FERC Clarifies Policy on Simultaneous Exchange Transactions

FERC reiterates that simultaneous exchanges between affiliates require prior approval and clarifies the types of transactions covered by this policy and the showing necessary to receive FERC approval.

On November 2, the Federal Energy Regulatory Commission (FERC or the Commission) rejected challenges to its 2012 order[1] on “simultaneous exchange transactions.”[2] Under the order, affiliates may enter into simultaneous exchanges as long as they obtain prior approval from FERC and FERC finds that there are not attempts to circumvent transmission service regulation or concerns of affiliate abuse or separation of functions violations. FERC also provided key clarifications to its policy by explaining the types of transactions included within or excluded from the requirement of prior FERC approval.

Simultaneous exchange transactions occur when a pair of wholesale power transactions are simultaneously arranged (i.e., are part of the same negotiations) between the same two counterparties such that Party A sells an electricity product to Party B at one location and Party B sells a similar electricity product to Party A at a different location with both transactions having an overlapping delivery period. The simultaneous exchange is the overlapping portion (both in volume and delivery period) of these wholesale power transactions.

In the 2012 order, FERC ruled that entities are permitted to engage in simultaneous exchanges without prior FERC approval (beyond the necessary authorization under section 205 of the Federal Power Act for the sale for resale of electric energy) if such transactions do not include the marketing function of a transmission provider conducting simultaneous exchange transactions involving that transmission provider’s system. In contrast, the marketing function of a transmission provider is not permitted to engage in simultaneous exchanges “involving” that transmission provider’s system absent prior Commission authorization, as evaluated on a case-by-case basis.[3]

In the rehearing order, FERC rejected arguments that it had not adequately explained its reasoning for requiring the marketing function of a transmission provider to seek prior approval for simultaneous exchanges. FERC reiterated that affiliates can enter into simultaneous exchange transactions only with prior FERC approval, which would depend on FERC finding that the transaction would not reflect affiliate abuse or circumvent FERC’s transmission service and separation of function requirements.

In the rehearing order, FERC also clarified the 2012 order:

• In the context of FERC’s discussion of simultaneous transactions, the term “marketing function” refers to the definition of marketing function in FERC’s Standards of Conduct regulations.
• The fact that a simultaneous exchange’s purpose is to make a bundled retail sale rather than to engage in marketing functions does not exempt a transaction from prior FERC review if the transaction involves a marketing function affiliate and an affiliated transmission provider’s system.
• The fact that only one point of a simultaneous exchange is on the contiguous system of a transmission provider’s affiliate does not exempt a transaction from the requirement to file for prior FERC approval.
• Brokered transactions in which independent parties do not know the counterparties to a transaction until after the fact are exempt from the prior approval requirement.
• The standard of review that will apply to requests for prior approval of simultaneous exchanges is the just and reasonable standard applicable to section 205 filings.
• FERC declined to prescribe the exact requirements for the content of a filing for prior approval of a simultaneous exchange but explained that an applicant could include the following information: (1) the parties to the transaction; (2) the delivery and receipt points involved; (3) the terms and conditions, including any charges or compensation; (4) details of ultimate power sources and sinks; (5) available competitive alternatives (accounting for physical constraints or whether transmission service for a related transaction was previously denied); (6) the operational implications, including any potential reliability and curtailment issues; (7) the power levels of the exchange; and (8) the desired dates and times for the exchange.
• In terms of how an applicant should address “available competitive alternatives” in a prior approval filing, FERC explained that it is interested in understanding whether the proposed transaction should raise any concerns of transmission regulation circumvention. FERC explained that it would expect to see, for example, information that shows that a customer has the option to obtain transmission from another source, has not requested a transmission provider’s transmission function to redispatch, is not paying twice for the service, and could have entered into the transaction with another power marketer instead of the transmission provider’s merchant affiliate.
• If the ultimate power sources and sinks in a simultaneous exchange are unknown at the time of a prior approval filing, they do not need to be specified in the filing. In such a case, an applicant must submit an informational filing to update this information within 30 days that such information becomes known.
• FERC will allow applicants to submit market-based rate tariff amendments that seek authorization for short-term exchanges between specified pairs of points. Once such a market-based tariff is approved, the applicant will be able to engage in short-term simultaneous exchanges between those specified points without any further FERC approval.

Contacts
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, DC
Joseph W. Lowell