Industrial and Residential Customers Agree: Proposed FERC Rules for Electricity Market Rates are Flawed

After years of experimenting with "market-based rates" for wholesale electricty, at times with disastrous results for consumers, the Federal Energy Regulatory Commission (FERC) is proposing to adopt official rules regarding market rates. Currently, market rates for wholesale sales of electricity have been authorized by FERC under a series of generic orders and individual orders, which typically grant applications of sellers for market-based rates who satisfy the standards created in the generic orders.

One of the major features of FERC's system is that sellers are allowed to change rates without publicly filing them. As a result, new rates take effect without advance notice, an opportunity for consumers to protest, or regulatory scrutiny for reasonableness. Once the rates are in effect sellers argue that reasonableness cannot be challenged, except prospectively. With rates changed frequently and sales reported only quarterly there is no effective remedy for unreasonable rates. This result breaks the "bond" of consumer protection in the Federal Power Act, which is that all rates must be just and reasonable and that no charges will be imposed that have not first been subject to public scrutiny and review by FERC, which is ultimately accountable to the public.

In addition to codifying existing market rate standards and practices into official agency rules, FERC is proposing a number of changes that would ease requirements for sellers seeking market rates. Under current standards, market rates may be denied to sellers who fail a market power "screen," such as having large stand alone market share. Also, existing rules require closer scrutiny of some sales between holding company affiliates, for example, when a state regulated retail utility purchases energy at wholesale from an affiliated company owned by the same parent corporation. The new rules would eliminate some market power reviews, and would allow affiliate transactions even where there is market power if FERC deems that retail customers are not "captive." The new rules would also forbid the advance filing of contracts affecting rates in some situations, so that some rates could be kept secret and unreviewable before they take effect.

Consumer groups that commented in response to the proposed rules raised numerous objections in their August 7, 2006 initial comments. These groups were industrial customers, a group of consumer advocates who say the market rate system is illegal, and the National Association of State Utility Consumer Advocates (NASUCA).

NASUCA, in its initial comments, made the following points:

• State jurisdiction over generation should not be eroded or preempted.
• The Commission should repeal the exemption of post July 9, 1996 generating plants from market power assessment, as proposed.
• Sellers previously exempted from market power assessment should not be "grandfathered" without any review of market power.
• The Commission should not create a broad new category of sellers controlling less than 500 MW who would not be subject to market power review.
• The Commission should reexamine its standards for allowing market rates and assessing market power.
• The Commission should not allow sellers denied market rates to discriminate by charging any amount between incremental and embedded cost, should more closely define those terms, and should not eliminate statutory filing requirements.
• The Commission should not limit its scrutiny of affiliate transactions only to those involving a "franchised utility with captive customers."
• The Commission should not assume that inter-affiliate contracts with prices linked to spot market rates or proprietary price indexes or auction results are always just and reasonable.
• Contracts for the purchase of electricity by affiliates serving retail customers should be publicly filed in advance subject to protest and Commission review for reasonableness.
• Separation of function requirements should apply to any affiliate with retail customers, not just to those who are state franchised utilities.
• Record retention requirements should be six years.
• Definitions should be revised.
  
• The Commission should articulate a legal justification for the proposed rules and tariff modifications.
  

Industrial customers also expressed deep dissatisfaction with the existing FERC market rate system:

The Commission's current [Market Based Rate Authority] analysis is incompatible with the Federal Power Act's "just and reasonable" requirement because it is not prefaced with explicit Commission findings that a competitive market exists, as the analysis is required to do under established precedent, nor does it set forth a standard for making the necessary "competitive market" determination. Absent findings, based on empirical evidence, that competition exists, the Commission's MBRA scheme cannot be relied upon to ensure just and reasonable rates.

State consumer advocates from New Mexico, Utah, Colorado, Rhode Island, and non profit advocates PULP, National Consumer Law Center, and Public Citizen, stated:

The NOPR seems to claim that if sellers are competitive, rates will necessarily be just and reasonable. To the contrary, the Court decisions and statute require the Commission to ensure that this is the case. It certainly was not the case in California and the West in 2000 and 2001, and we are offered in this NOPR no way of determining whether it will be the case now. The NOPR simply proposes ways of encouraging competition, not ways of monitoring actual prices charged, to ensure that such competition has resulted in lawful rates under the Federal Power Act.
Consumer Advocates agree with the Industrial Customers that: “The time for evaluating whether market-based rate authority is delivering any value to retail customers is long past due.”

Utilities filed comments in early August 2006 seeking to loosen further the proposed standards for market rates. The utilities want to expand the number of sellers who would be exempt from any periodic review by FERC whether they could exercise market power, to broaden the scope of permissible transactions between sellers and holding company affiliates that have retail customers who must pay the wholesale rates passed through to them, and to eliminate most cost-based regulation -- even for sellers who have market power. Market participants who sell and buy electricity sought exemption from market power tests by seeking a very narrow definition of control over generation.

The consumer groups filed reply comments September 20, 2006. NASUCA's reply comments state that "NASUCA believes it would be unwise for the Commission to loosen requirements for market rates at a time when there is a lack of consensus on how to measure market power and how to assure that market rates are reasonable, as required by the Federal Power Act..." The advocates questioning FERC's legal authority stated:

Consumer Advocates believe that the Commission in this NOPR is relying on the same faulty premise as the Commission did in the settlement rejected in Tejas Power, viz., that at long as wholesale buyers agree to negotiated prices, this satisfies the Commission’s statutory obligation to ensure that wholesale rates are just and reasonable and not unduly preferential or discriminatory. Both the statute and the case law provide otherwise, and Consumer Advocates ask the new Commissioners to review the premise underlying the current MBR scheme that the NOPR proposes to perpetuate.

Nor may the Commission delegate its authority and responsibility to ensure that wholesale rates are lawful to the States, as it appears to try to do through certain auctions, RTOs, etc. The authority is not the Commission’s to delegate.

In October 2006, Attorney Generals from the states of Illinois and Connecticut filed late intervention papers and supported the views of the advocates questioning FERC's legal authority to dispense with rate filing.

To sum up, the energy producing and marketing utilities commenting on the proposed FERC rules generally favor more deregulation. The primary purpose of the Federal Power Act, however, is protection of utility customers, not advancement of utility interests. The reaction of consumers to FERC's latest move toward deregulation is not enthusiastic.