Background
FERC regulations require certain separation between transmission employees and wholesale merchant function employees. Corporations often use general financial, accounting and business support employees to support transmission and wholesale merchant function employees. This close working relationship and access to transmission information may create circumstances that warrant review with respect to FERC regulations. This paper reviews relevant FERC regulations in the area and recent FERC cases, this paper is intended as a general introduction to the subject and is not intended to offer legal advice. Competent legal counsel should be consulted for specific questions in this area or for any legal question.
DiscussionRegulatory Requirements and History
The FERC Standards of Conduct are codified in 18 CFR § 37.41 and were promulgated as part of Order 889 Open Access Same-Time Information System (formerly Real-Time Information Networks) and Standards of Conduct, 75 FERC 61,078, (1996) as amended by Order 889-A, 62 FR 12053 (1997). Order 889 was a companion to Order 888 Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, 75 FERC 61,080 (1996) which dealt with Open Access to Transmission Systems. Order 889 was specifically focused on information access systems (OASIS) and Standards of Conduct for Public Utility Employees.2
As noted in 18 CFR § 37.4 (a) the employees of the transmission provider engaged in transmission operations must function independent of employees and affiliate employees engaged in wholesale merchant function. This basic requirement is referred to as "functional unbundling" of the transmission and wholesale merchant function. The clear rationale is to provide for a barrier between the functions such that non affiliated wholesale energy companies can compete fairly with the affiliated wholesale merchant function and have access to the same information. This functional unbundling does not have to be absolute and it is clearly recognized by the FERC that at some point in management, responsibility for wholesale merchant functions and transmission operations will merge.3
The relevant issues to be considered when evaluating proposed business functions are the (1) prohibition and (2) conduit requirements from FERC "Standards of Conduct". Prohibition is defined in 18 CFR § 37.4 (b) (1) (3) and requires that employees engaged in wholesale merchant functions be (1) prevented from conducting transmission system operations or reliability functions, and (2) have limited access to the systems control center and have access only to transmission information available on the OASIS. On this point, the threshold question is whether or not the proposed functions include functions that make the position a "wholesale merchant function". If the employees are performing wholesale merchant functions they can not be allowed access to non-public transmission information. Wholesale merchant function is defined in the regulations 18 CFR § 37.3 as "the sale for resale of electric energy in intestate commerce". The conduit limitation is described in 18 CFR § 37.4 (b) (4) which provides that transmission system employees shall not disclose transmission system information through non-public means off of the OASIS.
FERC Cases of Relevance
FERC regulations do not provide a detailed definition of wholesale merchant function. There are a number of cases that provide an indication of the type of activities that are "wholesale merchant functions". In addition, some of these cases describe how "conduit" concerns may arise in these situations. The following descriptions summarize recent FERC cases that are relevant to these issues.
In American Electric Power, 81 FERC P61, 332 (1997) the FERC noted that, "AEP states that its transmission system operations and merchant functions rely on support services, such as legal counsel, accounting, finance and data processing . . . As explained in the discussion of generic issues, AEP may share support personnel who do not participate in directing, organizing or executing transmission system operations or reliability functions or wholesale merchant functions, provided that it can demonstrate that shared employees comply with prohibitions concerning communications". Of note, the FERC recognizes that accounting and finance are support functions, which can support both transmission and merchant function employees. This is important because analytic accounting and financial activities can often be at issue for corporations. FERC issues a caution to AEP that these employees must not become conduits of information.
In Carolina Power and Light, 87 FERC P61, 276 (1999), the FERC requested clarification of job functions in the following context.
The FERC accepted Carolina's revised filing. In which, Carolina explained that these coordination and analysis positions were dedicated to system economic dispatch and reliability functions. Carolina went on to explain these positions did not support sales functions for the Wholesale Power Department. The explanation by Carolina and acceptance by FERC support a conclusion that the FERC will not apply a simple mechanical test looking at titles and function descriptions. FERC will look to the underlying purpose for which the functions are being performed. In this case the FERC found that these employees were not performing wholesale merchant functions. The FERC does not provide a detailed rationale for reaching this conclusion, beyond the acceptance of Carolina's explanation of these individuals role in economic dispatch and reliability as opposed to sales.
In Carolina Power and Light, 87 FERC P61, 276 (1999), the FERC questioned the acceptability of certain functions at the Public Service Company of New Mexico (PNM). At one point the FERC noted, "[t] here are job descriptions that suggest improper sharing. The job description for the Director Transmission Development and Contracts appears to include analytic and training support to the wholesale merchant function. The job descriptions for the Energy Analysts, which are under the transmission function, include reverification and checkout of all interchange and billed transactions (energy sales, wheeling & other transactions)." Going further the FERC notes in reference to these positions that "PNM must either separate transmission/reliability functions, create job descriptions that accurately and unambiguously demonstrate the separation of functions." The FERC's interest in this position includes certain analytic functions in support of the wholesale merchant function.
From Long Island Power Authority, 88 FERC P61, 013 (1999) the FERC noted that, "This is consistent with CSU, in which the Commission permitted an independent business unit to design rates for the transmission system and wholesale merchant function because the employees of this unit did not direct, organize or execute transmission/reliability or wholesale merchant functions." These support functions may involve complex financial analysis and access to transmission information. The FERC found this acceptable. Analytical financial support employees that design rates face unique problems in that (1) it possible that non-public transmission system information is used as inputs is used in their analysis and that (2) their evaluations may be considered discretionary marketing decision making functions. Problem (1) is the "embedded information" conduit issue discussed in Allegheny infra. With respect to Problem (2), the algorithms and job functions of the analyst should be reviewed to ensure that the analyst is not engaged in discretionary marketing decision making but providing a ministerial reporting function.
From Allegheny Power Services, 84 FERC P61, 131 (1998), "The Commission agrees with ConEd that retail electric forecasting is neither a transmission/reliability nor a wholesale merchant function. On the other hand, there may be scenarios in which retail electric forecasting data could be used to derive transmission-related information. For example, wholesale merchant employees could determine that a specific interface will be constrained due to local transmission limits when the retail load exceeds a certain volume. Consequently, employees who perform retail electric forecasting must comply with the non-disclosure rules so that they will not become a conduit for transmission system information. " This is particularly relevant with respect to conduit issues in that the FERC notes that "electric forecasting data could be used to derive transmission related information". Business functions that involve delivery of information to wholesale merchant function employees should be reviewed to ensure that "embedded transmission" information is not inappropriately transmitted. "Embedded transmission" information is non-public transmission information, which can be derived from a data set that does not obviously contain such transmission information.
Conclusion
A close review of certain support employees is warranted to determine whether these individuals jobs may be considered "wholesale merchant functions". Particular focus may be paid to certain financial and accounting positions, to ensure that information is being reported without providing sales or marketing advice and direction. The data and information transmitted from these offices may need to be reviewed to ensure that "embedded transmission" information is not communicated to wholesale merchant function employees. As always, competent legal counsel should be consulted to make determinations on a case by case basis.
1. § 37.4 Standards of conduct. (In part states that) A Transmission Provider must conduct its business to conform with the following standards:
(a) General rules. (1) Except as provided in paragraph (a)(2) of this section, the employees of the Transmission Provider engaged in transmission system operations must function independently of its employees, or the employees of any of its affiliates, who engage in Wholesale Merchant Functions. (b) Rules governing employee conduct. (1) Prohibitions. Any employee of the Transmission Provider, or any employee of an affiliate, engaged in wholesale merchant functions is prohibited from: (i) Conducting transmission system operations or reliability functions; and (ii) Having access to the system control center or similar facilities used for transmission operations or reliability functions that differs in any way from the access available to other open access Transmission Customers. (3) Information access. Any employee of the Transmission Provider, or of any of its affiliates, engaged in wholesale merchant functions: (i) Shall have access to only that information available to the Transmission Provider's open access transmission customers (i.e., the information posted on an OASIS), and must not have preferential access to any information about the Transmission Provider's transmission system that is not available to all users of an OASIS; and (ii) Is prohibited from obtaining information about the Transmission Provider's transmission system (including information about available transmission capability, price, curtailments, ancillary services, and the like) through access to information not posted on the OASIS that is not otherwise also available to the general public without restriction, or through information through the OASIS that is not also publicly available to all OASIS users. (4) Disclosure. A Transmission Provider is responsible for ensuring compliance with the following provisions: (i) Any employee of the Transmission Provider, or any employee of an affiliate, engaged in transmission system operations or reliability functions may not disclose to employees of the Transmission Provider, or any of its affiliates, engaged in wholesale merchant functions any information concerning the transmission system of the Transmission Provider or the transmission system of another (including information received from non-affiliates or information about available transmission capability, price, curtailments, ancillary services, etc.) through non-public communications conducted off the OASIS, through access to information not posted on the OASIS that is not at the same time available to the general public without restriction, or through information on the OASIS that is not at the same time publicly available to all OASIS users (such as E-mail).
2. Open access non-discriminatory transmission service requires that information about the transmission system must be made available to all transmission customers at the same time. This means that public utilities must make available to others the same transmission information that is available to their own employees and that is pertinent to decisions they make involving the sale or purchase of electricity.
3. FERC Stats & Regs. , Regulations Preambles January 1991-June 1996 P31, 036 at 31,654-56 "Thus, at some corporate level, employees, directors or officers will have responsibility for the transmission and wholesale merchant functions of the transmission provider.