Has the "Complete and Permanent Bond of Protection" Provided by Ferc Refunds Eroded in the Transition to Market-Based Rates?

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Synopsis: The Federal Energy Regulatory Commission (FERC or Commission), and its predecessor, the Federal Power Commission, have a long history of providing refunds to consumers for rates collected by natural gas companies or public utilities that are determined to be unjust and unreasonable or not in conformance with the lawful filed rate. Over the past two decades, the Commission has undertaken natural gas and electric industry restructurings that have encouraged the development of markets where natural gas or electricity can be bought or sold. Unlike traditional cost-based rates, however, the market-rate payable to all sellers into a market can be affected by the actions of a single market participant. This article first reviews the Commission's historical refund authority and the basics of refund calculations under cost-based, formula-based, and market-based regulation. It then takes a more in-depth look at refunds under market-based rates. It concludes that under market-based rates, consumers are less likely to be made whole when rates are found to be unjust and unreasonable, or unlawful, than under traditional cost-based regulation.

I. INTRODUCTION

Over the past two decades, the FERC has encouraged and approved the development of "competitive" markets as a means of providing consumers with efficiently priced energy and energy transportation under the Natural Gas Act (NGA)1 and the Federal Power Act (FPA).2 As described in a recent symposium on the changing landscape of energy law:

Part II of the Federal Power Act and the Natural Gas Act have changed from aregulatory scheme that controlled market power exercise by utilities, pipelines, andproducers through classic rate regulation to a regulatory regime that controls the exercise of market power through reliance on a mixture of competition and regulation. This change was accomplished by congressional amendments to Part II of the Federal Power Act and the National Gas Act and through reinterpretation of the laws by FERC and the courts. It could be argued that more dramatic changewas accomplished through reinterpretation than through enactment of legislativeamendments.3

Although there have been numerous challenges to the Commission's "reinterpretation" of its organic statutes and efforts to encourage competition in markets it regulates, including critical commentary on the legal basis for and practical consequences of such rates,4 the courts that have addressed the issue have uniformly upheld the FERC's market-based initiatives.5

Even under market-based rate regimes, however, the FERC retains jurisdiction and the concomitant responsibility to ensure that rates in these markets remain just and reasonable, and, unless there are countervailing equitable reasons, to provide refunds to make consumers whole when rates depart from the just and reasonable.6 Even under a market-based regulatory regime, "[t]he FPA cannot be construed to immunize those who overcharge and manipulate markets in violation of the FPA."7 Figure 1, which shows total electricity costs in California for 1999-2003, dramatically illustrates the impact that market (or regulatory) dysfunction can have on consumers.8 Indeed, this figure understates the total cost to consumers during the California Energy Crisis since it does not include the costs associated with multiple rolling blackouts or the opportunity costs of the funds that were used for energy purchases and thus could not be used for other investment, consumption, or services. It is unlikely that a market will fail again in the spectacular manner and for the extended period that occurred in California in 2000 and 2001. However, it is still quite probable that there will be future market deviations from just and reasonable rates that, like passing hurricanes, tornados, or earthquakes, will occur episodically with damages that cannot be evaluated until after the event. Understanding the FERC's refund authority when this occurs is important both for consumers who should receive the protection from excessive prices but also for those sellers who may be required to make such refunds. …