There are so many interesting issues that I’d like to post on, but like the Commission, I’ll be taking an August recess – part work, part play. I’ll see you back here in September!

On July 8, I attended FERC’s compliance workshop which was, surprisingly filled to overflowing. While I applaud FERC for all of its outreach efforts, in enforcement and all other matters, quite honestly, I don’t see the use for panels like these since folks are often reluctant to address the really tricky issues. For example, at Tuesday’s event, all of the panelists deflected questions about the relationship of FERC’s enforcement jurisdiction to that of other agencies such as the CFTC.

This particular program lasted three hours, actually an hour under schedule As far as I could tell, it didn’t even need to last that long since Commissioner Mohler was able to summarize the key points in a five minute closing statement.

For those who missed the conference, which wasn’t transcribed, here’s the takeaway:

According to industry representatives on the panels, the key features of an effective compliance are buy-in from the top, adequate employeee training that avoids the problem of “training fatigue” and visibility and accessibility of compliance staff.

As for what FERC can do, panelists believed that the FERC help desk represented a good start. But panelists also asked FERC to provide more guidance on its priorities and additional clarity when interpreting how it will enforce its regulations. At least one panelist expressed a desire for FERC to create a matrix, similar to the one designed by NERC, that lists violations and the corresponding degree of seriousness. One attendee expressed that the RTOs take inconsistent positions on their willingness to offer compliance guidance or interpret their regulations, and asked FERC to work with the RTOs to help establish consistent practices.

FERC left the record open for two weeks to accept additional written comments.

FERC decisions don’t often find their way up to the Supreme Court. With the complexity of the issues involved in FERC appeals, the federal courts of appeal that review FERC decisions can barely muster up the interest to discern the applicable precedent, let alone depart from it so substantially as to give rise to a circuit split that would catch the Supreme Court’s eye. Indeed, you need to go back half a decade to find the two most recent Supreme Court cases involving Part II of the Federal Power Act – and at least there, the cases raised the kind of juicy preemption issues that courts enjoy sinking their teeth into. See Entergy La. v. La PSC, 539 U.S. 39 (2003)(holding that FPA preempts state commission from blocking of costs allocated in FERC tariff); New York v. FERC, 535 U.S. 1 (2002)(affirming FERC Order No. 888, finding that FPA preempts state regulation over transmission without regard to wholesale or retail distinction).

So what compelled the Supreme Court’s to take on Morgan Stanley Capital Group v. PUD #1 of Snohomish County which revolves around the somewhat technical Mobile-Sierra doctrine and the dichotomous public interest/just and reasonable standard of contract review (or presumption, as the Court now calls it) that has since evolved? The Ninth Circuit. According to n. 7 of the majority opinion, up until the Ninth Circuit’s erroneous decision, the circuit courts’ understanding of the Mobile Sierra doctrine was so uniform that no circuit split concerning its meaning arose. At the same time, while rejecting the Ninth Circuit’s view of the Mobile Sierra, the Court affirmed the result which means that the contracts return to FERC for further review. Continue below the jump for the details of the ruling.

The case originated in 2000-2001, in the midst of the California energy crisis. With prices out of control Snohomish signed a 9 year power purchase contract with Morgan Stanley at a rate of $105/MWh. Though higher than the historic average of $24 MWh, the contract rates were substantially lower than spot market prices, which peaked as high as $3000/Mwh. Once the crisis abated, Snohomish asked FERC to modify the contract arguing that Mobile Sierra did not apply to the contract’s market based rates as they had not been initially approved by FERC. And even if Mobile Sierra did apply to market based rates, Snohomish contended that the contract modification was warranted because the contract rates were so high that they violated the public interest. Later, Snohomish would add a third claim — that the contract was not entitled to the Mobile Sierra presumption because it was formed at a time when energy markets were, according to a FERC staff report, dysfunctional. Ultimately, both the ALJ and FERC rejected these claims and refused to modify the contract.
Snohomish took the case to the Ninth Circuit, which overturned FERC’s order. The Ninth Circuit held that rates set by contract (whether pursuant to a market-based tariff or not) are presumptively reasonable only where FERC has had an initial opportunity to review the contracts under the just and reasonable standard at the time they are filed. As part of its initial review of rates, the court said that FERC must inquire into “the market conditions in which the contracts at issue were formed. Second, the Ninth Circuit held that even assuming that the Mobile-Sierra presumption applies, the standard for overcoming that presumption is different for a purchaser’s challenge to a contract, namely, whether the contract rate exceeds a “zone of reasonableness.”

The Supreme Court granted cert. and in a 5-2 ruling (with Ginsburg concurring and Roberts and Breyer not participating), rejected the Ninth Circuit’s reasoning, but affirmed the results. Below are the salient points of the opinion:
Majority

1. The Court reaffirmed that there is only one statutory standard for assessing wholesale electricity rates, whether set by contract or tariff–the just-and-reasonable standard. While Mobile Sierra does not change the just and reasonable standard, neither does it obligate FERC to review contracts to ensure that they are just and reasonable, as the Ninth Circuit erroneously found. Instead, Mobile Sierra embraces the proposition that contracts negotiated by sophisticated parties at arms length are presumptively just and reasonable and can be abrogated only by showing that the contract will pose serious future harm to the public interest. In addition, where “it is clear that one party to a contract engaged in such extensive unlawful market manipulation as to alter the playing field for contract negotiations, the Commission should not presume that the contract is just and reasonable,” said the Court.

The Court’s view of Mobile Sierra differs from that of FERC, which has long regarded Mobile Sierra as establishing a standard of review for contract modification rather a presumption of just and reasonableness. Analytically, the Court’s interpretation aligns the Mobile Sierra doctrine more closely with the FPA’s statutory “just and reasonable language.” At the same time, the ruling confers “just and reasonable” status on all arms length, negotiated contracts, thus (in the words of the dissent) “hobbling” FERC’s ability to define the just and reasonable standard for itself.

2. The Court clarified that the Mobile Sierra doctrine applies to market based rates and other rate contracts not subject to initial review by FERC, and also applies irrespective of whether the buyer or seller seeks a modification.

3. The Court found that FERC did not adequately consider the future burden to consumers and possible unlawful market manipulation by the sellers which might have tainted the negotiations giving rise to the rates. Accordingly, the Court remanded the case to FERC to evaluate a causal connection between unlawful activity and the contract rate. But the Court concluded: “Where, however, causality has been established, the Mobile-Sierra presumption should not apply.”

Dissent

1. The dissent criticized the majority for creating a “pratically insurmountable” presumption that rates set by contract are just and reasonable, a result not supported by Mobile Sierra.

2. The dissent argued the Court should have given FERC more flexibility on remand to examine all factors that might be relevant to evaluating the contract rate, such as natural disasters and market manipulation by entities not parties to the challenged contract.

3. From the dissent’s perspective, though FERC technically won the case, “it has paid a tremendous price:

The Court has curtailed the FERC’s authority to interpret the terms “just and reasonable” and thereby substantially narrowed FERC’s discretion to protect the public interest by the means it thinks best. Contrary to congressional intent, FERC no longer has the flexibility to adjust its review of contractual rates to account for changing conditions in the energy markets or among consumers.

So what’s the bottom line? The Morgan Stanley decision represents a big victory for the sellers who may have lost some ground in the short run, but ultimately, have won the war. True, they must return to FERC to defend the contracts with Snohomish but they can move forward with full assurance that all other arms-length negotiated contracts remain impervious to modification. As for FERC, the dissent correctly recognizes that the ruling curtails FERC’s discretion. At the end of the day, Snohomish’s claims survive (for now), but Mobile Sierra still thrives.

Just a week after urging FERC to investigate whether Edison Mission continued to engage in a questionable trading pattern that the company said had been discontinued, the Illinois Attorney General Lisa Madigan withdrew the motion, reports the Baltimore Sun.  Seems that new data released by PJM confirmed what Edison earlier: claimed the plants involved in the suspicious activity are not owned by Edison.  While it’s tough to admit a mistake, entrenchment in an untenable position can harm the credibility of one’s entire case.  So Madigan took the right approach by quickly dismissing the claim.

Still, neither Edison nor the FERC are off the hook. Madigan and multiple other entities — among them state commissions and industrial and consumer groups — continue to pursue their rehearing request of FERC’s approval of $9 million dollar settlement agreement with Edison.  The parties argue that by releasing Edison from liability associated with civil or administrative claims connected with the subject of the investigation, i.e., Edison’s alleged market manipulation, FERC’s settlement order unlawfully abrogated the rights of non-settling parties to pursue other remedies potentially available under the Federal Power Act such as refunds or disgorgement of profits.

A few weeks back, I posted about FERC’s $9 million settlement with Edison Mission to punish the company for wasting staff’s time with evasive and obstructionist tactics during FERC’s investigation of possible market manipulation. But the settlement order does not make any findings on whether the underlying offense, i.e., Edison’s “high offer” pricing strategy, violated market manipulation rules. Though the order doesn’t specify, because Edison claimed that it discontinued the high offer practice in April 2006 and agreed to spend $2 million on a compliance program, presumably FERC found it unnecessary to probe further.

But the state of Illinois believes that Edison Mission continued to use the high offer pricing scheme after April 2006. As such, the Illinois AS filed a petition with FERC for rehearing of the settlement order and asking FERC to reopen its investigation of Edison Mission, reports Trading Markets and Reuters. According to the Illoins AG’s petition, analysis of past PJM bidding records suggests that Edison continued the high offer pricing strategy at several plants long after the time it claims the practice had ceased. For its part, Edison denies that the unlawful transactions came from its units. The American Public Power Association and seven other state commissions and industrial and consumer groups within the PJM market moved to intervene in the proceeding and joined in Illinois’ request to reopen the proceeding.

In addition to asking FERC to reopen the investigation, the parties challenge one section of the settlement agreement that provides that Edison Mission will not be held liable for any civil or administrative claims associated with the subject of the investigation. The parties contend that this language potentially prevents non-settlement parties from filing a Section 206 complaint or seeking other relief such as refunds or disgorgement of profits for Edison’s conduct. Indeed, many of the pleadings rely heavily on Maine PUC v. FERC, the DC Circuit discussed here, which forbids FERC from approving a settlement that would deprive third parties of their statutory rights under the FPA.

Asking FERC to reopen an investigation based on emergence of new evidence is a relatively simple procedure, and based on the new evidence from Illinois regarding Edison’s continuation of its high pricing strategy, I think it’s likely that FERC will take a second look at this matter. From a procedural perspective, the rehearing requests are trickier, because only parties to the proceeding, i.e., intervenors can file for rehearing under Section 313(b). Because the Edison settlement resulted from a staff investigation, FERC never issued public notice or invited intervention. And as I described here, FERC recently stated that as a general rule, it will not allow third parties to intervene in enforcement proceedings, though it would consider exceptions in cases (such as this one) where third parties are directly affected by FERC’s resolution of a penalty, such as where they are potential recipients of disgorged profits.

Here, however, the parties are impacted by FERC’s approval of the settlement because it deprives them of their statutory rights to seek additional relief — for example, in the form of a complaint to recover unjust profits. As such, FERC needs to cleanse the settlement order of any language releasing Edison from future liability, or at a minimum, FERC must clarify that the language does not foreclose parties aggrieved by Edison’s conduct from seeking other forms of administrative relief. But once FERC modifies the settlement agreement, Edison has the option of disavowing the agreement as well. Though I can’t predict how all of this will resolve, one thing is sure: after this case, FERC isn’t likely to be rubber-stamping settlement agreements without closer review.

Over at my other energy blog, Renewables Offshore, I’ve done my best to offer my play by play predictions of the outcome of the Washington State Department of Ecology’s petition for review of FERC’s order issuing the first ever license for a marine renewable energy project . My bet: the license stands. What do you think?

Here’s my video introduction to FERC Fights, hopefully the first of many more to come (for those of you uninitiated in the video world, these are harder to tape in one cut than it looks!). Welcome!

According to this post at Energy Tech Stocks , FERC is forecasting that the nation’s power system will rely more heavily on demand response (DR) this summer than in previous years. Specifically, FERC forecasts that in the Northeast, DR is expected to roughly double from just under 2% of internal demand to 4% while in the Midwest and Upper Midwest, DR is expected to increase to 6% of internal demand, up 50% over last summer’s 4%.

The increasing reliance on demand response is cause for celebration for two different groups of “green” interests. The environmentally green embrace DR because it reduces consumption from emissions-spewing power plants and if used extensively, can allow utilities to put off construction of new power plants. And for those to whom green means dollars, a hot summer will make investment in DR companies hot as well.

Looks like FERC can rely on its alter-ego, NERC to enforce reliability standards. As reported by Reuters and Baltimore Sun, NERC issued the first two fines to two utilities for violating rules on vegetation management by failing to keep trees clear of power lines and causing brief power outages. Both of the offenders, Baltimore Gas and Electric and MidAmerican Energy self-reported the outages and accepted NERC’s respective proposed penalties: $180,000 for BGE and $75,000 for MidAmerican Energy.   Interestingly, BGE’s delay in clearing vegetation resulted, at least in part, from opposition by residents to its tree trimming practices, says the Baltimore Sun.   In addition to these penalties, NERC found that several other entities committed reliability violations, but did not warrante a penalty.  NERC’s orders can all be accessed at the Electric Reliability Law Blog.  FERC will have the final say over the penalties.

For some of my small clients, civil penalties of even $15,000 or $25,000 pose a substantial enough financial burden (and also carry risk of disbarment from doing business at FERC), that they’ll typically lodge a challenge.   Apparently, for a large company, amounts like $75,000 or $180,000 aren’t stiff enough to trigger opposition, even where there’s a plausible defense, as in BGE’s case where residents’ opposition stymied tree trimming efforts.  So what’s your opinion – what’s a large corporation’s pinch point when it comes to civil penalties?

FERC is holding a Compliance Workshop in Washington D.C. on July 8, 2008. The workshop will give interested participants to share perspectives and information on federal energy regulatory compliance and focus, in particular, on the elements of a sound compliance program. One or more of the Commissioners may attend the workshop. The workshop won’t be web-cast or transcribed, but I’m hoping to attend and either Live Blog the conference or Twitter it — though my fellow twitterers may die of boredom at my tweets! Let me know either by email or in the comments if you’ll be attending. I’d love to meet you. And if you can’t make it, but you’re interested in a particular topic, let me know that too either by email, carolynelefant@fercfights.com or in the comments below.