Federal Restructuring News
Fall 2003

After more than a year of hearings, revisions, and a flurry of impassioned statements from state utility regulators – for and against – the Federal Energy Regulatory Commission’s (FERC) standard market design proposal may die a quick death this fall as the U.S. Senate and House confer on a national energy bill.

Standard market design (SMD) would require public utilities to turn regulation of their high-voltage transmission lines to Regional Transmission Organizations. Each RTO would cover several states. As part of the FERC plans for a national transmission market, all electricity producers would have access to the national grid made up of the RTOs.

FERC would set a standard charge for access to the grid, along with other charges that would be based on transmission capacity – that is, the local RTO would establish a market-based system that would allow electricity generators and marketers access to available transmission capacity. Transmission costs would be higher in congested areas that do not always have enough transmission capacity to meet demand.

SMD has received considerable support from Northeastern and many Midwestern states because it would, theoretically, provide incentives for construction of new transmission – builders could make more money in areas where transmission cost more because of congestion. In the long run, supporters believe, more capacity would mean adequate power and lower rates.

Southern and many Western states, on the other hand, oppose SMD because they already have the cheapest rates in the country (with the notable exceptions of California, Montana and Nevada), and fear the FERC plan would drive rates up and circumvent local jurisdiction of transmission. Jim Kerr, a member of the North Carolina Utilities Commission and part of a group fighting the FERC plan, said, "If the Rust Belt [the cities of the Northeast and upper Midwest] could benefit from cheap power being churned out by coal-fired power plants in the Southeast, then it stands to reason that the change would drive up electricity costs for Southern consumers."

In 2003, SMD’s detractors took their fight to Congress, which has been attempting to pass a comprehensive energy bill. One section of that bill – the electricity title – dealt with wholesale power markets and FERC’s role in them. There, Southern Republicans attempted to prevent FERC from moving ahead with SMD until 2005.

The bill appeared to be dying amidst vehement disagreement among Democrats and Republicans, until the last week of July, when Senate leaders, in a surprise move, decided to resurrect last year’s proposed energy law.

S. 517, a massive 600-page bill, covers a wide range of topics: an electricity title, production incentives, reauthorization of the Price-Anderson Act, research, conservation and energy efficiency, renewables (including reauthorization of the renewable energy production incentive program) and a tax title (with tradable tax credit provisions).

The legislation will be revised in a conference with the House to work out differences between the Senate bill and the bill passed earlier this year by the House. That process will begin in September, when Congress reconvenes after its month-long break in August.

Sen. Pete Domenici, R-N.M., who as chairman of the Senate Energy and Natural Resources Committee spent months drafting a bill and will preside over negotiations, has said, "I'll be rewriting (the) bill. We're in the majority. We'll write a completely different bill."

Republican leaders, including Vice-President Dick Cheney, have pledged to delay the SMD proposal as part of the upcoming bargaining on the resurrected energy bill. Some Republicans, notably from the South, have pledged to stretch a ban on SMD until 2007. Shortly after the huge blackout of August 14, Energy Secretary Spencer Abraham announced that the Bush administration supports a three-year delay in SMD, because the proposal would "force down the throats'' a federal policy of deregulation that states with cheap power oppose.

Market Monitoring Rules Proposed

FERC has also been testing the boundaries of its regulatory authority by expanding its ability to get information about the day-to-day workings of wholesale electricity markets, how trading on those markets can be manipulated or "gamed," and how well energy companies are doing financially.

In short, FERC is trying to move beyond periodically reviewing the costs of wholesale electricity and begin monitoring electricity market conditions. In June 2003, the commission proposed new quarterly financial reporting requirements for energy companies. The rules would require public utilities and oil pipelines companies to file a complete set of quarterly financial statements. The statements would include an analysis of the companies’ financial condition, the amount of energy sold (in megawatt hours, dekatherms and or barrels of crude oil), and top company officials would have to sign a certification statement that all of the information in the quarterly report was correct

The quarterly reports would be be due within 45 days after the end of the quarter until 2005, when they would be due within 35 days.

June also marked the release of a report by the General Accounting Office noting gaps in the federal government’s collection of energy data. (Report No. GAO-03-586) The GAO observed that, "As long as these information gaps persist, FERC will be unable to oversee electricity markets in a comprehensive manner."

The problem, the report explained, is that open markets – FERC’s declared goal – require current and accurate data on electric supplies and prices. However, FERC’s information about power plant operations is "spotty," the GAO said, because many plants that used to be owned by regulated utilities are now owned by non-utility companies, which do not have to report to FERC.

The proposed FERC rules answer this criticism by requiring all private energy companies – whether owned by utility companies or by non-utility corporations – to provide the quarterly financial reports.

The GAO report also noted that the criminal and civil fines which FERC can use to punish companies for insider trading and other market abuses are "often inconsequential and do little to discourage precarious activities." The agency suggested that Congress may have to give the commission more authority to impose penalties and gather information if it is to guarantee a competitive wholesale energy market.

In late July, FERC imposed its first-ever civil penalty on the U.S. electric market when it ordered Louisiana-based Cleco Corporation to pay a $750,000 fine and refund $2.1 million to its ratepayers for favoring its affiliates in power market transactions between 1999 and 2002. The company has also had its right to trade electricity on the wholesale market revoked, although it can reapply for that privilege after one year.

The case is particularly important because of ongoing FERC investigations into similar activities by other energy companies, such as Southern Company, one of the biggest utilities in the U.S.

FERC Commissioner Pat Wood said the order may test the commission’s authority to issue penalties in such cases. He has asked Congress to give FERC more obvious ability to penalize energy traders: "At the moment, our civil penalty authority is limited. Expanding this authority would enhance the commission’s ability to deter anticompetitive behavior in energy markets."

The comment period on the rules ended August 22, 2003. It is not yet known what time frame the FERC Commissioners will adopt after reviewing the comments.