Energy Legal Blog

To help the state’s investor-owned utilities satisfy the law requiring them to obtain from renewable resources 20 percent of the power needed to service their retail customers, the California Public Utilities Commission (“CPUC”) recently relaxed its former rule that all of that renewable power must be deliverable to the utility’s own service territory if it is to be counted toward the 20 percent.  Now the requirement can be met so long as the utility has a transmission path sufficient to deliver the renewable generation to some point within the larger footprint of the California ISO.  The CPUC ruling is certain to help California’s three investor-owned utilities — San Diego Gas & Electric (“SDG&E), Southern California Edison (“SCE”), and Pacific Gas & Electric — comply with the 20 percent portfolio requirement notwithstanding transmission constraints that limit the deliverability of certain renewable energy resources. 
 
The new approach to deliverability grew out of the CPUC’s review of the current procurement plans through which the California utilities propose to achieve the 20 percent requirement by 2010.  For its part, FERC too recently addressed deliverability in connection with an SCE proposal to change the funding mechanism for a proposed transmission line to major wind resource.  (See FERC Denies SoCalEd Full Approval of Utility’s Plan to Add Transmission, Use Wind to Reach RPS Goals, July 14, 2005).   Were Congress to eventually adopt a national portfolio standard, as some Senators have proposed, then this flexible approach to deliverability might also prove necessary beyond California since some of the most abundant renewables, wind generation in particular, but also hydro and solar, are remote from many service territories that are subject to a renewable portfolio requirement and are unable to reach those service territories due to transmission constraints. California is out front on considering many of these issues.  In another CPUC proceeding, the CPUC continues to address how transmission costs associated with individual projects should be considered in evaluation of proposals for satisfying renewable portfolio requirements.  (Res. E-3946; Res. E-3935; R.04-04-026) [UPDATE]

The Illinois Commerce Commission (“ICC”) has adopted a sustainable energy plan modeled largely after the plan that Governor Rod Blagojevich proposed last February.  Illinois joins a growing list of states whose regulatory agencies have implemented Renewable Portfolio Standards (“RPSs”), including neighbors Iowa, Minnesota and Wisconsin.  In addition to the RPS outlined in the Plan, the new measure also contains a complementary Energy Efficiency Portfolio Standard (“EEPS”). 

The voluntary RPS asks that utility companies obtain two percent of their energy needs from renewable sources by 2006, and then increase this percentage in annual one percent increments to eight percent by 2012.  Wind energy is expected to account for the majority of this growth in renewable energy use.  Under the EEPS, utilities are encouraged to create initiatives intended to reduce the state's rising demand for electricity by 10 percent by 2007.  These initiatives will involve utilities facilitating their customers' investments in energy saving technology and equipment.  The ICC estimates that these strategies will reduce Illinois' increasing energy demands by 25 percent by 2015.  Electric utilities are to submit proposals for executing the Plan to the ICC by August 18, 2005. [NEW MATTER]

In a decision noteworthy for its implicit encouragement of bundling traditional utility network service with competitive goods and services, contrary to the regulatory course charted in recent years for pipelines, local telephone exchanges and electric transmission grids, a divided (6-3) U.S. Supreme Court recently affirmed a Federal Communications Commission (FCC) declaratory rule that exempts from common-carrier regulation providers of broadband cable modem service because of the bundling of the telecommunications component of that service with internet applications.  The majority decision in what will likely become known as the Brand X case (after an internet service provider (ISP) that supported common carrier regulation and opposed the FCC rule) dismissed with virtually no analysis the objection that the FCC rule allows broadband cable providers, such as Comcast, to deny common-carriage access to competing ISPs, while at the same time the FCC takes precisely the opposite approach in its regulation of the other principal media for accessing the internet, dial-up access and Digital Subscriber Line (DSL) service, both of which are required to provide nondiscriminatory common carriage.

While the majority decision in large part turned on an evolving and mushy area of the law concerning the extent to which federal courts must defer to the expertise and judgment of a regulatory agency such as the FCC, the ultimate question boiled down to this:  Does a broadband cable provider offer telecommunications service to the public for a fee?  If so, then the provider, like providers of dial-up and DSL, is subject to mandatory regulation as a common carrier and must provide nondiscriminatory access to competing ISPs.  Conversely, if the broadband cable modem provider is deemed not to offer telecommunications service, then it is an information service provider, like an ISP that does not own wires or cables, and escapes common carrier regulation.  Because of the nature of the broadband cable providers' service, which does not offer telecommunications on a stand-alone basis, but instead only uses telecommunications to provide end users with a package of internet applications, the FCC ruled and the Supreme Court affirmed that broadband cable providers do not “offer” telecommunications.  Paraphrasing the majority, evidently incredulous dissenters countered:

[F]or the inputs of a finished service to qualify as the objects of an “offer” . . . , it is perhaps a sufficient, but surely not a necessary, condition that the seller offer separately “each discrete input that is necessary to providing . . . a finished service . . . .”  The pet store may have a policy of selling puppies only with leashes, but any customer will say that it does offer puppies — because a leashed puppy is still a puppy, even though it is not offered on a “stand-alone” basis.

It remains to be seen whether this decision of the high court will have any carryover influence in other network industries with natural monopoly characteristics, such as pipelines, local exchange telecommunications and electric transmission systems.  The direction of these industries has been just the opposite.  In recent years, they have been unbundled from sales of natural gas or oil, long distance and wireless service, and electric energy, respectively, and required to provide competing sellers nondiscriminatory access to their networks and common carriage.   It would be a stunning volte-face if these industries could escape this obligation simply by adopting a policy of bundling network access with other services or products and not offering it on a stand-alone basis.  [National Cable & Telecommunications Association, et al., v. Brand X Internet Services, et al., 545 U.S.--, 162 L. Ed. 2d 820 (June 27, 2005)] [NEW MATTER]

With the issuance of a recent Revenue Procedure, the Internal Revenue Service has eliminated a long running source of discord in the negotiation of new (or expanded) generator interconnections.  The new Revenue Procedure creates a “safe harbor” that exempts from taxable income the payments that a generator, pursuant to FERC open-access rules, advances to an operator or owner of the transmission system to which it proposes to interconnect for needed upgrades to the transmission network.  Many transmission utilities treated these advances as taxable income to the utility and would insist that a generator pay the tax on top of the funds it advanced for the network upgrades.  Generators generally thought that this was nonsense since FERC requires that funds advanced to the transmission utility be repaid to the generator with interest within a specified period (formerly 5 years and now 20 years); since the complete value advanced is repaid it should not be treated as income of any kind in the hands of the transmission utility, they argued, and repeatedly sought the concurrence of the Service.  Finally, the Service provided that concurrence, better late than never.

The new Revenue Procedure extends the safe harbor in two scenarios that are divided by December 20, 2004, the date on which FERC adopted its Order No. 2003B, a standard open-access interconnection agreement (IA) for large (50 megawatts or greater) generators.  After that date, the transmission utility receiving an advance for network upgrades may treat the advance as not taxable so long as the advance is repaid in accordance with the IA of Order No. 2003B.  And for an IA entered before December 20, 2004, the advance may be treated as not taxable so long as the IA requires repayment in cash or transmission credits, consistent with FERC decisional precedents.  [Standardization of Generator Interconnection Agreements and Procedures, 109 FERC ¶ 61,287 (2005)] [NEW MATTER]

In his new capacity as Chair of FERC, Joseph Kelliher has made good on his commitment to improving the existing open-access transmission rules that the agency adopted nearly ten years ago.  In particular, with Kelliher at the helm, FERC appears committed to strengthening the anti-discrimination protections of existing regulation of interstate power transmission.  At the same time, under Kelliher’s leadership, FERC formally interred the Standard Market Design (SMD) Rulemaking proceeding that his predecessor Pat Wood rolled out on Wall Street three years ago, see Special Update (7/31/02), but promptly abandoned after it encountered fierce opposition from utilities in the Northwest and Southeast.   Ironically, neo open-access transmission will likely pursue many of the same transmission goals that SMD sought to achieve and may prove in many respects to be SMD by another name.

First proposed in July 2002, SMD was grounded in the operational separation of power generation from transmission and the operation of the high voltage grid.  The SMD grid operator would be a new Independent Transmission Provider or ITP that, in addition to scheduling uses of the grid, would operate day-ahead and real-time spot markets for energy and ancillary services.  Because all uses of the grid would be subject to the same rules, SMD was rightly viewed as a threat to traditional practices that allowed utilities to prioritize certain transmissions over others irrespective of the customer’s willingness to pay.  Opposition persisted and was never assuaged by a 2003 FERC White Paper that sought to make SMD more palatable by watering down its strict independence and anti-discrimination provision.  SMD had long been a dead letter when, on July 19, 2005, FERC formally terminated the SMD proceeding.  SMD, FERC explained, had been overtaken by the industry's voluntary development independent operators — regional transmission organizations (“RTOs”) and independent system operators (“ISOs”). 

For customers located in areas not regulated by RTOs or ISOs, the open-access transmission tariff  or OATT that FERC adopted in 1996 is the primary and only protection against unfair or unduly discriminatory rules and practices for accessing the transmission grid.  But the OATT, in Kelliher’s view is inadequate for the job.  In particular, Kelliher has pointed to its failure to provide transmission customers with a reciprocal ability to initiate penalties for transmission owners for OATT violations, as well as its inconsistency regarding the appropriate method for calculating available transmission capacity.  How the agency under Kelliher will address these deficiencies and produce a new and improved OATT will play out in coming months. Also remaining to be seen is whether FERC's reassessment of its open-access rules and the OATT will also result in more vigorous enforcement of those rules in the near term.  (Docket No. RM01-12-000) [Update]

Engaging the nettlesome issue of scarcity, FERC convened an inquiry into whether the PJM Interconnection needs scarcity pricing and, if so, how a generator’s potential to exercise market power during periods of scarcity should be mitigated.  FERC’s attention to these issues in PJM may herald for the MidAtlantic numerically exact mitigation price triggers, similar to what has already been established for other organized RTO and ISO markets.

The current inquiry grows out of a proceeding in which FERC explored compensation due generating units needed to run for reliability reasons.  In PJM, reliability generators are generators in load pockets that are offer capped, i.e. paid their marginal costs plus 10% when there are transmission constraints, and also those generators wishing to deactivate but cannot because they are needed for reliability.  PJM had proposed to FERC a new “no-three pivotal supplier test” to exempt generators from mitigation when generators able to serve a load pocket do not have market power.  A pivotal supplier in PJM is one whose output is required to meet load, and PJM proposed that when four or more pivotal suppliers are considered competitive (or there are no pivotal suppliers), competitive conditions exist and mitigation is not warranted.  PJM asserted that this test was consistent with the delivered price test that FERC uses when it evaluates market power resulting from proposed mergers and acquisitions.  But FERC disagreed.  The agency decided additional justification was required and set for hearing the appropriate test for market power in PJM load pockets.  [PJM Interconnection, LLC, 112 FERC ¶ 61,031 (2005)] [NEW MATTER]