Commissioner James Danly Statement
April 29, 2022
Docket No. ER22-108-001
I concur in today’s order.[1] The sole question before us is whether section 205 of the Federal Power Act (FPA)[2] has been satisfied. That is, has Southwest Power Pool, Inc. (SPP) shown that its filing is just and reasonable? It has.
Energy Trading Institute (ETI) objects to the “unreasonabl[e]” increase in minimum capitalization requirements that it asserts could potentially affect a substantial number of market participants and provides a number of arguments in support of its position.[3] As an initial matter, it must be conceded that, while the increase may not be “unreasonable” as that term is used in utility regulation, ETI is doubtless correct that the upward departure embodied in these proposed tariff revisions is of great enough magnitude to catch our attention and to warrant scrutiny.
ETI offers a litany of criticisms, among which are that: (i) SPP’s approach would not have mitigated the credit risks posed by the GreenHat Energy LLC default in PJM or those coming out of Winter Storm Uri;[4] (ii) PJM considered and dropped a capitalization increase due to the decrease in liquidity and negative impacts on market participants;[5] (iii) the proposed capitalization increases are inconsistent with the Commodity Futures Trading Commission precedent and orders exempting SPP from Commodity Exchange Act swap regulation;[6] (iv) the proposed capitalization requirements increase the costs of doing business in the SPP market, reduce liquidity, decrease hedging opportunities, and fail to enhance protections for market participants;[7] (v) they unreasonably burden “qualified and eligible market participants”[8] and discriminate against “smaller, niche competitors;”[9] (vi) they do not “squarely address the risks presented”[10] and pose gaps that need to be addressed;[11] and (vii) they discriminate based on participation in other RTOs/ISOs.[12] Every one of the above-listed concerns is valid and ETI makes a compelling case for why SPP’s proposed tariff revisions might have been better. That, of course, is not the inquiry when examining a utility’s submission pursuant to FPA section 205. The proposal at issue need not be perfect, it need merely be good enough to be deemed just and reasonable.[13]
However, none of the criticisms offered, either alone or together, demonstrate—dispositively—that the proposal fails FPA section 205. For example, the fact that this one tariff revision will not solve all of SPP’s problems does not render it infirm,[14] especially in light of the fact that it SPP describes this submission as a single (but important) step as SPP and its stakeholders continue to explore and consider further reforms.[15] Similarly, the fact that SPP could have proposed tariff revisions that may have had less pronounced effects on either the cost of participation or on liquidity does not, in itself, require rejection.[16] And while ETI’s point that the revisions would discriminate against participants in other markets is rightly a matter of concern, would it not make sense when evaluating a participant’s solvency to take cross-market exposures into consideration?[17]
As compelling as ETI’s criticisms are, SPP’s submission satisfies FPA section 205 and marks an acceptable first step in necessary market reforms.
For these reasons, I respectfully concur.
[1] See Sw. Power Pool, Inc., 179 FERC ¶ 61,083 (2022). According to SPP, the proposed increased minimum capitalization requirements are “but one discrete set of Tariff revisions to enhance a specific aspect of creditworthiness requirements” that are “one important step in protecting the integrity and functionality of SPP’s markets.” Southwest Power Pool, Inc. November 23, 2021 Answer at 3. It certainly is true that SPP’s proposed increased minimum capitalization requirements are a drastic departure from those currently in effect. Yet, they were developed in order to prevent a drastic problem—potential defaults and socialization of related costs— in its footprint. In order to address this problem, the proposed requirements were developed through SPP’s stakeholder process, which is the correct forum to address market participant creditworthiness requirements. See, e.g., Southwest Power Pool, Inc. October 14, 2021 Transmittal at 2-3 & n.9; Southwest Power Pool, Inc. February 9, 2022 Deficiency Response at 8-11.
[2] 16 U.S.C. § 824d.
[3] See, e.g., Energy Trading Institute November 4, 2021 Motion to Intervene and Protest at 6; see id. at 1-2, 12-13.
[4] Id. at 2.
[5] Id. at 6.
[6] Id. at 7-10.
[7] Id. at 12-15.
[8] Id. at 3.
[9] Id. at 2.
[10] Id. at 7.
[11] Id. at 15-17.
[12] Id. at 10-12.
[13] See, e.g., Oxy USA, Inc. v. FERC, 64 F.3d 679, 692 (D.C. Cir. 1995) (stating that a proposal “need not be the only reasonable methodology, or even the most accurate”); Louisville Gas & Elec. Co., 114 FERC ¶ 61,282, at P 29 (“[T]he just and reasonable standard under the FPA is not so rigid as to limit rates to a ‘best rate’ or ‘most efficient rate’ standard. Rather, a range of alternative approaches often may be just and reasonable.”), order on reh’g sub nom. E.ON U.S. LLC, 116 FERC ¶ 61,020 (2006).
[14] See, e.g., Midwest Indep. Transmission Sys. Operator, Inc., 131 FERC ¶ 61,185, at P 25 (2010) (“[T]he mere fact that the methodology can be refined does not undercut [the Commission’s] conclusion that [a proposed] method affords a just and reasonable rate for transmission customers. As the court noted . . . ‘reasonableness is a zone, not a pinpoint.’”) (citation omitted); Cities of Bethany v. FERC, 727 F.2d 1131, 1136 (D.C. Cir. 1984) (the Commission properly did not consider “whether a proposed rate schedule is more or less reasonable than alternative rate designs” and an applicant under the FPA need not show that its proposal is “superior to alternative[s]”).
[15] Southwest Power Pool, Inc. November 23, 2021 Answer at 3-4.
[16] Energy Trading Institute November 4, 2021 Motion to Intervene and Protest at 20-22.
[17] Sw. Power Pool, Inc., 179 FERC ¶ 61,083 at PP 42-43.