May 2000

Please Don't Sqeeze 
The X-Factor

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2000/05)

As private power entrepreneurs are learning, there is a parallel universe to e-commerce, called e-law. Enshrined on the e-law.com web site is the newly digitalized, but longstanding first rule of power regulation: "When technology outstrips regulation, preserve the power of the regulator." Hard cases based on this principle make just as bad law digitally as they did in hard copy. The Courts have most recently made this point, and thereby perhaps rendered more complex practical efforts to allow deregulated power to be market-regulated.

Recently, FERC asserted jurisdiction over the Automated Power Exchange, Inc. ("APX") as a public utility under the Federal Power Act and required it to file information about itself (and also to pay an annual fee – an issue now being separately reviewed). The DC Circuit now has affirmed FERC’s decision more or less on the basis of applying the noble traditional administrative law principles that there should be deference to colorable agency jurisdiction, where certain minimal due process type tests are met - which is not to say the decision was correct as a matter of good policy. Indeed, the decision provided sufficient explicit fodder for the following alternate conclusion: Congress never knew (and could not have known) about automated exchanges when it passed the legislation FERC is administering. Since the overall purpose of all of FERC’s initiatives is to replace regulation with the operation of free markets whose regulation must be honest (as should any commodity exchanges) but not subject to the incessant oversight of regulators, regulation should be very light handed. While publicly created exchanges may be "jurisdictional", in the sense that they are part of the architecture government is creating to remold the industry, private computer-based electronic commerce arrangements among freely consenting parties who can go elsewhere to do their trades, do not fit this mold. If Congress wants to extend regulation to these operations, FERC can certainly bring their existence to its attention and encourage it to do so.

The nub of the FERC/Court decision was that while APX was not a pure "broker", which never took power title for resale (a regulatory exempt category under FERC decisions) neither was it a mere "information management agent" as APX argued. While it did not own archetypal FERC jurisdictional facilities (generation facilities and transmission facilities; or even the paperwork related facilities (which had previously been deemed to make power marketers jurisdictional), APX was held to be an "integral part" of trading transactions, which exercised "effective control" over them, in that buyers and sellers were subject to compulsory matching/transaction closure if their bids/offers fell within the then-applicable band established by the applicable APX algonthins – uniformly applied to all transactions. (Those algonthins, FERC noted, were not made available to the public.) "Consequently, the phrase "market price" when used in relation to the APX marketplace, asserted FERC describes the price APX’s computer estimates to be most likely to clear the market, rather than the most common meaning in other contexts, i.e. "a price which willing sellers and buyers have agreed to trade". It was more, in short, than a pure bulletin board type system where transactions voluntarily might be transacted, which FERC had adjudged to be non-jurisdictional.

By reaching this decision, FERC (as affirmed by the court) lumped the APX with the Cal PX which aggregates supply and demand, matches buyers and sellers and therefore previously had been held to control sales and be jurisdictional. No distinction was found to exist between APX, in which parties voluntarily participate, and the Cal PX, to which the State utility commission directed the three largest investor-owned utilities to sell their entire supply through 2001. To ensure adequate power supply availability in the "fledgling market" PX is an integral part of the overall system restruction.

The finding of FERC jurisdictionality of APX is no slight burden! APX must file a "detailed description and explanation of its services, including the calculation of market price, fees and all relevant terms""- arguably, for a competitive business, the guts of its operations.

Why did FERC really do it? The operation of the new deregulated markets has already outrun the limited operations first of power brokers and now of power marketers. Power marketing has become the core of the operations of major utility unregulated subsidiaries – not just daring cutting edge, marginal players. The original marketers have acquired utilities themselves. Thus, we have the prospect – as in the securities industry – of dueling markets wherein the best price can be obtained. Some of these markets are wholly regulated; some are not, when they simply enable buyers to obtain best prices. The existence of multiple markets has, itself, become a forcing function of competition.

In the power context, it is not insignificant that the supplier rebellion against the FERC sanctioned-ISO in New England has taken the form of a call for the operation of multiple power exchanges. Bringing on the .coms, as they seek, means challenging the government sanctioned pricing monopoly. Conversely, governing APX and the Cal PX in the same way has the effect of reestablishing the FERC as the competition Czar. Perhaps ultimately, this is the way to assure that order and not chaos will prevail in the markets. There may be another FERC motive as well: simply to prevent the several States from mucking up trading exchange regulation even more than FERC might do itself. For those who doubt this possibility, we have NARUC’s recent wish list to Congress, which includes the following pertinent treaties: Congress should not preempt jurisdiction in the states to address market power concerns... NARUC advocates a continuum of options, such as accounting conventions and codes of conduct, and urges Congress to preserve state flexibility to use those options... FERC should have jurisdiction over transactions between suppliers and retail customers located in different states and it should be required to defer to states acting on a regional basis.

Unfortunately, perhaps, too, however, a yet more fundamental principal of power regulation is in play. The one alluded to at the beginning of this column. Put succinctly it is: regulators want to regulate. Unfortunately their urge to squeeze the market "X" charge factor may seriously constrain the very market-base regulation which they now purport to champion. Private power should emphatically join e-commerceurs in the rallying refrain: "Please don’t squeeze the x-factor."

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.