in MVARS (the unit of measure for reactive power). FERC further points out that the Tolling Agreement defines the terms "capacity" and "ancillary services" separately—which FERC found reflected the parties intent not to use the terms interchangeably. Because the consent provision in the Supplemental Agreement applies only to "capacity" and does not include the term "ancillary services," FERC determined that the provision does not cover the synchronous condenser conversion project and, consequently, does not provide JP Morgan with consent rights for this project to go forward.
FERC also ruled JP Morgan's assertions regarding CAISO reliability studies proposals to address reliability issues beyond the scope of the declaratory order proceeding, and commented that CAISO demonstrated that the synchronous condenser conversion project a technically feasible solution to address identified reliability issues. Finally, because FERC determined that it could resolve the issues on the basis of interpreting the Supplemental
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