Fortnightly Magazine - February 15 1999

The FERC didn't say, but honest lawyers want to know.

December was a grim month for those wanting the Federal Energy Regulatory Commission to further define the limits of a "sham transaction," as that idea is understood under the Federal Power Act, which dictates when an electric utility must offer transmission services to power producers, marketers or other utilities.fn1 Of the three cases concerning this issue that were pending before the FERC on the first day of the month, all were resolved. But none was explained.

One case was simply withdrawn. Another was settled.fn2 The third, Prairieland Energy Inc.,fn3 was perhaps the most disappointing. The sham question squarely came before the commission, but the FERC dismissed the case on what was essentially a procedural technicality.

Honest lawyers are left wondering, when is it wheeling retail and when is it wholesale? Is every middleman a sham?

The Prairieland decision was disappointing for two reasons. First, it added an unnecessary procedural hurdle for those applying for wheeling orders under FPA Section 211. Second, it avoided addressing a murky area of the law that needs to be defined. The commission should have addressed the substance of the transaction, which would have assisted attorneys (and others) practicing in the brave new world of wholesale competition. Instead, it left parties structuring these transactions to fight it out on their own.

The Prairieland Case

At issue in Prairieland was a transaction involving four parties. Prairieland Energy Inc. (PEI) asked Commonwealth Edison to transmit power that PEI was buying from Griffin Energy Marketing LLC, for ultimate sale to PEI's only customer, the University of Illinois. ComEd refused, claiming - among other things - that the transaction was barred by Section 212(h) of the FPA, because PEI was created by U of I, a retail customer of ComEd, for the sole purpose of avoiding the FPA's ban against mandatory wheeling for purely retail or "sham" transactions. PEI then filed a Section 211 application with FERC, requesting that the commission order ComEd to provide the service.

Instead of addressing whether the transaction was contrary to Section 212(h) of the FPA, FERC claimed that PEI was not eligible even to ask for wholesale transmission. It ruled that PEI did not qualify as an "electric utility," as defined in FPA Section 3(22).fn4 According to the FERC, PEI "provide[d] no support demonstrating the indicia of a sale." The FERC cited People's Electric Cooperative ("People's"),fn5 in which it had ruled that the Byng Public Works Authority ("Byng") was an "electric utility" because it had established rate schedules, taken title to electricity, leased facilities for providing service, billed its customers, owned the meters and handled accounts payable and accounts receivable separately. Because PEI had not demonstrated that it did these things, it was not eligible to request a wheeling order.

Form Over Substance

An examination of Byng's physical characteristics as an "electric utility" illustrates the infirmities of FERC's analyses in Prairieland and People's. Byng had two part-time employees at the time of the ruling. The only facilities it owned were meters. One of the two "delivery