Frontlines
Lost in Translation
Critics say FERC's filed rate doctrine is wrong for the times.
July 2004
By Richard Stavros
It's quite remarkable how the Federal Energy Regulatory Commission (FERC) has been able to pound a square peg into a round hole. With not much more than a wink and a smile, FERC has taken a depression-era law meant for monopolies-the Federal Power Act (FPA)-and has made it serve double duty as a foundation for competitive power markets.
Yet FERC's reinterpretation, for all its good intentions, may prove inadequate in the long run to define and support full-fledged energy markets.
Here's the gist of it:
If an electric utility wants to go off tariff and sell wholesale power at market-based rates (such as the clearing price in a regional spot market), then it need only convince FERC that it lacks market power in generation and transmission. Once it leaps that hurdle, then a mere filing of an umbrella tariff, coupled with later-filed quarterly reports (with numerical details on the actual market sales prices) will satisfy the requirements of FPA section 205. That section requires FERC to find that wholesale power rates are "just and reasonable."
But what happens if the market later behaves in strange ways? What happens later if the utility continues to sell into the regional spot market, but the clearing price climbs higher than anyone could have imagined at the time FERC had certified the utility as free of market power?
Lockyer's Troubles, Spitzer's Triumph
Well, if you are California Attorney General Bill Lockyer, and if you think the market has done wrong to the consumers you represent, you ask for a refund. You ask a court to overturn the "rate" that FERC "approved" in advance, sight unseen, when it granted umbrella authority for market-based sales.
But you have a problem. A big obstacle stands in the way. That's when the filed-rate doctrine-an arcane legal construct that is out-dated for today's competitive markets-rises up and blocks your path.
The "filed-rate doctrine" says that the approved "rate" now has the force of law, as if enacted by Congress itself. This means that a person, group, or company that wants to challenge the validity of the "rate" through a court appeal cannot ask the court to second-guess what FERC did. "There is no relief other than which the commission can provide-a regulatory regime," wrote attorneys Robert McDiarmid and Beth Emery in this magazine in 2003.
But Lockyer, a divisive figure in energy circles, argues a valid point: that there is really no "filed rate." In court documents, he says, "Market-based tariffs do not contain any rates at all, 'just an offer to negotiate.'" He continues that the filed-rate doctrine prevents the enforcement of state antitrust and unfair competition statutes.
The chief point of contention here is not necessarily FERC's process for allowing market-based rates, though the commission's review of its four-pronged market power test is causing great concern (see this issue's "Perspective" column, p. 16). Nor is it a call for cost-based rates, which is the agenda of some that have attacked the filed-rate doctrine.
Rather, how do we protect consumers? Whether it be stocks, bonds, shoes, or stereos, how can we presume that prices are "just" and forever barred from legal challenge, simply because they were sanctified before the fact?
FERC faults California's market design. Eliminating the filed-rate doctrine would lead only to frivolous lawsuits, FERC Chairman Pat Wood has said.
Yet when a crisis similar to California's energy bust struck the nation's mutual fund industry, New York Attorney General Eliot Spitzer found the way open to prosecute the abuses in the financial sector on behalf of his state's consumers. Spitzer could seek recompense even when the overseeing agency, the Securities and Exchange Commission, was reportedly slow (just like FERC) and perhaps in some cases even ignorant of the white-collar crimes Spitzer eventually discovered.
Where's the danger in that? In 1996, when Congress amended the Telecom Act, it chose to allow state law remedies that were previously barred under the filed-rate doctrine.
A Computer Malfunction?
Consider this amusing, nearly comic twist to the filed-rate doctrine that has emerged from the Northeast, where competitive spot markets hold sway.
In FERC Docket No. ER04-798, ISO New England is proposing to recalculate the market-clearing price for power for all nodes and all hours (7 a.m. to 11 p.m.) for the day-ahead market of April 19, 2004. It says it used incorrect information to operate the computer algorithm that generated locational marginal prices (LMPs). Power traders oppose the ISO because they say retroactive changing of the market prices at this stage would violate the filed-rate doctrine.
Here's what happened. Operation and maintenance plans for April 19 called for outages at two transmission lines on that day, to make repairs. In reality, the outages were scheduled to occur sequentially, to minimize service disruption. But someone (a lineman?) supplied incorrect info to the ISO. The ISO was told that the outages would occur simultaneously.
Supplied with faulty information, the ISO programmed the incorrect info into its computer-based system that receives bids and calculates the clearing price. Extremely high prices resulted from the error. The ISO investigated, found no manipulation, and published the high prices.
Weeks later, the ISO figured out what happened. It claims that the prices for the day must now be re-calculated retroactively; the original prices were erroneous because they did not reflect the correct "factual situation." Thus, the ISO says that this is a permitted exception to the filed-rate doctrine. The rate was based on incorrect facts. Therefore, it is proper now to readjust the rate.
Traders say ISO rules state that LMP prices must reflect "the expectation of the ISO" at the time in question. In this case, they say the ISO "expected" both transmission lines to be down at the same time. The prices therefore are correct, even though the "expectation" upon which that calculation was done was based on a mistake. The ISO answers that its "expectation" was wrong, and therefore the prices must be wrong, and must be corrected retroactively.
The traders counter that if you accept the ISO's reasoning, then any price for any single day whatever will always be exposed to the risk of a future recalculation, and that traders would never agree to trade under such an environment.
The traders sound like they have a good case. This was a popular argument in California, despite the fact that the guarantees they ask for are not really found in any mature exchange or market.
The New York Stock Exchange and the New York Mercantile Exchange said they publish the correct prices when they find an error, and they would not let computer-glitch prices stand (which, they note, happens rarely). They also said it would not matter when the mistake was discovered. Why perpetuate a mistake?
Those New York entities don't need a filed-rate doctrine. They know that publishing correct prices and engendering trust is their "bread and butter," because traders of any kind would move their business elsewhere otherwise. That's called competition. It would be nice to have a little more of it in wholesale power markets.
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