FERC Filings
MOTION TO INTERVENE, REQUEST FOR MODIFICATION, OR IN THE ALTERNATIVE REHEARING, OF THE ELECTRIC POWER SUPPLY ASSOCIATION re COMMUNICATIONS WITH COMMISSION-APPROVED MARKET MONITORS
REQUEST FOR NOTICE AND COMMENT RULEMAKING
The Commission’s January 16 Order is both procedurally and substantively deficient. It should be held in abeyance, absent the Commission moving forward with a notice and comment rulemaking.
A. Procedural Issues
The Commission’s January 16, 2003 Order is procedurally deficient because (1) Rule 2201 does not give the Commission the authority to generically exempt off-the-record communications with market monitors; (2) the Commission failed to comply with the notice and comment procedural requirements necessary to amend or repeal Rule 2201 required by the Administrative Procedures Act (“APA”); (3) even if the Commission had attempted to change Rule 2201 in conformance with the notice and comment requirements of the APA, the APA itself does not permit the exemption adopted in contested, on-the-record proceedings; and (4) the Order deviates from the Commission’s established practice.
1. The Commission’s Ex Parte Rules do not Permit it to Exempt Market Monitors
Rule 2201 does not give the Commission the authority to exempt off-the-record communications between the Commission and market monitors. The Commission’s existing regulations governing off-the-record communications provide that,
in any contested on-the-record proceeding, no person outside the Commission shall make or knowingly cause to be made to any decisional employee, and no decisional employee shall make or knowingly cause to be made to any person outside the Commission, any off-the-record communication.
There is no credible dispute that market monitors are “person[s] outside the Commission.” In fact, the Commission acknowledges as much: “[t]o be sure, market monitors are ‘persons outside the agency;’ indeed, they are not employed by the agency but are typically compensated by the operators of the transmission systems.” Therefore, notwithstanding the Commission’s portrayal of the market monitors as the “eyes and ears” of the Commission and as “practically an extension of, or a surrogate for,” the Commission’s own staff, absent a substantive modification or amendment to the existing regulations the Commission and the market monitors are strictly prohibited from engaging in off-the-record communications in the context of a contested on-the-record proceeding.
Rule 2201 provides an exemption to the general prohibition on ex parte communications for emergency and national security situations, and in certain instances to Federal, state, local or Tribal agencies not a party to the proceeding. Additionally, while Rule 2201 allows the Commission “by rule or order, [to] modify any provision of this subpart,” the current rule allows such modification only “as it applies to all or part of a proceeding . . . .” In other words, the Commission may, by issuance of a rule or order, create an exemption to Rule 2201’s prohibitions against ex parte communications, but only as applied to a single, identified proceeding. For example, in Regional RTO Panels, State-Federal regional panels were convened to address issues on a generic basis as well as in the captioned proceedings. In order to permit the participation of certain state commissions who were parties to the underlying proceedings, the Commission modified the application of Rule 2201 to treat, as exempt communications, discussions between the Commission and the state commissioners who were parties to the docketed proceedings. The Commission, however, ordered that communications be placed in the decisional file of the appropriate proceeding(s) and that transcripts of the panels be made available “to ensure fundamental fairness to other parties in the proceedings.”
Thus, a plain reading of Rule 2201(a) reveals that it does not give the Commission the authority to unilaterally modify its ex parte rules as applied to all proceedings. In the January 16 Order, however, the Commission did just that in creating a new exempt class for market monitors for all future proceedings. Consistent with the text of Rule 2201, as well as the precedent in Regional RTO Panels, the modification exempting market monitors from ex parte communication rules can be limited to no more than a single identified proceeding or set of proceedings.
Furthermore, existing Commission regulations also impose notice and disclosure requirements upon the Commission should it receive prohibited off-the-record communications. These provisions impose after-the-fact notice and disclosure requirements to insure that affected parties are afforded an opportunity to respond to inappropriate ex parte communications. The notice and disclosure provisions, fundamental to insuring the integrity and fairness of Commission proceedings, would be discarded under the Commission’s January 16 order.
In sum, because the existing regulations do not exempt off-the-record communications between the Commission and market monitors, and because the existing regulations impose notice and disclosure requirements, the Commission cannot “modify the application” of its regulations to effect a substantive modification or amendment, or to permit an action that is expressly prohibited under the same regulations, absent notice and comment rulemaking.
2. The Commission Failed to Comply with the Notice and Comment Procedures Necessary to Substantively Modify or Amend its Regulations
It is well settled that agencies are obliged to comply with the notice and comment requirements of the APA before engaging in a rulemaking. A rulemaking constitutes any “agency process for formulating, amending, or repealing a rule.” Section 553 of the APA provides that an agency must publish notice of a proposed rulemaking in the Federal Register and must “afford interested persons an opportunity to participate . . . through the submission of written data, views, or arguments.” Section 553 further requires that an agency publish a rule not less than thirty days before its effective date and that the agency incorporate a “concise general statement” of the rule’s “basis and purpose.”
Notwithstanding the fact that the Commission styled the present action as an “order,” the January 16 Order is properly considered a rule. The January 16 Order, as adopted, has a potentially substantial impact on parties subject to the Commission’s oversight. Further, the rulemaking does not qualify for any exception to the notice and comment requirements under the APA.
a. The January 16 Order is properly considered a rule for purposes of the APA
Notwithstanding the fact that the Commission labeled its action an “Order” modifying the application of a rule, the purpose and operative effect of the action is properly understood as a rulemaking. As the decisional law makes clear, agency labels are not conclusive; rather, an appeal to the nature of the proceeding is required.
The APA broadly defines a “rule” as “an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describ[e] . . . procedure or practice requirements.” One of the key distinguishing characteristics embraced by the courts as a means of differentiating between a rule and an order is that a rule prescribes a future course of conduct, rather than merely pronouncing existing rights and obligations. In the present matter, the nature of the proposal necessarily contemplates a prospective imposition of general applicability – a prospective exemption for market monitors in contested on-the-record proceedings before the Commission. Therefore, the January 16 Order is properly construed as a rule and, thus, is subject to APA notice and comment requirements.
b. The January 16 Order constitutes a rulemaking without proper notice or publication
As noted above, the APA requires publication of all proposed rules in the Federal Register. Specifically, the APA imposes a statutory requirement that the notice include: when, where, and why the rulemaking proceeding is being held; the legal basis of the rule; and the terms or substance of the proposed rules, or at least a description of the subject matter involved. The APA further requires that both proposed and final rules be published in the Federal Register. The purpose of the notice and publication requirement is to afford interested parties an opportunity to participate in the rulemaking and to provide legal notice for all affected persons. While agencies are typically given wide latitude with respect to the adequacy of the notice, such deference is inapposite where, as here, the Commission has failed to provide any notice whatsoever. Therefore, by failing to provide advanced notice and publication of the rulemaking and in failing to provide interested parties an opportunity to comment, FERC has failed to comply with the statutory requirements imposed by the APA.
c. The January 16 Order does not qualify for any exception to the notice and comment requirements
None of the exceptions to the APA requirements for notice and comment rulemaking apply to the January 16 Order. It is settled law that the notice and comment requirements of the APA apply only to “legislative” or “substantive” rules; they do not apply to “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice.” Additionally, where the agency establishes “good cause” for dispensing with such process, notice and comment will not be required.
The present rule does not qualify as an interpretative rule. An interpretative rule embodies a non-binding agency opinion on how a statute should be viewed and, thus, is merely advisory in nature. In the present case, the January 16 Order substantively alters the existing rights of affected parties by exempting communications between the Commission and the market monitors in the context of contested on-the-record proceedings. Therefore, it cannot be said that the present rule “simply states what the administrative agency thinks the statute means and only reminds parties of existing duties.” Accordingly, the rule in the present case does not enjoy an exemption from the APA’s notice and comment requirements as an interpretative rule.
The January 16 Order is not exempt as a statement of policy. General statements of policy merely announce an agency’s plan for enforcement of a particular statute. General statements of policy impose no rights or obligations and have no substantial impact on affected members of the public. In the instant case, there can be no doubt that the Commission’s action will have a real and substantial impact on affected parties. Indeed, the Commission acknowledges the potential for prejudice to the parties involved in a contested on-the-record proceeding resulting from the exemption of the market monitors from the Commission’s ex parte prohibition. Accordingly, the Commission cannot credibly appeal to this exemption as the basis for failing to provide the notice and comment procedures required by the APA.
The January 16 Order does not qualify as a rule of practice. In general, courts have interpreted the rules of practice and procedure exemption to include agency rules that address rules of evidence, the manner and date for filing pleadings, and the delegation of basic duties. The touchstone of the procedural exception is that it covers “agency actions that do not themselves alter the rights or interests of parties, although it may alter the manner in which the parties present themselves or their viewpoints to the agency.” Further, while courts have recognized that “procedure impacts on outcomes and thus can virtually always be described as affecting substance,” to pursue that line of analysis would result in the “obliteration of the distinction that Congress demanded.” As noted above, there can be no credible dispute as to the substantive effect of the January 16 Order. In fact, such change in the relative interests of the parties in the context of a contested on-the-record proceeding was expressly contemplated by FERC. Accordingly, the rule exempting market monitors from the ex parte rules does not enjoy an exemption from the APA’s notice and comment requirements as a rule of practice or procedure.
Last, the Agency has failed to assert, nor could it establish, an exemption to the APA notice and comment requirements on the basis of good cause. The good cause provision admits exception to the general notice and comment requirements in cases of emergency and where such procedures would be impracticable, unnecessary, or contrary to the public interest. In the instant case there is no emergency, nor is there any basis for impracticability. Further, in view of the potential prejudice to parties involved in contested on-the-record proceedings it cannot credibly be maintained that notice and comment on the rule would have been adverse to the public interest. Additionally, even where such grounds for an exemption are present, the Commission must publish its reasons for dispensing with the procedural protections afforded under the APA with the issuance of the rule. Here, no such rationale was provided. Accordingly, the agency cannot appeal to the good cause exemption.
Accordingly, because the rule in the present case does not enjoy an exemption from the APA’s notice and comment requirements, it therefore is procedurally invalid.
d. The Commission failed to afford interested parties the opportunity to comment in advance of the adoption of the January 16 Order
The Agency failed to provide interested parties with the opportunity to comment on the substance of the rule. The notice and comment rulemaking procedures of the APA require an agency to provide interested parties with the opportunity to comment after the notice of a proposed rule has been published in the Federal Register. As discussed above, in the present proceeding the Commission failed to notice or publish the rule. The failure of the agency to afford an opportunity to comment is a distinct procedural flaw. Therefore, where the Commission has completely failed to afford any opportunity for comment, the rule is procedurally invalid.
3. The Exemption of Market Monitors from the Commission’s Ex Parte Rules Violates the APA
In support of the January 16 Order modifying the ex parte regulations, the Commission references the provision of the existing rules that allows the Commission “by rule or order, [to] modify any provision of [Rule 2201] as it applies to all or part of a proceeding, to the extent permitted by law.”
As discussed above, however, this provision is properly understood as a conditional limitation on the Commission’s authority to modify Rule 2201, not a positive grant justifying modification in its own right. Therefore, independent of the question of whether the Commission has the authority to modify its rules (subject to the notice and comment requirements discussed above), is the question of whether the modification proposed is “permitted by law.” In the instant case, the modification of the ex parte rules contemplated in the Commission’s January 16 Order is not permitted by law, particularly when the Commission does not propose to disclose any of these conversations.
The APA prohibits ex parte communications between agency decisional staff and interested persons outside the agency. The market monitors are clearly “persons outside the agency.” The APA bars ex parte communications if they are relevant to the merits of the proceeding. The January 16 Order does not discriminate between non-substantive and substantive communications addressing the merits of a proceeding and, more importantly, does not provide for any disclosure to the parties in the contested proceeding.
The contested on-the-record proceedings covered by the January 16 Order are properly considered adjudicatory and, thus, are subject to the APA ex parte rules. Thus, the Commission’s January 16 Order providing for off-the-record communications is not “permitted under law.”
4. Adopting the Rule Without the Benefit of a Notice and Comment Rulemaking Process Deviates From the Commission’s Established Practice
From the outset, the Commission’s implementation of the important principles behind the ex parte rules, i.e., fundamental fairness in Commission proceedings and ensuring meaningful judicial review has been conducted through a formal notice and comment rulemaking. During the rulemaking process leading up to the issuance of Order No. 607, interested stakeholders provided the Commission with practical input regarding the creation of rules regulating off-the-record communications, including the establishment of certain classes of participants who may be “exempt” from Rule 2201’s prohibitions. The Commission erred by not instituting the same process here. The Commission should have proceeded with an open and transparent process, such as a notice and comment rulemaking, allowing interested stakeholders the opportunity to help shape the scope of the market monitor exemption, consistent with general principles of fairness and equity, and after determining the problems caused by the current rules.
In sum, the ex parte rules and the protections contained therein have been substantively modified by the January 16 Order, and the absence of a notice and comment period deprives parties of their procedural rights and is inconsistent with the APA as set forth above. In the end, the situation here is similar to that faced by the United States Park Service (“Park Service”) in United States v. Picciotto. There, the court struck down the Park Service’s attempt to exempt itself from the APA’s notice and comment rulemaking requirement. The Park Service adopted, pursuant to the APA’s notice and comment requirements, regulations governing activity in all national capital region parks, including a subsection imposing restrictions on particular activities at certain sites. The Park Service subsequently adopted a number of “additional conditions” to § 7.96(g) that were made generally applicable to all permitted demonstrators at a specific site, and which carried criminal penalties. These “additional conditions” were not published in a general notice of proposed rulemaking in the Federal Register, nor was the public given an opportunity to comment. The court rejected the claim that the Park Service’s actions were an interpretive rule, explaining that “rules that grant rights and impose obligations [are] substantive,” while “an interpretive rule explains an existing requirement; it does not impose an ‘additional’ one.” As such, the court held that the “additional conditions” adopted by the Park Service constituted a substantive rule and must be held to a notice and comment process. Similarly, setting aside that the Commission has misinterpreted its own regulations, the Commission’s decision to generically add a new exempt class of off-the-record communications is certainly a substantive change to the existing regulation. Accordingly, the Commission’s determination to include market monitors as a new exempt class under Rule 2201(e)(1) should be held in abeyance pending a formal notice and comment rulemaking in order to ensure that interested market participants have an opportunity to present “data, views and arguments” concerning a proposed rule. Since there is no proceeding before the Commission at this time necessitating the ex parte input of a market monitor, the time required for a formal notice and comment rulemaking proceeding is not a deterrent to commencing such a proceeding. In the interim, if there is a current, on-going proceeding in which the Commission would be aided by input from a market monitor, it may issue an order, pursuant to Rule 2201, and limited to that proceeding, giving it the authority to engage in off-the-record discussions, subject to appropriate notice and disclosure provisions.
B. Substantive Issues
On its face, the January 16 Order is substantively deficient. The January 16 Order states that “the Commission is committed to ensuring the proper and efficient operation of the wholesale energy markets, and . . . believes that objective can be met in part by the use of market monitors.” This statement, however, paints with too broad a brush. The Commission did not clearly identify the precise problem(s) it seeks to avoid or rectify by engaging in off-the-record communications with market monitors. Rather, the Commission simply stated that, in addition to its own market monitoring and oversight staff, market monitors,
assist the Commission by being in the market and collecting and analyzing relevant data and reporting data analyses, conclusions, and recommendations back to the Commission. Timely receipt of those reports is critical to the Commission’s ability to respond and thus avoid unnecessary costs that delay could cause.
EPSA does not dispute that independent market monitors will have access to useful information that may not be available to the Commission in the regular course of business. More precise parameters, however, must be established concerning when market monitors may be consulted, and the scope of information that they may be consulted on must be identified. The Commission can start that process by identifying the problems with the current rules and proposing concrete solutions that can be commented on by interested market participants. EPSA is willing to assist the Commission in ensuring that it can have access to the market monitors, but it is incumbent on the Commission to clearly define in the first instance the parameters of the information it seeks, and to work with interested market participants, through a formal notice and comment rulemaking, to resolve the problem that the existing ex parte rules are causing.
In the meantime, the Commission’s statements that market monitors are an extension of Commission staff fails to provide sufficient justification for instituting a blanket exemption for this class of persons. Indeed, while market monitors may provide useful and, at times, critical information to the Commission concerning market issues in various regions of the country, they are not “official” governmental employees employed by the Federal Energy Regulatory Commission, nor are they contractors hired by the Commission and therefore a bona fide extension of the Commission. Thus, the Commission’s statements that market monitors “function as the Commission’s ‘eyes and ears’ in the marketplace,” and are “practically an extension of, or a surrogate for, the Commission’s own market monitoring and investigative staff,” do not provide sufficient justification under Rule 2201 for applying this exemption for market monitors across the board to any and all future proceedings.
Given the procedural and substantive changes mentioned above, the Commission should not move forward with the proposal absent a notice and comment period. In the alternative, the Commission must make significant modifications to its January 16 Order if it decides not to provide for such a process.
C. Proposed Changes
Absent initiation of notice and comment rulemaking process to address the above-stated procedural and substantive issues, certain changes must be made to the Commission’s determination in the January 16 Order to ensure continuation of a fair and workable process governing off-the-record communications with Commission decisional staff. Such changes include clearly defining the independence standards that independent system operators and/or regional transmission system operators (“ISOs/RTOs”) and market monitors must meet, and the scope of persons covered under the exemption, as well as identifying persons to whom the exemptions to the ex parte communications should not apply.
1. Independence
The independence requirement has two aspects. First, the ISO/RTO itself must be independent. Unless an ISO/RTO meets the Commission’s requirements for independence set forth in Order No. 2000, the market monitor for that ISO/RTO should not be eligible under the exemption provided in the January 16 Order. Independence of the underlying ISO/RTO is key to ensuring unbiased actions by the ISO/RTO seeking to make ex parte communications through its market monitor. For example, in California the Commission has held, and is litigating in the courts, that the California ISO Board does not meet the independence requirements of an ISO/RTO. As such, the California ISO market monitor should not be permitted to engage in ex parte communications with Commission decisional staff. Since the California ISO itself is not independent, it may seek, through ex parte communications by the market monitor, to influence the Commission to the detriment of the market as a whole. For that reason, the Commission should not allow, at a minimum, the market monitor for the California ISO to engage in such discussions.
Second, the market monitor itself must be independent of the ISO/RTO. The SMD NOPR calls for market monitors to be “autonomous of the Independent Transmission Provider’s management and market participants.” The Commission has put these words into practice in the Midwest ISO. There, the Commission, in approving the contract for market monitoring services between the Midwest ISO and Potomac Economics, Ltd., limited the terms and conditions of the contract to terms of compensation and termination provisions, and adopted by reference the terms and conditions contained in the Commission-approved Market Monitoring Plan. Doing so, the Commission held, “remove[d] the potential for conflict” between the contract and the Market Monitoring Plan, thereby ensuring independence of the market monitor’s determinations.
At the present time, however, the only “Commission-approved” market monitor is the Midwest ISO Independent Market Monitor (“Midwest ISO IMM”). Other market monitors do not meet the standards of independence either, e.g., in the case of California, the ISO is not independent from its stakeholders and the market monitor is not independent from the ISO. For example, Potomac Economics is the Midwest ISO IMM, as well as the market monitor for the New York Independent System Operator (“NYISO”) and the Independent System Operator-New England (“ISO-NE”). However, Potomac Economics is a “Commission-approved” market monitor only in their role as market monitor for the Midwest ISO since it is not clear whether their contract with the NYISO and ISO-NE contain the same contractual protections to ensure that they are truly independent from the NYISO or ISO-NE. The Commission, therefore, should not allow ex parte discussions regarding activities in the NYISO and ISO-NE, pending a determination that the terms and conditions of the NYISO and ISO-NE market monitors’ employment meet the Commission’s independence standards as provided for in Midwest ISO. The scope of the January 16 Order should be limited to apply to only those market monitors that are independent, as set forth in the SMD NOPR and Midwest ISO.
2.
Scope of Persons Covered by Exemption
The January 16 Order is also lacking in detail regarding the scope of those individuals to be covered by this new exempt class consisting of market monitors. For the reasons set forth above, market monitors directly employed by an ISO/RTO, as compared to being employed by the ISO/RTO as an independent contractor pursuant to a Commission-approved contract, should not be permitted to engage in off-the-record communications with the Commission under this exemption because, by their very nature, employees of the ISO/RTO cannot be independent.
3. Failure to Provide Notice of Communication
The sua sponte creation of a new ex parte exemption, i.e., communications from market monitors to Commission decisional staff, without also subjecting such communications to notice and disclosure, raises due process concerns. Refusing to disclose the contents of such discussions to the parties to a proceeding and preventing them from addressing issues presented to the Commission’s decisional staff by market monitors effectively prevents such parties’ exercise of their due process rights. For example, the Commission has, on prior occasions, created exempt classes to be added to the ex parte rules. The exempt communications, however, were made subject to the notice and disclosure requirement and were required to be placed in the decisional record. This allowed affected parties to at least comment on the communication or take some other action with regard to the communication. Thus, at a minimum, any exempt off-the-record communications between market monitors and Commission decisional staff must be (i) made available to the parties to the proceeding, along with a general description of the conversation, and (ii) included in the decisional record, consistent with Rule 2201(e)-(h).
Case law supports such a disclosure requirement and points to the importance of ensuring that federal agencies disclose the substance of relevant information in order to provide the opportunity for meaningful participation and open decisionmaking. The D.C. Circuit has made clear that because ex parte contacts cannot be rebutted through an adversarial process, basic fairness demands that such contacts not be part of agency decisionmaking. The D.C. Circuit stated,
Administrative and judicial adjudications are viable only so long as the integrity of the decisionmaking process remains inviolate. There could be no way to protect the sanctity of the adjudicatory process if we were to condone direct attempts to influence decisionmakers through ex parte contacts.
The D.C. Circuit has stressed the need for disclosure, adding that the,
fundamental proposition that the right to comment or the opportunity to be heard on questions relating to the public interest is of little or no significance when one is not apprised of the issues and positions to which argument is relevant. Only when the public is adequately informed can there be any exchange of views and any real dialogue as to the final decision. And without such dialogue any notion of real public participation is necessarily an illusion.
Moreover, adversarial comment is crucial to guarantee “proper functioning of agency decisionmaking and effective judicial review.” Without disclosure of communications between market monitors and the Commission’s decisional staff, other participants will be unable to address undisclosed arguments which in turn will impair the agency’s decisionmaking since its decision will not be based on the written record before the Commission. Courts cannot determine that an agency acted properly where such agency justifies its actions by reference to the public file without disclosing the substance of other relevant information presented to the agency. In such instances, the courts will find the agency’s actions arbitrary. As such, fundamental fairness and an agency’s duty to provide a record for judicial review requires that the Commission disclose any exempt off-the-record communications between market monitors and Commission decisional staff.
4. Exceptions to the Market Monitor Exemption
Finally, the Commission must clarify that a market monitor is prohibited from engaging in off-the-record communications with Commission decisional staff if the market monitor’s “employers,” i.e., the ISO or RTO which employs the market monitor, are parties to that proceeding. Thus, a market monitor should not be allowed to comment in a contested proceeding when its employer is a party to such proceeding, regardless of whether the market monitor has provided substantive testimony. To allow otherwise would create the potential for a market monitor or the ISO/RTO to engage in self-dealing on behalf of its “employer,” to the detriment of other parties to the proceeding. Moreover, absent an outright prohibition, there is no way for the Commission or interested parties to police such discussions, since the discussions are not subject to disclosure.