FERC Filings
REPLY COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION ON TERMS AND CONDITIONS OF PUBLIC UTILITY MARKET-BASED RATE AUTHORIZATIONS
BODY
Investigation of Terms and Conditions
of Public Utility Market-Based
Rate Authorizations
Docket No. EL01-118-000
The Electric Power Supply Association (EPSA) hereby files reply comments on the Commission’s Order Establishing Refund Effective Date and Proposing to Revise Market-Based Rate Tariffs and Authorizations, issued on November 20, 2001 (November 20th Order). Per the Commission’s November 30th Notice of Extension of Time (November 30th Notice), initial comments were due on January 5th, with reply comments due February 5th, 2001.
On December 19, 2001, EPSA filed a Request for Intervention, Clarification and Rehearing of the Commission’s November 20th Order underscoring the Order’s tremendous potential to damage the competitive wholesale bulk power market if implemented. EPSA again filed comments on January 5, 2002, re-emphasizing the arguments made in our December 19th filing and, additionally, endorsing the paper entitled “Market Power and Withholding” written by Scott M. Harvey and William W. Hogan that was filed on December 20th by both Dynegy Power Marketing, Inc. and the Edison Electric Institute.
In addition to EPSA’s filings, the Commission received a host of comments from industry participants roundly criticizing the conditioning proposal. However, at this juncture in the development of critically needed new generation throughout the country, the Commission should take particular note of the comments of Goldman Sachs and the Financial Industry Intervenors. They persuasively argue that investors will react negatively to the November 20th Order since it creates a potential open-ended refund obligation for industry participants with market-based rate authority. Because of this, market participants might need to set aside reserves to reflect the potential for refund obligations. Likewise, the Commission should consider the comments of Edison Mission which set forth the pitfalls that occurred in England when the regulatory agency in that country tried to adopt a similar proposal. The Commission should learn from the trials of the UK regulators and avoid repeating the same blunders.
Noted economist Alfred Kahn also stresses the devastating affects the November Order will have on investment in new generating capacity, “which, along with establishing the necessary conditions for demand elasticity, is the fundamental remedy for the problem that the Order is attempting to resolve.” Kahn further emphasizes how the Commission’s proposal will undermine “day-to-day managerial decisions,” stressing that:
“Managements must make those decisions in real time; the only way in which FERC could enforce its order would be on the basis of second-guessing, after the fact-determinations that seem to me clearly to threaten endless litigation – much more pervasive and judgmental than even the most thoroughgoing historical regulation has heretofore attempted, in my experience.”
Furthermore, the Commission received comments from the Federal Trade Commission – an entity that has great experience in market development and oversight responsibilities – that specifically and solidly warn the Commission against the use of behavioral rules to regulate anticompetitive behavior and that the proposed conditioning should be abandoned due to the massively detrimental hazards it will impose on the bulk power markets. The FTC Comments go on to stress how the Commission erred by not correctly defining physical and economic withholding – as written, the November 20th Order completely ignores legitimate opportunity costs.
While most of the comments supported EPSA’s viewpoint opposing the November 20th Order, a handful outwardly support the Commission’s proposal to condition all market-based rates, based on the premise that doing so will preserve just and reasonable rates and control all market power. Like those supporting the Order, EPSA agrees that rates must remain just and reasonable and that abuse of market power must be controlled. In fact, EPSA has actively urged the Commission to ensure that rates do remain just and reasonable and the market remain free of those who abuse their market power. EPSA does, however, have a problem with how the Commission proposes to fulfill this duty – to condition all existing market-based rate tariffs on vague and ill-defined standards such as “anticompetitive behavior” or the “exercise of market power” without appropriate determination of the definitions, procedures and authorities.
Tellingly, other than generally supporting conditioning as a way to achieve just and reasonable rates, the comments of those supporting conditioning are devoid of any legal support for the condition. To be sure, under Farmers Union, the Commission must ensure that competition will keep rates within the zone of reasonableness. Under prior precedent, the Commission can order refunds if a transaction violates a tariff on file. At the same time, these fundamental propositions do not support the proposed refund condition for one simple fact: the Commission cannot take action against the filed rates, i.e. the market-based rate, outside the specific requirements of Section 206 of the Federal Power Act (FPA) and the Commission cannot condition market-based rates in a manner to read out of the statute the specific protections of Section 206 of the FPA. That section specifically prohibits the application of retroactive refunds prior to the time that a complaint is initiated against the filed rate, in this case the market-based rate.
Indeed, the legislative history of the Regulatory Fairness Act (RFA) makes clear that the purpose of the RFA was to create procedural symmetry between rate increase cases brought under Section 205 of the FPA and rate decrease cases brought under Section 206, not to institute potentially unlimited retroactive refunds, nor undermine the notice and other requirements previously a part of the FPA, which certainly did not provide for unlimited authority to order retroactive refunds. As explained by the one of the bill’s sponsors:
Today we are introducing legislation to remedy the inequity that exists under the Federal Power Act. We want to make sure that consumers of utilities that buy wholesale power are given the same procedural rights and the same opportunity for relief that shareholders of wholesale suppliers enjoy. Our bill makes a one paragraph addition to section 206 of the Federal Power Act. That paragraph directs FERC to set a refund effective date for section 206 rate decrease complaints. If, after completing its investigation and proceedings, FERC decides that a wholesale electric rate is too high, the decrease can go into effect from the time the purchasing utility sought relief: the refund effective date. Nothing in this legislation changes FERC’s authority to determine the just and reasonable rate. Nothing in this bill gives consumers any more than they are entitled to. The purpose of our bill is merely to ensure that consumers get full, fair, timely relief from electric prices that are too high.
At the same time, the Congress made clear in its deliberations, this potential for refund liability must be accompanied by notice to market participants that refunds might be ordered:
H.R. 2858, as amended by the Committee, would allow the Federal Energy Regulatory Commission (FERC) to grant refunds, subject to certain limitations, under section 206 of the Federal Power Act (FPA). Section 206 governs proceedings in which rate reductions are sought by wholesale power customers or through action initiated by the Commission. In either case the Commission under current law may only order the rates of public utilities to be reduced prospectively from the date of its decision that existing rates are unlawful.
H.R. 2858, as amended, would give the Commission the discretion to require public utilities to refund amounts paid in excess of just and reasonable rates for certain periods prior to the Commission’s decision. Generally, the Committee amendment would permit refunds to be ordered for a period beginning with a “refund effective date” (established not less than two months or more than seven months after the filing of a complaint or publication of the Commission’s notice of intent to initiate a section 206 proceeding) and ending 15 months from such date.
Indeed, as the report makes clear, pursuant to the RFA, a refund effective date can be established no earlier than 60 days after official notice of such a complaint is published. Thus, any potential refund liability begins subsequent to the time a complainant alleges that unjust rates are being charged and is conditioned on adequate notice to affected market participants.
In short, the RFA was meant only to fill a perceived gap in existing regulatory authority/procedures, not alter the fundamental principles embodied in the FPA. By adopting a vague and non-specific standard, the Commission is attempting to expand its authority to order refunds well beyond that provided by the Congress. Moreover, by adopting a vague and non-specific standard, and then providing for retroactive refunds for violation of that vague and non-specific standard, market participants are not being given the Notice considered and required by Congress in the Regulatory Fairness Act. In essence, the Commission is creating a continuing refund effective date, without the filing of a formal complaint or the Commission initiating an investigation on its own Motion.
Rather than adopt poorly-drawn conditioning language contrary to the FPA, EPSA and other industry participants have repeatedly urged the Commission to use the tools it currently employs to ensure that rates remain just and reasonable, and at the same time facilitate the development of robust competitive electricity markets. Much like the Federal Trade Commission in their comments, EPSA maintains that the surest way to diffuse market power is to have RTOs with the right structures and rules to facilitate liquid markets and transmission access, thereby reducing the need to evaluate or condition market-based rate applications. As we stated in our December comments, the most important task for the Commission right now is to take actions that: (a) standardize market design and market structures, (b) develop a new pro forma tariff, (c) broaden competitors’ access to non-discriminatory transmission service by establishing broadly defined RTOs, and (d) facilitate new entry with actions such as requiring fair and effective interconnection policies for new merchant
plants. All of these efforts are underway at the Commission and should remain the key focus of the Commission and industry attention.
February 5, 2002
Respectfully submitted,
/S/
Julie Simon, Vice President of Policy
Erin Perrigo, Manager of Policy
Electric Power Supply Association
1401 New York Avenue, NW
11th Floor
Washington, DC 20005
(202) 628-8200
CERTIFICATE OF SERVICE
I hereby certify that I have served a copy of the comments by first class mail, postage prepaid, upon each person designated on the official service list compiled by the Secretary in this proceeding.
Dated at Washington, D.C., February 5, 2002.
/S/__________________
Julie Simon