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Fortnightly Magazine - February 15 1999

points" at which it took title to the electricity it bought from its sole supplier, People's Electric Co-op, was a pole traversed by a single-phase 7.2-kilovolt line. The pole marked the boundary between the co-op's "transmission line" and Byng's "distribution line." Byng leased distribution lines from People's for $1 per customer per year. Byng provided no transformation of the electricity. It was People's Co-op that received power from its wholesale suppliers, transformed the energy to household voltage and distributed it to end-users.fn6

People's and Byng, however, were able to convince FERC that Byng "sold" power to its customers, all of whom were retail customers of People's.fn7 With regard to the relationship between the sale in People's and the sale in Prairieland, FERC stated in a footnote that "Section 212(h) of the FPA ¼ is inapposite to this case, since the Commission is not conditioning an Order upon, or requiring the transmission of [sic] electric energy."

Now let's return to Prairieland. PEI had all, if not more, of the physical characteristics of Byng. It would own a meter used to measure power delivered to U of I; it would take title to the energy delivered by Griffin; and it would lease a distribution system over which it would deliver power to U of I. PEI's error was its failure to submit detailed information to the FERC regarding its power sale agreements with U of I. It might have done so, however, if it were afforded an evidentiary hearing before a FERC administrative law judge; that is where evidence of the agreements between Byng and its customers was presented. In essence, PEI's application was rejected because it did not include information about a transaction that would not fall under FERC jurisdiction in any event. In this way, the FERC opted for form (i.e., additional procedural requirements for Section 211 applications) over substance (i.e., addressing whether the transaction was a sham).

Unanswered Questions

In general, the sham rule prevents an end-user from setting up a "paper" utility in order to obtain electricity from an alternate supplier. Even so, the sham transaction rule in the FPA is somewhat confusing.

The FERC has interpreted this issue four times. In City of Palm Springs, it ruled that meters do not constitute a distribution system for purposes of serving the ultimate consumers of the transmitted electricity.fn8 In Suffolk County Electrical Agency, it said that the issue of whether the entity receiving the power would own or control a distribution system was unclear, and set the matter for hearing.fn9 Twice it has held that the provision was satisfied, and an order requiring transmission services was justified.fn10 It has never, however, stated or suggested that an applicant must submit detailed information regarding a retail sale. Nor has FERC ever addressed whether leased lines constitute a distribution system or whether a wholly owned subsidiary of a state corporation can be a legitimate utility under the first criterion. These were the difficult questions that FERC should have addressed in Prairieland.

Perhaps the FERC saw that the Prairieland deal was a sham and dismissed