CWG Petition

20091028-5127 FERC PDF (Unofficial) 10/28/2009 4:05:01 PM

UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION

Market-Based Rates For Wholesale Sales
Of Electric Energy, Capacity And
Ancillary Services By Public Utilities

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RM04-7-___

Amended Request for Clarification
Members of the Compliance Working Group1 hereby submit this amended request
for clarification regarding which employees can be “shared” for purposes of compliance
with the Commission’s Affiliate Restrictions adopted under Order No. 697.2 The original
request, submitted on March 9, 2009, has been supplemented and restated to provide
further information and support, as requested by the Commission Staff.
Introduction
The question presented arises because of an unintended inconsistency in the
treatment of shared employees under the two major rulemakings – Order Nos. 697 and

1

The Compliance Working Group is described below. The members of the
Compliance Working Group taking part in this filing are: Allegheny Energy, Inc.,
American Electric Power Company, Inc., Cleco Corporation, Consumers Energy
Company, Dominion Resources, Inc., Duke Energy Corporation, Edison
International, El Paso Electric Company, Energy East Corp., Entergy Corporation,
Exelon Corporation, FirstEnergy Corp., FPL Group, Inc., Pacific Gas and Electric
Co., Progress Energy, Inc., Public Service Enterprise Group Incorporated, and
Westar Energy, Inc.

2

Mkt.-Based Rates for Wholesale Sales of Elec. Energy, Capacity and Ancillary
Servs. by Pub. Utils., Order No. 697, FERC Stats. & Regs. ¶ 31,252 (“Order No.
697”), order clarifying final rule, 121 FERC ¶ 61,260 (2007), order on reh’g and
clarification, Order No. 697-A, FERC Stats. & Regs ¶ 31,268, (“Order No. 697A”), order on reh’g and clarification, 124 FERC ¶ 61,055, order on reh’g and
clarification, Order No. 697-B, FERC Stats. & Regs. ¶ 31,285 (2008) (“Order No.
697-B”).

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7173 – that impose restrictions on employee interactions and communications. Order No.
697 sought to ensure consistency between the two rules by holding that shared employees,
for purposes of its Affiliate Restrictions, would be the same as later defined by the
Standards of Conduct. However, an inconsistency later arose because Order No. 717
ultimately revised the Standards of Conduct by eliminating the concept of shared
employees altogether.4 This was not because sharing was no longer allowed, but, to the
contrary, because the Standards of Conduct had been simplified to such an extent that an
exhaustive list of shared employees was no longer necessary.
This disconnect has created a compliance conundrum that should be remedied.
There is now a “void” or “null set” in the Affiliate Restrictions because Order No. 697
defines shared employees with reference to a later rulemaking, Order No. 717, that
eliminates that term altogether. This not only renders compliance difficult for regulated
companies, like the Compliance Working Group, who take compliance very seriously,
but also frustrates the Commission’s enforcement function because there is essentially no
law to apply on this issue.
The Commission can remedy this situation, and achieve its original objective of
making both rules consistent, by adopting the requested clarification. Specifically, we
request that the Commission interpret the Affiliate Restrictions to permit sharing of
employees who are not “transmission function employees” or “marketing function
employees” – the same sharing that is now permitted under the Standards of Conduct.

3

Standards of Conduct for Transmission Providers, Order No. 717, FERC Stats. &
Regs. ¶ 31,280 (2008) (“Order No. 717”), order on reh’g and clarification, Order
No. 717-A, 129 FERC ¶ 61,043 (2009).

4

Order No. 717 at PP 128-129.

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This interpretation is consistent with the purpose of Order Nos. 697 and 717, will
facilitate compliance by regulated companies, and enhance enforcement by the
Commission. In addition, as was the case with Order No. 717, this interpretation would
not eliminate the residual protection afforded by the rule against undue discrimination.
The Amended Request for Clarification is organized as follows.
describes the Compliance Working Group.

Section I

Section II provides background on the

evolution of the Affiliate Restrictions in Order No. 697 and Standards of Conduct in
Order No. 717 and why there is now an inconsistency in this area. Section III explains
why the relief sought here is consistent with the intent behind both rules, will facilitate
compliance and does not pose undue risks to captive ratepayers.
I.

The Compliance Working Group
The Compliance Working Group consists of 27 energy companies representing a

broad cross-section of the industry, including integrated electric businesses, merchant
generators, marketing and trading businesses, and natural gas distributors. Collectively,
these companies operate in every region of the country and participate in all forms of
electric and natural gas markets. The group came together in mid-2008 to develop a
model FERC compliance program guide. That document, consisting of approximately
375 pages of original material,5 is now complete after six months of intensive work by
member companies. During the course of preparing the model compliance program
5

The document presents compliance guidelines for companies to consider in light
of their own unique circumstances. As the Commission has said, “each case is
unique and no one size fits all” when it comes to putting together a compliance
program, Enforcement of Statutes, Regulations and Orders; Revised Policy
Statement on Enforcement, 123 FERC ¶ 61,156 at P 59 (2008), and “there is no
one template or approach for a good compliance program.” Compliance with
Statutes, Regulations, and Orders; Policy Statement on Compliance, 125 FERC
¶ 61,058 at P 10 (2008).

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guide, group members debated the issue presented here, and came to the conclusion that
clarification is needed to promote compliance.
II.

Background
The issue presented here implicates two elements of the Affiliate Restrictions that

were adopted by Order No. 697 – the “separation of functions” requirement 6 and the
“information sharing” restriction. 7

Under the separation of functions requirement,

employees of market-regulated power sales affiliates 8 must operate separately, to the
maximum extent practical, from employees of affiliated franchised utilities with captive
customers.9 The information sharing restriction prohibits a franchised public utility with
captive customers from sharing market information with a market-regulated power sales
affiliate if the sharing could be used to the detriment of captive customers, unless
simultaneously disclosed to the public. Thus, both rules apply on their faces at the

6

18 C.F.R. § 35.39(c).

7

18 C.F.R. § 35.39(d). The interpretive issue does not bear on the categories of
affiliate restrictions that apply purely on a corporate basis, namely the restrictions
on affiliate sales of power, 18 C.F.R. § 35.39(b), affiliate sales of non-power
goods and services, 18 C.F.R. § 35.39(e), and affiliate brokering, 18 C.F.R. §
35.39(f).

8

A “market-regulated power sales affiliate” is “any power seller affiliate other than
a franchised public utility, including a power marketer, exempt wholesale
generator, qualifying facility or other power seller affiliate, whose power sales are
regulated in whole or in part on a market-rate basis.” 18 C.F.R. §§ 35.43(a)(4) &
35.36(a)(7).

9

A “franchised public utility” is “a public utility with a franchised service
obligation under state law.” 18 C.F.R. §§ 35.43(a)(3) & 35.36(a)(5). Subsequent
references in this document to “franchised public utilities” will assume that such
utilities have captive customers, as the interpretive issue that arises here only
arises when the rules apply, i.e., when the utilities have captive customers.

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corporate level, i.e., between all employees of affiliated companies, based on what the
companies do.
However, there are exceptions to the separation of functions requirement for
certain categories of employees who are “permitted” to be shared, often referred to in
short-hand as “shared employees.” Specifically,
Franchised public utilities with captive customers are
permitted to share support employees, and field and
maintenance employees with their market-regulated power
sales affiliates. Franchised public utilities with captive
customers are also permitted to share senior officers and
boards of directors with their market-regulated power sales
affiliates; provided, however, that the shared officers and
boards of directors must not participate in directing,
organizing or executing generation or market functions. 10
Similarly, such “[p]ermissibly shared support employees, field and maintenance
employees and senior officers and boards of directors . . . may have access” to market
information.11 In Order No. 697, the Commission declined a request to provide a “nonexhaustive list of examples of permissible shared support employees.” 12 Instead, the
Commission “clarif[ied] that the types of permissibly shared support employees under the
standards of conduct are the types of permissibly shared support employees that will be
allowed under the affiliate restrictions in § 35.39(c)(2)(c).”13
As this quotation indicates, Order No. 697 recognized that the Standards of
Conduct would be modified in the future.

10

18 C.F.R. § 35.39(c)(2)(ii).

11

18 C.F.R. § 35.39(d)(2).

12

Order No. 697 at P 564.

13

Id. (emphasis added).

At the time Order No. 697 was issued, the

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Court of Appeals in National Fuel Gas Supply Corp. v. FERC14 had struck down portions
of the Standards of Conduct and the Commission was in the process of adopting new
regulations to comply with the National Fuel decision. The intent of Order No. 697, as
reflected in the above passage, was to ensure that the Affiliate Restrictions would be
consistent with the subsequent treatment of shared employees in the revised Standards of
Conduct. However, the Commission could not have foreseen at that time that the revised
Standards of Conduct would eliminate the concept of shared employees altogether. This
occurred because, although the prior Standards of Conduct were organized based along
corporate form, with carve-outs for certain categories of shared employees, Order No.
717 streamlined the rule in a way that eliminated the need for a specific category of
shared employees:
As discussed in the NOPR, the substitution of the employee
functional approach for the corporate separation approach
renders continuation of the concept of “shared employees”
unnecessary. Since only those individuals who engage in
transmission or marketing functions now fall within the
scope of the Independent Functioning Rule, support
personnel of the type formerly included in the concept of
shared employees, and who do not meet those definitions,
do not. Therefore, there is no need to further exempt them
under the outmoded rubric of shared employees. 15
The Commission declined to address the impact of this finding on the parallel issue
arising under Order No. 697 because the problem was “beyond the scope” of the Order
No. 717 rulemaking. 16

14

468 F.3d 831 (D.C. Cir. 2006).

15

Order No. 717 at P 129.

16

See id. at P 130 (“We decline to amend prior orders that mention shared
employees; guidance from prior orders will be applicable or not depending on
whether those orders address concepts that survive the revisions made in this
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III.

Argument
We explain below why the clarification requested will (i) ensure consistency

between the Affiliate Restrictions and Standards of Conduct, (ii) enhance compliance and
strengthen enforcement, (iii) is consistent with the purposes of the Affiliate Restrictions,
and (iv) will not detract from the residual protections provided by the rule against undue
preference.
A.

The Requested Interpretation Ensures Consistency Between the
Affiliate Restrictions and Standards of Conduct

The objective of Order No. 697 on the issue presented here was to ensure
consistency in the treatment of shared employees as between the Affiliate Restrictions
and the Standards of Conduct.17 Our request for clarification fulfills this objective by
aligning the treatment of shared employees under Order No. 697 with the approach taken
in Order No. 717. In Order No. 717, the Commission held that any employees who are
not “marketing function employees” or “transmission function employees” can be shared.
To ensure consistency between the Affiliate Restrictions and Standards of Conduct, and
thereby fulfill the original objective of Order No. 697, the Commission should clarify that
any employees who are not market function employees or transmission function
employees can be “permissibly shared” under Order No. 697.

Final Rule.”); id. at PP 314-315 (denying as “beyond the scope of this Final Rule”
a request to “extend[] the use of the employee functional approach to the Code of
Conduct/affiliate restrictions promulgated by Order No. 697 and set forth in 18
CFR § 35.39 of the Commission’s regulations.”) (footnote omitted).
17

Order No. 697 at P 564 (holding that “the types of permissibly shared support
employees under the standards of conduct are the types of permissibly shared
support employees that will be allowed under the affiliate restrictions in §
35.39(c)(2)(c).”) (emphasis added).

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The regulatory text accompanying Order No. 697 enumerates three categories of
shared employees:

“support employees,” “field and maintenance employees,” and

“senior officers and boards of directors.”

The Commission has the discretion, as

indicated in Order No. 697, to interpret these terms in the manner requested and thus no
amendment to the regulatory text is required.

In this regard, we note that the

Commission found in Order No. 697-B – which was issued after Order No. 717 was
issued – that risk management employees could be shared employees, and that no
amendment to the regulatory text was necessary to make this interpretation.18 The same
should be true with respect to the broader interpretation we request here.19
We also wish to be clear that this interpretation would, as is the case under Order
No. 717, define the entire universe of permissibly shared employees, not just “support”
employees. Thus, our requested clarification extends to the other two categories of
employees that are identified in the regulatory text as permissibly shared, i.e., field and
maintenance employees, and officers and directors. All of the arguments presented
herein (e.g., regarding the need for consistency between the two rules and to enhance
compliance and enforcement) apply to all classifications of employees that can be shared.
B.

The Requested Clarification
Strengthen Enforcement

Will

Enhance

Compliance

and

This clarification will not only ensure consistency, but enhance compliance and
strengthen enforcement as well. When Order No. 697 was adopted the Commission was
still considering the remand of the Standards of Conduct by the National Fuel decision.
18

See Order No. 697-B at P 59.

19

See Order No. 697 at P 564 (listing, as examples of support employees, not only
administrative support workers such as human resources, travel, and information
technology, but also employees with other roles, such as lawyers and accountants).

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The D.C. Circuit in National Fuel criticized and vacated the old Standards of Conduct
because they sought to remedy potential abuses for which there was no actual record of
abuse. After lengthy deliberations and a second Notice of Proposed Rulemaking, the
Commission determined that the Standards of Conduct had become too unwieldy to
enforce and therefore adopted significant structural changes to them. Specifically, the
Commission found that:
the corporate separation approach had proven difficult to implement, as
evidenced by the scores of waiver requests submitted to the Commission,
and impeded legitimate integrated resource planning and competitive
solicitations, as reflected in the concerns raised by the electric industry in
particular and also by state commissions. The Commission also found that
the existing Standards are too complex to facilitate compliance or support
enforcement efforts, and have had the unintended effect of making it more
difficult for transmission providers to reasonably manage their
businesses.20
The Commission therefore eliminated the corporate separation approach in favor of a
functional approach and found “these reforms, by making the Standards clearer and by
refocusing them on the areas where there is the greatest potential for affiliate abuse, will
make compliance less elusive and subjective for regulated entities, and will facilitate
enforcement of the Standards by the Commission.”21
The same concerns will arise under the Affiliate Restrictions unless the
Commission adopts the clarification requested here. First, the failure to adopt the clear
separation envisioned by Order No. 717 will necessarily embroil the Commission in
making numerous findings on various employee classifications – e.g., whether
accountants, lawyers, plant operators, linemen, customer representatives, financial

20

Order No. 717 at P 9.

21

Id. at P 2.

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experts, materials procurement personnel and a myriad of other employee classifications
can be shared. Not only are these classifications difficult to make in the abstract, but the
functions of employees within these classifications can differ from company to company.
This process of creating long lists of “shared” employees by rule and then entertaining
countless waiver requests from companies to address their unique circumstances was
found by Order No. 717 “too complex to facilitate compliance or support enforcement.”22
Second, this problem is compounded by the fact that, not only would the Affiliate
Restrictions be “too complex” standing alone, but they would conflict with the Standards
of Conduct. The Affiliate Restrictions and Standards of Conduct are difficult enough for
the average employee to comprehend, but it becomes even more difficult to train
employees on two sets of conflicting rules.

For example, consider the plight of an

employee working for a regulated utility who, under the Standards of Conduct, can
provide support to both transmission and generation functions (including affiliates)
because he is neither a transmission function employee nor marketing function employee.
However, if this employee is not on the “list” of shared employees under the Affiliate
Restrictions, he cannot interact with market regulated affiliates for purposes of
compliance with Order No. 697. Thus, in training this employee, it must be explained to
him that he can provide a support function for purposes of compliance with the Standards
of Conduct, but cannot provide that same function for purposes of compliance with the
Affiliate Restrictions. This is no simple thing to explain to an employee who does not
understand FERC and cannot comprehend how his job description and performance

22

Id. at P 9.

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criteria can be fulfilled by “supporting” the entire company in some instances but not
others.
Granting our request would eliminate this problem and thereby facilitate
compliance by allowing a single system of employee classification that is uniform across
both sets of rules. The goal of establishing a uniform system of classification is to allow
companies to tell employees which interactions are allowed and which are prohibited,
without requiring the employee to make a determination of which set of rules applies.
This should greatly enhance understanding, and hence, compliance.

Without the

interpretation requested here, such simplified application of these complex rules would be
difficult or impossible.
In addition to this generic problem, there are specific situations that create
heightened complications that go well beyond training. One common example arises
because of the patchwork of retail restructuring and traditional regulation that exists
across the country, meaning that many companies operate in both regulated and
restructured states and, as such, their previously integrated generation fleet is now owned
by both franchised utilities and marketing affiliates. (And, in some cases, a single plant is
jointly owned and hence split between franchised utilities and marketing affiliates.) This
fleet of generation is typically operated and maintained by the same workforce of support
employees as before retail restructuring.

Under the Standards of Conduct, these

employees can be shared because they do not perform transmission functions or engage
in wholesale power sales.

However, there is no clear answer under the Affiliate

Restrictions. On the one hand, the Affiliate Restrictions authorize the sharing of field and

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maintenance employees.23 On the other hand, an audit conducted under the predecessor
to the Affiliate Restrictions (previously called the “Code of Conduct”) found that “outage
scheduling personnel” could not be shared. 24
Facing this dilemma, a conservative company might chose to segregate its
operation and maintenance function into two categories: (i) plant managers who, under
the Florida Power audit finding, might be deemed involved in “outage scheduling,” and
(ii) other plant employees supporting these managers who might not be so classified.
This creates a situation where hundreds of plant employees can be shared but report to
managers who cannot be shared and hence are “walled off” from each other, which, in
turn, creates numerous compliance problems and inefficiencies that raise costs to
ratepayers.
For example, during an outage cycle, the nonregulated plant manager cannot
know where his field and maintenance employees are at any given time because that
knowledge might reveal which regulated plant was out at given time, thereby conveying
“market information” to him.

This problem then cascades into other areas by, for

example, creating the need for employees’ timesheets to be altered to mask where the
employee was spending his time during the month. Otherwise, the plant manager would
learn this information in the exercise of his normal supervisory function. For the same
reason, an entire range of other data – e.g., concerning budgets, generating statistics,
station dispatch cost reporting, historical performance and outage data – must be
segregated so as not to be shared.
23

See 18 C.F.R. § 35.39(c)(2)(ii).

24

See Florida Power Corp., 111 FERC ¶ 61,243 (2005) (attaching audit report that
notes, in discussion at page 18, about sharing outage scheduling personnel).

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This divisions of the workforce also creates problems for enhancing reliability.
The definition of “market information” in 18 C.F.R. § 35.36(a)(8) includes “generator
outages” and “historic generator volumes,” thereby posing the risk that coordination
among plant managers on lessons learned from prior outages or incidents could transfer
information that cannot be shared. This undermines, rather than enhances, the reliability
of the electric grid.
These problems can be alleviated if the clarification requested here is granted.
Plant managers who do not engage in the sale of power would not be marketing function
employees under the Standards of Conduct. 25

Accordingly, under the requested

interpretation, they could be shared to coordinate the support for outages and thereby
avoid the myriad of problems highlighted above. This would benefit ratepayers by
avoiding the unnecessary costs and delays associated with the procedures enumerated
above
Some may argue that allowing coordination among plant management might
allow for affiliate abuse, but this is not the case. Although the timing of an outage is
commercially sensitive, there are two distinct inputs into outage planning. One is the
commercial input – i.e., when should the plant be online to support sales, and when can it
be offline. This input is provided by marketing employees, since they are the ones whose
25

Under the new standards of conduct a “[m]arketing function employee” is “an
employee, contractor, consultant or agent of a transmission provider or of an
affiliate of a transmission provider who actively and personally engages on a dayto-day basis in marketing functions.” 18 C.F.R. § 358.3(d). “Marketing
functions” are, “in the case of public utilities and their affiliates, the sale for resale
in interstate commerce, or the submission of offers to sell in interstate commerce,
of electric energy or capacity, demand response, virtual transactions, or financial
or physical transmission rights, all as subject to an exclusion for bundled retail
sales, including sales of electric energy made by providers of last resort (POLRs)
acting in their POLR capacity[.]” Id. § 358.3(c).

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sales are being supported. The second input is practical in nature – i.e., when are the
personnel and materials available. To our knowledge, most (if not all) plant managers
fall into this second category, as do the vast majority (and perhaps all) of generating plant
personnel.

But regardless, anyone who is conducting a marketing function for a

marketing affiliate (including a plant manager) is prohibited from receiving market
information from the franchised utility, including outage schedules. So companies will
be faced with a choice to adopt one approach or the other, but either way the purpose of
the rule will be served.
Finally, we respectfully submit that, for many of the same reasons, the foregoing
example is as problematic for the Commission’s enforcement function as it is from a
compliance perspective.

There is no clear basis for making distinctions in an

enforcement context between plant managers, middle managers, or any other employee
supporting the operation and maintenance of the generation fleet. Although such a
distinction was made in the Florida Power audit report, statements in an uncontested
audit report do not create binding law. They may put the industry on notice of Staff’s
position in an enforcement context, but, without actual law to apply, the Commission’s
enforcement function is undermined, not enhanced. This is one of the fundamental
reasons the Commission streamlined the Standards of Conduct – to aid its enforcement
function by making the rules clearer.
C.

The Requested Interpretation Fulfills The Objectives of The Affiliate
Restrictions

“[T]he purpose of the affiliate restrictions is to ensure that captive customers of a
franchised public utility are adequately protected from any harm that may arise from

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affiliate dealings.”26 The affiliate restrictions provide a “safeguard against affiliate abuse
by protecting against the possible diversion of benefits or profits from franchised public
utilities (i.e., traditional public utilities with captive ratepayers) to an affiliated entity for
the benefit of shareholders.”27 Under the interpretation we request, a franchised public
utility with captive ratepayers could not share transmission function employees 28 or
marketing function employees with a market-regulated power sales affiliate, and no one
(under the no-conduit rule29) could share the franchised utility’s market information with
the marketing function employees or transmission function employees of a marketregulated power sales affiliate.30
These protections are sufficient to prevent the customer harms the rules seek to
prevent. Absent the separation of functions requirement, a person engaged in marketing
functions theoretically could harm a franchised utility’s captive customers by causing the
franchised utility to enter into a transaction that benefits the position of a market26

Order No. 697-A at P 241.

27

Market-Based Rates for Wholesale Sales of Elec. Energy, Capacity, and Ancillary
Servs. By Pub. Utils., Docket No. RM04-7-000, Notice of Proposed Rulemaking
at P 120 (issued May 19, 2006) (referring to the pre-affiliate restrictions “codes of
conduct”).

28

Under the new standards of conduct, a “[t]ransmission function employee” is “an
employee, contractor, consultant or agent of a transmission provider who actively
and personally engages on a day-to-day basis in transmission functions.” 18
C.F.R. § 358.3(i). “Transmission functions” are “the planning, directing,
organizing or carrying out of day-to-day transmission operations, including the
granting and denying of transmission service requests.” 18 C.F.R. § 358.3(h).

29

18 C.F.R. § 35.39(g).

30

While it is unlikely that most market-regulated power sales affiliates would have
transmission function employees, it is possible. For example, a company with
market-based rates that did not have a franchised service territory could own or
operate merchant transmission.

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regulated power sale affiliate.31 Similarly, absent the information sharing requirement, a
marketing function employee for the franchised utility could, in theory, give a “hot tip”
on a prospective transaction to the market-regulated power sales affiliate.32 The potential
for harmful conduct by a transmission function employee is the basis, of course, for the
standards of conduct. However, to our knowledge there is no evidence of employees
outside these two groups acting in a way that is consistent with the no-conduit rule, and
yet harmful to captive customers. Thus, there is no need to extend protections other than
the no-conduit rule beyond transmission function employees and marketing function
employees.

31

See, e.g., Heartland Energy Servs., Inc., 68 FERC ¶ 61,223 at 62,062 (1994).
(“Affiliate abuse takes place when the affiliated public utility and the affiliated
power marketer transact in ways that result in a transfer of benefits from the
affiliated public utility (and its ratepayers) to the affiliated power marketer (and
its shareholders). For example, a customer may need firm power and may agree
to purchase nonfirm power from an affiliated power marketer at above market
rates because the affiliated public utility agrees to sell back up service to the same
customer at a preferentially low rate. While the customer may pay a reasonable
rate overall for the two services, which when combined meet the customer’s need
for firm power, the affiliated utility has diverted profits to the affiliated power
marketer.”).

32

See, e.g., id. (“The Commission is concerned about two types of transactions that
can be preempted by affiliate abuse, to the detriment of the affiliated public
utility’s native load ratepayers. First, if an affiliated power marketer purchases
power that otherwise would have been purchased by the affiliated public utility,
the affiliated power marketer receives the benefit that would have otherwise gone
to the affiliated public utility’s ratepayers. It is very difficult to prove in a rate
case that a public utility did not aggressively seek opportunities to purchase
cheaper power for its ratepayers; therefore, it is unlikely that the Commission can
rely solely on prudence inquiries in the rate case process to police this type of
potential abuse. A second concern is that the affiliated public utility will fail to
compete as a seller of power in order to benefit the affiliated marketer. This can
result in the affiliated power marketer being able to sell at a higher rate.”).

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D.

The Rule Against Undue Preference Will Continue to Protect Captive
Customers in Other Situations

By streamlining the Standards of Conduct to enhance compliance and
enforcement, Order No. 717 did not eliminate the residual protections provided the
prohibition on undue preference.33 Rather, the Commission held as follows:
Some commenters request the Commission to declare that the Standards
occupy the field with respect to the area of undue preferences, and that
matters not specifically covered by the Standards may not be found to be
violations of the undue preferences prohibition in the FPA or the NGA.
This we decline to do. There are potentially an infinite number of ways
undue preferences might arise, and the Standards are not intended to be
exhaustive. It is possible that an entity might embark on a course of
conduct not contemplated by the Standards, which could be found upon
investigation to constitute a violation of the statutory undue preference
prohibitions. In such case, the entity’s compliance with the Standards in
other aspects would not serve as a defense.”).34
The same caveat should apply to the Affiliate Restrictions if the requested relief is
granted. Indeed, as the Commission held in Order No. 697-A, “we remind all marketbased rate sellers that the FPA prohibits any seller from providing an undue preference to
an affiliate or any other seller.”35 Our proposed interpretation does not, and could not,
affect this statutory backstop. Rather, the Affiliate Restrictions are, and should remain,
prophylactic rules and, as such, their costs should be weighed against their effectiveness
in preventing harm that likely would occur in the absence of the rules.36 Our proposed
33

See FPA sections 205 and 206, 16 U.S.C. §§ 824d-824e.

34

Order No. 717 at P 294

35

Order 697-A at P 242.

36

See Nat’l Fuel Gas Supply Corp., 468 F.3d at 844; see also InterCoast Power
Mktg. Co., 68 FERC ¶ 61,248 at 62,133 (1994) (stating, with respect to codes of
conduct: “The possibility of affiliate abuse raises a difficult issue. While we
must guard against affiliate abuse, we also do not want to burden affiliated power
marketers with excessive, unnecessary regulatory requirements.”); Inquiry Into

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interpretation strikes the appropriate balance, because it directly addresses the vast
majority of circumstances in which harm could arise, and because companies are on
notice that whether the rules apply or not, they must not provide any undue preference.
IV.

Conclusion
For the reasons stated here, we respectfully request that the Commission interpret

the Affiliate Restrictions involving functional separation and information sharing to apply
to employees that are not “marketing function employees” or “transmission function
employees” under the Standards of Conduct.

Respectfully Submitted,

/s/
John Moot
Noel Symons
Skadden, Arps, Slate,
Meagher & Flom LLP
1440 New York Ave., N.W.
Washington, DC 20005
202-371-7890
[email protected]
Counsel to the Participating Members of the
Compliance Working Group

October 28, 2009
Alleged Anticompetitive Practices Related to Mktg. Affiliates of Interstate
Pipelines, Order No. 497, FERC Stats. & Regs. ¶ 30,820 (1988), order on reh’g,
Order No. 497-A, FERC Stats. & Regs. ¶ 30,868 at 31,589 (1989), aff’d, Tenneco
Gas v. FERC, 969 F.2d 1187 (D.C. Cir. 1992) (stating, with respect to the Order
No. 497 gas standards of conduct: “In determining the appropriate action to take,
the Commission sought to fashion a rule that would prevent these abuses with the
least regulatory infringement necessary.”).

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Document Content(s)
Amended Request for Clarification.PDF.................................1-18