Archive for the ‘Wholesale Energy Markets’ Category

FERC (presumably) Smug after Ninth Circuit Upholds Market-Based Rate Policy

Photo by Waldo Jaquith. Some rights reserved.

Late last week, folks at FERC probably popped some bottles of champagne when the U.S. Court of Appeals for the Ninth Circuit issued an opinion denying a petition challenging FERC’s Order No. 697, “Market-Based Rates For Wholesale Sales Of Electric Energy, Capacity And Ancillary Services By Public Utilities.”

Order No. 697, which became effective September 18, 2007, codified FERC’s standards for market-based rates by “providing a rigorous up-front analysis of whether market-based rates should be granted, including protective conditions and ongoing filing requirements in all market-based rate authorizations, and reinforcing its ongoing oversight of market-based rates.” The components of the rule were designed, according to FERC, “to ensure that market-based rates charged by public utilities are just and reasonable.”

However, not everyone thought Order No. 697 was the bee’s knees. Less than a year after the original rules were published, FERC filed Order No. 697-A, which responded to “a number of requests for rehearing and clarification of Order No. 697.” Mostly, FERC denied rehearing of the issues, though it did provide some clarifications.

Still unsatisfied, several petitioners filed a petition for review in federal appellate courts. The petitioners contended that “(1) that FERC, by relying solely on the market to regulate rates, has violated its statutory obligation to ensure that rates are just and reasonable; and (2) that the market-based rates policy, which allows sellers to file a market-based rate and does not require sellers to give sixty days advance notice of changes in market prices, violates the express terms of the FPA.”

The Court denied the petition, but not without a tip of the hat to the petitioners themselves in this rather touching conclusion:

The parties to this dispute raise policy issues of exceptional importance. We recognize that the questions here considered impact real-world energy markets, industries, and consumers. Plainly the well-being of consumers, and not regulatory inertia, should be the touchstone. But we emphasize that our role is limited by statute and the holdings of the Supreme Court. Our review is that of a federal appellate court, not a policy analyst. The question before us here is not whether we think market-based rates are a good idea; instead, it is whether the market-based rate policy embodied in Order 697 exceeds FERC’s authority as conferred by the FPA. Taking into account Chevron deference, the law of our circuit, other relevant precedent, and the direction of the Supreme Court as to how we should approach such administrative law issues concerning federal agencies, we conclude that Order 697, as presented to us in this petition, does not per se violate the FPA.

As law firm Van Ness Feldman put it (in a recent alert), “The case, Montana Consumer Counsel v. FERC, No. 08-71827, is a clear vindication of FERC’s market-based rate policy, from a court that has viewed market-based rates with suspicion.”

Akin Gump and King & Spalding have also recently published memos on the opinion. Future legal analysis of the decision can be found on knowlegemosaic’s Law Firm Memos search page.

FERC’s Proposed Data Improvements Aim to Enhance Market Monitoring and Transparency

Late last month, FERC concurrently released two Notices of Proposed Rulemaking (NOPRs) related to electronic tag (e-Tag) data associated with transactions in wholesale power markets.

The first NOPR (Docket No. RM10-12-000) proposes changes to “facilitate price transparency in markets for the sale and transmission of electric energy in interstate commerce” by requiring market participants that are currently excluded from the Commission’s jurisdiction under section 205 of the Federal Power Act (16 USC 824d) to file Electric Quarterly Reports (EQR) with the Commission. The proposal also requires such reports to include e-Tag ID data.

The second NOPR (Docket No. RM11-12-000) would require the North American Electric Reliability Corporation (NERC) to provide FERC with access to “complete electronic tagging data used to schedule the transmission of electric power in wholesale markets.” FERC claims that this information – which would not be made publicly available – would “aid the Commission in market monitoring and preventing market manipulation, help assure just and reasonable rates, and aid in monitoring compliance with certain business practice standards.”

Law firms Van Ness Feldman and Hogan Lovells have published legal alerts summarizing the proposals here and here, respectively. Hogan Lovells predicts that the proposed changes, if passed, will “significantly enhance FERC’s market oversight and enforcement capabilities.”

FERC Approves Final Rule on Demand Response Compensation

Photo by woody1778a. Some rights reserved

Two days ago, FERC issued the final version of a rule that establishes “a specific compensation approach for demand response resources participating in the organized wholesale energy markets administered by RTOs and ISOs.”

The rule is guided by the notion that a wholesale energy market is only as effective and competitive as the active participation of its customers in the form of “demand response.” (Demand response means a reduction in the consumption of electric energy by customers in response to an increase in the price of electric energy or to incentive payments designed to induce lower consumption of electric energy.) Because demand response can help improve the function of these markets, some demand response resources are also compensated for their participation.

To date, compensation schemes have widely varied across Regional Transmission Organization (RTO) and Independent System Operator (ISO) organized wholesale energy markets. FERC’s final rule creates a uniform system for compensating demand response resources. The organized wholesale market operators will be required to make compliance filings by July 22, 2011.

You can see the rule in its originally proposed form here.

Preventing Insider Trading and Market Manipulation in Wholesale Energy Markets

Late last week, international law firm WilmerHale published a very thorough review of the European Commission’s (EC) recently proposed rules aimed at preventing abuse in wholesale energy markets.

Image by William Maver. Some rights reserved.

The proposal hopes to close gaps in the “existing regime” that were found upon inspection by the Committee of European Securities Regulators and the European Regulators Group for Electricity and Gas (at the request of the EC). While the EC’s  Market Abuse Directive and the Markets in Financial Instruments Directive prohibit manipulation in financial markets, these Directives fail to cover the 75% of energy transactions that occur outside of energy exchanges.

According to the EC’s press release, the new rules specifically prohibit:

  • use of inside information when selling or buying at wholesale energy markets.
  • transactions that give false or misleading signals about the supply, demand or on prices of wholesale energy market products
  • distributing false news or rumours that give misleading signals on these products.

While the EC claims to be unaware of any particular cases of price manipulation in the EU, they are quick to make an example of the US. Amaranth Advisors LLC, an American hedge fund, “accumulated massive natural gas holdings in the form of derivatives […], pushing up prices and making huge profits. It is assumed that an Amaranth-style market manipulation would inflate gas and electricity bills of European businesses and industrial users by some Euro 1 billion.”

At least we had the rules to deal with it (eventually) – 18 CFR § 1c became effective in January 2006 after the passage of the Energy Policy Act, and was made famous (well, in certain circles) by the case against Amaranth and subsequent enormous settlement in 2009. Let’s hope for the EU’s sake that their new rules have a more preventative effect.

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