[Federal Register Volume 68, Number 1 (Thursday, January 2, 2003)]
[Notices]
[Pages 88-89]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-33093]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket Nos. ER02-2170-000 and ER02-2170-001]


Before Commissioners: Pat Wood, III, Chairman; William L. Massey, 
and Nora Mead Brownell: Aquila, Inc.; Order Accepting for Filing and 
Suspending Power Sales and Purchase Agreement, Establishing Hearing 
Procedures, and Providing Guidance on Affiliate Sales Policy

December 20, 2002.
    1. In this order, we will accept, suspend, make effective subject 
to refund, and set for hearing, Aquila Inc.'s (Aquila) executed Master 
Power Sales and Purchase Agreement (Agreement) for the sale of electric 
energy to its affiliated power marketer, Aquila Merchant Services 
(AMS). This order establishes an evidentiary hearing to determine 
whether the price charged by Aquila for the affiliate sale to AMS under 
the Agreement addresses the Commission's affiliate abuse concerns; 
i.e., was not below the relevant market price. This order benefits 
customers because it provides guidance on the Commission's affiliate 
sales policy and ensures that customers are protected from affiliate 
abuse.

Background

    2. On June 26, 2002, Aquila filed the Agreement with the Commission 
for the sale of up to 70 MWh per hour of electric energy from Aquila to 
its affiliated power marketer, AMS, for the period June 28, 2002 
through August 31, 2002.\1\ The Agreement established the sale price as 
the highest of: (1) $32.00 per MWh; (2) 110 percent of the seller's 
incremental cost; (3) the seller's highest hourly priced sale during 
the hour; or (4) an hourly price tied to the ``Into Cinergy'' trading 
hub prices for that day, as published by Megawatt Daily.\2\ According 
to Aquila, this would ensure that the sale price under the Agreement 
would not be too low and could not result in harm to Aquila's captive 
ratepayers. Aquila requested an effective date of June 28, 2002.
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    \1\ Aquila stated that it filed the Agreement with the 
Commission because it involves a sale of electric energy from Aquila 
to an affiliated power marketer.
    \2\ Aquila stated that the sale price would be no lower than 70 
percent of the ``Into Cinergy'' index for hours between 6 a.m. and 
noon and between 8 p.m. and 10 p.m.; and 130 percent of the ``Into 
Cinergy'' index for hours between noon and 8 p.m. See June 26 
Transmittal at 2.
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    3. On August 23, 2002, Commission staff issued a deficiency letter 
requesting that Aquila: (1) Provide cost support for the $32.00 per MWh 
rate; (2) explain why ``Into Cinergy'' as published by Megawatt Daily 
is an appropriate index; and (3) further explain the 70 percent and 130 
percent multiplier. The deficiency letter also required that the 
Agreement be filed as a stand-alone rate schedule.
    4. During the period June 28, 2002 through August 31, 2002, Aquila 
went forward with the affiliate sale to AMS pursuant to the Agreement.
    5. On October 22, 2002, Aquila filed its response to the deficiency 
letter. It explains that the $32.00 per MWh rate was a negotiated rate 
floor to be utilized only during an hour when the ``Into Cinergy'' 
price, 110 percent of Aquila's incremental cost and the price in the 
highest priced Aquila off-system sale were all below $32.00 in a given 
hour. Aquila also claims that ``Into Cinergy'' is the appropriate index 
for the Aquila system because it represents the closest liquid trading 
point to the market in Missouri. According to Aquila, the only other 
alternative, the ``Into Entergy'' trading hub, is not liquid and there 
are frequent transmission constraints between Entergy and Missouri 
which cause a separation of market prices. In addition, Aquila explains 
that the 70 percent and 130 percent multipliers were developed as a 
proxy for converting the average 16-hour ``Into Cinergy'' trading hub 
market price into useful hourly prices.\3\ Further, Aquila states that 
in every one of the 36 hours of the Agreement under which energy was 
purchased, the sales price was higher than the relevant adjusted ``Into 
Cinergy'' price.\4\ Aquila also designates the Agreement as Aquila's 
FERC Rate Schedule No. 120.
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    \3\ Aquila states that the 70 percent multiplier discounts the 
16-hour ``Into Cinergy'' Hub price for the morning and evening hours 
when the typical hourly market is lower than the 16-hour average 
while the 130 percent multiplier applies a premium for the peak 
hours when the hourly market is above the average. It asserts that 
while it did not use a study to determine the 70 percent and 130 
percent multipliers, it determined that these numbers were 
conservative based on the actual hourly prices in the market. See 
October 22 Transmittal at 3.
    \4\ Aquila states that energy was scheduled during only five 
percent of the hours when the Agreement was operative, which it 
claims demonstrates that the pricing was not favorable to the 
purchaser. See October 22 Transmittal at 4. Aquila attaches an 
after-the-fact analysis of the hourly energy prices for the ``Into 
Cinergy'' hub as reported in Megawatt Daily for the 16-hour period 
of 6 a.m. through 10 p.m. for June, July and August 2002. See 
Attachment A, October 22 Transmittal.
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Notice of Filing

    6. Notice of Aquila's June 26, 2002 filing was published in the 
Federal Register, 67 FR 45,716 (2002), with comments, interventions or 
protests due on or before July 17, 2002. None was filed. Notice of 
Aquila's October 22, 2002 filing was published in the Federal Register, 
67 FR 67,165 (2002), with comments, interventions or protests due on or 
before November 12, 2002. None was filed.

Discussion

    7. A traditional public utility with market-based rate authority is 
prohibited from making sales to an affiliate absent prior approval from 
the Commission in a separate filing under section 205 of the Federal 
Power Act (FPA).\5\ The Commission requires that this prohibition be 
included in the utility's market-based rate tariff unless the 
Commission has otherwise authorized the utility to transact with its 
affiliates.\6\
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    \5\ 16 U.S.C. 824d (2000).
    \6\ See, e.g., AES Placerita, Inc. et al., 89 FERC ] 61,202 at 
61,613 (1999).
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    8. The Commission has also stated that affiliate abuse takes place 
when a traditional public utility and its affiliated power marketer 
transact in ways that result in a transfer of benefits from the 
traditional public utility (and its captive customers) to the 
affiliated power marketer (and its shareholders).\7\ Because sales of 
power between an

[[Page 89]]

affiliated power marketer and an affiliated public utility are not at 
arms-length and present the situations in which affiliate abuse may be 
the most prevalent, the Commission requires that no sale of power occur 
unless the Commission approves the transaction in a separate rate 
filing under section 205.\8\ In evaluating whether to approve a request 
to sell power to an affiliate where a traditional public utility, such 
as Aquila, makes sales to an affiliated power marketer, the Commission 
is concerned that such sales not be made at a rate that is too low 
(i.e., below market price).\9\
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    \7\ See, e.g., Heartland Energy Services Inc., 68 FERC ] 61,223 
at 62,062 (1994).
    \8\ See, e.g., Heartland Energy Services, Inc., 68 FERC ] 61,223 
at 62,064 (1994); Southern Company Services, Inc., 72 FERC ] 61,324 
at 62,047 (1995); Tucson Electric Power Company, 81 FERC ] 61,131 at 
61,623 (1997); Central and South West Services, Inc., 82 FERC ] 
61,001 at 61,003 (1998), reh'g denied, 85 FERC ] 61,444 (1998).
    \9\ See, e.g., Pinnacle West Capital Corp., et al., 91 FERC 
61,290 (2000); reh'g denied, 95 FERC ] 61,300 (2001). See also 
Detroit Edison Co., 80 FERC ] 61,348 (1997) (Detroit Edison), where 
the Commission allowed sales by a public utility to its affiliated 
power marketer subject to the following conditions: (1) The sale 
must be at a rate that is no lower than the rate it charges non-
affiliates; (2) the public utility must make the same offer to 
unaffiliated entities at the same time through its electronic 
bulletin board; (3) the public utility must simultaneously post the 
actual price charged to its affiliate for all transactions. Id. at 
62,198.
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    9. In the instant case, Aquila filed under section 205 of the FPA 
for authority to make sales to its affiliated power marketer pursuant 
to the terms and conditions of the Agreement. However, Aquila submitted 
its proposal two days prior to the service commencement date and 
proceeded to transact under the Agreement without prior Commission 
approval. As noted, initiating such a sale before receiving our 
authorization is not consistent with our precedent.
    10. Aquila submits that the sale price as established in the 
Agreement addresses the Commission's affiliate abuse concerns because 
it sets the sale price at the highest of: (1) $32.00 per MWh; (2) 110 
percent of the seller's incremental cost; (3) the seller's highest 
hourly priced sale during the hour or; (4) an hourly price tied to the 
``Into Cinergy'' trading hub prices for that day, as published by 
Megawatt Daily. Although Aquila attempts to demonstrate why the pricing 
protections proposed in the Agreement would produce a sales price that 
is not below the market price, the more appropriate question at this 
point in time, given that the term of the Agreement has concluded, is 
what harm, if any, captive customers have experienced as a result of 
the transactions. In particular, the key issue is whether the price 
actually charged for the sales in question under the Agreement 
satisfied the Commission's affiliate abuse concerns; i.e., was not 
below the relevant market price.
    11. Because we are unable to resolve this issue based on the record 
before us, we will require an evidentiary hearing. We encourage the 
parties to provide a diverse range of evidence for purposes of 
establishing relevant market prices. This should include benchmark 
evidence which shows the prices, terms and conditions of sales made by 
non-affiliated sellers or evidence of the prices that non-affiliated 
buyers were willing to pay for similar services from Aquila. 
Accordingly, we will accept the Agreement for filing, suspend it for a 
nominal period to become effective June 28, 2002, subject to refund, 
and establish an evidentiary hearing on the pricing issue. If Aquila is 
found to have transacted at a price below the relevant market price, 
the Commission will consider, among other remedies, requiring a 
surcharge up to the market price with interest.\10\
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    \10\ We note that we have the statutory authority to order such 
remedies as we may deem appropriate. 16 U.S.C. 825h (2000).
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    12. Finally, we reaffirm that sales of power between a traditional 
public utility and its affiliates are not permitted without first 
receiving Commission approval of the transaction under section 205 of 
the FPA.\11\
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    \11\ See supra ] 7 & 9.
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    The Commission orders:
    (A) The Agreement is hereby accepted for filing and suspended for a 
nominal period, to become effective June 28, 2002, subject to refund.
    (B) 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 the 
Federal Power Act, particularly Sections 205 and 206 thereof, and 
pursuant to the Commission's Rules of Practice and Procedure and the 
regulations under the Federal Power Act (18 CFR chapter 1), a public 
hearing shall be held in Docket No. ER02-2170-001, as discussed in the 
body of this order.
    (C) A Presiding Administrative Law Judge (ALJ), to be designated by 
the Chief Administrative Law Judge for that purpose, pursuant to 18 CFR 
375.304 (2002), must convene a prehearing conference in this proceeding 
to be held within approximately fifteen (15) days after issuance of 
this order, in a hearing or conference room of the Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426. 
Such conference shall be held for the purpose of establishing a 
procedural schedule. The Presiding Judge is authorized to establish 
procedural dates and to rule on all motions (except motions to dismiss) 
as provided for in the Commission's Rules of Practice and Procedure.
    (D) The Secretary is hereby directed to publish a copy of this 
order in the Federal Register.

    By the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. 02-33093 Filed 12-31-02; 8:45 am]
BILLING CODE 6717-01-P