• Stricken Retroactive California Rate Likely Dooms Comparably Assessed Midwest Charge
  • April 22, 2009
  • Law Firm: Bracewell & Giuliani LLP - Houston Office
  • The writing appears to be on the wall for FERC’s contested decision to tag retroactively financial-only traders in the Midwest ISO (MISO) with past Revenue Sufficiency Guarantee (RSG) charges.   The writing on the wall comes in the form of a February 27 decision of a unanimous three-judge panel of the United States Court of Appeals for the DC Circuit in City of Anaheim v. FERC, which struck down FERC orders that retroactively increased the invoices to purchasers from western power generators who had been required to sell power during the 2000-01 California energy crisis pursuant to "must-offer" obligations that the Secretary of Energy imposed on them.

    In the vacated orders FERC ruled on the Federal Power Act (FPA) § 206 complaint of the “must-offer” western generators in which they contended that the FERC-approved prices for their “must-offer” electricity sales to local cities and other purchasers were unlawfully low.  In a July 20, 2006 order, FERC agreed.  It found the "must-offer" prices to be unjustly and unreasonably low, but did not at that time determine how much the rate should be increased in order to be just and reasonable.  Not until nearly six months later, in a February 13, 2007 order did FERC set a just and reasonable rate for the sales at issue and then made that rate effective retroactively as of June 1, 2006.  The City of Anaheim California, a recipient of the retroactive rate increase, appealed, resulting in the February 27 appeals court decision.

    In its opinion, the Anaheim panel vacated FERC's order, ruling that FPA § 206 does not authorize FERC to increase rates.  Quoting from Anaheim’s counsel, the panel explained "[t]o uphold FERC's action here, we would have to find "that there's no difference between the procedural framework of § 205 [the statutory provision concerning rate increases] and the procedural framework of § 206; [] that 'thereafter' in § 206(a) really means any time after the filing of a complaint; that the term 'refund' in § 206(b) really means refund or increase; that 'amounts in excess of' under § 206(b) really means amounts in excess of or less than; [or] that 'prospective' can mean a date many months earlier than the date of the Commission order fixing a rate."

    The Anaheim panel’s decision should put to rest the dispute ongoing at FERC as to whether the agency can change the provisions of the MISO tariff so as to make financial-only or “virtual” energy traders liable retroactively for a share of contested RSG charges. In a November 10, 2008 order, FERC responded to the § 206 complaints of physical energy traders who questioned why a provision of the MISO tariff required them to pay RSG charges, but exempted certain trading by “virtual” traders as a result of a requirement that a market participant must be actually withdrawing energy on the day in question to be eligible for RSG charges.  FERC agreed that this was not fair and instituted effective August 10, 2007 new tariff language making both physical and “virtual” traders liable for RSG charges.  The effect of the retroactive implementation of the new language is that certain physical traders in MISO will receive refunds of past RSG payments, while virtual traders become liable retroactively for those refunds.  In a transparent attempt to evade the bar of Federal Power Act § 206 against retroactive rate increases — a bar unambiguously reaffirmed in Anaheim — FERC characterized the retroactive RSG charge to “virtual” traders as a "cost allocation" change regarding "resettlement":  "We recognize that we are ordering the refund of an ISO-administered cost allocation and therefore our refund directive means a resettlement of Revenue Sufficiency Guarantee costs paid by market participants, with some market participants paying for the difference between the billed costs and the costs assigned under the revised cost allocation and others receiving a refund equal to the difference between the bill costs and the costs assigned under the revised cost allocation."  Sound familiar?