While the Federal Energy Regulatory Commission chases the trail of some long-gone transaction in pursuit of retroactive refunds for a few consumers, it may be harming the many who depend on the efficient functioning of the competitive market, Duke Energy said in asking the Commission to narrow the window for challenges.

FERC’s behavior modifications for market participants (RM03-10) includes an open window for retroactive refunds that will chill competitive markets. “The Final Rule (644) simply assumes, without supporting analysis, that consumers will be better off, either in terms of more diligent compliance with the rules or through reparations that the Commission will order if it discovers rule violations. The Final Rule, however, fails to consider the harm to markets, and therefore to consumers, that will result….”

Duke noted that rather than accept the regulatory risk of after-the-fact challenges, market participants “will inevitably forgo activities that are pro-competitive and efficiency-enhancing,” thereby damaging the entire market. FERC’s failure to consider the consequences of its actions is not reasoned decision-making.

Duke was one of several market participants requesting rehearing and clarification of the lengthy refund exposure and other elements of its final rule creating a Code of Conduct to eliminate the potential for manipulation. Comments filed by Merrill Lynch and the American Gas Association said the rules were unduly vague, overly broad and redundant (see Daily GPI, Jan. 5).

Sempra Energy agreed that the window for complaints to be filed should be closed after a 90 day period after the calendar quarter in which the violation occurred. FERC set that time limit, but then provided for exceptions that crack that limit wide open. The rule allows open-ended challenges by market participants who could not have known of the alleged misconduct. They would be able to file a complaint within 90 days of the discovery of the alleged violation. Also, regardless of the time limits, FERC may initiate a challenge within 90 days of being notified of possible transgressions.

The uncertainty embodied in the exceptions should be eliminated both Duke and Sempra said; then market participants can safely rely on the finality of the transactions and revenue implications. If the Commission must utilize retroactive refunds, Duke suggested it “establish a date certain (e.g. one year after the end of the relevant calendar quarter) after which the Commission will rely on remedies other than retroactive refunds of transaction revenues.”

Duke further challenges the legitimacy of using retroactive refunds at all. “In the final rule, the Commission uses its conditioning authority to create a class of filed rates that are not fixed and will remain subject to refund, to be fixed at a later date. This exceeds the Commission’s authority…”

Cinergy Marketing and Trading LP notes that “superimposing a retroactive refund condition onto a bargain made in a competitive market is an extraordinary remedy.” Further there are no protections against frivolous litigation instigated against sellers by buyers who are unhappy with their bargains. The rule attempts “to bootstrap overly broad and unduly vague certificate conditions into authority to impose retroactive refund liability, in direct contravention to [Natural Gas Act] Section 5.”

And Cinergy raises the specter of discrimination between sellers of natural gas under blanket sales certificates or sales for resale and “first sellers” of natural gas because the Code of Conduct does not apply to first sellers who were exempted from the Commission’s jurisdiction by the Natural Gas Policy Act of 1978.

Meanwhile, Shell Offshore Inc. and other producers attacked FERC’s definition of exempt first sales in Order 644, which “appears to imply that when an affiliate of a producer buys the producers production and resells it, that might not qualify as a first sale.” Shell says FERC should clarify its definition of first sale to conform to previous court decisions, as follows: “Where a producer or its marketing affiliate is affiliated with an interstate pipeline, intrastate pipeline or local distribution company, and where the producer is selling its own production or the marketing affiliate is selling its affiliated producer’s production, then in either circumstance the sale qualifies as a ‘first sale.'”

©Copyright 2004 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.