May the FERC Rely on Markets to Set Electric Rates?
Norlander, Gerald, Energy Law Journal
In the aftermath of spectacular failures of electricity markets it previously approved, the Federal Energy Regulatory Commission (FERC) accelerated its pursuit of a deregulatory agenda for the electric utilities and services under its jurisdiction. The essence of this approach is to supplant traditional agency rate setting with market mechanisms to determine wholesale electricity and bulk transmission rates.1 Seeking to lessen its role as rate dispute umpire and administrative rate setter, the FERC is attempting to restructure the industries it regulates and redefine itself to achieve an agency "vision" of "[d]ependable, affordable energy through sustained competitive markets."2 An explicit goal is to "[f]oster [n]ationwide [c]ompetitive [e]nergy [m]arkets as a [s]ubstitute for [t]raditional [r]egulation."3 Notwithstanding the FERC's forceful efforts to implement the new "vision" and goals, are markets a lawful substitute for rate regulation? I conclude they are not.
The current initiative to implement the FERC vision is a 612 page July 31, 2002 Notice of Proposed Rulemaking to create agency structured markets with a "Standard Market Design" for setting rates (SMD NOPR).4 If adopted, the rule would establish markets managed by new entities, denominated by the FERC as "Independent Transmission Providers" (ITPs). These "independent" private utilities would be approved by the FERC to be controllers of the bulk power transmission grids, and rate-setters. The SMD NOPR would require transmission-owning utilities to transfer control of their facilities to ITPs.5 Each ITP would create and manage six markets (hence the "Standard Market Design") to set variable rates for components of wholesale electricity and transmission service. These agency-fostered bazaars would use "spot" markets to set rates only for day-ahead and real time balancing purposes. Generators and energy marketing utilities would obtain "market-based rate" orders from the FERC. These orders would allow rates to be determined by the ITP markets, so that the tariffs and rate schedules filed by the utilities would not disclose the actual rates demanded or charged.6 The spot market rates would be complemented by rates set privately in unfiled bilateral, off-spot market contracts.7
This article addresses whether the FERC has power under existing law to use markets for setting rates. It does not address the merits or wisdom of the spot market rules, or other controversial proposals contained in the SMD NOPR proposal (such as assertion of FERC jurisdiction over the transmission component of previously bundled state-regulated retail rates).8 Basic features of the SMD NOPR are highlighted to illustrate the agency's emphasis on creating private markets and using market mechanisms to set rates, and to distinguish the proposed rules from rate filing and rate fixing requirements of the Federal Power Act of 1935 (FPA). Several Supreme Court decisions involving federal regulatory agency efforts to rely upon markets to set rates are examined. The FERC's legal justifications for market based rates, and the lower court opinions upon which they are based, are also reviewed.
The article concludes that if the issue of the FERC's market based electricity rate initiatives were squarely presented in litigation, the court would likely apply the clear language of the FPA, and its longstanding judicial interpretations, to bar the FERC from using market prices to set rates. In particular, the FERC market based rate making initiative conflicts with the statutory duty of FERC jurisdictional utilities publicly to file schedules of reasonable rates demanded and charged under Section 205 of the FPA, and deviates from the process prescribed by statute for remedying undue discrimination and fixing by the agency of non-discriminatory, reasonable rates under Section 206 of the FPA.
II. KEY FEATURES OF THE FERC SMD NOPR
The FERC issued an evolutionary series of generic orders to foster the creation and operation of private day-ahead and real-time electricity spot markets to perform the rate-setting function. …