May 2, 2005

Federal Energy Regulatory Commission Deregulates Electric Rates Illegally, Violates the Federal Power Act

Public Citizen Joins Other Consumer Groups and Attorneys General in Brief Seeking to Overturn FERC’s Entire Market Rate Scheme

WASHINGTON, D.C. – The Federal Energy Regulatory Commission’s (FERC) entire market rate regulation scheme is contrary to the Federal Power Act (FPA), Public Citizen said in a brief filed in the U.S. Court of Appeals for the D.C. Circuit on behalf of several state attorneys general and consumer advocacy organizations. The brief states that FERC illegally deregulated the electric rates under its jurisdiction, allowing the market to set rates, when only Congress can deregulate rates.

The case, filed in July 2004, stems from the California energy crisis of 2000-2001. Wholesale sellers authorized by FERC to sell electricity at market-based rates manipulated the markets on a massive scale and overcharged consumers   billions of dollars while FERC abdicated its regulatory responsibility to ensure just and reasonable rates, the brief says. In November 2001 – one year after the crisis began – FERC proposed specific “market behavior rules” to address abuses it then acknowledged had occurred in California. The rules were finalized in May 2004.

Public Citizen and its co-petitioners contend that FERC lacks statutory authority to allow the market – that is, utilities themselves – to set rates without prior public notice and review of the rates by FERC as required by the FPA, with or without behavior rules.

“FERC has turned the congressional goal of protecting consumers from paying excessive rates on its head by establishing a market-based rate regime that allows energy sellers to set rates without FERC review and eliminates most of the FPA’s other consumer protections as well,” said Lynn Hargis, an attorney with Public Citizen and a former assistant general counsel for electric rates at FERC.

Public Citizen is joined in its challenge to FERC’s market rate scheme by the Colorado Office of Consumer Counsel, the Rhode Island attorney general, the New Mexico attorney general, the Utah Committee of Consumer Services, the Public Utility Law Project of New York, Inc., and the National Consumer Law Center.

Two California parties, the California Public Utilities Commission and the California Electricity Oversight Board, have joined the consumer advocates in maintaining in the brief that FERC’s behavior rules for electricity sellers are not sufficient to properly monitor electricity sellers, even assuming FERC has the statutory authority to allow market rates.  The rules established industry-wide standards of behavior that purportedly prevent colorful manipulative practices engaged in by Enron and other energy traders, such as: “ricochet” or “megawatt laundering” (selling power out-of-state with subsequent resale into state at higher prices, thus evading price caps); “Fat Boy” (withholding of previously agreed deliveries of power in order to sell the energy at a higher price in the spot market); and “Get Shorty” (fabrication and sale of emergency back-up power).

As an example of the insufficiency of the rules, the brief states, sellers repeatedly have used withholding strategies to drive up prices and take advantage of inelastic need for electricity. Yet the so-called behavior rules do not prohibit outright such withholding of electric energy from sale to the market, thereby allowing the creation of artificial shortages of energy and enormous increases in prices for remaining energy sales.

The consumer advocates are asking the court to overturn FERC’s market rate scheme, fix just and reasonable electric rates for the future, and consider what refunds should be paid to parties as a result of rates charged unlawfully. Alternatively, all the joint petitioners are asking the court to vacate and remand the behavior rules in part.

To view the brief, click here.

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