Administrative Law Overview

1
Administrative Law Overview

• Congress grants authority to administrative
  agency through statute.
• Administrative agency interprets the statute and
  acts according to Congress intent.

2
Down the Road Judicial Review

• Clear Congressional Intent
• Must follow Congress
• No Clear Congressional Intent
• Agency allowed to interpret permissible
  construction of the statute
• Factors
• (1) Text, (2) Context, (3) More specific
  statutes, and (4) Common sense

3
Todays Hearing

• Before the Federal Energy Regulatory Commission
• Must decide on how to interpret the Federal Power
  Act

4
Southern California Electric (Petitioner) V.
Dynegy (Respondent)

• What does just and reasonable
• really mean?

5
December 15, 2000

• Dynegy sold 5000 MWh of power to SCE
• 130 per MWh
• From Palo Verde Facility
• Largest Gas Generator in California
• Dynegy made 650,000

6
Hearing Officer Findings

• December 13th and 14th
• Demand for power in the Cal PX market at an
  all-time high
• Generation reserve margins near zero
• Dynegy's very high price was a scarcity rent
• Highest Previous Price 60 per MWh
• Average Price 40 per MWh
• Dynegy did not collude with other sellers
• Dynegys costs of generation had not increased

7
May 29, 2001

• Dynegy sold 5000 MWh of power to SCE
• 500 per MWh
• From Palo Verde Facility
• Largest Gas Generator in California
• Dynegy made 2,500,000

8
Hearing Officer Findings

• High prices for pollution credits
• SCEs credit rating had dropped.  
• The Dynegys rate consisted of the following
• 50 per MWh Generation Costs
• 200 per MWh Air Pollution Allowances
• 250 per MWh Risk Premium

9
Federal Power Act (FPA)

• 16 U.S.C. 824d
• All rates and charges made . . . by any public
  utility for or in connection with the . . . sale
  of electric energy . . . shall be just and
  reasonable . . .

10
Southern California Electric

• How such compensation may be ascertained, and
  what are the necessary elements in such an
  inquiry, will always be an embarrassing
  question.
• Smyth v. Ames

11
The FERC Does Not Have Authority to Implement a
Market Based Tariff

• The Supreme Court refuses to permit
  administrative agencies to implement market based
  tariffs without express statutory authority.
• The notice requirement of the FPA prevents the
  FERC from creating a market based tariff.
• The rates charged by Dynegy are invalid under the
  market based tariff.

12
MCI v. ATT

• (C)hanging it from a scheme of rate regulation .
  . . to a scheme of rate regulation only where
  effective competition does not exist may be a
  good idea, but it was not the idea that Congress
  enacted into law.

13
11 U.S.C. 824d (d)

• Notice required for rate changes Unless the
  Commission otherwise orders, no change shall be
  made by any public utility in any such rate . . .
  except after sixty days notice to the Commission
  and to the public.

14
11 U.S.C. 824d (d)

• The Commission, for good cause shown, may allow
  changes to take effect without requiring the
  sixty days notice . . . by an order specifying
  the changes so to be made and the time when they
  shall take effect and the manner in which they
  shall be filed and published.

15
11 U.S.C. 824d (f)

• automatic adjustment clause means a provision
  of a rate schedule which provides for increases
  or decreases . . . without prior hearing, in
  rates reflecting increases or decreases (or both)
  in costs incurred by an electric utility.

16
Dynegy's Rates Are Not "Just and Reasonable"
Because They Do Not FallWithin a "Zone of
Reasonableness".

• The FPA requires the FERC to ensure that
  generators in the energy market charge a "just
  and reasonable" rate for the sale of power
• Courts have interpreted "just and reasonable" to
  permit any tariff formula only when it produces
  rates within a "zone of reasonableness".
• Dynegy's rates are not "just and reasonable"
  because they do not fall within a "zone of
  reasonableness".

17
FPC v. Hope Natural Gas

• The rate-making process under the Act, i.e., the
  fixing of just and reasonable rates, involves a
  balancing of the investor and the consumer
  interests.
• Regulation does not insure that the business
  will produce net revenues.

18
Balancing the Interests

• December 15, 2000
• No increase in cost for Dynegy to generate
• More than 3x price increase
• May 29, 2001
• Market placed hardships on everyone
• Dynegy could have easily hedged purchase of
  pollution costs

19
Dynegy's Rates Are Not "Just and Reasonable"
Because Dynegy AttainedThem Through the Abuse of
Market Power.

• In a competitive market, a market based tariff
  creates rates within this "zone of
  reasonableness".
• The FPA does not permit the FERC to implement a
  market based tariff in a non-competitive market.
• In the presence of low marginal supply and
  inelastic demand, a generator may have market
  power without a large market share.
• The two transactions between Dynegy and SCE
  demonstrate that Dynegy not only had market power
  over SCE, but also exploited this market power.

20
The Lucky Outcome
21
Supply Glut
22
Supply Shortage
23
Dynegys Market Action
24
Market Abuse

• December 15, 2000
• Hockey stick pricing
• May 29, 2001
• Exorbitant 200 risk premium

25
Dynegys Counterargument
26
The FERC Does Have Authority to Implement Market
Based Tariffs.

• FERC has not abandoned its mandate to ensure
  electricity prices are just and reasonable
• Judicial deference to an agency is very strong in
  complex, policy-oriented determinations
• So, it is unlikely that a court would strike down
  FERCs current market based rate system

27
The FERC Does Have Authority to Implement a
Market Based Tariff.

• The Supreme Court ruled on market based tariffs
  in the telecommunications market This does not
  automatically apply to the energy industry.
• There were not explicit changes to the FPA to
  authorize market based rates, but FERCs position
  that the Act authorizes these rates as long as
  they are just and reasonable
• The notice requirement of the FPA applies to
  utilities not to wholesale electricity providers.
  

28
FERC Does Have Authority to Implement a Market
Based Tariff

• Judicial decisions have condemned only those
  market pricing systems that
• Rely solely on market forces
• Do not retain mechanisms of monitoring
  unreasonable pricing, and
• Do not require mitigation of market power

29
Supporting Precedent

• Hope In re Premium Area Rate Cases
• The NGA (nor the FPA) do not require a particular
  formula or method for ratemaking
• Elizabethtown Gas
• Nothing precludes the FERC from relying on market
  based pricing, so long as the market is
  competitive
• California v. FERC
• Market based pricing regime upheld, with caveat
  that there must be monitoring mechanisms enforced

30
FERCs Approval Method of Market Based Ratemaking

• Case by case approval
• Seller must not have, or at least have mitigated,
  market power in transmission or generation
• Typically, the cap is 20 of market share
• Seller must comply with numerous filing
  requirements regarding market power and pricing
  methods
• Changing circumstances in industry must justify
  the shift

31
Market Based Ratemaking

• We have shown that FERC has the authority to
  implement market based pricing.
• Now, we will show that our client, Dynegy, has
  charged SCE with prices that were set by market
  forces, and that remained within a zone of
  reasonableness.

32
Dynegy Did Not Have or Use Market Power Over
SCE.

• The Commission allows power sales at market-based
  rates if the following conditions are met
• seller and its affiliates do not have, or have
  adequately mitigated, market power in generation
  and transmission and cannot erect other barriers
  to entry.
• Dynegy did not have controlling share of the
  market
• There is no evidence of affiliate abuse or
  reciprocal dealing.
• Rather, the prices it asked for reflected what
  Dynegy believed the market would bear, given a
  scarcity supply coupled with the high
  inelasticity of demand for electricity

33
Dynegy did not commit any fraudulent acts or
transactions.

• Risk premiums are not fraudulent
• Risk premiums protect sellers from unacceptable
  financial risks due to a high likelihood of
  default.
• Purchasing of pollution credits is a requirement,
  and are legitimately part of Dynegys costs
• These are both legitimate business practices in
  the market

34
Dynegys December 15, 2000 rate was well below
the average rates charged on the spot market.
May rates also fell below the wholesale
electricity price caps.

• December, 2000 - Dynegy sold 5000 MWh to SCE at a
  rate of 130/MWh.
• Prices in the California wholesale electricity
  spot markets reached monthly averages of nearly
  400/MWh in December 2000 and average daily
  prices of nearly 1200/MWh.
• May 2001 - Dynegy sold 5000 MWh to SCE at a rate
  of 500/MWh.
• FERC set price cap on wholesale electricity
  750/MWh.

35
Regional Retail Price Caps Were the Unjust and
Unreasonable.

• Dynegys prices just and reasonably represented
  the market. However, the state of California did
  not allow the market to operate effectively which
  made Dynegys rates seem unreasonable.
• With price caps at the retail level, there was no
  reduction in demand reactive to high prices.
• The best way to protect the consumer is to allow
  free market forces to operate at both the
  wholesale and retail level.

36
FERCs Market Behavior Rules

• After the California Energy Crisis, the FERC
  issued two Orders regarding Market Behavior
  Rules. These Rules are not binding, nor
  retroactive, but are a useful tool in determining
  which business practices the FERC considers
  anticompetitive in the electricity industry.
• Dynegys actions comply with the Rules.