Energy Industry July 2008 Updates

01 August 2008 Publication

Legal News: Energy Industry

FERC Asserts Jurisdiction Over Futures Contracts That Affect Natural Gas Sales and Over Individual Traders

On July 17, 2008, the Federal Energy Regulatory Commission (FERC) issued an expansive ruling on several issues in its ongoing investigation of whether Amaranth Advisors LLC, its affiliates, and two individual traders violated FERC’s anti-manipulation regulations in their futures trading activities. First, FERC reaffirmed its view that it has jurisdiction under the Natural Gas Act to impose penalties for manipulative trading of certain New York Mercantile Exchange natural gas futures contracts that had a clear and direct effect on physical natural gas sales prices. Second, FERC exercised personal jurisdiction over Brian Hunter, a former Amaranth trader, and over Amaranth International Limited, an affiliate of Amaranth Advisors LLC. Third, FERC ruled that liability can be triggered when an entity, including individuals, acts with reckless disregard to physical natural gas prices subject to the Commission’s jurisdiction, even if such acts do not include the provision of false information. Fourth, FERC ruled that parties may not seek de novo review in federal district court until FERC has first assessed penalties under the Natural Gas Act for violations of its market manipulation regulations. FERC ordered an administrative law judge to hold a hearing to resolve the material facts in dispute on these matters.

FERC’s decision in this case is further evidence of the stepped-up role that FERC has assumed since the California energy crisis of 2000–2001 in monitoring market manipulation. The case also is of interest on the jurisdictional issues as to the boundaries between FERC jurisdiction and the Commodity Futures Trading Commission, as it rejected arguments that FERC does not have jurisdiction over traders who operated only in the futures market.

FERC Reaffirms Termination of Mandatory QF Purchase Obligations for Three Utilities in the Southwest Power Pool Region and Retention of Obligation for a Fourth

On July 21, 2008, FERC denied rehearing of its January 22, 2008 order granting in part and denying in part an application by Southwestern Public Service Co. (SPS), Oklahoma Gas and Electric Co. (OG&E), Public Service Company of Oklahoma (PSO), and Southwestern Electric Power Co. (SWEPCO) to terminate their mandatory qualifying facility (QF) purchase obligations under the Public Utility Regulatory Policies Act of 1978 (PURPA).

FERC affirmed its previous order granting OG&E, PSO, and SWEPCO’s requests to be relieved of their mandatory purchase obligations, concluding that QFs within their control areas have nondiscriminatory access to competitive wholesale markets that provide the QFs with a meaningful opportunity to sell energy and capacity to buyers other than the utility to which the QF is interconnected. FERC also affirmed that it could not find that QFs located in the SPS control area have nondiscriminatory access to markets based on the evidence of transmission constraints there. All four of the utilities are located within the Southwest Power Pool (SPP) region. FERC rejected a request that its positive findings with regard to OG&E, PSO and SWEPCO be applied on a region-wide basis within SPP. Rather, it clarified that its findings as to QF mandatory purchase obligations are “to be made on a utility service territory-wide basis.” 

Whereas market participants may have previously assumed that the QF mandatory purchase obligation would be mostly determined on a market-wide basis, this decision makes it clear that the facts for each utility service territory are crucial.  

FERC Orders Increased Flexibility for Holding Company Systems Without Centralized Service Companies in Rehearing of Cross-Subsidization Rules

In Order No. 707-A, issued July 17, 2008, FERC acted on the rehearing of Order No. 707, which amended FERC’s regulations by adopting restrictions on affiliate transactions between franchised public utilities that have captive customers or that own or provide transmission service over jurisdictional transmission facilities and their market-regulated power sales affiliates or non-utility affiliates. Specifically, under Order No. 707, FERC held that (1) its approval is required for any wholesale sale of electric energy between the utility and a market-based power sales affiliate; (2) unless otherwise permitted by a FERC rule or order, sales of any non-power goods or services by the utility to any market-based power sales affiliate or non-utility affiliate must be at the higher of cost or market price; (3) with the exception of purchases from centralized service companies, purchases by the utility of any non-power goods and services from any market-based power sales affiliate or non-utility affiliate must be at a price no higher than the market price; and (4) purchases of non-power goods and services by the utility from a centralized service company must be at cost.

Granting rehearing as to the provision of shared corporate general management and administrative services, FERC amended its regulations in Order No. 707-A to allow companies within a single-state holding company system that do not have a centralized service company to provide each other general administrative and management services at cost. FERC further stated that it would consider requests on a case-by-case basis for waivers of at-cost pricing by multi-state holding companies that do not have centralized service companies. In addition, FERC refused to incorporate materiality thresholds with respect to Order No. 707 rules, stating that it may revisit this issue in the future.

FERC Clarifies Simultaneous Transmission Import Provision in the Market-Based Rate Rule

On July 17, 2008, FERC resolved confusion that had emerged from a footnote in Order No 697-A regarding market-based rate filings. The question pertains to how available transmission import capability is to be allocated among competing suppliers for purposes of performing the indicative screen market power analysis. Numerous parties had complained that the footnote was a deviation from prior FERC policy. In the order, FERC accepted these arguments and granted rehearing. Deadlines for pending market power filings from companies in the Southeast and in PJM had been extended in the meantime until this issue was resolved. 

To clarify how available transmission import capability is to be allocated, FERC stated that market-based rate sellers may allocate the simultaneous transmission import limit (SIL) capability on a pro rata basis. SIL capability represents the limit of the transmission system to simultaneously import power into the study area. The pro rata basis is to be premised on the relative shares of the market-based seller’s uncommitted generation capacity in first-tier markets and that of competing sellers when performing the indicative screens. The order provides specific guidance on performing the analysis. 

Legal News is part of our ongoing commitment to providing legal insight to our energy clients and our colleagues.

Please contact your Foley Energy attorney if you have any questions about these topics or want additional information regarding energy matters. Authors and editors:

Ronald N. Carroll
Washington, D.C.

Thomas McCann Mullooly
Milwaukee, Wisconsin

Ann L. Warren
Washington, D.C.

Olya Petukhova
New York, New York

Svetlana V. Lyubchenko
Washington, D.C.

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