Where Is Super-FERC?

Deck: 

Sweeping revisions to Order 888 are needed before true wholesale competition can take place.

Fortnightly Magazine - June 2006

There’s been a lot of talk in the industry about new super powers for market enforcement, conferred by Congress on the Federal Energy Regulatory Commission (FERC) in last year’s energy legislation.

Even FERC Chairman Joseph T. Kelliher, at several conferences, has waxed ecstatic about them, saying, in effect, that FERC is ready to go after the market manipulators wherever they are.

Certainly, the new powers appear impressive. The Energy Policy Act of 2005 (EPACT 2005) expands FERC’s civil and criminal penalties, makes market manipulation unlawful, and allows FERC to initiate investigations (public or private) on its own initiative or after third-party complaint, to name just a few items.

With powers like those, one might expect that FERC by now would have captured scores of energy criminals and masterminds—that the markets of the U.S. energy industry once again are safe for trading.

But this hasn’t been the case entirely. Many believe that FERC still labors at a disadvantage.

Like the kryptonite that rendered Superman powerless, some believe that lack of clarity in the 10-year old Order 888 has rendered FERC powerless to detect wrongdoing in markets governed by the pro forma Open Access Transmission Tariff (OATT).

The revelation that the OATT doesn’t prevent abuse may not be news to readers. Chairman Kelliher admitted as much in his statement early last year on reforming Order 888: “In the past, the commission has concluded that the OATT no longer prevents undue discrimination and preference. That conclusion was reached as long as five years ago in Order 2000, the RTO order. I think what we are really doing here today is picking up where the commission left off five years ago with Order 2000.”

FERC’s Notice of Inquiry (NOI) initiated last year (RM05-25) asks a host of questions on various aspects of the OATT, and some concern areas that generators and transmission customers have been complaining about for many years, such as transmission pricing, the obligation to expand capacity, joint transmission planning and joint ownership, rollover rights, imbalances, and more. (See the January 2006 Commission Watch, “Tariff Tinkering,” by Bruce W. Radford, p. 27, for an overview of the issues involved.)

Much of the problem with the OATT is the lack of prescription. “Public utilities have come to differing interpretations of their OATTs and differing conclusions about what is necessary to comply with the commission’s rules,” Kelliher said. One sore spot for many market participants has been how utilities calculate available transmission capacity (ATC)— the heart of the issue, as utilities have been allowed to pick whatever method they prefer.

Some utilities filing responses to FERC’s NOI on Order 888 argue there is no problem, or one of such limited scope that major reforms are not needed.

The Edison Electric Institute (EEI) in reply comments wrote: “The comments submitted in response to the NOI did not present evidence of widespread undue discrimination that would warrant sweeping reforms to the commission’s pro forma [OATT] or making structural changes in the industry.” But without substantial standardization and reform, how will market participants in non-RTO regions know they are getting a fair deal?

Penalties, Penalties, and More Penalties

EEI, in its initial comments to the NOI, has proposed three steps that FERC could take on an industry-wide basis that would increase the transparency of transmission operations to allay any concerns that transmission customers might have. EEI proposed that:

• Transmission providers make their base-case load-flow studies available to potential customers (subject to reasonable security and confidentiality protections);

• The industry work through the North American Energy Standards Board to develop guidelines with respect to information that should be posted concerning denial of requests for transmission service; and

• The North American Electric Reliability Council (NERC) clarify what information should be posted concerning the reason for implementing transmission loading relief (TLR).

EEI believes that each of these proposals “if adopted, will increase transparency and reduce any perception, as unfounded as it is, of undue discrimination by transmission providers in responding to transmission requests.”

But Occidental Chemical Corp. believes greater transparency alone will not prevent undue discrimination and preference in the provision of transmission service.

Instead, Occidental takes a harder line. The company believes the OATT should make clear that transmission providers violating the OATT will be subject to penalties.

According to Occidental: “The OATT should be revised to provide for tariff-based sanctions against transmission providers that fail to meet specific requirements and/or engage in discriminatory behavior. In addition, the commission should clarify in the OATT that any violation by a transmission provider of its OATT obligations could result in the imposition of civil penalties.”

Occidental says the new civil penalty authority under EPACT 2005 was enacted by Congress to give the commission meaningful action in the face of discriminatory behavior by regulated utilities.

In addition, Occidental proposes revocation of market-based rate authority for transmission providers for certain OATT violations.

Meanwhile, EEI disagrees with the notion that the OATT should provide for civil penalties. The association believes that the penalties already provided for in the Federal Power Act and other laws should suffice, but many critics say that the existing penalties address only a fraction of potential tariff violations. And many believe any redefining of OATT provisions should focus on enforcement and penalties.

The Southern View: The Road Back to Unbundling

FERC commissioners promise that any reforms to Order 888 won’t serve as a backdoor re-entry for the now abandoned standard market design. But the suspicion persists nonetheless. In various comments, utilities like Southern Co. have urged FERC “not to view this rulemaking proceeding as a vehicle for mandating participation in an RTO, requiring the retention of an ICT, or ordering any other type of structural reform.”

The National Association of Regulatory Utility Commissioners (NARUC) has said: “States are in the best position to weigh the final impact of such changes on consumers, as well as other costs and benefits of structural separation. A state that chooses not to require structural separation should not be forced to do so.”

FERC’s Kelliher has made much of creating a more constructive dialog with states regulators. And it is still to be determined whether FERC will make small or large changes to the OATT.

But FERC in 1996 established that its landmark Order 888 would be the platform for wholesale competition. FERC has a duty to ensure that potential suppliers of electricity have equal access to the market—a duty that FERC must serve.

On another note, as a special to this year’s annual CEO edition, I’d like to highlight two insightful articles on the white-hot topics of interest rates and capacity market reform, on pp. 24 and 58, respectively. Given the financial nature of these issues, we’re pleased to announce our authors, Ian C. Connor and Larry Kellerman, come from Goldman Sachs, the firm that the Economist recently named the world’s leading investment bank.

From all of us at the Fortnightly, we hope you enjoy this year’s special CEO issue.