FERC Filings
Reply Comments of EPSA, Independent Energy Producers of California, Independent Power Producers of New York, Inc. and the Western Power Trading Forum re: Investigation of Terms and Conditions of Public Utility Market-Based Rate Authorizations
Comments
A. Disgorgement of Profits is the Appropriate Legal Remedy
Certain commenters criticize the Commission’s proposal to impose the disgorgement of unjust profits obtained if a seller is found to have engaged in transactions or behavior prohibited under the proposed Market Behavior Rules. In the alternative, parties have suggested broadening the definition of disgorgement (i.e., by extending the disgorgement to all affiliates of the seller or to all of the seller’s transactions above costs in a market) or simply multiplying the disgorgement amount by some arbitrary figure. Some commenters go even further and suggest that the Commission adopt a “make the market whole” approach. These commenters do not, however, substantiate the Commission’s legal authority to adopt such approaches. The Commission, in fact, does not have the legal authority to impose these types of penalties.
Any requirement that sellers pay an amount in addition to that earned from their illegal transaction would constitute a penalty; clearly, a requirement to “make the market whole” would be a payment above that earned from any illegal conduct. Thus, it is a penalty that falls outside the Commission’s legal authority to impose. This is particularly true given the Commission’s theory in adopting the various tariff conditions. The Commission is amending the filed rate of sellers, i.e. the market-based rate, to impose various conditions on their ability to sell at market-based rates. If any seller violates the condition, that seller is violating its filed rate. In that event, the Commission can remedy the violation.
However, the remedy is to place the seller in the same position as if it did not violate the filed rate, in other words never collected the revenues that violated the filed rate. Requiring the disgorgement of profits, i.e. the refund of the amounts earned on the illegal transaction, is the only remedy consistent with the Commission’s own basis for adopting this order.
Moreover, disgorgement is the only approach consistent with the case law addressing the Commission’s ability to remedy violations of the tariff. The focus of those cases, e.g. Cox v. FERC, is to prevent unjust enrichment by the seller who violated the tariff, or in that case, the certificate. At the same time, the courts have cautioned the Commission that the seller cannot be worse off after paying refunds for any violation, otherwise such refunds would constitute a penalty. For example, in Coastal Oil and Gas Corporation v. Federal Energy Regulatory Commission, the court found that the Commission had imposed a penalty when it required the producer/seller to forfeit not only all of its profits, but also prohibited the seller from recovering “any payment whatsoever for the gas.”
The Coastal court was following the case law set out in Mesa Petroleum v. FERC, where the court said that one standard for when a remedy constitutes a penalty is whether the refunding party is “in a worse economic position after paying the refunds.” Certainly, a seller required to refund not only their profits, but also to reimburse the entire market for excess costs, would be in a “worse economic position” after that magnitude of total refund. Such an approach would thereby constitute a penalty and be beyond the Commission’s legal authority.
Ignoring the Commission’s lack of legal authority to impose penalties, commenters press on that the existing remedies are not sufficient to deter inappropriate conduct. That is not the case. Disgorgement is only one in a quiver of arrows available to the Commission, with the most harmful arrow being the Commission’s ability to revoke the seller’s ability to sell at market-based rates, an authority the Commission has shown a willingness to use. Such an outcome would severely restrict a company’s ability to participate in the competitive wholesale market. In severe cases, the Commission can refer behavior to other agencies for appropriate criminal action. Finally, commenters simply do not appreciate the fact that a Commission finding of a seller’s violation of the conditions of its market-based rate authority, and the resulting disgorgement of profits, would have a devastating impact on a company both in terms of its ability to attract future customers and its relationship with its shareholders.
Competitive Suppliers recognize that the Commission lacks the ability under the Federal Power Act to impose penalties and has supported Congressional action to correct that deficiency. Pending Congressional action, the Commission should not and cannot impose penalty schemes such as the proposed “make the market whole” approach. Setting aside the lack of legal authority, the marketplace cannot sustain the uncertainty caused by the Commission’s threat to unwind literally thousands of transactions across a market as a remedy for one seller’s illegal transaction or impose such costs on the individual seller. This situation is untenable and would likely cause greater harm to the wholesale competitive market overall than many of the violative behaviors delineated in the proposed Market Behavior Rules.
B. The 60-Day Time Limitation for Filing Complaints Is Proper and Necessary
As Competitive Suppliers stated in initial comments, the 60-day time limitation for bringing complaints to the Commission allows for transactional finality and is absolutely necessary for certainty in the marketplace. This certainty must extend not only to the time period in which complaints may be filed, but to the type of complaints bound by that time period. An open-ended risk that the Commission might question any transaction at any time in the future – perhaps in response to a Hotline complaint made by a market participant otherwise precluded from or no longer eligible to file a complaint itself – will have a chilling effect on the market. Market participants and other state or federal authorities cannot be given an unfettered ability to overlook their due diligence obligation to determine that a transaction violates the proposed Market Behavior Rules within a finite timeframe. The limitation as proposed includes a reasonable waiver if and when the party bringing the complaint could not reasonably have known about the transaction within that time frame, which provides consumers with sufficient opportunity for relief from possible market behavior abuses.
The current legal requirement for a prospective refund effective date under FPA Section 206 gives parties notice that certain transactions are subject to refund. Any behavioral rules adopted in this proceeding must put market participants on notice as to acceptable and unacceptable conduct under their market-based rate authority. This notice requirement is crucial to the effectiveness of any behavioral rules, and a proscribed time limitation on all complaints of violations of the behavioral rules is integral to and consistent with the notice requirements of the Federal Power Act.
C. Parties Must Make a Threshold Showing to File a Complaint against a Market Participant
In addition to the time limitation imposed on complaints, Competitive Suppliers reiterate that an entity filing a complaint based on the Market Behavior Rules must make a prima facie case before the Commission will consider the case or set it for hearing. This must include an estimation of the alleged unjust and unreasonable profits based on the specific behavioral violation. Such specificity, quantification and evidentiary support of individual harm resulting from the prohibited transaction should be required to allow the Commission to conduct an initial review of all complaints in order to prevent frivolous filings. Frivolous or “placeholder” complaints filed in order to circumvent time limitations must be dismissed swiftly by the Commission.
D. A Nationally-Imposed Real-Time Must Offer Obligation is Inappropriate
Certain California parties have suggested that the Commission impose an explicit Real-Time Must Offer Obligation like that in California as a permanent and fundamental condition for all market-based rate authority. This proposal is improper and unacceptable. In California, the Commission initially approved this obligation as a temporary measure in April 2001 to directly respond to the market anomalies that occurred in California during 2000. The California Must Offer Obligation was never intended to become a permanent market feature even of the California Independent System Operator (CAISO); rather, it was intended to help stabilize a still volatile marketplace. In the absence of such market anomalies, this obligation constitutes an improper taking of capacity without compensation.
The Commission has itself clarified that the California Must Offer Obligation is intended as a temporary fix for that specific troubled market:
We find that extending the current West-wide must-offer requirement is necessary to ensure reliable energy supplies and continued short-term market stability. We will consider removing the must-offer requirement in the future after we determine that adequate infrastructure and market design improvements have been made and Western market prices reflect competitive outcomes on a more consistent basis.... The failure of [California’s market progress] leaves the Commission with little choice but to extend market protections. The Commission does not make this decision lightly. Our continued intervention subjects the market to additional pressures that we would prefer to avoid under other circumstances.
Hence, Competitive Suppliers urge the Commission to follow its own directive and dismiss outright the notion of a national Real-Time Must Offer Obligation. Extending such an obligation to any market outside of California contravenes the progress and complexity of many of the regional marketplaces and would ultimately damage the health and necessary interaction of market forces, precluding efficient investment. Such an obligation is a complicated and specific market element that must be tied to a complex set of market structures. It is both improper for consideration in this forum and improper as a national market feature.