Purely Financial Traders Not Liable for RSG Charges in Midwest ISO Market

On Thursday, October 26, 2006, the Federal Energy Regulatory Commission ("FERC") issued an order on rehearing clarifying its prior determination that virtual transactions in the electricity markets operated by the Midwestern Independent Transmission System Operator, Inc. ("MISO") were required to be assessed revenue sufficiency guarantee ("RSG") charges.¹ On April 25, 2006, FERC had issued an order indicating that virtual traders may be assessed RSG charges, potentially even for prior periods. That order had caused some confusion and uncertainty in the MISO markets. Since April, day-ahead and real-time prices diverged, and at least one hedge fund announced it would exit the market because of such uncertainty. As a result of this latest order, however, purely financial traders that transacted in the MISO virtual markets, but did not physically withdraw energy in real time, will not be assessed any RSG charges — neither retroactively for any prior period, nor prospectively for the near future. FERC continues to believe that virtual transactions may cause RSG costs to be incurred and, if so, should be allocated some RSG charges. Thus, FERC required MISO to file within 60 days a proposal properly evaluating and assessing RSG charges to virtual supply offers. FERC made clear, however, that this upcoming MISO proposal would not become effective until FERC approved it.

Background. In the electricity markets run by MISO, the RSG charges compensate generators committed to serve real-time energy demand for unrecovered start-up and energy production costs. MISO’s tariff provides that the per unit real-time RSG charge is to be calculated in part based on virtual supply offers in the day-ahead market, and assessed to market participants that actually withdraw energy during the day. Since the beginning of its market operations on April 1, 2005, however, MISO calculated the real-time RSG charges without consideration of the virtual supply offer quantities for all market participants. On October 27, 2005, MISO proposed to delete the references to virtual supplies from the tariff provisions regarding real-time RSG charges.

FERC’s RSG Order. On April 25, 2006, FERC issued an order partially rejecting MISO’s proposed tariff revisions, and ordering a reallocation of RSG charges among market participants dating back to April 1, 2005.² FERC concluded that, under MISO’s tariff, the RSG charge applies to virtual supply offers, and that MISO violated its tariff by not charging cleared virtual supply offers for RSG costs. FERC thus ordered MISO to reallocate the RSG charges, with surcharges and refunds (with interest) as appropriate to reflect the correct allocation of RSG costs. However, FERC stated that the retroactive reallocation of real-time RSG charges should be applied only to market participants that withdraw energy in real-time.

FERC also rejected MISO’s tariff proposal to prospectively eliminate entirely virtual supply transactions from the calculation of the RSG charge. FERC determined that virtual supply offers could cause generators’ costs to increase and impact revenue sufficiency, and that MISO had not established that virtual supply offers caused no RSG costs. FERC ordered MISO to file a new tariff proposal that allocated some portion of RSG charges to virtual supply offers.

Numerous parties sought rehearing and clarification of FERC’s RSG Order arguing that MISO’s tariff cannot be interpreted to require a retroactive reallocation of RSG charges to purely financial transactions where the market participant did not physically withdraw energy in the real-time market. Parties challenged FERC’s imposition of refunds as unfair and harmful to the market. Parties also disputed whether virtual transactions had any effect on the incurrence of RSG costs in MISO’s reliability assessment commitment ("RAC") process by which generators are asked to stand ready to serve load in real-time.

FERC’s Order On Rehearing. On October 26, 2006, FERC issued its order on rehearing of the prior RSG Order. FERC interpreted the existing tariff to mean that virtual supply offers would only be assessed RSG charges on those days that the market participant withdraws energy, and that "withdrawing energy" means a physical withdrawal of energy at a pricing node. In other words, unless the market participant engaged in physical transactions in real time, their virtual supply offers would not be subject to RSG charges. Accordingly, under MISO’s currently effective tariff, purely financial traders are not to be assessed RSG charges on their virtual trading activities in MISO.

FERC then exercised its discretion and reversed its prior decision requiring MISO to provide refunds to customers. FERC reasoned that market participants relied upon statements in the MISO Business Practice Manuals that virtual transactions would not be allocated RSG charges, and that ordering refunds would be unfair and inequitable because it would render uneconomic previous virtual transactions that market participants could not revisit.

FERC required MISO to prospectively allocate RSG charges to virtual transactions consistent with the terms of its tariff to prevent future inequity. It is unclear whether MISO should begin properly assessing RSG charges from the date of FERC’s Rehearing Order (October 26, 2006) or from the date of the RSG Order (April 25, 2006). However, for purely financial traders that did not physically withdraw energy in real-time, the issue does not apply because, as FERC has interpreted MISO’s current tariff, RSG charges are not assessed on virtual transactions where the market participant does not physically withdraw energy in real time.

With regard to MISO’s original proposal to exempt virtual transactions altogether from RSG charges, FERC affirmed its prior conclusion that virtual supply offers accepted in the day-ahead market can require the commitment of physical resources in the RAC process, and thus may cause RSG costs to be incurred. FERC ordered MISO to propose a charge that assesses RSG costs to virtual supply offers based on the RSG costs they cause, and to make a compliance filing within 60 days. FERC stated that MISO’s proposal in compliance with this requirement will not go into effect until FERC approves the proposal. Accordingly, purely financial traders may be subject to the assessment of RSG charges on their virtual transactions at some point in the future.

© 2007 Sutherland Asbill & Brennan LLP. All Rights Reserved.

This article is for informational purposes and is not intended to constitute legal advice.