Commission Watch
FERC Addresses California Crisis, Enrages Gov. Davis
August 2003
By Lori A. Burkhart
The commission nails companies, but orders payments.
The Federal Energy Regulatory Commission (FERC) finally dealt with the many issues that arose out of the 2000/2001 California energy crisis. On June 25, FERC issued a slew of orders that settled some old disputes, gave a glimpse of the future, and offered insight into the commissioners' thinking.
California Gov. Gray Davis called the decisions by FERC "reprehensible." He equated punishing Enron to "beating a dead horse." Finally, Davis said it is "clear that ratepayers will have to look to the courts for relief, since none is coming from FERC." What made Davis so angry? A recap is in order.
Deathblow to Enron Trading. In what it called its first "death-penalty case," FERC unanimously revoked market-based rate authority and terminated blanket-marketing certificates for Enron Power Marketing Inc. and Enron Energy Services, collectively known as Enron Power Marketers. But in order to cause no more harm in the bankruptcy proceeding, FERC said it would allow Enron to "unwind" its present electric and natural gas positions and then notify FERC of its last trading date. Docket No. EL03-77-000 and RP03-311-000, 103 FERC 61,343, June 25, 2003.
Commissioner Nora Mead Brownell: "This case more than any other makes it clear when you have as part of your business plan systemic market manipulation, you will not have market-based rate authority."
Commissioner William Massey: "Profit maximization is not a reason for market manipulation. We shout that loudly and clearly."
Commissioner Pat Wood III: "By revoking the company's authority to sell electricity at market-based rates, and similarly to sell natural gas under a blanket certificate, we send a clear signal that competitive markets must work in the interest of customers and the public interest."
Bull's-eye Now on 60 Firms. FERC ordered 60 companies to show cause why they should not be forced to repay illegal profits from allegedly "gaming" the wholesale power market via short-term contracts during the California energy crisis from Jan. 1, 2000, to June 20, 2001. It said the companies appear to have engaged in behavior that violated the tariffs of the California ISO (Cal-ISO) and the now defunct California Power Exchange (PX).
Commissioner William Massey dissented on two points. He would not limit the penalties for gaming to merely disgorgement of unjust profits. Because manipulation can raise market-clearing prices to all players, he believes manipulative sellers should be forced to make the market whole. Also, he would not apply remedies to nonpublic utilities because he does not believe FERC has such authority over them. Docket Nos. EL03-137-000, et al., 103 FERC 61,345, June 25, 2003.
Brownell: "This was probably one of the most challenging orders to conclude. We need to complete closure and develop rules to prevent this from happening in the future."
Massey: "Disgorgement of profits may not be a deterrent."
Wood: "The remedy to make the market whole was used in a 2001 Reliant Energy case, and I believe that remedy is still available. I hope Congress gives us more robust power in such matters."
Still More Targets. FERC also instructed some 24 other partnership companies to justify power trading profits or else face disgorging them. It explained that a recent report issued by the commission staff had provided enough evidence to suggest that those partnership companies had joined with Enron Power Marketing Inc. to engage in illegal gaming during the California power crisis. Those partnership firms include investment banking company Morgan Stanley, as well as utility companies such as Sempra, El Paso Corp., and British Columbia Hydro's Powerex Corp. Docket Nos. EL03-180-000 et al., 103 FERC 61,346, June 25, 2003.
Brownell: "We need a better understanding not only of business relationships, but of what they know, and whether they are willing or unwilling participants."
More Screening for Anomalous Behavior. FERC agreed with staff that bidding by market participants in the short-term energy markets operated by the California PX and the Cal-ISO from May 1, 2000, to October 2, 2000, appeared to be excessive. It adopted a $250 per megawatt screen to identify prima facie evidence of anomalous behavior for the Western market for that period of time. Entities that submitted bids in excess of $250 per megawatt in the Cal-ISO and PX markets will be investigated and required to demonstrate why such bids did not violate the ISO's and PX's Market Monitoring and Information Protocols (MMIP). Docket No. IN03-10-000, 103 FERC 61,345, June 25, 2003.
Massey: "I would probably look at bids somewhere under $250, and that is my quibble with this order."
Wood: "Of particular interest to me are what bids were made high and not taken? We need to look at those companies that bid portfolios above the market, which is economic withholding in its purest sense."
Power Contracts not Modified. FERC ruled that $12 billion in long-term contracts entered into by the California Department of Water Resources, the California Public Utilities Commission (PUC) and the California Electricity Oversight Board with six sellers would be upheld. Commissioner Massey, long a proponent of contract modification in these cases, dissented. Docket Nos. EL02-60-003 and EL02-62-003, 103 FERC 61,354, June 25, 2003.
Massey: "Distortion of short-term markets created a tainted environment impossible to negotiate long-term deals."
Wood: "I guess people could go, 'Gosh, these are the same parties that show up in these other cases.'"
Rulemaking Aimed at "Never Again." FERC acted to stem market abuse by proposing new rules that would prevent market manipulation while strengthening communication and reporting requirements for electric and gas markets. The rules would set forth the transactions and practices to be prohibited under electric power sellers' market-based rate tariffs and gas sellers' blanket certificate authority. The punishment for violation of the proposed rules would include disgorgement of profits as well as revocation of certificate authority to operate. Docket Nos. EL01-118-000, et al., 103 FERC 61,349, June 26, 2003; Docket Nos. RM03-10-000, 103 FERC 61,350, June 26, 2003.
Wood: "We have proposed rules that will add new behavioral constraints and reporting requirements. We also touch upon solutions to some of the index and reporting issues we heard about yesterday at the well-focused Price Reporting Issues conference with the Commodity Futures Trading Commission."
Not the Last Word. Wood urged companies to negotiate settlements to avoid many long proceedings held before FERC law judges.
Lori A. Burkhart is legal editor of Public Utilities Fortnightly. Contact her at lab@pur.com.
In Brief. . .
- FERC proposed new quarterly financial reporting requirements to help it identify and evaluate emerging trends, business conditions, and financial issues affecting regulated energy companies. It currently requires financial statements and supporting data be filed on an annual basis. Docket No. RM03-8-000, 103 FERC 61,352, 18 CFR Parts 141, 260, 357 and 375, June 26, 2003.
- The commission set rules for utilities to document their cash management programs to address concerns that large, mostly unregulated pools of money in such programs may detrimentally affect regulated rates. Docket No. RM02-14-000, 103 FERC 61,351, 18 CFR Parts 101, 201, 260, 352 and 357, June 26, 2003.
- FERC ordered NRG, the bankrupt subsidiary of Xcel Energy, to honor a contract it entered into with Connecticut Light and Power. The deal loses money for NRG (it says $500,000 per day), and a court earlier allowed NRG to escape the contract. Docket No. EL03-123-001, 103 FERC 61,344, June 25, 2003.
- The commission accepted a compliance filing by PJM regarding ability of its Market Monitoring Unit (MMU) to obtain information from transmission owners and their affiliates when the MMU is investigating claims of undue preference. Docket No. EL01-122-05, June 25, 2003.
- The California PUC issued the second of two decisions in the first phase of its demand response rulemaking, addressing an "interagency vision for advancing statewide demand response goals." The decision sets specific goals for demand reduction by the electric utilities, and it also sets out an initial set of voluntary tariffs and conservation programs for customers who use more than 200 kW of power per month. Re Advanced Metering, Demand Response, and Dynamic Pricing, R. 02-06-001, D. 03-06-032, June 5, 2003 (Cal.P.U.C.)
- Maryland's highest appeals court has ruled that an electric utility violated anti-assignment provisions contained in a power purchase contract with a qualifying cogeneration facility (QF) when divesting its generation assets under the state's electric restructuring program. Maryland PSC v. Panda-Brandywine, L.P., No. 92, Sept. Term, 2002, 2003 WL 21321572, -A.2d-, June 10, 2003 (Md.) -L.A.B. & P.C.
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