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One case was simply withdrawn.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 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 it as such, while giving a different reason. Even so, Prairieland raises more questions than it answers.

For instance, why was the FERC so adamant about asserting its jurisdiction in People's and avoiding it in Prairieland? Perhaps because in People's the transmitting utility and the retailer were working together, whereas in Prairieland they were diametrically opposed. Another question arises: Why did the FERC dismiss PEI's request so lightly? Perhaps it figured that U of I would receive direct access in 1999 under the restructuring law passed recently in Illinois, and did not wish to force the issue. Or perhaps the FERC would simply rather focus its attention elsewhere. Or, more likely, the FERC recognized that the transaction met the letter of the sham transaction provision, but arguably not the spirit.

Although PEI is an instrumentality of the state and would control a distribution system used to serve the retail customer, it appears to have been formed for the sole purpose of bypassing ComEd. Addressing the substance of this transaction would require the FERC to answer novel and difficult legal questions. For whatever reason, it may have preferred to avoid doing that. In the process, however, the FERC added an additional procedural requirement to Section 211 applications, that being the inclusion of a power sales agreement to prove that the applicant is an electric utility.

Alas, attorneys working in this area now are forced to wait until this issue comes before the commission again, only to hope for a decision on the substance of a transaction, rather than on the form of the application itself. As a regulatory body charged with interpreting the statutes it administers, the FERC should have seized the opportunity to further define this new and dynamic area of the law. Instead, it chose to drop the ball.

Jonathan Norling is a staff attorney for the Pacific Northwest National Laboratory, Portland, Ore. Prior to joining the Laboratory in 1998, Norling worked as an associate for Duncan, Weinberg, Genzer & Pembroke P.C. He can be reached at

1 Section 211 of the FPA allows "any electric utility, Federal Power marketing agency, or any other person generating electric energy for sale or resale" to apply to FERC for an order requiring a transmitting utility to provide transmission services to the applicant. 16 U.S.C. § 824j(a). Section 212(h) prohibits FERC from ordering wheeling directly to an end-user and prohibits transactions designed to circumvent the ban on mandatory retail wheeling. 16 U.S.C. § 824k(h).

2 On Dec. 1, 1998, Washington Water Power requested withdrawal of its pleadings in Docket Nos. TX97-2-000 and TX97-3-000. Also in December 1998, the Chicago Housing Authority sent a letter to FERC stating that it had reached a settlement of its case pending in Docket No. TX98-1-000.

3 Docket No. TX98-4-000, Dec. 28, 1998, 85 F.E.R.C. ¶ 61,446.

4 85 F.E.R.C. ¶ 61,446, slip op. at 5. Section 3(22) of the FPA defines an electric utility as "any person or state agency (including any municipality) which sells electric energy." 16 U.S.C. § 796(22).

5 Opinion No. 426, Sept. 16, 1998, 84 F.E.R.C. ¶ 61,229. Neither PEI nor ComEd had cited this decision in its pleadings.

6 The presiding judge found that all that had changed since Byng became involved in the transaction was that "a few meters have been added and a few lines have been leased or sold. The energy, purportedly sold by People's, flows from [People's wholesale suppliers] to end-users without any intervening action by People's as a 'wholesale supplier' or by

[Byng] ¼ as a supposed distributor of electric power and energy."

Id at 65,067.

7 The presiding judge believed that People's and Byng had entered into the transaction in order to evade the jurisdiction of the Oklahoma Commerce Commission (OCC). Apparently, People's wanted: (1) to add new loads without having to compensate Oklahoma Gas & Electric and Public Service Company of Oklahoma for any stranded investments; and (2) to charge rates lower than those allowed by the OCC. Id at 65,068.

8 76 F.E.R.C. ¶ 61,127 at p. 61,702 (1996) ("We do not see how the installation of duplicate meters to measure power that moves across [Southern California] Edison's wires to the same end users constitutes delivery within the meaning of the statute.").

9 77 F.E.R.C. ¶ 61,355 at p. 62,551 (1996).

10 See Cleveland Elec. Illuminating Co., 76 F.E.R.C. ¶ 61,115 at p. 61,559 (1996) and Southwestern Public Service Co. v. El Paso Elec. Co., 80 F.E.R.C. ¶ 61, 159 at p. 61,695, slip op. at 7 (1997).


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