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Frontlines

Critics say FERC's filed rate doctrine is wrong for the times.
Fortnightly Magazine - July 2004

consumers? Whether it be stocks, bonds, shoes, or stereos, how can we presume that prices are "just" and forever barred from legal challenge, simply because they were sanctified

FERC faults California's market design. Eliminating the filed-rate doctrine would lead only to frivolous lawsuits, FERC Chairman Pat Wood has said.

Yet when a crisis similar to California's energy bust struck the nation's mutual fund industry, New York Attorney General Eliot Spitzer found the way open to prosecute the abuses in the financial sector on behalf of his state's consumers. Spitzer could seek recompense even when the overseeing agency, the Securities and Exchange Commission, was reportedly slow (just like FERC) and perhaps in some cases even ignorant of the white-collar crimes Spitzer eventually discovered.

Where's the danger in that? In 1996, when Congress amended the Telecom Act, it chose to allow state law remedies that were previously barred under the filed-rate doctrine.

A Computer Malfunction?

Consider this amusing, nearly comic twist to the filed-rate doctrine that has emerged from the Northeast, where competitive spot markets hold sway.

In FERC , ISO New England is proposing to recalculate the market-clearing price for power for all nodes and all hours (7 a.m. to 11 p.m.) for the day-ahead market of April 19, 2004. It says it used incorrect information to operate the computer algorithm that generated locational marginal prices (LMPs). Power traders oppose the ISO because they say retroactive changing of the market prices at this stage would violate the filed-rate doctrine.

Here's what happened. Operation and maintenance plans for April 19 called for outages at two transmission lines on that day, to make repairs. In reality, the outages were scheduled to occur sequentially, to minimize service disruption. But someone (a lineman?) supplied incorrect info to the ISO. The ISO was told that the outages would occur simultaneously.

Supplied with faulty information, the ISO programmed the incorrect info into its computer-based system that receives bids and calculates the clearing price. Extremely high prices resulted from the error. The ISO investigated, found no manipulation, and published the high prices.

Weeks later, the ISO figured out what happened. It claims that the prices for the day must now be re-calculated retroactively; the original prices were erroneous because they did not reflect the correct "factual situation." Thus, the ISO says that this is a permitted exception to the filed-rate doctrine. The rate was based on incorrect facts. Therefore, it is proper now to readjust the rate.

Traders say ISO rules state that LMP prices must reflect "the expectation of the ISO" at the time in question. In this case, they say the ISO "expected" both transmission lines to be down at the same time. The prices therefore are correct, even though the "expectation" upon which that calculation was done was based on a mistake. The ISO answers that its "expectation" was wrong, and therefore the prices must be wrong, and must be corrected retroactively.

The traders counter that if you accept the ISO's reasoning, then any price for any single day whatever will always be exposed to the risk