As part of the ongoing legal fallout from the 2000-2001 California energy crisis, on January 9, 2017, FERC issued an order clarifying that, for purposes of that proceeding, “pricing umbrella” evidence is relevant only for contextual purposes and cannot serve as a basis for finding refund liability. In this order, FERC clarified that “pricing umbrella” evidence may be introduced solely for the purposes of providing context for FERC’s consideration, and that such evidence should not constitute the basis for finding refund liability.
In April 2015, the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”) remanded this proceeding to FERC with instructions to broaden the scope of evidence it would consider in determining whether certain wholesale power sellers accumulated excessive market share in the run-up to California’s energy crisis (see May 13, 2015 edition of the WER). The Ninth Circuit was concerned that FERC only considered a single type of market share analysis (the so-called “hub-and-spoke” screen) and also did not adequately examine whether sellers complied with transaction reporting obligations. On remand, FERC re-established a trial-type hearing before an administrative law judge to reexamine these issues and to permit parties to present alternate market power analyses. One of the lingering issues that FERC sought to address was the scope of evidence that could be presented at the hearing—in particular, the question of whether parties could introduce “pricing umbrella” evidence.
Under the “umbrella theory,” the continued exercise of market power by one large supplier in a bilateral market to increase rates beyond the “just and reasonable” threshold effectively creates an “umbrella” under which smaller suppliers can also raise their prices. Some parties invoked this theory in several previous FERC proceedings on the California-crisis to argue that transaction reporting deficiencies by certain sellers concealed market manipulation thereby creating a pricing umbrella problem. The sellers themselves fought back against this “umbrella theory,” arguing that it contravened the United States Supreme Court’s decision in Morgan Stanley Capital Group, Inc. v. Pub. Util. Dist. No. 1 of Snohomish Cnty., Wash., 554 U.S. 527, 554–55 (2008), which held, in part, that liability for market manipulation required “finding a causal connection between unlawful activity and the contract rate.” In those previous orders, FERC agreed with this latter argument and rejected the “umbrella theory” as a stand-alone basis for market manipulation liability because it failed to establish the requisite “causal connection.” In an October 2016 order, FERC attempted to clarify that—although umbrella pricing evidence cannot prove liability—it could still serve as contextual support for refund claims. Certain wholesale sellers sought clarification from that order to ensure that the introduction of any “umbrella pricing” evidence (in the form of transaction reporting deficiencies) would not alleviate the burden on challengers to prove the required “causal connection” to establish liability.
In the January 9, 2017 order on clarification, FERC emphasized that the focus of a market manipulation inquiry under the United States Supreme Court’s Morgan Stanley decision “is the conduct of the seller and whether that conduct directly affected contract prices.” Thus, FERC clarified that although it will “permit the introduction of pricing umbrella evidence solely for the purpose of providing greater context and depth for probative, seller-specific evidence, this evidence should not be treated as evidence that can be the basis of a finding of refund liability.”
In so doing, although FERC “affirm[ed] that pricing umbrella evidence is not an element upon which a finding of refund liability may be based in this proceeding” (emphasis added), FERC’s clarification, coupled with the Morgan Stanley “causal connection” requirement, indicate that “umbrella theory” evidence will be limited in market manipulation cases to providing context, rather than establishing refund liability.
A copy of FERC’s order can be found here.