FERC Filings
REQUEST FOR REHEARING OF JULY 25 REFUND ORDER
I.
ORDERING RETROACTIVE REFUNDS TO OCTOBER 2, 2000 IS LEGALLY FLAWED AND INAPPROPRIATE
A.
Retroactive Refunds Are Inappropriate Because The Commission Made No Finding That Any Market Participant Exercised Market Power, Did Not Define The Exercise Of Market Power, And Made No Factual Determination That The Circumstances Which Existed In All Hours From October 2, 2000 Through June 20, 2001 Warrant Refunds Being Ordered
Under Commission precedent, a seller is allowed to charge market based rates if the seller lacks market power or if the market power of the seller has been mitigated. Each of the sellers subject to refunds in this proceeding were authorized to charge market based rates and charged rates that conformed with the market based rate authority issued by the Commission from October 2, 2000 through June 20, 2001. As the Commission said in the July 25th Order:
[i]t has not been demonstrated that any conditions or limitations of sellers’ market-based rate tariffs have been violated. The conditions hypothesized by the parties are not evident from the market-based rate schedules or our orders. Thus, there is no basis for finding that the sellers acted inconsistently with Commission-filed tariffs or with specific requirements in their filed rate authorizations.
Given that the filed rate is the market based rate of each seller, then prior to ordering refunds under Section 206 of the Federal Power Act, the Commission must find that a seller violated the conditions of its market based authority, i.e. exercised market power. Yet, nowhere in these lengthy proceedings did the Commission find that any seller exercised market power or otherwise violated the conditions of its market based rate authority. The Commission said in the November 1st Order:
Rather, the Commission finds in this order that the electric market structure and flawed market rules for wholesale sales of electric energy in California are seriously flawed and these structures and rules, in conjunction with an imbalance of supply and demand in California have caused, and continue to have the potential to cause unjust and unreasonable rates for short-term energy (Day-Ahead, Day-of, Ancillary Services and real-time energy sales) under certain conditions. While this record does not support findings of specific exercises of market power, and while we are not able to reach definite conclusions about the actions of individual sellers, there is clear evidence that the California market structure and rules provide the opportunity for sellers to exercise market power when supply is tight and result in unjust and unreasonable rates under the FPA.
The December 15th Order said:
[W]hile exercises of market power may cause a rate to be unjust and unreasonable, in the circumstances here, independent of any conclusive showing of a specific abuse of market power, a variety of factors have converged to drastically skew wholesale prices under certain conditions: significant over-reliance on spot markets which by their very nature can produce dramatic price increases when supply is tight; significant increases in load combined with lack of new facilities as well as reduced availability of supply from out of state; chronic underscheduling; and lack of demand responsiveness to price.
The Commission made no findings in the July 25th Order to explain, now, why refunds are required for all hours for the period October 2, 2000 through June 20, 2001. The Commission clearly did not find in the July 25th Order or in any previous order in this proceeding that market power could be exercised in a non-reserve deficiency situation. Indeed, the Commission specifically said in the December 15th Order that it did not find that all rates at all times in these spot markets were unjust and unreasonable. Rather, the Commission’s focus in the November 1st and December 15th Orders was that in certain supply and demand conditions, the flawed California market rules and structures—the failure to provide for forward contracting or permit new generation; could create the potential for exercise of market power or could result in excessive prices. Consistent with those two decisions, prior to the July 25th Order, the Commission ordered refunds only during periods of reserve deficiency. In addition, the Commission ordered changes in the PX and ISO structures to eliminate some of the demand conditions and flawed market rules and structures that had the potential to result in excessive prices or create the exercise of market power.
The Commission did not show in the July 25th Order how market power could be exercised when no reserve deficiency existed or after changes to the ISO and PX, thereby requiring refunds to be ordered. Indeed, the Commission specifically said in the April 26th Order why mitigation, or in this case refunds, was inappropriate during non-reserve conditions.
Once the ISO enters an emergency situation, supply is short relative to demand, demand response is not significant, and the ISO is charged with the responsibility to acquire the available power. In these circumstances, prices may exceed those that would be charged in a competitive market. But these situations are limited to emergency situations. During non-emergency conditions, a supplier has less of an incentive to bid a high price, because it cannot be sure it will be dispatched, since it runs the risk that other suppliers will offer lower bids. In addition, limiting price mitigation to emergency conditions will limit the incentive for generators to withhold capacity in other than emergency conditions. A generator that physically withholds capacity to raise price runs the risk that its withholding of capacity will force an emergency condition in which price mitigation will apply. For these reasons, applying price mitigation to emergency conditions is sufficient to assure just and reasonable rates under the FPA.
Not only did the Commission not find the exercise of market power, the Commission in these proceedings never defined the term, “the exercise of market power.” To be sure, the Commission did set forth examples of anticompetitive conduct. However, the July 25th Order contains no evidence that any such acts occurred and certainly no evidence that such acts occurred during all hours such that the scope of refunds contemplated in the July 25th Order are warranted.
In the end, the Commission cannot order refunds for all periods from October 2, 2000 through June 20, 2001 on the basis of the ability to allegedly exercise market power during a supply/demand imbalance. The Commission has made no finding or determination that any seller exercised market power or engaged in anti-competitive conduct. Thus, the only basis for ordering refunds is the Commission’s belief that, absent refunds, rates would fall outside the “zone of reasonableness” for this period. The Commission, however, in the July 25th Order and throughout this proceeding never articulated or applied any standards to establish a “zone of reasonableness” in a market based rate context. In particular, the Commission did not articulate a standard for when prices are too high such as to fall outside the “zone of reasonableness,” a point conceded by the former Chairman of the Commission. The current Commission in the July 25th Order also conceded that point:
Nor did it [the Commission] set an objective standard against which market pricing standards would be measured or indicate that any price above that standard would be prima facia excessive.
In short, the Commission cannot order refunds because the Commission cannot support, with record evidence, why the resulting rate would be a just and reasonable rate as opposed to the rate previously charged in compliance with the filed tariff, i.e. the market based rate. In addition, in each of a series of prior Orders, including those dated December 15th, March 9th, April 26th, June 19th, the Commission adopted “new and improved” market mitigation measures, each one applying a different standard, a different formula and calculating a different result. These mitigation measures are internally inconsistent and incompatible with each other, despite the fact that some ordered refunds (or, more accurately offsets) for portions of the same period covered by the July 25th Order. As a matter of law and policy, the Commission cannot simply ignore these prior orders and, with no explanation or opportunity for hearing, proceed to implement the July 25th refund methodology.
The courts have cautioned that the Commission must provide an adequate basis for its decisions, including articulation of factual findings supported by underlying data and assumptions. The Commission must make “a reasoned decision based upon substantial evidence in the record.” Here, in ordering refunds for all periods based on a to-be-determined proxy price, the Commission did not make a reasoned decision based on substantial evidence in the record.
B.
The Commission’s Processes Were Inadequate To Any Determination That Refunds Are Appropriate. The Commission’s Process Violate Competitive Suppliers’ Rights of Due Process
The Commission cannot support ordering refunds because competitive suppliers have not been given the opportunity to put forward an adequate defense against those refunds. There have been no trial type hearings on the just and reasonable rate and no opportunity to present evidence or cross-examine witnesses who allege that refunds are owed. When almost $9 billion in refunds are claimed, fundamental fairness dictates that prior to making any final determination on refunds, competitive suppliers must be given the opportunity to test the allegations of those seeking refunds and present their own evidence. Yet, competitive suppliers have not had access to the underlying data relied on by ISO in numerous studies alleging overcharges, much less the opportunity to test the various assertions made. Certainly, no opportunity to test assertions was afforded during the 15 day California settlement conference established by the June 19th Order. Counsel for IDACORP succinctly summed up those proceedings.
This complicated matter that has caused us to all be here for many days is a settlement proceeding. The matter has not been set for hearing under Part 385 of the Commission’s regulations. The Commission’s order establishing this settlement conference afforded you [the Chief Administrative Law Judge] only 15 days to try and forge a settlement of an extraordinarily complex matter involving hundreds of parties, and we have heard it claim hundreds of millions of dollars.
To date, no party has presented any public company-specific refund claims against any seller with any evidentiary support that we are aware of.
As a result, the parties, in particular, the marketers who have asked me to speak on their behalf – and we’ll provide you with a list – have had no adequate opportunity to protect our formal legal rights. There’s been no opportunity for discovery, and certainly, no opportunity for the presentation of meaningful testimony testing any assertions that are raised against us, or prepare testimony in our own defense in the nature of an affirmative case.
The schedule adopted by the Commission and the scope of the matters encompassed by the Commission’s order have, we believe, effectively deprived you of the opportunity, and in fact, the authority to fully accord us these rights. We know you’ve labored hard to assure that people’s rights are protected, but we think that the protections that are available have turned out to be inadequate under Commission norms and Constitutional norms. . . .
Under no circumstances do we believe that a record developed in a proceeding like this in the present circumstances can constitute substantial evidence sufficient to support any Commission order on the merits.
Others has similar comments:
The settlement proceedings, which are confidential and the limited “record” produced within a day and a half, do not meet the most basic or substantive requirements of the Administrative Procedure Act (“APA”). The unverified and unsupported papers and calculations provided during the last day and a half of the settlement conference cannot provide the requisite basis for findings or conclusions.
Parties added:
Here, the only non-confidential information on which the Judge can rely for his substantive recommendation is that presented in the last day and half of the settlement proceeding, during which time a “record” was being formed. While the ISO and other parties may have presented various analyses prior to that time as part of the settlement discussions, all of that material is confidential, and there has been no opportunity to review or test those figures, let alone an opportunity for discovery, cross-examination, and the presentation of meaningful testimony to refute that data. Even during the last day and a half there was no opportunity to cross-examine the “evidence” presented by parties—the parties were limited to asking very few “clarifying questions” of the witnesses. These extremely constrained proceedings cannot form the basis for a record sufficient to pass the substantial evidence test, particularly given the complexity of the issues involved here and the millions (or billions, according to the ISO) of dollars at stake.
Given the legitimate concerns expressed by the parties concerning the on the record processes at the settlement conference, the Commission cannot retroactively order refunds by relying, in part, on the Chief Judge’s recognition that “the methodology in the June 19 Order must be modified in order to be applied to the period October 2, 2000 through June 20, 2001.”
Moreover, no opportunity to test assertions or present testimony against refunds will be afforded to competitive suppliers during the proceedings ordered in front of Judge Birchman. The Commission said:
The scope of the hearing will be limited to the collection of data needed to apply the refund methodology prescribed herein; we will direct Judge Birchman not to entertain any arguments relating to the methodology or the scope of the transactions subject to refunds except as otherwise indicated in this order.
To be sure, there is no requirement for the Commission to hold a trial type hearing if there is otherwise an adequate basis for its decision. However, the California proceedings are unprecedented at the Commission, certainly in recent memory. This is not another garden variety rate case or certificate proceeding; at risk, in a highly politicized environment, are claims that almost $9 billion in refunds are due by sellers who are similarly owed billions of dollars by parties, some of whom are now in bankruptcy. In this situation there are fundamental due process requirements that must be taken into account. The Commission should not deny parties a meaningful opportunity to protect their interests by sponsoring their own witnesses on market power and the operation of the market in general, cross examining and taking depositions of the ISO’s witnesses who allege that overcharges occurred and, of course, challenging any proxy price to be used for refunds, should a need be found, after hearing, to order refunds. Moreover, the Commission does not have an adequate basis to order refunds based on the written record received on the ALJ’s recommendation and the findings made to date in this proceeding. Therefore, the Commission should hold a trial type hearing before any final determination is made that refunds are appropriate for the applicable period.
C.
The Commission’s Decision To Retroactively Impose Refunds Is Directly Contrary to Longstanding Commission Precedent That Such Rule Changes Are Inappropriate Since Market Participants Cannot Retroactively Alter Their Behavior. The Decision Is Retroactive Ratemaking In Violation Of The Filed Rate Doctrine
Commission precedent holds that in a market based rate environment, rules should not be retroactively applied since market participants cannot retroactively adjust business decisions made in reliance on the previous rules. The Commission’s decision to retroactively impose refunds deviates from this precedent. Clearly market participants cannot alter now their participation in ISO and PX markets based on a price that has not yet even been determined. Those business decisions were based on the rate on file and parties had no notice that the rate would be altered by refunds being ordered in the manner prescribed by the July 25th Order. The Commission’s Order gives no indication why the Commission chose to deviate from this precedent and retroactively imposing refunds beyond those noticed in FERC’s various Orders is particularly inappropriate given, as set forth above, that market participants have not been given the opportunity to develop such an adequate record that refunds are not appropriate and market participants had no notice that refunds would be imposed in this fashion.
The Commission set forth why retroactively imposing refunds were inappropriate in its August 23, 2000 Order.
Refunds are discretionary. Moreover any attempt to establish a just and reasonable price to serve as the basis for a refund calculation would be extremely difficult to the extent that it would require the Commission to reconstruct economic decisions that would have been made under different circumstances. In addition, in the context of market based rates and a competitive market, refunds may not be the appropriate remedy to address any competitive problems that may be found. Thus, in establishing a refund effective date in these dockets, we wish to emphasize that, while refunds would ultimately offer some level of restitution to California ratepayers, they may be an inferior remedy from a market perspective and not the fundamental solution to any problems occurring in California markets.
Prior to issuance of the July 25th Order, market participants had no notice that the Commission would impose refunds in the manner prescribed in that Order. The August 23rd Order establishing the refund effective date, and the investigation into the ISO and PX markets, gave no clear guidance. Indeed, that order suggested the contrary; that no refunds would be ordered. The December 15th Order found that rates, in all periods, were not unjust and unreasonable. All of the Commission’s prior decisions provided for mitigation only during reserve deficiencies, consistent with its findings in the November 1st and December 15th Orders concerning the exercise of market power during a supply/demand imbalance. For example in its March 9th Order establishing the proxy clearing price under the $150 breakpoint established in the December 15th Order, the Commission said:
In analyzing the reported bid data, and the system conditions that occur in the ISO and PX markets, the Commission has determined that potential market power is most likely to be exercised during periods of the most severe supply/demand imbalance. Stage 3 emergencies occur during operating reserves are at or below 1.5 percent of load and therefore, represent the most severe supply/demand imbalance.
Applying a similar approach in the April 26th Order, the Commission ordered mitigation during a Stage 1, 2 or 3 emergency. The Commission said:
The Commission will make price mitigation applicable to all conditions defined by the ISO as beginning when reserves fall below 7.5%. These conditions, although applied for purposes of reliability, nevertheless can serve as a standard by which the market should have enough supply to yield a competitive result. Ordinarily, in a competitive market with demand response, high prices during times of reserve deficiency would be legitimate scarcity rents needed to properly allocate energy to those placing the highest value on obtaining energy. However, given the lack of demand responsiveness in this market, when the market realizes that reliability targets are missed, suppliers have a greater incentive to offer supply at prices above what they would ordinarily bid in a competitive market. Under these conditions, all suppliers are aware of how tight supplies are relative to the amount they have to offer, and have an incentive to set a high bid price. Because of the lack of demand response, these prices may not reflect what the market would have established as appropriate scarcity rents and, therefore, may not be just and reasonable.
At best, market participants had some inkling that refunds might be ordered during a reserve deficiency. However, market participants had no inkling of a refund order for all periods until the June 19th Order providing for mitigation on a going forward basis. The July 25th Order is simply the June 19th Order applied retroactively and the Commission concedes that its order is patterned after that decision. At that time, it was certainly impossible to retroactively change one’s behavior.
However, market participants could have changed their behavior to limit their refund exposure if they would have had notice of the possible Commission action. Take credit issues, for example. One aspect of the decision to retroactively lower prices, is that the Commission is eliminating any credit risk that a market participant might have incorporated into its bid. In business, one approach to a credit risk situation is to increase the price charged to compensate for the risk of not being paid. If competitive suppliers would have known that the Commission would eliminate the protection for credit risk, it might have sought changes in the ISO tariff to compensate for the loss of this protection or simply sought other opportunities where credit was not an issue. Competitive suppliers cannot now take those actions.
The Commission’s decision to order refunds during all periods based on a to-be-determined proxy mitigation price is particularly egregious given that the Commission has already issued refund orders under the mitigation provided for under the December 15th Order. There, the Commission said it would determine the transactions subject to further review within 60 days. Those not subject to review were granted a “safe harbor” by being considered final.
We clarify that unless the Commission issues some form of notification to a seller that its transaction is still under review, refund potential on a particular transaction will close 60 days after the initial report is filed with the Commission. The institution of a 60 day period for the review of transaction will provide sellers with the certainty they request and allows a reasonable period for analysis by staff.
From January through June, the Commission issued notices for transactions during Stage 3 emergencies and established prices and refund amounts for transactions during such emergencies. Parties could either refund, or more than likely offset, the amounts owed or provide further justification. If the justification provided for those transactions was inadequate, refunds/offsets were ordered. Under the clear language of the December 15th Order, all other prices during all other periods were final and no longer subject to review other than prices set during a Stage 3 emergency. To now open these periods for further refunds as provided for under the July 25th Order detracts from the Commission’s goal of giving competitive suppliers regulatory certainty for their transactions. For a competitive market to work, competitive suppliers must have confidence that the Commission will adhere to its pronouncements and by removing the safe harbor the Commission seriously undermines its credibility with competitive suppliers.
While the Commission can always change its mind and does not have to follow precedent, the Commission must provide an adequate justification for doing so. In this case, the Commission can provide no such justification for ordering refunds during all periods since the Commission did not find that any market participant exercised market power, did not find an exercise of market power, as set forth in the December 15th and other orders, during all periods and did not define the just and reasonable rate in a market based rate situation or otherwise show that applying refunds for all periods was necessary to ensure just and reasonable rates.
Finally, ordering retroactive refunds violates the prohibition against retroactive ratemaking. The purpose of the prohibition against retroactive ratemaking and its corollary, the filed rate doctrine, is to ensure that the rates charged by jurisdictional sellers can be predicted and thus relied upon. As one court said, purchasers need to “know in advance the consequences of the purchasing decisions they make.” Likewise, sellers must be able to rely upon their rates on file at the Commission, in this case the market based rate. Market participants did have notice, from the August 23rd Order, that the rates they charged in the ISO and PX markets after October 2, 2000 were subject to change or refund. However, market participants did not have notice that the rates in these markets would be so fundamentally altered in the July 25th Order when the Commission’s previous findings and pronouncements did not support such a fundamental change. As the Transwestern court indicated,
it [the Commission] may not simply announce some formula and later reveal that formula was to govern from the date of announcement.
Yet that is exactly what the Commission is doing in this case by establishing a proxy price on a retroactive basis and then ordering refunds off of that proxy price.
D.
The Commission Should Clarify That The Rate Resulting From Any Refunds Is The Just And Reasonable Rate
In the event that the Commission decides to order refunds, the Commission should clarify that the resulting rate, on which refunds are ordered, is the just and reasonable rate under the Federal Power Act. Stated another way, the Commission should explicitly state that the rates that result are Commission prescribed rates and that all charges not refunded must conclusively be deemed just and reasonable.
Under the Federal Power Act, all rates determined by the Commission, are just and reasonable under Sections 205 and 206. In ordering refunds in this proceeding, the Commission is acting under the authority under Section 206 of the Federal Power Act. As the plain language of Section 206 states:
Whenever the Commission, after a hearing had upon its own motion or upon complaint, shall find that any rate, charges, or classification demanded, observed, charged or collected by any public utility for any transmission or sale subject to the jurisdiction of the Commission, or that any rule, regulation, practice or contract affecting such rate, charge, or classification is unjust, unreasonable, unduly discriminatory or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice or contract to be thereafter observed and in force, and shall fix the same by order.
Thus, consistent with the statutory provision, the Commission should rule that the rate set in this proceeding, i.e. the proxy price, upon which refunds or offsets will be ordered, is the only just and reasonable rate for this time period. This is not a proceeding where the Commission simply accepted, without suspension, a rate filed by a jurisdictional utility. Here, based on its analysis of the record established in these proceedings, the Commission has prescribed the just and reasonable rate, i.e. the proxy price, and ordered refunds of charges over the proxy price. The proxy price prescribed by the Commission has become the just and reasonable rate for this time period and the Commission should so clarify on rehearing.
Setting aside that such a clarification is consistent with the statutory provision and the Commission’s actions in this proceeding, such a clarification is important if the many investigations by California state officials into the wholesale market, a wholesale market under the Commission’s exclusive jurisdiction, are to ever come to some conclusion. California state officials must someday return to the task of making California’s market work over the long term e.g. by ensuring that market participants are paid for the services they provide, encouraging investment in generation and demand side management and putting in place an ISO board that has the confidence of market participants. That simply will not happen if California continues investigating the rates for the past period in order to prove that the rates were unjust and unreasonable. The Commission can thus facilitate the return to a more rational market by explicitly stating that its investigation of the rates during this period is completed, that refunds were ordered for any rates deemed unjust and unreasonable and that the resulting rates are just and reasonable.