FERC Filings
MOTION FOR LEAVE TO INTERVENE AND PROTEST ONE DAY OUT-OF-TIME OF THE ELECTRIC POWER SUPPLY ASSOCIATION re: MIDWEST INDEPENDENT TRANSMISSION SYSTEM OPERATOR, INC. AND AMERICAN TRANSMISSION COMPANY LLC
ARGUMENT
1. The Commission Should Direct The Applicants To Clarify The Term Direct Damages
The Commission should direct that the Applicants clarify their definition of direct damages. The essence of the Applicants’ filing is to place a limitation on the direct damages that can be recovered absent some showing of gross negligence or intentional misconduct. Yet, nowhere in the filing do the Applicants set forth a definition of direct damages and the types of damages that can be recovered under this definition. The Commission should rectify this situation by requiring the Applicants to set forth their definition of direct damages, and the type of damages that can be recovered, so that market participants can comment on that definition and then such definition should be included in the Tariff.
2. There Should Be No Limitation On A Generator’s Direct Damages Associated With A RTO’s Failure To Perform Under A Contract.
There should be no cap on direct damages that a generator/marketer incurs due to the Applicants’ failure to perform under the OATT. EPSA does not oppose the continuation of the broad limitations on liability resulting from an outage that existed when utilities were vertically integrated, i.e. generated and transmitted power directly to serve end-use customers. Indeed, much of the rationale in support of the broad limitations proposed herein, and the cases cited, address the classic situation where liability is limited for outages that cause damage to end-users, such as spoiled food at a restaurant after a power outage. Certainly, limitations on liability are appropriate in that situation since the restaurant can and should procure insurance or purchase backup generation to cover such a calamity and the cost to the Applicants and/or MISO TOs to procure such insurance in order to cover all potential damages for all third parties impacted by OATT services would be prohibitive.
However, that same rationale does not apply in the restructured electric industry. Now there are new parties involved in the electric business, i.e. generators and marketers, whose success depends on efficient and reliable transmission service. In the event a transmission provider fails to perform, the generator/marketer should receive the direct damages associated with that failure. For example, if an avoidable transmission outage precludes a generator from serving a customer, the Transmission Provider or Transmission Owner, whichever is responsible, should compensate the generators/marketers for the full cost of obtaining replacement power.
The evidence that generators/marketers in the Midwest ISO are not similarly situated to traditional end-use customers , for which liability is appropriately limited, can be found in the Midwest ISO’s Operating Protocols for Existing Generators. Under the Protocols, the operating authority of the Midwest ISO with regard to the operation of Generators includes having:
Authority to direct all actions as necessary to maintain safety and to prevent or manage Emergency Conditions affecting the facilities under its control including the decisions and actions taken at any satellite control centers, subject to existing environmental and operating restrictions that may limit a Generator’s ability to change its dispatch.
Likewise, the Midwest ISO has the authority to “give direction as necessary to both Generators and other Operating Authorities as necessary to maintain the reliability and security of the Transmission System.” To the extent that the Midwest ISO issues such direction to a Generator in a negligent fashion, a wide variety of damages could occur, not the least of which is damage to expensive generating equipment. The Applicants impose no such requirements on traditional end-users.
The Applicants set forth the difficulty in procuring insurance to cover their risks. Certainly, that is the case for the classic situation of spoiled food at a restaurant that suffers an interruption in electric service and EPSA does not oppose the continued limitation on liability for that situation. However, when it comes to procuring insurance for the failure to perform under the OATT, or RTOs/TOs providing direction to a generator in a negligent fashion, there is no insurance product available to generators/marketers to protect against such damages. As such, the Applicants/TOs are in a better position than a generator/marketer to procure such insurance. Certainly, they have one advantage. There are provisions in their cost of service rates to recover the cost of insurance premiums. Generators/marketers must deduct such costs from the revenues they earn in the market, assuming such insurance can be purchased in the first instance. Thus, the limitation on direct damages associated with the Applicants/TOs failure to perform under the OATT should be eliminated and a generator/marketer should be entitled to compensation for all direct damages they incur due to failure of the Applicants or MISO TOs to perform under the OATT in the event such damages are proven in an appropriate court of law.
3. Applicants Have Failed To Adequately Justify The Proposed Caps On Direct Damages And Such Caps Will Not Set the Proper Incentives For An RTO
The Applicants propose that: (1) MISO TOs and ATCLLC’s liability be capped at direct damages not to exceed the greater of $500,000 or 0.25 percent of the MISO TO’s annual revenue from the use of its transmission system except to the extent the MISO TO is found liable for gross negligence or intentional misconduct; and (2) Midwest ISO’s liability be capped at direct damages not to exceed a total of $5 million to all parties, except to the extent that the Midwest ISO is found liable for gross negligence or intentional misconduct. The only explanation provided by the Applicants regarding any justification for the level of the caps for MISO TOs is they are “modeled after the ERCOT liquidated damages provision” and that the Midwest ISO’s direct damage cap is a balance of interests and economic consequences that “is dependent upon assumptions about insurance premium costs, frequency of insurable events and the magnitude of damages per event.”
Applicants fail to explain why ERCOT’s liquidated damages provision is a proper model for the MISO TO cap and provide no detail or explanation justifying the assumptions referred to as the basis for the Midwest ISO cap. In the ERCOT context, liquidated damages arise when the transmission provider fails to complete necessary interconnection facilities on time to meet the generator’s in-service date. Liquidated damages are intended to serve as an incentive for the transmission provider to construct facilities on schedule. Such damages have little relation to the direct damages (sometimes many millions of dollars ) that a market participant would face for the negligent actions of a MISO TO in providing service under the MISO OATT. Likewise, the Applicants do not even attempt to show that the $5 million cap has any relation to the direct damages that a market participant would incur for the negligent actions of the Applicants in providing service under the OATT.
As such, Applicants do not provide sufficient justification to support the reasonableness of the proposed cap on direct damages for MISO TOs’ or Midwest ISO’s failure to perform under the OATT. If the cap is retained, it should be substantially increased since generators/marketers can incur significantly more direct damages if the Midwest ISO and Midwest TOs fail to perform under the OATT and neither the Midwest ISO and the Midwest TOs have not shown that they cannot procure sufficient insurance to compensate generators/marketers for their failure to perform under the OATT.
Setting aside the lack of justification, in reviewing any request to limit damages for negligent behavior, the Commission must ensure that, if such limitations are granted, transmission owners and RTOs will still have an incentive to conduct their affairs in a reliable and efficient fashion. When the MISO TOs and Applicants are shielded from the direct damages associated with its negligent actions through artificially low caps, the incentives are not sufficient.
The Applicants’ filing refers to the need to insulate the MISO TOs and the Midwest ISO from liability arising from outages and interruptions for the long term good of the market. To be sure, that should be a concern to the Commission since any RTO will play an important role in the nation’s economy through its administration of transmission assets and wholesale electric markets. At the same time, courts have long recognized that merely because an organization serves the public interest does not mean that it should be immune from liability. President and Dirs. of Georgetown Coll. v Hughes, 130 F.2d 810 (D.C. Cir. 1942); Parker v. Port Huron Hosp., 105 N.W. 2d 1 (Mich 1960).
Applicants also argue that if there is no limitation on liability, the transmission system may be overbuilt, in order to minimize interruptions and outages. At this particular time, there is little concern of the transmission system being overbuilt. Indeed, the transmission system is in desperate need of upgrading and RTOs and transmission owners need all reasonable incentives to ensure that they are properly maintaining and expanding their systems. Certainly one incentive to transmission owners and RTOs would be stricter regulatory oversight , but a better way is making transmission owners and RTOs fully accountable for their negligent actions in maintaining the system. Providing the right economic incentives is always preferable to a command and control regulatory structure.
Moreover, the limit on direct damages shifts the responsibility for the recovery of direct damages away from the actor that caused the damages, the MISO TOs and Appicants. To the market participant that must rely on the Applicants and MISO TOs for reliable service. Direct damages were defined long ago by the Indiana courts as “the ordinary and natural results of the negligence; such as are usual and as therefore might have been expected” Binford v. Johnson, 82 Ind. 426 (1882) 1882 WL 6194 (Ind). Market participants should not be required to show that a MISO TOs or the Applicants were grossly negligent or engaged in intentional misconduct under the OATT merely to recover the full amount of such damages. Such a standard is almost impossible to meet. Gross negligence is defined as the “intentional failure to perform a duty in reckless disregard of the consequences as affecting the life or property of another.” Intentional misconduct requires a plaintiff to show that the defendant knows, that under existing conditions, their conduct will probably result in injury. Picadilly, Inc v. Colvin, 519 N.E. 2d 1217 (Ind 1988). The Colvin court provided examples of such misconduct as conscious indifference, heedless indifference, reckless disregard for the safety of others, reprehensible conduct and heedless disregard of the consequences. That should not be the standard that a market participant must meet to recover the “ordinary and natural results of negligence” of an RTO/TOs and doing so inappropriately shifts the risks of damages.
The Commission should consider the signal that granting such broad limitations on liability would send to such important entities in a restructured electric market. The Commission is counting on the Applicants and MISO TOs to efficiently and reliably operate the transmission system and administer the wholesale market. The Commission should not send the signal that the entities that own and operate the transmission system will only be liable for minimal damages unless they provide such a low standard of care to the market as gross negligence or intentional misconduct.
Moreover such a signal is inconsistent with the Midwest ISO and the TOs’ approach to maintaining reliability operations of the grid. Under the rubric of maintaining reliable operations, the Midwest ISO and the TOs have sought the broadest amount of operational authority, such as the ability to dispatch generation, in the Operating Protocols for Existing Generators. Yet, in this filing, the Midwest ISO and its TOs seek to limit their responsibility for the actions they might take, under the broad authority they themselves sought. For example in Docket No. ER02-1767-000, the MISO seeks the authority to redispatch generation as a congestion management tool, arguing that such authority is necessary to protect reliability. In that proceeding, numerous parties have argued that the MISO does not have the technology to solicit bids for redispatch. Yet, the Midwest ISO seeks to limit its liability for the actions it takes, actions that participants in ER02-1767-000 are arguing the Midwest ISO is not yet properly equipped to take. That is not appropriate.
In addition, the current structure of the Midwest ISO vis-a-vis its Member TOs lends itself to increased opportunities for negligent actions and thus damages from those actions. Currently, the Members TOs continue to physically control their transmission systems, while the Midwest ISO issues operating instructions. This lack of central control, such as currently exists in PJM, results in an increased level of communication and thus an increased opportunity for such communication to be transmitted negligently. Despite this structure, the Applicants seeks to limit its liability in the event that the Midwest ISO transmits or the Member TOs receive, such communication in a negligent fashion.
4. The Limitations On Liability Proposed Should Not Abrogate Any Liability Provisions Of Existing Interconnection Agreements.
The Commission should clarify that any limitations approved herein will not abrogate or nullify any liability provisions contained in existing interconnection agreements. Such provisions were the result of hard fought negotiations between the parties and the parties’ expectations as to the risk of possible damages. The Commission should not modify that expectation in a tariff filing subsequently made by the Applicants and its member companies. As such, in acting on this filing the Commission should clarify that the nothing herein abrogates or otherwise nullifies any limitations previously negotiated by the generators and TOs and approved by the Commission.