[Federal Register Volume 66, Number 228 (Tuesday, November 27, 2001)]
[Notices]
[Pages 59241-59243]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29450]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. EL01-118-000]


Before Commissioners: Pat Wood, III, Chairman; William L. Massey, 
Linda Breathitt, and Nora Mead Brownell; Investigation of Terms and 
Conditions of Public Utility Market-Based Rate Authorizations; Order 
Establishing Refund Effective Date and Proposing To Revise Market-Based 
Rate Tariffs and Authorizations

Issued November 20, 2001.

I. Introduction

    In this order, the Commission institutes a proceeding pursuant to 
section 206 of the Federal Power Act (FPA)\1\ to investigate the 
justness and reasonableness of the terms and conditions of market-based 
rate tariffs and authorizations \2\ of public utilities that sell 
electric energy and ancillary services at wholesale in interstate 
commerce. As discussed below, the Commission proposes to revise all 
existing market-based rate tariffs and authorizations to condition all 
public utility sellers' market-based rate authority to ensure that such 
rates remain just and reasonable and do not become unjust or 
unreasonable as a result of anticompetitive behavior or abuse of market 
power. The Commission intends to condition all new market-based rate 
tariffs and authorizations in a similar manner. The proposed condition, 
including the refund effective date, will protect customers from 
excessive rates and charges resulting from anticompetitive behavior or 
abuse of market power, as discussed more fully below.
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    \1\ 16 U.S.C. Sec. 824e (1994).
    \2\ Our use in this order of the term ``market-based rate 
tariffs and authorizations'' is intended to include all tariffs and 
rate schedules under which a public utility is authorized to make 
sales of electric energy and ancillary services at market-based 
rates.
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    Independently, in light of numerous concerns raised by market 
participants in cases involving market-based rates, the Commission 
intends to review its approach to evaluating market-based rate 
applications. The Commission will in the near future hold a series of 
outreach meetings with industry experts. The Commission expects that 
such meetings will inform a generic rulemaking proceeding on potential 
new analytical methods for assessing markets and market power. In 
addition, the Commission has initiated a proceeding on market design 
and market structure to reform open access transmission tariffs and 
standardize market design rules as appropriate.

II. Discussion

    In an order issued on November 1, 2000, we found that the 
``electric market structure and market rules for wholesale sales of 
electric energy in California were seriously flawed and that these 
structures and rules, in conjunction with an imbalance of supply and 
demand in California, have caused, and continue to have the potential 
to cause, unjust and unreasonable rates for short-term energy * * * 
under certain conditions.''\3\ In a series of subsequent orders, the 
Commission reiterated those earlier findings and, among other things, 
established conditions, including refund liability, on sellers' market-
based rate authority to prevent anticompetitive bidding behavior.\4\ In 
its June 19 Order, the Commission stated that abuse of market power 
cannot and will not be tolerated, that sellers will be subject to 
losing their market-based rates for engaging in anti-competitive 
conduct, and that ``as a condition of continued authorization of 
market-based rates, public utility sellers in the WSCC [Western Systems 
Coordinating Council] must agree to refunds, with interest pursuant to 
18 CFR 35.19a, of any overcharges resulting from anticompetitive 
bidding or behavior.''\5\
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    \3\ San Diego Gas & Electric Company, et al., 93 FERC 
para.61,121 at 61,349-50 (2000), reh'g pending (November 1 Order).
    \4\ San Diego Gas & Electric Company, et al., 93 FERC 
para.61,294 (2000), reh'g pending (December 15 Order); San Diego Gas 
& Electric Company, et al., 95 FERC para.61,115 at 61,360 (2001) 
(April 26 Order), order on reh'g, 95 FERC para.61,418 (2001), reh'g 
pending (June 19 Order); San Diego Gas & Electric Company, et al., 
96 FERC para. 61,120 (2001), reh'g pending (July 25 Order).
    \5\ June 19 Order, 95 FERC at 62,548, 62,565.
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    Based on our recent experience involving wholesale electric markets 
in California and the rest of the WSCC, and consistent with our 
intention to review the Commission's approach to evaluating market-
based rate applications and also to explore generic transmission and 
market design protocols, we believe it is necessary and appropriate to 
impose a tariff condition on all public utility sellers with market-
based rate authority. This tariff condition, described more fully 
below, will ensure that rates collected pursuant

[[Page 59242]]

to market-based rate tariffs and authorizations are just and reasonable 
and that customers have full refund protection against anticompetitive 
behavior or abuse of market power.\6\
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    \6\ The Commission proposes to apply the condition to all public 
utility sellers currently authorized to sell at market-based rates 
and to make the condition effective 60 days following publication in 
the Federal Register of the notice of the Commission's initiation of 
this proceeding. A list of such sellers and the docket numbers in 
which they previously received market-based rate authorization is 
attached as Appendix A. In the event that a public utility with 
market-based rate authority as of the date of issuance of this order 
is not listed in Appendix A, such omission is inadvertent and does 
not mean that a non-listed utility is exempt from the tariff 
condition proposed herein. The Commission does not, however, propose 
a specific date by which each such seller must make a compliance 
filing, but instead proposes to direct each seller to include the 
required revision to its tariff the next time that it files an 
amendment to the tariff or seeks continued authorization to sell at 
market-based rates. The date of submission of the compliance filing 
will not, however, delay the effective date of the condition.
    The Commission intends to condition all future market-based rate 
tariffs and authorizations in a similar manner.
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    In today's electric industry, the Commission is faced with power 
and energy sales markets that are increasingly interstate in nature and 
increasingly dependent upon one another, and with power and energy 
sales markets that are in varying stages of transition to competition 
at the wholesale and, in numerous states, the retail level. We have a 
responsibility under the FPA to monitor wholesale markets to ensure 
that jurisdictional rates in the markets remain within a zone of 
reasonableness. Our responsibility is to ensure that sellers not charge 
unjust and unreasonable wholesale rates, and that the market structures 
and market rules governing public utility sellers nationwide, and 
affecting the wholesale rates of such public utility sellers, do not 
result in, or have the potential to result in, wholesale rates that are 
unjust, unreasonable, unduly discriminatory, or preferential. We have 
become increasingly concerned about the potential that public utilities 
with market-based rate authorization might, under certain 
circumstances, exercise market power or engage in anticompetitive 
behavior that could result in unjust or unreasonableness rates.
    Although we do not find here that particular sellers have, for 
example, exercised market power, we propose to take steps now to 
minimize the potential for any such market power abuse or 
anticompetitive behavior and thus protect against possible unjust and 
unreasonable rates. Pursuant to FPA section 206, we are establishing a 
refund effective date 60 days from the date on which notice of 
initiation of this investigation is published in the Federal Register 
and seek comments on our proposal to revise all market-based rate 
tariffs and authorizations in effect to condition public utility 
sellers' market-based rate authority to prevent anticompetitive 
behavior or the exercise of market power. In particular, all such 
market-based rate tariffs and authorizations would be revised to 
include the following provision: ``As a condition of obtaining and 
retaining market-based rate authority, the seller is prohibited from 
engaging in anticompetitive behavior or the exercise of market power. 
The seller's market-based rate authority is subject to refunds or other 
remedies as may be appropriate to address any anticompetitive behavior 
or exercise of market power.'' We will also require that this provision 
be included in all new market-based rates tariffs and authorizations. 
Violation of such provision would constitute a violation of a tariff or 
rate schedule on file under FPA section 205, and the Commission would 
have the authority to address promptly potential instances of 
anticompetitive behavior or exercises of market power through the 
imposition of refunds or such other remedies as may be appropriate.
    Anticompetitive behavior or exercises of market power include 
behavior that raises the market price through physical or economic 
withholding of supplies. Such behavior may involve an individual 
supplier withholding supplies, or a group of suppliers jointly 
colluding to do so. Physical withholding occurs when a supplier fails 
to offer its output to the market during periods when the market price 
exceeds the supplier's full incremental costs. For example, physical 
withholding would occur when a generator declares a forced outage when 
its unit is not, in fact, experiencing mechanical problems, and when 
the market price is above the unit's full incremental costs. Economic 
withholding occurs when a supplier offers output to the market at a 
price that is above both its full incremental costs and the market 
price (and thus, the output is not sold). For example, we would expect 
that, during periods of high demand and high market prices, all 
generation capacity whose full incremental costs do not exceed the 
market price would be either producing energy or supplying operating 
reserves. Failing to do so would be an example of economic withholding. 
Withholding supplies can also occur when a seller is able to erect 
barriers to entry that limit or prevent others from offering supplies 
to the market or that raise the costs of other suppliers. Examples 
would include denying, delaying or requiring unreasonable terms, 
conditions, or rates for natural gas service to a potential electric 
competitor in bulk power markets.
    Should public utility market participants engage in prohibited 
behavior, their rates will be subject to increased scrutiny by the 
Commission, and to potential refunds or such other remedies as may be 
appropriate. This could result in further conditions or restrictions on 
their market-based rate authority, including, for example, prospective 
revocation of the market-based rate authority of the seller or any of 
its affiliates, or conditions precluding the seller from selling at 
market-based rates to its affiliate.
    We believe that our proposal herein is necessary to ensure that 
rates which are market-based remain just and reasonable, and to ensure 
that the Commission can adequately remedy any anticompetitive behavior 
or the exercise of market power that might subsequently be brought to 
the Commission's attention, and protect customers through refunds or 
other remedies where appropriate.
    We conclude that a trial-type hearing is not necessary to resolve 
the matter that is the subject of the proceeding that we are 
instituting here.\7\ Rather, we believe that a ``paper'' hearing will 
allow us to determine whether the condition we propose to add to all 
market-based rate tariffs and authorizations is appropriate given the 
state of today's wholesale electric markets. Further, given our 
statutory responsibility to ensure that rates under existing market-
based rate tariffs and authorizations remain just and reasonable, we 
believe that expeditious resolution of this proceeding is critical. 
Accordingly, the Commission will provide interested entities an 
opportunity to file comments and reply comments regarding our proposal 
to

[[Page 59243]]

revise all market-based rate tariffs and authorizations in effect to 
condition public utility sellers' market-based rate authority to 
prevent anticompetitive behavior or the exercise of market power. 
Initial comments will be due 15 days from the date of this order, and 
reply comments will be due 15 days from the date of filing of initial 
comments.
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    \7\ The use of a ``paper'' hearing rather than a trial-type 
evidentiary hearing has been addressed in numerous cases. See, e.g., 
Public Service Company of Indiana, 49 FERC para.61,346 (1989), order 
on reh'g, 50 FERC para.61,186, opinion issued, Opinion 349, 51 FERC 
para.61,367, order on reh'g, Opinion 349-A, 52 FERC para.61,260, 
clarified, 53 FERC para.61,131 (1990), dismissed, Northern Indiana 
Public Service Company v. FERC, 954 F.2d 736 (D.C. Cir. 1992). As 
the Commission noted in Opinion No. 349, 51 FERC at 62,218-19 & 
n.67, while the FPA and the case law require that the Commission 
provide the parties with a meaningful opportunity for a hearing, the 
Commission is required to reach decisions on the basis of an oral, 
trial-type evidentiary record only if the material facts in dispute 
cannot be resolved on the basis of the written record, i.e., where 
the written submissions do not provide an adequate basis for 
resolving disputes about material facts.
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    In cases where the Commission institutes a section 206 proceeding 
on its own motion, as here, section 206(b) requires that the Commission 
establish a refund effective date that is no earlier than 60 days after 
publication of notice of the Commission's intent to institute a 
proceeding in the Federal Register, and no later than five months 
subsequent to the expiration of the 60-day period. We will establish a 
refund effective date of 60 days from the date on which notice of our 
initiation of this investigation is published in the Federal Register. 
The Commission is also required by section 206 to indicate when it 
expects to issue its final order. The Commission expects to issue a 
final order in this proceeding by the end of March 2002.

The Commission Orders

    (A) Pursuant to the authority contained in and subject to the 
jurisdiction conferred upon the Federal Energy Regulatory Commission by 
section 402(a) of the Department of Energy Organization Act and by the 
Federal Power Act, particularly section 206 thereof, and pursuant to 
the Commission's Rules of Practice and Procedure and the regulations 
under the Federal Power Act (18 CFR chapter I), the Commission proposes 
to revise all public utility sellers' market-based rate tariffs and 
authorizations, and to conduct the proceedings directed in Ordering 
Paragraph (B) below, as discussed in the body of this order.
    (B) Interested persons may submit to the Commission arguments and 
evidence as outlined in the body of this order 15 days from the date of 
this order. Replies may be made 15 days thereafter.
    (C) The Secretary shall promptly publish in the Federal Register a 
notice of the Commission's initiation of the proceeding under section 
206 of the FPA in Docket No. EL01-118-000.
    (D) The refund effective date established pursuant to section 
206(b) of the FPA will be 60 days following publication in the Federal 
Register of the notice discussed in Ordering Paragraph (C) above.
    (E) The Secretary shall promptly publish this order in the Federal 
Register.

    By the Commission.
David P. Boergers,
Secretary.
[FR Doc. 01-29450 Filed 11-26-01; 8:45 am]
BILLING CODE 6717-01-P