Energy Legal Blog

A New York bankruptcy judge has become the first to implement a provision of the Energy Policy Act of 2005 (EPAct 2005) that prohibits bankruptcy judges from deciding disputes over the fees associated with termination of pre-June 20, 2001, power supply contracts where the seller has been found to have manipulated the market and had its FERC market-pricing authority revoked.  In EPAct 2005 Congress granted to FERC exclusive jurisdiction to decide whether such sellers should be permitted to collect termination fees from their former buyers.  Although this provision of the statute does not mention Enron by name, it nevertheless squarely targets the disgraced energy trading giant.  Enron declared bankruptcy on December 2, 2001, inducing many of its buyers to terminate.  In order to benefit from this provision of the statute, a buyer's objection to payment of a termination fee must be pending and not subject to the final order of any court.

The specific dispute before the bankruptcy judge stemmed from a contract entered into in August 2000, which called for Enron to supply power to Luzenac America Inc.'s talc processing facilities in Montana.  After Enron filed for bankruptcy, its trustee sued Luzenac in the U.S. bankruptcy court for the southern district of New York for contract termination fees.  That suit is still pending.  Based on the EPAct provision, Luzenac petitioned FERC in October to review Enron's claim for termination fees.  In response, Enron asked the bankruptcy court to prevent Luzenac from pursuing its FERC petition.  Judge Arthur Gonzalez, however, denied Enron's motion, and agreed that, as a consequence of EPAct 2005, FERC has exclusive jurisdiction to resolve the dispute.  The judge's ruling will pave the way for other former Enron buyers to petition FERC to relieve them of Enron termination charges, which FERC is expected to do.

Following persistent delays and bickering, the nine utilities that originally proposed the formation of Grid West voted unanimously at a meeting on November 1 to reject a compromise proposal put forth by the Bonneville Power Administration (“BPA”), with six of those utilities promising to forge ahead with plans for a new regional entity without BPA.  While Puget Sound Energy and Avista Corp. have announced they no longer plan to participate in a regional organization, PacifiCorp, Idaho Power, NorthWestern, Sierra Pacific Resources, Portland General Electric, and the British Columbia Transmission Corp. insist they intend to regroup and continue their plans to develop an independent entity in the Pacific Northwest. 

Negotiations to form an independent entity in the region have been going on for several months.  The Grid West proposal was put forth several months ago by a number of investor-owned utilities and BPA.  The parties drafted bylaws for Grid West, but were careful to make clear that the organization would not be a Regional Transmission Organization (“RTO”), a concept that would have faced strong opposition from state officials.  The Grid West parties even sought a declaratory order from FERC that the proposed entity would satisfy FERC's requirements but would not necessarily have to qualify as an RTO.  Following FERC's conceptual approval of Grid West in July, a number of public power agencies and municipal utilities, among BPA's primary customers, formed a group called the Transmission Improvements Group (“TIG”) and put forth their own counter-proposal to Grid West.  TIG's proposal flirted with limited improvements to the transmission grid, but stopped far short of placing grid operations in the hands of an independent board.  [See Negotiations Continue on BPA's Role.]  The Grid West parties and TIG appeared to be at an impasse, when in late October, Deputy Secretary of Energy Clay Sell wrote a letter to BPA encouraging cooperation in the region.  BPA, in turn, released a compromise, or so-called “convergence,” plan that sought to marry the two fundamentally antithetical proposals.  BPA convened a meeting of interested parties on November 1 to gauge support for the convergence plan; however, during this meeting, BPA failed to garner any support for its proposal. 

Following the rejection of its compromise plan, BPA has pledged to continue talking with interested parties, and TIG has stated that it has further ideas about how to proceed.  The six remaining Grid West utilities plan to rewrite the Grid West bylaws, removing the provisions that concern BPA, and plan to contact other entities that may want to join a future initiative, inducting the Alberta independent system operator and Public Service of Colorado.  However, even if these Grid West faithfuls cohere, it remains to be seen how effective their organization could be without BPA's involvement, given its large share (by most counts, approximately 75 percent) of the transmission facilities in the Pacific Northwest.

California voters affirmed they support competition in the state’s energy markets.  In the latest election, approximately 65% of voters opposed a ballot initiative that would have banned retail choice, increased state oversight of utilities, and eliminated direct access for those customers not already in the state’s program.  The Utility Reform Network sponsored Proposition 80, arguing that it was needed to replace failed deregulation policies and to prevent market manipulation, price spikes, and rolling blackouts in the future.  Had it been accepted, the initiative would have allowed for private energy companies, such as non-utility generators and marketers, to be placed under the jurisdiction of the California Public Utility Commission (“CPUC”), and utilities would have been prohibited from charging prices responsive to demand.

Interestingly, in September, the CPUC unanimously voted to oppose Proposition 80, determining that the initiative duplicated work already in progress at the Commission, and would prevent the Commission from fulfilling the goals it set in its Energy Action Plan II, including supporting the existing competitive retail market and re-opening the direct access program, which allows large commercial energy users to buy power directly from private energy companies.  According to its opponents, the rejection of Proposition 80 will ensure customer choice and encourage development of much-needed generation capacity.

FERC recently implemented a rule that requires potential developers of new LNG terminals to begin pre-filing procedures at least six months before filing a formal application with FERC.  The pre-filing process had previously been optional, but becomes mandatory under the recently enacted Domenici-Barton Energy Policy Act of 2005 (EPAct 2005).  While EPAct 2005 prescribes the pre-filing process only for applicants for new LNG terminals, FERC's rule is more expansive.  In accordance with the agency's National Environmental Policy Act responsibility to consider the potential environmental effects of LNG facilities, FERC has applied the pre-filing requirements to applicants seeking to construct all of the jurisdictional facilities entailed by an LNG terminal, including regasification, storage, and pipelines.  In addition, since many of the same safety concerns that arise with new LNG facilities may also arise when existing LNG terminals are modified or expanded, FERC will apply the rule to applicants seeking to make changes whenever the proposed modifications involve significant state and local safety considerations that have not been previously addressed.

Applicants subject to the new rule must now submit to FERC as much detail about their proposed facilities as possible, including the proposed project's conceptual design and engineering features, and its potential environmental, security and safety impacts.  The applicant has a window of 180 days after FERC issues notice of the prospective applicant's initiation of the pre-filing process to file the formal application for authorization of the LNG facilities. 

Congress' stated intention in requiring FERC to implement this requirement is to encourage LNG developers to coordinate with state and local authorities to address safety and security considerations.  In furtherance of this goal, the rule requires applicants to submit to FERC the names of the relevant federal and state agencies and identify the agency selected by the governor of the state where the project would be located to consult with FERC on the project's potential consequences.  Applicants must also demonstrate that this state agency has been made aware of the applicant's intention to use the pre-filing process.  [Regulations Implementing Energy Policy Act of 2005; Pre-Filing Procedures for Review of LNG Terminals and Other Natural Gas Facilities; New Matter]

In the latest version of its Regional Transmission Expansion Plan, the PJM Interconnection announced support for an additional $297 million in transmission upgrades, including $70 million for new transmission lines needed for the nation's capital.  Adequacy of available power supply became an issue in the greater District of Columbia (DC) metro area late last summer when Mirant announced it was shutting down its 482-MW, coal-fired power plant in Alexandria, Virginia because of air emissions.  The DC Public Service Commission (PSC) petitioned FERC and the Department of Energy (DOE) to prevent the shutdown.  See Reliability v. Health: Neighboring States Battle over Dirty but Needed Generator.

Following a brief shutdown, the Mirant plant resumed limited operations.  The shutdown, however, focused attention on the need to increase power supply to the DC area.  In October, Potomac Electric Power Company (PEPCO)  ― the utility serving DC ― filed an emergency petition for authorization from the DC PSC to construct two 230 kV underground and two 69 kV overhead transmission lines.  PEPCO cited as an emergency the uncertainty about the future of the Mirant plant, and asked the DC PSC to waive certain procedural requirements so that the transmission lines could be constructed on an expedited basis.  PEPCO earlier had supported the DC PSC's petition to FERC and DOE. 

The DC PSC has yet to issue any substantive orders in response to PEPCO's petition, but the D.C. Office of the People's Counsel recently sounded in with its concerns, arguing that the DC PSC should move expeditiously but also adhere to its normal permitting process for the proposed transmission projects, which entails extensive intra-government consultation and community outreach.  Meanwhile, the future of the Mirant plant remains unresolved.

After having sent FERC back to the drawing board to rethink its rules on a firm shipper’s right of first refusal to extend a capacity reservation on an interstate natural gas pipeline beyond its initial term and to segment a firm reservation into forward and backhauls, a U.S. Appeals court on October 28 vindicated the agency’s resolution of both issues. 

Specifically, in connection with the right of first refusal that existing firm shippers enjoy under FERC’s open-access rules, the court held that FERC was justified in eliminating its cap on the number of years that an existing firm shipper must commit to in order to match the firm service request of a competing shipper and trigger the existing shipper’s right of first refusal.  Previously, FERC had proposed to cap the term that the existing firm shipper match at 20 years and then 5 years, but the court found no reasoned basis for either cap.  Now, for a shipper to take advantage of the right of its right of first refusal to extend firm service beyond the term of its reservation, it will have to match a competing purchaser’s term, without limitation on the term, and price (as before, up to a maximum rate).  According to both FERC and the court agreeing with the agency, a term cap was not needed to prevent a pipeline from exercising market power since five other constraints on pipeline operations already cabined the potential exercise of market power against existing shippers:  (1) cost of service rates; (2) the requirement that a pipelines sell all of its capacity; (3) shipper access to FERC complaint procedures; (4) a shippers’ ability to release for third-party sales capacity that it reserved but didn’t need; and (5) the non-discriminatory access rules of the standard pipeline tariff.

On the backhaul issue, the court rejected interstate pipeline objections to FERC’s proposal to permit firm shippers to divide their capacity reservations within a transportation zone into forward hauls, backhauls, or combined forward hauls and backhauls. The pipelines contended that allowing such flexible uses of firm reservations effectively amended the contracts between the firm shippers and the pipelines; FERC and the court ruled that it did not.  Allowing backhauls within a zone of firm reservation and giving that haul a firm, yet secondary priority to firm (but superior to interruptible) was service that the firm shipper had paid for and was not a new service requiring contract amendment. 

The two shipping rules affirmed by the court laudably promote competition, without compromising consumer protections.  On the right of first refusal issue, requiring incumbent shippers to match fully the offers of competing shippers is fair and forces shippers to value competitively scarce resources.  And on the backhaul issue, allowing shipper flexible use of capacity it has already paid for, irrespective of direction of flow, simply prevents interstate pipelines from proliferating services and charges.   [American Gas Association v. FERC (DC Cir. No. 04-1094]