On June 21, 2007, the Federal Energy Regulatory Commission ("FERC" or "Commission") issued an Advance Notice of Proposed Rulemaking ("ANOPR") seeking public comment on potential reforms to improve operations in organized wholesale power markets. The ANOPR followed an earlier FERC investigation in Docket No. AD07-7 that examined: (1) demand response initiatives, (2) the degree to which wholesale energy markets were competitive; and (3) the role that ISOs/RTOs were playing in energy markets. After several hearings this year, FERC concluded that it needed to consider issuing new regulations to identify challenges facing competitive wholesale power markets in regional transmission organizations (RTOs) and independent system operators (ISOs) to propose workable solutions.
FERC emphasized that those areas of the country that did not have wholesale energy markets operated by ISOs/RTOs would not be exempt from wholesale competition. However, such socalled "bilateral competitive markets" (in areas such as the Southeast) were not the subject of the ANOPR. Competition would be strengthened in these non-RTO markets through other FERC proceedings, such as the Open Access Transmission Tariff reform, efforts to improve competitive solicitation and market access, and market based rate reform.
The ANOPR makes preliminary proposals in four specific areas regarding wholesale competition in RTO and ISO regions: (1) the role of demand response in organized markets; (2) increasing opportunities for long-term power contracts; (3) strengthening market monitoring; and (4) the responsiveness of RTOs and ISOs to customers and other stakeholders.
Comments on the ANOPR topics are due to FERC on August 16, 2007.
FERC Issues Final Rule To Prevent Exercise Of Market Power
On June 21, 2007, FERC issued a Final Rule modifying its current standards for market-based rates for sales of electric energy, capacity, and ancillary services, in an effort to strengthen competitive markets and to protect consumers from an electric power seller’s exercise of market power. After reviewing the comments received in response to its May 19, 2006 Notice of Proposed Rulemaking ("NOPR"), FERC issued this final rule adopting many of the provisions contained in the NOPR.
The Final Rule streamlines FERC’s traditional four-prong analysis for determining whether a seller should be granted market-based rate authority into a two-part test: analysis of horizontal (generation) and vertical (transmission) market power. In addition, FERC eliminated the so-called "section 35.27 exemption," which provided an exemption for generation built after July 9, 1996 from the requirement to demonstrate any lack of market power. Any entity requesting market-based rate authority on or after the effective date of the Final Rule must provide a horizontal market power analysis for any generation it controls, regardless of when the generation was built.
For those entities that are unable to demonstrate a lack of market power, FERC will determine suitable mitigation on a case-specific basis, including whether a must-offer requirement is necessary for mitigation of market power. The Final Rule also allows mitigated sellers to make market-based rate sales at the metered boundary between a mitigated balancing authority area and a balancing authority area in which the seller has market-based rate authority.
The Final Rule does not adopt the provision in the NOPR for a standardized market-based rate tariff or require all sellers under one corporate umbrella to be subject to the same tariff. The Final Rule becomes effective 60 days after publication in the Federal Register.
FERC Approves $2 Million Civil Penalty For Code Of Conduct Violations
FERC approved a Stipulation and Consent Agreement on June 12, 2007 that requires Cleco Power, LLC et al., to pay a civil penalty to resolve an investigation into whether it violated its code of conduct and a 2003 Commission-approved Stipulation and Consent Agreement.
In the 2003 Stipulation and Consent Agreement, Cleco agreed to a more stringent code of conduct, which required the various Cleco companies, including those entities that were unregulated affiliated power marketers and generators, to function independently of each other.
FERC Staff conducted an investigation of Cleco and uncovered violations of the 2003 Consent and Stipulation Agreement by Cleco’s regulated electric utility and its exempt wholesale generators. The two entities violated the code of conduct and the 2003 settlement by sharing six operating personnel and market information as recently as winter 2005. Cleco also failed to report these violations to FERC’s Office of Enforcement, as required by the 2003 settlement.
The new Stipulation and Consent Agreement approved by FERC in June 2007 not only requires Cleco to pay a $2 million penalty, but also to abide by a new compliance plan. FERC noted that Cleco had selfreported some of the violations and has already made adjustments to avoid a recurrence of these violations. Nonetheless, Cleco neither admitted nor denied the alleged violations. Cleco may not recover the money for the penalty through its ratepayers.
U.S. Court Of Appeals Rejects Challenge To Ferc Authority To Prevent Market Manipulation
The United States Court of Appeals for the District of Columbia Circuit ("Court") issued a decision on June 22, 2007 rejecting a challenge to FERC’s authority to set rules to prevent market manipulation. In 2001, in response to anticompetitive and market manipulative practices, FERC approved a set of "Market Behavior Rules," imposed as conditions on all existing and future market-based tariff approvals.
The Colorado Office of Consumer Counsel and others petitioned for review alleging that FERC violated Section 206 of the Federal Power Act ("FPA") by failing to also "fix" a new rate, in addition to regulating sellers’ behavior. FERC responded that Petitioners’ claims were moot with the passage of the Energy Policy Act of 2005, which gave FERC authority to prohibit manipulative or deceptive practices, and FERC’s rescission of its Market Behavior Rules. Nonetheless, the Court determined the controversy continued because FERC never rescinded its initial determination that market-based rates were unjust and unreasonable.
The Court denied Plaintiff ’s petition for review based on the "plain language" of FPA Section 206, which the Court explained does not require FERC to revisit all elements of its market-based rate tariffs where FERC found only one aspect of the tariffs to be unjust or unreasonable. The Court held that Section 206 "nowhere mandates" that where FERC makes a finding with regard to a discrete issue, it also is required by Section 206 to reopen and reevaluate all other aspects of the filed rate.
FERC Approves Western Power Settlements
On June 21, 2007, FERC issued orders approving two more settlements related to its investigation of wholesale power markets during the Western energy crisis (January 1, 2000 through June 20, 2001).
The first settlement agreement requires PacifiCorp to pay $27.9 million to resolve all outstanding issues and claims against it related to its power market transactions in California and the Pacific Northwest. The other parties agreeing to the settlement include: California’s investor-owned utilities, the state Attorney General’s Office, the California Electricity Oversight Board, the California Public Utilities Commission and the California Department of Water Resources.
In addition, FERC approved a Joint Offer of Settlement and Settlement and Release of Claims Agreement submitted by El Paso Marketing LP ("El Paso") and San Diego Gas & Electric. In 2000, FERC established the scope and methodology for calculating refunds related to transactions in the spot markets operated by California Independent System Operator, Inc. and the California Power Exchange during the Refund Period. The Joint Offer of Settlement is meant to resolve the refund issues and other claims against El Paso arising from this proceeding.
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