The International Swaps and Derivatives Association and the Financial Institutions Energy Group filed a joint friend-of-the-court brief yesterday with the Supreme Court, warning that the national wholesale market for electric power could be seriously harmed unless the high court overturns a pair of decisions handed down last December by the U.S. Court of Appeals for the Ninth Circuit. An ISDA official said the case may have an adverse effect on municipal derivatives used in connection with long-term public power contracts.ISDA and FIEG argued that the appellate court got it wrong when it ruled that buyers of wholesale electricity could essentially void their contractual obligations and obtain rate reductions if their contracts were viewed by the Federal Energy Regulatory Commission as having been negotiated in a “dysfunctional” market, the groups said.The brief stressed that if the pair of appellate court decisions is allowed to stand, wholesale traders of electricity will lose confidence in the enforcement of their contracts, which will “impede” their ability to manage risk and encourage them to “commit their capital to other markets that entail less risk.” It also argued that the decisions would essentially invalidate the so-called Mobile-Sierra doctrine, which holds that contracts cannot be altered except in the most extraordinary circumstances. “As applied by the Ninth Circuit here, the standard of market 'dysfunction’ makes no sense,” the brief said, noting that in a properly functioning market, prices rise and fall in response to changes in market conditions, including changes in supply and demand and changes in prices in adjacent markets. “Such price movements indicate that the market is working as it should, not that it is dysfunctional,” the brief said. “That is especially true when there is no indication — as there is no indication here — that the contracting parties behaved improperly or that the market was not workably competitive at all times.”The sizeable dispute, which emerged from the 2000-2001 Western electricity crisis, involves four appeals to the high court stemming from the two Ninth Circuit court decisions, two of which the high court agreed in September to jointly review. The outcome of the other two petitions for review rests upon the court’s decisions in the cases it agreed to review, for which oral arguments are expected to be heard early next year.Robert Pickel, ISDA’s chief executive officer, said municipal derivatives contracts, which are sometimes used in long-term public power contracts, “very likely” could be impacted by the circuit court’s opinions if the high court does not reverse them. But he said ISDA’s concerns apply to public power contracts in general.“If there’s an ability somewhere down the road for the certainty of the contract to be drawn into question, which we think is a result of these ninth circuit decisions, then it makes it more difficult for parties to decide to enter into these transactions,” Pickel said. “Or [wholesale sellers of power] may need to charge different amounts in order to have some protection against that risk. We just think it leads to a market that does not function that well.”But Robert Nordhaus, a member of the Van Ness Feldman law firm here, said the circumstances of the electricity crisis were unique and led to “the total market blowup” of wholesale prices throughout the West. Spot prices for electricity rocketed to $600 from $60 per megawatt hour during peak periods of the crisis, he said. “I would say that the lawyers on both sides are characterizing the dispute as more earth-shaking than it really is,” Nordhaus said.He said there was very high demand and a decrease in supply — fueled by a lack of hydroelectric power, a big component of the energy system on the West Coast — that was exacerbated by a newly deregulated market in California, which had a number of structural defects resulting from both federal and state regulations, as well as “shenanigans” by Enron Corp.“I don’t see this as a major cross-cutting issue that will affect the municipal bond market,” he said.
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