A no-holds-barred interview with the electric industry’s chief architect of wholesale electric market design.
FERC's Tough New Rules: Survival Skills for A New Era
any action, transaction, or conspiracy for the purpose of impairing, obstructing or defeating a well-functioning market.” 7 Thus, in FERC’s view, the regulations “will permit the commission to police all forms of fraud and manipulation that affect natural gas and electric energy transactions and activities the commission is charged with protecting.” 8
In a related vein, EPACT added a new §23 to the NGA and a new §220 to the FPA. These new provisions direct FERC to facilitate price transparency in natural-gas and wholesale electric markets, as well as in energy transportation and transmission markets, having due regard for the public interest, the integrity of those markets, fair competition, and the protection of consumers.
FERC has broad latitude to decide what information it needs to facilitate price transparency. FERC also has the authority to prescribe rules that it determines are “necessary and appropriate” to require the timely provision of information about the availability and prices of wholesale natural gas, wholesale electric energy and transmission service to FERC, state commissions, buyers and sellers of wholesale natural gas, and the public. 9 In determining the extent and timing of information that must be provided, FERC is directed “to ensure that consumers and competitive markets are protected from the adverse effects of potential collusion or anticompetitive behaviors that can be facilitated by untimely public disclosure of transaction-specific information.” 10 Additionally, FERC is empowered to obtain information needed to facilitate price transparency from “any market participant,” except for natural-gas producers, processors, and natural-gas users with “a de minimis market presence” on the gas side and on the electric side, entities that have “a de minimis market presence.”
In addition to the market manipulation, transparency, and reliability obligations added by EPACT, a myriad of pre-existing substantive requirements for market participants now carry with them the threat of civil penalties of $1 million per violation per day for non-compliance. These include:
• Affiliate Standards of Conduct;
• Market Behavior Rules; and
• Affiliate Codes of Conduct.
Another major area of concern involves the rules on interlocking directors. These limitations are found in Part III of the FPA. Because EPACT extended the new civil penalty authority to Part II of the FPA and not other parts of that act, it does not appear to us that violations of these rules would subject a market participant to the legislated civil penalties. However, FERC has been very active in this area recently and it remains a significant area of concern.
A substantive discussion of all of these, as well as other obligations imposed on the energy industry is beyond the scope of this article. The important point is that these requirements are out there waiting to trip up participants that don’t actively take steps to ensure compliance.
A key energy market characteristic that is likely to continue for at least the next year is tight fuel supply conditions. As noted in FERC’s State of the Market 2004 Report, when fuel supplies are tight (as indicated by relatively low natural-gas storage fill compared to average) prices