benefit of counsel: law? what law?: generators selling in RTO markets still have control over their rates

The Federal Power Act (FPA) grants public utilities the right to propose rates for any wholesale power service they provide, and FERC must accept these rates if it determines they are just and reasonable and not unduly discriminatory or preferential. This statutory framework ensures that the public utility retains the level of control over its revenue stream necessary to ensure its constitutional right to just compensation. If the public utility believes its compensation is inadequate, it has the right to increase its rate via a revised schedule or tariff, provided it can demonstrate that the revised rate satisfies the statutory standards.

Unfortunately, in some of the regional transmission organizations (RTOs), the law seems to have been forgotten, at least insofar as certain generating facilities are concerned. In RTOs, generators’ rates for wholesale power services ultimately are determined by highly complex market rules that prescribe uniform terms and conditions for power sales; and it is commonly believed that, once the framework for these services is addressed by the RTO’s market rules, the only avenue available to a public utility that is unsatisfied with its rate is to persuade the RTO or FERC to modify the RTO’s tariff. FERC has even gone so far as to require sellers to demonstrate that they are on the verge of going out of business before they themselves can decide to stop relying entirely on their market-based rates, and begin to charge traditional cost-based rates.

Apparently, to the extent the public utility had a legal right under the FPA to file a tariff proposing its own rates, that right somehow has been superseded by the RTO tariff. There is, however, no statutory foundation for this position. Having the right to charge market-based rates does not mean a generator has lost its right to charge cost-based rates. As the D.C. Circuit recently reaffirmed in Atlantic City Electric Company v. FERC, 295 F.3d 1, 9 (D.C. Cir. 2002), the Commission lacks the authority to require any public utility to cede its FPA filing rights in pursuit of the Commission’s regulatory policies.

So, how did such a basic legal right come to be forgotten? Don’t generators selling in RTO markets still have control over their own rates? Actually, the answer is not so complicated. Most of the market rules do facilitate trades and market liquidity, and contribute much needed clarity, product standardization, transparency and order to the market. It is easy to understand, then, why market participants would not object to, and even embrace, these rules. Indeed, in many RTO markets, the market rules do provide a reasonable opportunity for most generators to be adequately compensated for the services they provide, so there is no imperative for charging a cost-based rate.

But in those RTO markets where the Commission expressly has held that the market rules are fatally flawed because they do not provide adequate compensation for certain services that generators are obligated to provide, the desire to pursue one’s right to charge a cost-based rate is compelling. Indeed, where market-based rates for these services are non-compensatory, generators have no recourse but to rely on their FPA filing rights to seek cost-based rates-the very type of rate FERC has relied upon for decades to meet the just and reasonable standard where workably competitive markets do not exist.

Obviously, there is a tension between preserving a generator’s right to propose its own rates and the need for some level of uniformity in the rules governing organized markets. But in striking this balance, only Congress-not the RTO or FERC-has the authority to modify a seller’s statutory right to file for a just and reasonable rate for whatever jurisdictional services it provides, and particularly in a market that has demonstrably failed to provide that seller with adequate compensation.

Some might argue that a generator voluntarily relinquishes its FPA filing rights by choosing to provide services into the RTO markets because, should it not wish to do so, it simply could exit these markets. However, where RTOs require generators located in their footprint to provide a service, there is no legal basis for also requiring them to relinquish their right to charge compensatory cost of service rates for these required services.

Clearly, FERC cannot do indirectly through market rules what the court in Atlantic City said it could not do directly. It is time to adhere to the law: Sellers have a right to charge just and reasonable rates, and this right cannot be taken away by RTOs, or even by FERC.

Larry Eisenstat is a partner with Dickstein Shapiro Morin & Oshinsky LLP and head of the firm’s electric power practice. Donald Gelinas is an energy industry consultant with the law firm.

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