Supreme Court Denies Review of Consumer Groups' Challenge to FERC's "Market-Based Rates" Scheme, Leaving Issue Unresolved

Over the past decade or so, in a series of orders, the Federal Energy Regulatory Commission (FERC) began to allow producers and traders of wholesale electric service to sell at "market-based rates."  In doing so, FERC effectively eliminated requirements in Section 205 of  the Federal Power Act that all rates, charges and contracts -- and changes to them -- be transparently filed with FERC in advance, allowing for public and FERC scrutiny before they take effect.  The flip side of the filed rate regulation coin is that once filed and if not modified by the agency, the filed rates cannot be changed, except prospectively.

FERC adopted the fiction that by filing a so-called "market-based rate" tariff, which simply says charges will be determined by seller and buyer, the rate and rate change filing requirements are satisfied.  Further, to satisfy the statutory command that all rates be just and reasonable, and the corollary that any that are not are illegal, FERC assumed that prices would be reasonable if the seller singlehandedly lacked power to change the market price.  This system allows sellers and traders to change prices hourly, without disclosing their price demands and without filing in advance the prices that will be charged.  This system is vulnerable to market malfunction, price rigging and manipulation, and has resulted in huge overcharges without meaningful remedies for consumers.  See  Mohler, Has the “Complete and Permanent Bond of Protection” Provided by FERC Refunds Eroded in the Transition to Market-Based Rates?, 33 Energy L.J. 41, 44 (2012).

In 2004, FERC began a rulemaking proceeding to consolidate its market rate policies.  Consumer groups pointed out the apparent inconsistency of the market rate system and the filing requirements of the Federal Power Act, and the absence of any meaningful measure of whether a market rate is just and reasonable.  FERC adopted its proposed rules, rejecting the legal challenges, in its Order 697 and adhered to its market rate doctrines on rehearing  in 2008in Order 697-A.

Public Citizen, PULP, and the attorneys general of Connecticut, Rhode Island and Illinois petitioned for  judicial review of the FERC order adopting regulations to implement the market rates system.  The case was heard by the Court of Appeals for the Ninth Circuit.

In its decision, the Ninth Circuit acknowledged that the Supreme Court had said in a recent opinion that the legality of the "market-based rate" scheme was not decided, but considered itself bound by its prior decision in another case, Lockyer v FERC.  (In Lockyer, the Ninth Circuit rejected a broad challenge to the market rate system but found that FERC had not followed its own guidelines regarding quarterly reporting of charges, and remanded the case, which resulted in some refunds because the sellers had violated the subsequent reporting requirements of their market rate tariffs).

The consumer groups filed a petition for a writ of certiorari with the Supreme Court, asking it to review the Ninth Circuit order dismissing the case.  FERC filed a brief in opposition, which was supported by an amicus brief from a group of sellers and traders.  They argued, among other points, that there was no "split" in the circuits and that Congress, in some language mentioning energy markets, had ratified FERC's scheme.  The petitioners filed a reply brief arguing that a divergence among circuit courts is not determinative when a case is of national importance, and that Congress has not repealed or amended the critical requirements of the Federal Power Act, i.e., the procedural requirement that all rates and changes in rates be filed publicly in advance, and the substantive requirement that all rates and rate changes demanded and charged must be reasonable.

The Supreme Court issued an order denying the petition for a writ of certiorari on June 25, 2012.

The denial of certiorari is not a ruling on the merits of a case.  Consequently, the legality of FERC's scheme remains undecided by the Supreme Court and by circuit courts of appeal other than the Ninth Circuit.  Other litigants, for example, a utility buying wholesale electricity for its retail customers who objects to excessive unfiled market rate charges, are free to pursue relief.

If FERC asks Congress to regularize its system through amendments to the Federal Power Act, Congress would have the opportunity to reject or modify FERC's market system, add market reforms and consumer protections.  Also, modest non-bypassable surcharges on transactions in the wholesale markets could fund  environmental, universal service, affordability and utility consumer advocacy functions.  There is precedent for this.  In the aftermath of the Supreme Court's nullification in MCI v AT&T of the FCC attempt to abolish rate filing and deregulate the telecom industry, Congress adopted the Telecommunications Act of 1996, establishing a new regulatory platform designed for multiple utility providers to replace the old system geared toward monopolies, adopting consumer protections, adding affordability requirements for Lifeline and Linkup, and establishing a universal service funding mechanism.

Greg Sayre Confirmed as New PSC Commissioner

In the busy last week of the regular legislative session, Greg Sayre was quietly nominated by the Governor and on June 21, 2012 confirmed by the State Senate to be a Commissioner of the New York State Public Service Commission. Putting aside the continued lack of  public involvement in the streamlined selection process for New York PSC Commissioners, (who have important policy-making and quasi-legislative responsibilities affecting vital public services), this appears to be an excellent appointment.  

Commissioner Sayre brings state and federal telecom regulation expertise to the Commission,  from his more than two decades of legal work for Frontier Communications (nee Citizens, nee Global Crossing nee Rochester Telephone).  This is much needed at a time when broadband deployment, universal service, consumer protection, competition, and regulatory policies are in flux, in order to assure all New Yorkers have affordable and reliable broadband and telephone service on reasonable terms and conditions, with customer protection.  

Sayre has a background of public service.  In addition to his more recent work in the private telecom utility sector, he began his utility law career litigating electric utility rate cases as a member of trial staff of the well-regarded Pennsylvania Public Utilities Commission.  With solid undergraduate educational experience in the Midwest, a law degree from a Massachusetts law school, prior utility law work in Pennsylvania,  knowledge of the turbulent telecom area, including work at the FCC in Washington, and familiarity with western and rural areas of New York State, Sayre brings welcome geographical and subject matter experience to the five-member Commission, which now has two other members from Long Island and two from the Albany area.  For many years he has also been active in work of the  New York State Bar Association' Public Utility Law Committee.  


In a 2001 academic thesis, Regulatory Distortions of Local Exchange Telecommunications Infrastructure, Sayre indicated a personal preference for less economic regulation and more reliance on competition, antitrust law enforcement, and price cap regulation.  However, he also recognized and emphasized the need for regulatory attention  in order to achieve policy goals in areas of likely market failure:

Regulators therefore must define a new role for themselves, one less concerned with the details of utility pricing and operations and more focused on social policies that a competitive market cannot be expected to achieve. For example, regulation, likely in the form of some kind of subsidization mechanism, is probably required in the long run to assure the affordability of telephone service in remote and sparsely-populated areas.

Time and experience may have tempered Y2K Reagan/Thatcher era hopes about competition replacing economic regulation of utility services, after the Enron debacle and dysfunctional wholesale markets in the energy area, and the evolution of the telecom industry into functional oligopolies lacking important characteristics of a fully competitive market.  


In his new role as a Commissioner, Sayre will have the opportunity to develop sound state and Commission policies to accomplish what "a competitive market cannot be expected to achieve," for example, universal service, consumer protection and affordability goals.  In addition, he will have the bedrock duty under the Public Service Law to assure that all utility rates, charges, terms and conditions of service, no matter how they are established, are just and reasonable.

New York Formulating Plans to Use $78 Million Disgorged by Energy Trader for the Benefit of Electricity Consumers

On March, 2012, the Federal Energy Regulatory Commission (FERC) announced a $245 million settlement of its enforcement staff's investigation of Constellation Energy Commodities Group, (CECG), for alleged manipulation of wholesale electricity markets.  CECG was an electricity trader and participant in the wholesale electricity market operated by the New York Independent System Operator (NYISO).  CECG was investigated for making uneconomic transactions in order to create artificial price movements in the NYISO markets.  This movement generated large profits on financial derivative contracts, which paid CECG based on changes in the NYISO spot market prices. 

To settle the investigation, CECG agreed to pay a $135 million penalty to the government and also to disgorge $110 million of its profits from the trading gambit, $104 million of which is to be used for the benefit of electric consumers. New York's share is $78 million. 

There is no indication in the FERC order approving the settlement of how much CECG may have profited from the alleged manipulation. CECG admitted no wrongdoing, claiming it was only engaging in legitimate hedging transactions within the law.  Although the case was settled with no actual finding of market manipulation, the FERC Chairman issued a statement indicating his belief in correctness of FERC enforcement staff's conclusions regarding market manipulation:

As a final point, I note that since the issuance of the Commission’s order, a senior Constellation official has stated publicly that the company’s practices at issue here were “lawful portfolio risk management transactions.” In my opinion, clearly that is not the case. The Stipulation and Consent Agreement sets forth a detailed description of the transactions that I believe Constellation knowingly and willfully engaged in that form the basis of Enforcement Staff’s conclusion that Constellation engaged in market manipulation, fraud, and misrepresentation. I urge anyone who has any question as to Constellation’s actions in this case to read that Stipulation and Consent Agreement." 

Under the FERC Order approving the agreement between FERC enforcement staff and CECG, a FERC Administrative Law Judge will entertain recommendations from certain state agencies on how to allocate disgorged funds.   

There are disputes over which agencies are "eligible" to make recommendations to FERC:

AARP opposed a petition of a New York power generator seeking to be included in the group of agencies eligible to make recommendations to the FERC ALJ regarding distribution of the $78 million for the benefit of New York's electric customers.  

The New York PSC, the Attorney General, and the DOS opposed motions of the Long Island Power Authority (LIPA) and small New York municipally owned utilities to participate in apportionment of the fund by FERC. LIPA filed a response in support of its motion.

A ruling from the FERC ALJ on which entities are eligible to make recommendations regarding allocation of the funds has not yet been issued.  The ALJ has indicated she will look favorably upon consensus recommendations from the agencies deemed eligible to make therm, which would avoid the need for FERC to decide contested allocation proposals.

Meanwhile, New York's large industrial and commercial customers (represented by their association, Multiple Intervenors) petitioned the NY PSC on April 10 asking the PSC to seek control of 100% of the CECG settlement fund for NewYork, and, if specific harm from the Constellation trading gambits cannot be readily measured (as is likely), they ask the PSC to use all the $78 million as refunds, based on customer elcetricity usage. MI further said they will oppose any use of the money other than for refunds.

AARP opposed the MI petition.  AARP pointed out that spreading the benefit fund over all consumers based on their usage would likely result in a one time credit that would be insignificant for most residential customers.  Also, the proposal of MI would steer the majority of the funds to the largest users.  As customers taking service at spot market based rates, MI's members may have been incidental beneficiaries of the alleged market manipulation, if spot market prices were lowered by CECG to make profits on derivatives.  Derivatives are often purchased by utilities to hedge small customers against the risk of NYISO spot market volatility, and any artificially inflated costs of the derivatives could have been passed through to small customers.

Consumer groups, including AARP, Consumers Union, and NYPIRG are urging the Governor, the Attorney General, and other officials to use some of the $78 million settlement funds to assist New York consumers at risk of electric service termination, to augment energy efficiency programs, and to provide support for consumer advocacy in state and federal utility regulation proceedings. See Times Union, A Consumer Energy 'Seat' Wanted, Power settlement Spurs Advocates to Push for an Independent Voice, May 31, 2012. 

New York State provides very little support for utility consumer advocacy. Typically, independent utility consumer advocate offices have the independent capability to challenge commission decisions in court, are separate, or operate quasi-autonomously within an office such as the attorney general's office, and their leadership is not appointed by the same entity that appoints the utility regulatory commission.  In contrast to most other states, New York has no independent or quasi-independent state office providing residential consumer advocacy in the lengthy and complex regulatory proceedings that affect prices, terms, and conditions of utility service.  Last year, the two person staff of the vestigial Consumer Protection Board's utility intervention unit (which prior to its abolition had shrunk to about one tenth its prior size) was transferred to the Department of State, an Executive agency.  

Resources currently available to PULP -- an independent nonprofit organization -- are insufficient to support the analysis, expertise, and advocacy required to participate fully in all the major NYISO, state, and federal regulatory proceedings which affect the rates, terms and conditions of electric service.

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PULP Intervenes in the Central Hudson/Fortis Merger Case

Fortis, a Canadian holding company, has petitioned the Public Service Commission for approval to purchase Central Hudson Gas & Electric Company.   PULP intervened this week as a party in the Central Hudson/Fortis merger case at the NY Public Service Commission.  The petition for approval of the transaction under Section 70 of the Public Service Law, and other documents filed in the case, are available here.

Updates

• The Public Service Commission received an initial briefing on the case at its June 14, 2012.  See PSC June 14 session transcript beginning at page 54.
• Central Hudson shareholders voted to approve the transaction on June 19.  See, Poughkeepsie Journal, CH Energy shareholders OK sale to Fortis; stockholders seek investor benefits, $20 million consumer package being examined, June 20, 2012.