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| Energy Currents: "FERC Proposes Rule to Increase Reporting Requirements for Market-Based Electricity Sellers" |
| October 21, 2004 |
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On October 6, 2004, the Federal Energy Regulatory Commission ("FERC" or "Commission") issued a Notice of Proposed Rulemaking ("NOPR") that seeks to modify the market power reporting requirements applicable to wholesale electricity sellers operating with market-based rate authority ("Market Sellers"). Pursuant to Section 206 of the Federal Power Act, the Commission proposes to amend its regulations and to modify existing market-based rate tariffs to require Market Sellers to report changes in status within 30 days. The Commission also seeks to establish new regulations that would define the circumstances under which Market Sellers would be required to report such changes in status.
The NOPR arrives on the heels of a recent Ninth Circuit decision recasting the Commission's refund authority over market-based rate transactions as inherent to the market-based rate regime itself (see Vinson & Elkins' Energy Currents, 9/23/04). Contrary to long-settled expectations, the Ninth Circuit's opinion suggests that the FPA's regulatory framework does not provide the rate certainty that Market Sellers have relied upon in investing in electric generation assets. According to the Ninth Circuit, FERC possesses the discretion to review prior transactions and potentially order refunds for any period during which a Market Seller fails to comply with certain conditions of its market-based tariff, irrespective of the statutory limitations otherwise placed on FERC's refund authority. Given the NOPR's focus on establishing new requirements for change in status reporting, Market Sellers have a significant interest in participating in this FERC proceeding.
Areas for Comment Within the Commission NOPR
1. The Commission Seeks Comment on the Types of Changes in Market Power Status That Should Trigger a Reporting Requirement
The NOPR proposes to standardize the changes in status that would trigger Market Sellers' obligation to report to FERC. Notably, the Commission proposes to introduce an explicit reference to "control" in its existing market-based rate change in status provision. Accordingly, the NOPR identifies two non-exclusive events that would qualify as a change in status under the proposed regulations: "(i) Ownership or control of generation or transmission facilities or inputs to electric power production, or (ii) Affiliation with any entity not disclosed in the application for market-based rate authority that owns or controls generation or transmission facilities or inputs to electric power production or affiliation with any entity that has a franchised service area." According to the NOPR, the proposed references to "control" within the change in status provision are intended to capture arrangements, contractual or otherwise, granting Market Sellers decision-making control over sales of electric energy. The NOPR seeks comment on the introduction of this "control" concept into its change in status provision, including comment on the types of arrangements that could give rise to such control. Beyond the ownership or control concept, the Commission seeks comment on contractual or other arrangements, such as marketing alliances and tolling arrangements, that should be required to be reported.
The NOPR also seeks comment on potential methodologies under which the Commission could refine the general requirement to report relevant changes in status. For example, the Commission seeks comment on a possible threshold standard of materiality that arrangements would have to meet before triggering the proposed reporting requirement. Additionally, the NOPR asks for comment on the possibility of tying Market Sellers' reporting obligations to a defined threshold level of added generation below which no reporting would be required.
2. The Commission Seeks Comment on the Technical Aspects of a Proposed 30-Day Reporting Requirement for All Market Sellers
The NOPR proposes to require reporting of changes in status no later than 30 days after the relevant change in status. Market Sellers that previously had the option of reporting such changes every three years, in conjunction with or in lieu of their updated market analysis, will not retain that choice. Every Market Seller will be required to promptly report any relevant change in status. The Commission also reserves the right to order Market Sellers to conduct a market power analysis at any time.
The NOPR proposes a system whereby Market Sellers would report potential changes in status by submitting a transmittal letter detailing the change in status and its effect on the four prongs of FERC's market power test. Even in cases in which a Market Seller does not believe that a change in status has affected the conditions of the market power analysis underlying its market-based rate authority, the NOPR would require the Market Seller to report the change in status and justify its conclusion.
The NOPR seeks comment on the appropriateness of the requirement that changes in status be reported within 30 days.
Consequences of the NOPR for Market Sellers
If FERC adopts the proposed regulations as set forth in the NOPR, Market Sellers could face a significant additional burden in satisfying the new reporting requirements, as well as increased risks for failure to comply. According to the Ninth Circuit opinion, a Market Seller's failure to comply with its market-based tariff may provide FERC with the discretion to order refunds for prior market-based rate transactions that otherwise constitute final sales under the FPA. Therefore, it is possible that Market Sellers would be subject to refund liability for failing to report a change in status. To minimize potential liability, a Market Seller would first be required to scrutinize its application and subsequent filings to review the representations that have been made to FERC regarding market power. The Market Seller would then need to determine whether current circumstances compel immediate reporting under the new regulations. Thereafter, compliance with the proposed regulations would require on-going review of the circumstances related to the Market Seller’s market power. The burdens and risks associated with ongoing compliance will increase to the extent the reporting requirements are vague and ill-defined.
This NOPR proceeding provides Market Sellers with a framework for clearly defining their reporting obligations so as to minimize the risk of future refund liability related to reporting changes in status. The language currently proposed by the NOPR leaves open the possibility that Market Sellers will be required to report changes in status left undefined by the Commission's regulations. With the exception of the proposed references to control in the Commission's current change in status provision, the NOPR has placed responsibility for defining the relevant changes in status on the industry participants who choose to file comments. Especially in light of the many ways in which a Market Seller’s market power status can change irrespective of its own activities, successful management of potential refund liability will require greater specificity regarding the relevant changes in status than the NOPR's current provisions offer. Market Sellers would be well advised to use the comment period to raise this issue and seek a more definite enumeration of the relevant changes in status. Without such a commitment from the Commission, Market Sellers could be forced to constantly monitor their market behavior and to report a broad array of circumstances that might conceivably be considered changes in status, so as to avoid refund liability arising from the failure to report a change in status that the Commission only later deems a violation of the market-based tariff.
Market Sellers may also wish to comment on other specific issues identified by the NOPR. For example, the NOPR refers to the possible use of a threshold standard for added generation, below which reporting would not be required. Similarly, the NOPR asks for comment on a threshold standard of materiality for arrangements among companies that would trigger a change in status. Market Sellers would benefit from such standards being clearly defined because they would be better positioned to avoid compliance-related refund liability and to reduce the uncertainty attached to future market arrangements. If employed properly, such thresholds could balance the regulatory burden on industry participants and the Commission' obligation to monitor market behavior to ensure that competitive pricing prevails.
The NOPR also invites general suggestions regarding ways to improve the utility of reported information and reduce the burden on reporting companies. Market Sellers may be interested in suggesting alternatives to company-specific reporting requirements that would satisfy the Commission' goal of ensuring just and reasonable rates through competitive wholesale electricity markets, while avoiding the imposition of new compliance obligations on individual Market Sellers.
As noticed in the Federal Register, comments are due in Docket No. RM04-14-000 by November 15, 2004.
Energy Currents is an online publication of the law firm of Vinson & Elkins LLP. It is intended to afford notice to our clients and friends of certain developments. It is not intended, nor should it be used, as a substitute for specific legal advice regarding particular factual situations.
If you have any questions regarding Energy Currents, please contact the following:
Washington, DC:
Stephen Angle
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