Tuesday, June 26, 2007

"Nonregulated" Sellers of Electricity Become "Market-Regulated" Under New FERC Rule

In 2006 FERC proposed to codify new regulations and "streamline" its market rate policies, currently contained in a number of lengthy orders. FERC claimed to be issuing the new regulations under Federal Power Act Section 205, although that section makes no reference at all to market rates.

FERC's "streamlining" of existing policies included modifications that would accellerate the agency's deregulation agenda. For example, market power assessments would no longer be required for sellers with less than 500 MW, contracts between a retail utility and an affiliate would not be publicly filed subject to protest and review if the retail customers have retail choice, and sellers who possess market power would be able to set their own rates for sales less than a year's duration. No bona fide consumer organization supported further relaxation of regulation over wholesale electricity rates. See Industrial and Residential Customers Agree: Proposed FERC Rules for Electricity Market Rates are Flawed. This consumer skepticism of FERC's policies is informed by FERC's unwillingness to protect consumers from egregiously unreasonable market rates, FERC's opposition to granting refund remedies for unreasonable market rates in the Enron case and others, and inaction despite evidence of continued electricity market manipulation in the post-Enron era. See Consumer Groups Question FERC Market Rates, and the affidavit of the PJM Market Monitor recounting instances of market power exercise tolerated in the FERC-approved markets.

In the draft rules, FERC had referred to certain wholesale electricity sellers as "non-regulated."
Proposed § 35.36(a)(6) defined “non-regulated power sales affiliate” as “any non-traditional power seller affiliate, including a power marketer, exempt wholesale generator, qualifying facility or other power seller affiliate, whose power sales are not regulated on a cost basis under the FPA.
Perhaps the use of the term "non-regulated" was a Freudian slip because, although all wholesale electric rates are required by the FPA to be regulated, there is little evidence of meaningful FERC regulation of these entities' rates. The "non-regulated" sellers include holding company affiliates of traditional retail utilities, such as Con Edison Solutions, Con Edison Energy, and Con Edison Development. In some states, retail utilities are buying energy from such "non-regulated" entities, and passing the costs on to retail consumers. NASUCA objected to the use of the term "non-regulated" in its comments, pointing out that there is "no basis in the language of the FPA for the Commission to make any of these distinctions."

In Order 697, FERC adopted final rules. Perhaps in recognition that calling the wholesale power marketers "non-regulated" conveys the impression that customers are not being protected, FERC relabelled them: the "non-regulated" sellers are now deemed to be "market-regulated." The new term "market-regulated" appears 75 times in Order 697.

Although Federal Power Act and the courts give wide latitude to FERC's expertise in how the agency sets rates, the Supreme Court has said that the regulatory agency cannot simply let go and rely on markets exclusively to satisfy the statutory requirement that all rates must be just and reasonable.
we should also stress that in our view the prevailing price in the marketplace cannot be the final measure of "just and reasonable" rates ****Congress could not have assumed that "just and reasonable" rates could conclusively be determined by reference to market price. ****Congress rejected the identity between the "true" [just and reasonable] and the "actual" market price.
The new "market-regulated" label may not save FERC's market rate regime. Traditionally, the "bond" of the Federal Power Act is that no rate will be charged that has not been subject to review for reasonableness. FERC is quick to claim that it is not relying exclusively on markets, but the reality is that FERC allows unreasonable market rates to be charged and collected with no prior public filing or possibility of review, no objective standard for determining when market rates are excessive, and no way for customers to receive refunds because FERC invokes the "filed rate" doctrine to protect from revision market rates that were changed, charged, but never filed by the sellers.

The Court of Appeals for the Ninth Circuit has required FERC to consider market rate refunds after FERC refused to do so, based on a theory that rates determined in malfunctioning markets can be revised. Public Utility District No. 1 of Snohomish County, Washington v. FERC, 471 F.3d 1053 (9th Cir. 2006). The court seems to be saying, if FERC can invent a market rate system with unfiled rates, then the court can invent a refund remedy to protect consumers when markets malfunction and rates are unreasonable. In Order 697, however, FERC signalled that it is reading court cases allowing for refunds of excessive market rates very narrowly:
The Commission recognizes that several recent court decisions by the United States Court of Appeals for the Ninth Circuit have created some uncertainty for sellers transacting pursuant to our market-based rate program. The cases raise issues with respect to the circumstances under which sellers’ pre-authorized market-based rate sales may be subject to retroactive refunds and the circumstances under which buyers might be able to invalidate or modify contracts based on the argument that the contracts were entered into at a time when markets were dysfunctional. The Commission’s first and foremost duty is to protect customers from unjust and unreasonable rates; however, we recognize that uncertainties regarding rate stability and contract sanctity can have a chilling effect on investments and a seller’s willingness to enter into long-term contracts and this, in turn, can harm customers in the long run. The Commission recently provided guidance in this regard, noting that these Ninth Circuit decisions addressed a unique set of facts and a market-based rate program that has undergone substantial improvement since 2001, and reiterating that an ex ante finding of the absence of market power, coupled with the EQR filing and effective regulatory oversight qualifies as sufficient prior review for market-based rate contracts to satisfy the notice and filing requirements of FPA section 205.5 Through this Final Rule, the Commission is clarifying and further improving its market-based rate program. Moreover, the Commission will explore ways to continue to improve its market-based rate program and processes to assure appropriate customer protections but at the same time provide greater regulatory and market certainty for sellers in light of the above court opinions
Given FERC's history of refusing consumer remedies for manipulated market rates until ordered to do so by courts, and its continued solicitude to sellers who do not want to refund unreasonable, unfiled market rates, it appears that FERC is more likely to continue to uphold unreviewed rates in the name of regulatory certainty and contract sanctity than to protect consumers from unreasonable rates. For example, in an incident of apparent capacity market withholding and possible market manipulation in New York in 2006, FERC simply closed the case in which market participants and the New York PSC had complained of market malfunction, and commenced no proceeding to consider refund remedies, despite evidence of a malfunctioning market that, under the Ninth Circuit standards, might result in consumer refunds. See, Did Electricity Market Manipulation Cost New York Consumers $157 Million in the Summer of 2006?

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