Consumer Challenge to FERC "Market-Based Rate" System Proceeds

The Federal Energy Regulatory Commission (FERC) has jurisdiction over wholesale electric rates and rates for interstate transmission of energy. In recent years it has allowed sellers of wholesale energy to file standard "market-based rate" tariffs that, instead of containing schedules specifying all rates and charges, simply say rates, terms and conditions of all sales shall be made at undisclosed prices to be established by future confidential agreements between the purchaser and seller.

FERC is allowing sellers to bypass longstanding Federal Power Act (FPA) Section 205 requirements for advance public filing of schedules containing all rates, rate changes, and contracts affecting rates. The primary purpose of the FPA is the protection of consumers. The purpose of prior publication is to inform the public of proposed changes and to permit agency review and revision before they take effect. Under the "filed rate doctrine," once utility rates take effect, unreasonable rates can only be changed prospectively under FPA Section 206.

FERC’s system of "market-based rates" eliminates prior public filing of rates and changes in rates and contracts. This effectively eliminates the protections of FPA Section 205. FERC's "market-based rate" regime has resulted in unreasonable retail rates for consumers, and blackouts due to efforts to manipulate market prices. In an August 2, 2006 decision in cases arising from the California market rate debacle, the Ninth Circuit Court of Appeals described the failure of FERC’s market rate experiments as follows:

“[T]he CPUC and the California legislature commenced initiatives to restructure the California electric energy industry. The aim was to convert California’s investor-owned, regulated
utilities, to a deregulated market, in which the price of electricity would be established by competition, and consumers could select their electrical power supplier. The theory was that competition would lead to better service and a price reduction for consumers. * * * *

As we now know, something happened on the way to the trading forum, and the best laid regulatory plans went astray. The plan to establish a competitive market, while keeping the
exercise of monopoly and monopsony power in check, failed to account for energy economics and the sophistication of modern energy trading. As became clear in hindsight, even those who controlled a relatively small percentage of the market had sufficient market power to skew markets artificially. In short, the old assumptions, based on antitrust theory, that market power could not be exercised by those who possessed less than 20% of the market share proved inaccurate in California’s energy market. * * * *

Sellers quickly learned that the California spot markets could be manipulated by withholding power from the market to create scarcity and then demanding extremely high prices when scarcity was probable. The energy market is highly dependent upon weather; heat waves or cold snaps inevitably produce demand. Thus, it was quickly apparent to sellers that there was little risk and great profit in withholding capacity when high demand was anticipated based on weather forecasts. In addition, traders soon developed other purely artificial means of market manipulation, such as shutting down power plants when electric demand was high in order to destabilize the electric grid, and to increase prices. In order to maximize profit, traders engaged in anomalous bidding practices, including “hockeystick bidding,” in which an extremely high price is demanded for a small portion of the market, and “round trip trades,” in which an entity artificially creates the appearance of increased revenue and demand through continuous sales and purchases.”

While not as extreme as the market failure in California, market rate systems in the Northeast also have been plagued by price run ups in the FERC-approved private “spot markets” which establish daily and hourly spot market rates. Utility consumer advocates, including PULP, question whether FERC may rely on this particular market system to set electricity rates.

In a long-running case at FERC that began after the California debacle, FERC held that all existing market rates were unjust and unreasonable, and in 2004 it adopted a set of standard "market behavior" tariff conditions intended to deter manipulation.

FERC did not, however, prohibit witholding of energy to drive prices up, did not require public filing of rates and rate changes, and did not articulate any standard other than market results to measure whether "market-based rates" satisfy the "just and reasonable" standard required by the FPA.

That "market behavior" case is now on review in the Court of Appeals for the District of Columbia. The consumer advocates contend that the market-based rate regime as it has been implemented by FERC is out of compliance with the filing requirements of the FPA, and has no meaningful standard for determining if the market results are "just and reasonable." While the case was pending in court, FERC rescinded the "market behavior" tariff conditions and began a new rule making proceeding proposing essentially to continue its "market-based rate" regime without fundamental change.

The Consumer Advocates' initial brief filed August 30, 2006 argues that while FERC has considerable latitude in choosing methods to set “just and reasonable” rates, the agency lacks any power to deviate from the public rate filing procedures established by Congress in the FPA.

The petitioners rely on major Supreme Court precedents which nullified efforts of other federal regulatory agencies, the FCC and ICC -- which operated under regulatory statutes similar to the FPA -- to waive statutory filing and review provisions established by Congress in order to implement a new agency vision that would substitute market competition and deregulation for agency review of rates to see if they are just and reasonable. In the leading FCC case, the Supreme Court said:

"For better or worse, the Act establishes a rate regulation, filed tariff system . . . and the Commission's desire "to `increase competition' cannot provide [it] authority to alter the well-established . . . statutory filed rate requirements. . . . As we observed in the context of a dispute over the filed rate doctrine more than 80 years ago, 'such considerations address themselves to Congress, not to the courts. . . .'"

After the Supreme Court struck down the FCC efforts to deregulate, Congress amended the Federal Communications Act in 1996. The new law granted limited powers to the FCC to deregulate some services when Congressionally established standards are met, and Congress adopted a number of consumer protective measures that went well beyond what the FCC could or would do. These included a new national telephone lifeline assistance program to make phone service affordable for low-income customers, and programs to bring broadband services to schools, libraries, and rural areas unlikely to obtain timely, affordable service.

FERC must file its answering brief in the "market behavior" case by October 30, 2006. Check PULP's web site for further information on the FERC "market behavior" case.