The Texas Public Utility Commission (the “Commission”) enacted a new rule to prevent manipulation of wholesale electricity markets by market participants. Texas P.U.C. Subst. R. 25.503 (the “Rule”). The Commission, in commenting on the need for the rule, explained that “[r]ecent experience in Texas and other states has shown that during the transition to competition, the developing wholesale and retail markets can be subject to practices by market participants that serve the private interest of the participants at the expense of the public interest. These practices have resulted in unjustified increased prices to customers and market participants, reduced reliability of the electric power grid, and ultimately threaten the implementation of a successful competitive electric market.” Rulemaking to Address Wholesale Market Rules, Project No. 26201, Order Adopting New §25.503 (January 29, 2004) (the “Order”). To prevent these problems, the Rule establishes certain affirmative duties and prohibited practices of “market participants,” defined to include power marketers, utilities, power generation companies, qualifying facilities and other persons “participating in the ERCOT-administered wholesale market.”

Among other things, the Rule gives market participants the affirmative duty to:

• “[E]xercise due diligence to prevent the release of materially inaccurate or misleading information”
   

• Make “bids of energy and ancillary services [only] from resources that are available and capable of performing”
   

• Generally comply with ERCOT procedures; and
   

• Notify ERCOT immediately upon learning of an inability to comply with such procedures.

The Rule broadly prohibits “[a]ny act or practice of a market participant that materially and adversely affects the reliability of the regional electric network or the proper accounting for the production and delivery of electricity among market participants.” The Rule also sets forth a non-exclusive list of such “prohibited activities.” Among other things, a market participant must not:

• “[C]onduct trades that result in a misrepresentation of the financial condition of the organization”;
   

• “[C]ollude with other market participants to manipulate the price or supply of power”;
   

• “[S]chedule, operate or dispatch its generating units in a way that creates artificial congestion;”
   

• “[E]xecute pre-arranged offsetting trades with the same product among the same parties, or through third party arrangements, which involve no economic risk and no material change in beneficial ownership”; or
   

• “[E]ngage in market power abuse,” which specifically includes the “[w]ithholding of production . . . by a market participant who has market power.”
   

In its Order, the Commission acknowledges that “market power” and “market power abuse” need to be further defined and states that it will do so in a new rulemaking on market power.

The Rule recognizes a defense for a market participant that “served a legitimate business purpose consistent with prices set by competitive market forces; and that it did not know, and could not reasonably anticipate, that its actions would inflate prices, adversely affect the reliability of the regional electric network, or adversely affect the proper accounting for the production and delivery of electricity; or, if applicable, that it exercised due diligence to prevent the excluded act or practice.” The market participant has the burden to prove that the defense applies.

In the event of a violation, the Rule provides that the Commission “may seek or impose any legal remedy it determines appropriate for the violation involved.”

Robert A. Olson is a partner in the law firm of Brown, Olson & Gould P.C. which maintains a nationwide practice in energy law, public utility law and related commercial transactions. He can be reached at:

Brown, Olson & Gould, PC
2 Delta Drive, Suite 301
Concord, NH 03301

rolson@bowlaw.com | (603) 225-9716