FERC issued two show cause orders on July 26, 2007, requiring Energy Transfer Partners, LP ("ETP") and Amaranth, LLC to show cause why they should not be penalized $167 million and $300 million respectively, for allegedly violating FERC’s rules against market manipulation. In a statement, FERC Chairman Kelliher warned that "bad actors in the industry must recognize that manipulation, even in increasingly complex energy markets, can be detected. And when it is proven, they will be punished severely."
In the first show cause order, FERC gave ETP 30 days from the date of the order to dispute FERC’s findings that: (1) ETP manipulated wholesale natural gas markets at Houston Ship Channel on particular dates in 2003, 2004, and 2005; and (2) ETP’s Oasis Pipeline subsidiary showed preference for its affiliated shippers and discriminated against non-affiliated shippers, charged rates in excess of the maximum lawful rate, and did not file an amended operating statement. FERC proposed to assess civil penalties and disgorge profits, of more than $167 million, as well as, revoking ETP’s blanket certificate authority to sell natural gas.
In the second show cause order, FERC preliminarily found that the Amaranth hedge fund manipulated the natural gas markets by trading on the NYMEX Natural Gas Futures Contract, whose settlement price determines the price for a significant volume of FERC-jurisdictional natural gas transactions. Amaranth has 30 days from the date of the order to show cause why it should not be assessed civil penalties totaling $300 million.
Court of Appeals Checks FERC’s Jurisdiction and Refund Authority
On July 20, 2007, the Court of Appeals for the District of Columbia Circuit (DC Court of Appeals) issued a decision on petition for review of three FERC orders, holding that although FERC has authority to review rates for a non-jurisdictional entity under the just and reasonable standard, FERC does not have jurisdiction to order refunds.
Petitioners requested review of three FERC orders, which required the City of Vernon, California ("Vernon") to issue refunds to the California Independent System Operator, Inc. ("CAISO") for over collection of its transmission revenue requirement ("TRR"). Petitioners argued that because Vernon is a municipality, it is not subject to FERC jurisdiction under the Federal Power Act ("FPA") and so cannot be required to pay refunds.
While Section 205 of the FPA provides FERC with jurisdiction to review rates to ensure that they are "just and reasonable," municipalities such as Vernon are exempt under the FPA, even when they belong to regulated Independent System Operators ("ISOs"). The Court found that FERC may consider the rates of nonjurisdictional entities to the extent that they affect the rates of the ISO, which is subject to the FPA. As a Participating Transmission Owner in CAISO, Vernon’s TRR is a component of CAISO’s rate design. As such, the Court found that FERC had not been "arbitrary and capricious" in its decision to review Vernon’s TRR to determine whether it was just and reasonable.
However, in an unusual turn of events, the Court agreed with petitioners that FERC lacked authority to order Vernon to pay refunds. The Court determined that the intent of Congress was clear in drafting the FPA. Section 201(f ) of the FPA exempts from compliance with the FPA, governmental entities unless an express provision provides otherwise. The Court explained that because Congress specifically addressed the issue in exempting governmental entities from the FPA, FERC’s refund authority extends only to public utilities and not non-jurisdictional governmental entities, like Vernon.
FERC Issues Proposed Policy Statement to Modify Rate of Return Standards
FERC issued a Proposed Policy Statement on July 19, 2007 proposing to update its standards regarding the composition of the proxy groups used to decide the return on equity ("ROE") of natural gas and oil pipelines. Because the companies engaged in the pipeline business are increasingly "master limited partnerships" ("MLPs"), FERC is proposing to modify its policy regarding the composition of proxy groups to include MLPs.
Currently, in determining the ROE for natural gas and oil pipelines, FERC uses a Discounted Cash Flow ("DCF") model, which uses proxy groups to develop a range of reasonable returns earned on investments in firms with corresponding risks. FERC then assigns an ROE within the range, reflecting the risks of that pipeline as compared to the proxy group.
Under the proposed policy statement, MLPs (which often have a higher ROE) could be included in these proxy groups provided their cash distributions are capped at their reported earnings to determine the dividend yield, which is one component of the ROE under the DCF method.
The Proposed Policy Statement would apply to all gas and oil pipeline cases that have not completed the hearing phase by the time the final Policy Statement is issued. Applicability of the Proposed Policy Statement to cases that have completed the hearing phase would be conducted on a case-by-case basis. Initial comments on the Proposed Policy Statement, including comments on the applicability of the statement are due August 30, 2007 and reply comments are due September 19, 2007.
FERC Issues Notice of Proposed Rulemaking Adopting New Reliability Standards for Cyber Security
FERC issued a Notice of Proposed Rulemaking (NOPR) on July 19, 2007 proposing to approve a set of reliability standards developed by the North American Electric Reliability Corporation ("NERC") to help protect the bulk electric power supply system against disruption caused by cyber attacks. The NOPR seeks comments on eight proposed Critical Infrastructure Protection ("CIP") standards including: (1) Critical Cyber Asset Identification; (2) Security Management Controls; (3) Personnel and Training; (4) Electronic Security Perimeters; (5) Physical Security of Critical Cyber Assets; (6) Systems Security Management; (7) Incident Reporting and Response Planning; and (8) Recover Plans for Critical Cyber Assets. Comments are due 60 days after publication in the Federal Register.
In a corresponding order, issued the same day, FERC denied rehearing of its April 16, 2007 Final Rule on Mandatory Reliability Standards for the Bulk-Power System. In the order, FERC clarified that it has not yet defined the extent of the facilities to be included in the statutory term "Bulk-Power System," but will address this issue in future proceedings.
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