Energy and Appellate Law Alert
June 2009
Authors:
Donald A. Kaplan
don.kaplan@klgates.com
+1.202.661.6266
John L. Longstreth
john.longstreth@klgates.com
+1.202.661.6271
William M. Keyser
william.keyser@klgates.com
+1.202.661.3863
K&L Gates is a global law firm with
lawyers in 33 offices located in North
America, Europe, Asia and the Middle
East, and represents numerous GLOBAL
500, FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies,
entrepreneurs, capital market
participants and public sector entities.
For more information, visit
www.klgates.com.
Ninth Circuit Affirms Federal Energy
Regulatory Commission’s Grant of MarketBased Rate Authority
The ability to sell power at market-based rates is a cornerstone to a competitive
electric industry. In the first appellate decision reviewing revised guidelines of the
Federal Energy Regulatory Commission (FERC) for granting market-based rate
authority to a wholesale electricity seller, a panel of the U.S. Court of Appeals for the
Ninth Circuit has rejected a challenge to FERC’s grant of market-based rate authority
to several affiliates of PPL Corporation (PPL Companies) in the control area
covering most of Montana. Montana Consumer Counsel v. FERC, No. 07-73256
(June 8, 2009). The appeals court recognized the need to “afford great deference” to
FERC’s rate determinations and expressed reluctance to “second guess [FERC’s]
judgment on questions of policy within its expertise.” Although the ruling is
unpublished, it may offer insight into how the same court will approach its pending
review of FERC’s promulgation of its market-based rate policy contained in Order
Nos. 697 and 697-A.
FERC’s Market-Based Rate Procedures
FERC allows wholesale electricity sellers to sell at market-based rates, as opposed to
cost-based rates, in geographic markets in which the seller lacks market power.
FERC bases its market power determination primarily on the seller’s share of
capacity in the relevant markets, and also considers whether the seller can limit
competition through its control of transmission, erect barriers to entry, or engage in
abuse of affiliate relationships. A seller granted market-based rate authority must
update its market analyses every three years to confirm that it continues to lack
market power. At issue before the Ninth Circuit was the PPL Companies’ 2004
triennial update, which was extensively litigated before FERC in 2005 and 2006.
Over the past several years, FERC has substantially revised its guidelines to detect
the potential to exercise market power during different seasonal and electricity
demand conditions. Applicants for an award or renewal of market-based rate
authority must now first provide FERC data on two “indicative screens” based on the
seller’s uncommitted capacity available to serve the market – a wholesale market
screen based on the percentage of the uncommitted capacity in the market owned or
controlled by the seller, and a pivotal supplier screen based on whether the seller’s
capacity is needed to serve the market during peak periods. The screens are meant to
be conservative, and a seller that fails one or both of the screens is presumed to have
market power but may submit a more detailed “delivered price test” (DPT) analysis
to overcome this presumption. The DPT measures a seller’s (i) share of “economic
capacity,” which is its owned or controlled capacity that can economically be
delivered to the market, and (ii) share of “available economic capacity,” which
eliminates economic capacity that is needed to meet the supplier’s native load or
other long-term contractual commitments. The DPT test is not applied mechanically;
FERC takes account of other relevant factors as well. A seller granted market-based
authority must file electronic quarterly reports (EQRs) of its market- based sales so
Energy and Appellate Law Alert
that FERC can determine between triennial filings if
there are indicia of market power that require further
investigation.
The Ninth Circuit Upholds FERC’s
Application Of Its Market Power Tests
To The PPL Companies
The PPL Companies failed the initial market power
screen and thus submitted a detailed DPT analysis.
FERC accepted the analysis and renewed the PPL
Companies’ market-based rate authority.1 FERC’s
decision was appealed by the Montana Consumer
Counsel and the Montana PSC (the Montana
Parties), which had actively opposed the application
before FERC. The Ninth Circuit disposed of a
number of separate challenges by the Montana
Parties.
First, the Montana Parties attacked FERC’s use of a
“snapshot in time” approach, arguing that by looking
only at the twelve-month prior period on which the
PPL Companies’ market analysis was based, FERC
overlooked generation capacity owned by the PPL
Companies that was tied up in contracts during that
period but that would subsequently become
available. FERC justifies this approach on the basis
that historical data are more reliable and less subject
to manipulation. The Ninth Circuit did not reach
this question, accepting FERC’s alternative holding
that the PPL Companies would not have market
power even if the long-term contract capacity were
added back to PPL Companies’ market share.
Second, the Montana Parties criticized FERC’s
reliance on its presumption that, absent barriers to
entry, spot-market data are an appropriate proxy for
the competitiveness of long-term power markets.
Noting that FERC provided reasons to support the
presumption and that it was “reluctant to second
guess FERC’s judgment on such policy matters,” the
court held that FERC’s use of the presumption was
proper “on the current record.” The court also
adopted FERC’s conclusion that the PPL
Companies’ opposition to two new power plants in
Montana could not be a cognizable barrier to entry
because the companies had an undeniable right to
1
PPL Montana, LLC, 115 FERC ¶ 61,204 (2006), order on
reh’g, 120 FERC ¶ 61,096 (2007).
“express an opinion in a public proceeding before a
state agency.” The court found that FERC’s
conclusions were further supported by record
evidence of the availability of competing supply,
specifically responses to a Montana utility’s request
for competing power supply proposals.
Third, the court upheld FERC’s rejection of the
Montana Parties’ assertion that competing imported
supply be limited to unreserved transmission
capacity calculated using data from the Open
Access Same-Time Information System (OASIS)
rather than the Simultaneous Import Limits study
(SIL), which measures all supply that can be
imported. The court accorded “significant
deference to FERC’s choice of methods for
calculating market conditions . . . particularly when,
as here, those calculations call for considerable
technical expertise.” The court held that the record
did not support the claim that OASIS data were
superior to SIL data or that Petitioners had
presented their OASIS data in proper form.
Finally, the court held that FERC’s analysis was
properly based upon and incorporated antitrust
principles, and FERC properly took official notice
of the PPL Companies’ EQR filings to corroborate
its analysis.
Implications Of The Decision For
Pending Review Of FERC Order No.
697
The PPL Companies’ market-based rate update was
filed and reviewed under FERC’s interim marketbased rate regime adopted in AEP Power Marketing
Inc.2 Order No. 697 largely adopted the interim
rules with minimal modification.3 Many of the
challenges raised by the Montana Parties to the PPL
Companies’ update will likely be raised in
challenges to FERC’s Order No. 697, which the
2
107 FERC ¶ 61,018 (2004), reh’g granted in part and denied
in part, 108 FERC ¶ 61,026 (2004).
3
Market-Based Rates for Wholesale Sales of Electric Energy,
Capacity and Ancillary Services by Public Utilities, Order No.
697, 72 Fed. Reg. 39,904 (July 20, 2007), FERC Stats. &
Regs. ¶ 31,252, clarified, 121 FERC ¶ 61,260 (2007); order on
reh’g, Order No. 697-A, 73 Fed. Reg. 25,832 (May 7, 2008),
FERC Stats. & Regs. ¶ 31,268 (2008); order on clarification,
124 FERC ¶ 61,055 (2008); order on reh’g and clarification,
Order No. 697-B, 125 FERC ¶ 61,236 (2008).
June 2009
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Energy and Appellate Law Alert
Montana Parties have also appealed to the Ninth
Circuit. Thus, while the court was careful to limit its
unpublished memorandum to the record of the
proceeding before it, its decision sheds some light on
issues that will likely be addressed in its review of
Order No. 697.
FERC’s use of the spot market as a proxy for the
long-term power markets and its reliance on SIL
studies to gauge transmission import capacity are
both likely to be issues in the review of Order No.
697. On both issues, the court properly afforded
significant deference to FERC’s judgment and
expertise. While the court’s memorandum is not
precedent that is binding on the panel that will
consider Order No. 697, except as to matters of
claim or issue preclusion, it is a correct statement of
the law that can be cited in future cases. See Fed. R.
App. P. 32.1. It is also noteworthy that two of the
panelists in MCC v. FERC have recently been
critical of FERC’s administration of its marketbased rate program in other contexts. Judge Berzon
wrote the opinion on the California long-term
contract cases that the Supreme Court reviewed in
Morgan Stanley Capital Group, Inc. v. Public
Utility Dist. No. 1 of Snohomish County, 128 S. Ct.
2733 (2008), and Judge McKeown has been a
panelist in three cases concerning refunds for sales
in California and the Pacific Northwest that the
Ninth Circuit has remanded to FERC for further
consideration. (Judge Silverman was the third
panelist.) Thus, where FERC properly supports its
methods for calculating market conditions and
determining whether rates are just and reasonable
(and Order Nos. 697 and 697-A are extremely
lengthy and well supported), it can expect to receive
substantial deference.
The court’s memorandum can be found at the link
below.
http://www.ca9.uscourts.gov/memoranda/view_sub
page.php?pk_id=0000000267
K&L Gates LLP acted as counsel for the PPL
Companies in this matter.
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June 2009
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