The California Public Utilities Commission (CPUC) has approved plans by the investor-owned utilities (IOUs) in that state to include economic curtailment provisions in standard form contracts used for renewable energy purchases. As part of its approval of 2011 renewal portfolio standard procurement plans, the CPUC took this action, noting that it was taking no position on whether prior contracts, which did not explicitly include an economic curtailment provision, could properly be interpreted to allow such curtailment.
California utilities have been facing a Renewable Portfolio Standard (RPS) requirement of 20 percent, and new legislation signed by Governor Jerry Brown in April has increased that target to 33 percent by December 31, 2020. In recent action in pursuit of that goal, the CPUC approved the 2011 procurement plans of the California IOUs. Beyond the economic curtailment provisions, the order also addressed the use of tradable renewable energy credits and addressed the allocation of benefits and risks of the standard capacity product of the California Independent System Operator (CAISO).
The action on economic curtailment was approved by the CPUC in part because it believed that renewable projects would continue to be financeable. The basis for this finding are the requirements in economic curtailment provisions of form contracts limiting the developer’s risk to a set amount of curtailment to which any particular project would be subject. On behalf of the utilities, the need for such curtailment flexibility was attributed to the adoption by the CAISO of locational marginal pricing provisions as part of the market redesign and technology update (MRTU) initiative. No pro forma economic curtailment provision was adopted, although each IOU is required to include a provision addressing economic curtailment. One approach would allow for reduced generation of up to five percent of the expected annual generation, paying the contract price for the curtailed energy, but without compensation for any impact on lost production tax credits. Another would allow curtailment without any compensation for up to a predetermined, capped number of hours, with full compensation for exceeding the cap. The CPUC noted that these provisions are negotiable before final contract execution.
Each utility is filing its own specific 2011 procurement plan. These will include updated solicitation schedules for new projects. To date, 2,000 megawatts (MW) of new renewable capacity has been added in California under the RPS program, with 300 MW of new renewable capacity added in the first quarter of 2011 and 589 MW forecast to come online later this year.
The Federal Energy Regulatory Commission (FERC) has issued two Notices of Proposed Rulemaking (NOPR) that are designed to enhance electricity market transparency and improve FERC’s ability to monitor wholesale electricity markets for market power and manipulation.
In the first NOPR, FERC proposed requiring certain market participants that are not subject to Section 205 of the Federal Power Act to file electric quarterly reports (EQR). FERC stated that the proposal would provide FERC and the public a more complete picture about how prices are established or formed by bilateral transactions in the wholesale electricity markets. Under the current regulations, public utilities must file EQRs summarizing contractual terms and conditions in their agreements for cost-based and market-based rate sales and transmission service. Additionally, EQRs include transaction information for cost-based and market-based rate sales and transmission capacity reassignments.
The NOPR proposes that non-public utilities with annual wholesale sales greater than four million megawatt hours (MWh) and non-public utility balancing authorities with more than one million MWh in wholesale sales would be required to submit EQRs. The proposed regulations also would update filing requirements to include (i) transaction date, time, and type of rate, (ii) whether the deal was reported to an index publisher, (iii) if a broker or exchange was used and the identity of the broker or exchange, and (iv) electronic tag (e-Tag) ID data for the transactions.
FERC relied on the Energy Policy Act of 2005 (EPAct 2005) as authority for the proposed changes. EPAct 2005 directs FERC to facilitate price transparency in electric transactions in interstate commerce, and it gives FERC the ability to disseminate information on wholesale electricity and transmission. Further, EPAct 2005 allows FERC to obtain information from “any market presence,” unless that entity has a de minimis market presence. Comments on the NOPR are due June 28, 2011.
In a second NOPR, FERC proposed requiring NERC to provide e-Tag data to help FERC monitor wholesale markets and prevent market manipulation and help ensure just and reasonable rates. E-tags are used to schedule the transmission of electric power in wholesale markets. Currently, the North American Electric Reliability Corporation (NERC), as the electric reliability organization, collects E-tag information in near real-time to help regional reliability coordinators identify transactions that need to be curtailed to relieve overload when transmission constraints occur.
FERC proposes to gain access to e-Tag information from NERC to avoid requiring market participants to submit the same data to both NERC and FERC. Through e-Tagging, market participants submit certain transaction-specific information to balancing authorities and transmission operators on the contract path. The data includes source and sink, balancing authority areas, the transaction’s level of priority, and transmission reservation numbers. FERC also requested comments on whether to make e-Tag data available to Market Monitoring Units in the organized electric markets.
FERC believes that obtaining access to complete e-Tag data will help it identify anti-competitive or manipulative behavior or ineffective market rules, monitor the efficiency of the markets, and better inform FERC policies and decision-making. For example, by using e-Tag data in coordination with other resources, FERC will be able to better identify interchange schedules that appear anomalous or inconsistent with rational economic behavior. The access to e-Tag data will allow FERC staff to examine more effectively situations where interchange schedules are absent even when transmission capacity available and pricing differences between the two locations ought to be sufficient to encourage transactions between those locations. These circumstances could signal to FERC a market issue or other problem. In addition, FERC access to e-Tags would facilitate FERC audits or investigations in cases where e-Tags are relevant.
While market participants will not be responsible for providing e-Tag data to FERC under the proposed rules, they should take note that if the proposed regulations are implemented, there will be increased monitoring of wholesale markets.
Comments on the NOPR are due June 27, 2011.
FERC recently issued an order affirming the initial decision of an administrative law judge and imposing a civil penalty of $30 million on Amaranth’s lead trader, Brian Hunter, for his violation of FERC’s anti-manipulation rules.
This proceeding is the first fully litigated proceeding involving FERC’s enhanced enforcement authority under Section 4A of the Natural Gas Act, added by EPAct 2005, which prohibits manipulation in connection with transactions subject to FERC jurisdiction. FERC implemented the changes by means of Order No. 670, which codified new regulations governing market manipulation. In relevant part, the new rules state:
(a) It shall be unlawful for any entity, directly or indirectly, in connection with the purchase or sale of natural gas or the purchase or sale of transportation services subject to the jurisdiction of the Commission,
(1) To use or employ any device, scheme, or artifice to defraud,
(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity.
FERC issued a Show Cause Order to Amaranth in 2007 and ordered Amaranth to explain trading activities undertaken by the hedge fund relating to the trading of natural gas futures on the NYMEX. FERC stated that the alleged scheme involved Amaranth accumulating large amounts of natural gas futures contracts that were then sold off during settlement periods at the end of February, March, and April 2006, with the aim of driving down the settlement price. The trades were intended to benefit Amaranth’s larger short positions in natural gas swaps, whose value increased as the futures contract settlement price declined.
That is, Mr. Hunter, Amaranth’s lead trader, ordered his brokers to dump natural gas futures contracts onto the market right before close, which would depress the settlement prices. These depressed prices benefited Amaranth’s short positions on other trading platforms.
In an initial decision, an administrative law judge determined that Mr. Hunter’s actions constituted market manipulation and violated FERC’s rules. Mr. Hunter filed a brief on exceptions to the initial decision and appealed to FERC to overturn the initial decision. Mr. Hunter advanced several arguments, all of which were rejected by FERC.
Mr. Hunter argued that the CFTC had exclusive jurisdiction over natural gas futures contracts, and thus FERC could not exercise jurisdiction. FERC disagreed, however, and explained that because the settlement prices of natural gas futures contracts directly affect the price of FERC-jurisdictional natural gas sales, the conduct fell within Section 4A’s prohibition of manipulation “in connection with” FERC-jurisdictional sales.
Mr. Hunter also argued that, in the absence of some other deceptive conduct, so-called “open market” trading could not constitute market manipulation. FERC disagreed and stated “open-market transactions send false information into the marketplace if such transactions are undertaken with the intention of creating a false price.” The fact that trading occurs in a marketplace does not provide a safe harbor from FERC’s anti-manipulation rules.
Mr. Hunter argued that his trading did not result in an “artificial price,” and thus, as a matter of law, could not be manipulative. FERC rejected this argument and noted that “[t]he existence of an artificial price is not an element of a claim under § 4A of the Natural Gas Act or the Anti-Manipulation Rule … .” Regardless, FERC stated that an artificial price is simply one that is not produced by the normal forces of supply and demand, which happened when Mr. Hunter sought to lower settlement prices to benefit positions on other trading platforms. Thus, Mr. Hunter’s argument about price artificiality was moot.
Finally, Mr. Hunter argued that the evidence only supported a finding of three violations of the Anti-Manipulation Rule (one at the end of each settlement period in the three months at issue), which would only permit a maximum penalty of $3 million, rather than the $30 million levied by FERC. FERC disagreed: The penalty was not calculated based on each day of violation; rather, the sale with manipulative intent of each natural gas futures contract during the at-issue settlement periods constituted a separate violation of the Anti-Manipulation Rule.
FERC affirmed its $30 million penalty as appropriate and sufficient to discourage Mr. Hunter and others from engaging in market manipulation, but noted that it had statutory authority to “impose a penalty that significantly exceeds” $30 million.
Authors and Editors
Thomas McCann Mullooly
Andrea J. Chambers
Andrew M. Jamieson
Trevor D. Stiles