FERC Allows Market Manipulation Claims in New England Market Despite Improper Filing

On August 24, 2009, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) ruled that claims of market manipulation should be brought under section 306 of the Federal Power Act (“FPA”) and not section 206 of the FPA, where the Attorney General of Connecticut, the Connecticut Department of Public Utility Control (“DPUC”), and the Connecticut Office of Consumer Counsel (“OCC”) filed their complaints against power plant operators earlier this year. Despite the improperly filed complaints, the Commission agreed to set the complaints for a trial-type evidentiary hearing before an administrative law judge at the Commission.

Originally, on March 20, 2009, ISO New England Inc. (“ISO-NE”) and New England Power Pool Participants Committee (“NEPOOL”) filed proposed revisions to their penalty structure for non-delivered energy after identifying concerns with transactions associated with installed capacity (“ICAP”) import contracts. ISO-NE and NEPOOL alleged that in 108 instances, from January 2005 to January 2009, supply offers over the Northern New York AC Interface failed to perform when it was dispatched. This occurred every time the supply offer was above $660/MWh. On May 6, 2009, ISO-NE corrected itself by stating that the 108 offers did not clear the real-time energy market and were not dispatched.

In the meantime, complaints were filed by the Attorney General of Connecticut, Richard Blumenthal, and the DPUC and OCC jointly on April 20 and April 23, respectively. These complaints alleged that Brookfield Energy Marketing Inc. (“Brookfield”), H.Q. Energy Services (U.S.) Inc. (“HQUS”), and Constellation Energy Commodities Group, Inc. (“Constellation”) were paid nearly $86 million for electricity that was never delivered over a 26-month period that ended earlier this year.

In these complaints, the Connecticut Attorney General alleged that the operators’ conduct violated section 222(b) of the FPA while the DPUC and OCC alleged violations against section 206 of the FPA. These three parties (the “Connecticut Representatives”) filed an amended complaint on May 22, stating that at least $50.9 million was paid for reliability services that operators never intended to provide. Brookfield, HQUS, and Constellation claimed in their answers, filed on June 12, that the complaints should be dismissed because neither section 222(b) nor section 206 of the FPA create a private right of action for alleged market manipulation. On June 29, the Connecticut Representatives filed a notice that HQUS had been removed from their complaint.

The Commission noted that the complaints were improperly filed under section 206 of the FPA, which applies to changes in rates of public utility tariffs. Additionally, the Commission ruled that section 222(b) of the FPA does not create a private right of action for allegations of market manipulation. However, given the unique history of the allegations, the Commission determined that these actions can be brought before the Commission pursuant to section 306 of the FPA – which permits the filing of complaints for any violation of the FPA – and thus, set the allegations for hearing. Currently, a prehearing conference is scheduled for September 9, 2009 before Administrative Law Judge H. Peter Young.

A full copy of the Commission’s order can be found at http://www.ferc.gov/EventCalendar/Files/20090824170225-EL09-47-000.pdf.