Energy Legal Blog

In a December 27 rulemaking, two of three sitting FERC commissioners propose to eliminate the agency’s regulation in effect since 1963 that requires the parties to contracts subject to its Natural Gas (NGA) or Federal Power (FPA) Acts’ jurisdiction to include in their agreements prescribed language indicating whether they intend the seller to have the right unilaterally to change the rate or other material terms of their agreement.  In lieu of that requirement, a new rule would require only that the contractual parties state in their contract whether it is their intent that any unilateral proposal to change their agreement be allowed to take effect if shown to meet the just and reasonable standard of the NGA and FPA.  Absent expression of this intent, contracts other than pro forma transmission or transportation agreements will be interpreted as not authorizing unilateral changes unless the proposed change is shown not only to be just and reasonable, but also shown to be demanded by the greater public interest.  To be considered, public comments on this proposed change must be filed with FERC within 30 days of publication in the Federal Register — most likely early February.  If adopted in a final rule, the new rule of contract interpretation will apply to all non-form contracts executed 30 days or more after publication of the final rule in the Federal Register.

The proposed rule reflects the fact that, unlike common carrier regulation under which a tariff rate for a service is the only lawful rate for that service, the NGA and FPA implement a contract carrier form of regulation under which contracts (and not uniform tariffs) often establish the rates and terms of service in the first instance.  Interpreting these regulatory regimes, nearly 50 years ago the Supreme Court articulated the so-called Mobile-Sierra doctrine that bars FERC from unilaterally changing a contract rate and term under the NGA and FPA unless the change is required by the public interest.   Consonant with contract carriage and the Mobile-Sierra doctrine, it follows that the parties to a contract can agree to permit or to bar unilateral modifications to their bargains, and that, absent such an agreement, the default should be no unilateral changes to contracts under the NGA and FPA other than standard tariff service agreements for transportation and transmission.

Although sensible in the context of contract carriage, the proposed new rule will nevertheless engender controversy and criticism.  Exhibit A is the strongly worded dissent of FERC Commission Kelly.  By making no unilateral change — i.e., the public interest standard — the default, the majority, in Commissioner Kelly’s opinion, “turns the statute on its head.”  In the event of contract silence, she would have made just and reasonable the standard for unilateral changes, especially in instances where it is FERC itself or an interested non-party to the contract that is proposing the contract modification.  [Standard of Review for Modifications to Jurisdictional Agreements, 113 FERC ¶ 61,317 (2005)]

In stark contrast to the protracted merger proceedings of recent years, FERC approved MidAmerican Energy Holdings’ acquisition of PacifiCorp, and the merger of Duke and Cinergy, with no strings attached and only five months after the proposals were filed with the agency.  At the same meeting, FERC also affirmed its previous approval of the contested PSEG-Exelon merger.  Concurrently, FERC blessed MidAmerican's and  Duke’s proposals to hire independent operators for their transmission grids, but these measures were not a condition of the utilities' respective mergers. 

Not more than a few years ago, FERC routinely leveraged its gatekeeper control over mergers to force merger applicants to take other steps to the agency’s liking.  A favored step of late was requiring the utilities to join an RTO, which FERC required of AEP when it acquired CSW.  But FERC did not use it leverage in connection with these latest transactions.  None was even set for evidentiary hearing.  Exelon and PSEG had chosen to be proactive regarding any market power concerns and had proposed divestiture of generation, but the other applicants did not take this step.  They proved to be right, as FERC was satisfied that none of these transactions would harm competition, rates or regulation.  However, these utility mergers still require authorization from other regulators, including affected state regulators.

FERC separately approved Duke and MidAmerican's proposals to hire independent transmission coordinators to perform open-access transmission functions, including calculation and posting of total and available capacity, processing of transmission and interconnection service requests, operation of the OASIS, and coordination of transmission planning.  The utilities would retain other authority, however, including the setting of prices for transmission services.  FERC approved both proposals because it found they would increase transparency in the provision of transmission services.  FERC accepted Duke's proposal without condition, and MidAmerican's proposal subject to further steps by the utility.

FERC's approval of these proposals demonstrates its retreat from its policy under previous chairmen of encouraging participation in RTOs or ISOs.  Neither Duke nor MidAmerican is a member of an RTO or ISO and it would seem unlikely that either will join one soon.  Instead, they appear to be following the lead of Entergy, a forceful opponent of RTOs, which developed the independent transmission coordinator concept as an alternative to RTO or ISO participation.  The Entergy proposal went further than the latter two, however, as it also surrendered transmission pricing to the entity.  The common denominator of these proposals is that they eschew creation of organized, short-term energy or capacity markets, which have been a hallmark of RTO’s and ISOs, and which arguably increase competitive opportunities for power sellers and marketers.

Notably, Entergy has proposed hiring the Southwest Power Pool, an RTO, to serve as its ICT.  Duke would use Midwest ISO, another RTO, while MidAmerican has yet to select an entity.  See Duke Energy Asks FERC to Approve MISO as ICT for Duke Facilities; Entergy and SPP Come to Terms on ICT Agreement.  It will be worth monitoring to see whether these affiliations will mature into membership over time in the absence of merger conditions or other directives.

Wind developers and the transmission providers with whom they interconnect now have greater certainty regarding technical interconnection standards.  FERC's order comes several months after the North American Electric Reliability Council (NERC) had challenged FERC’s final rule regarding large wind plants' low-voltage ride-through capability, supervisory control and data acquisition (SCADA) capability, and maintenance of a certain reactive power factor.  NERC had argued that the earlier low-voltage ride-through standard, which requires generators to stay online for a specified time and at certain voltage levels when there is a disturbance on the transmission system, would have reduced the reliability of the electrical grid.

Following NERC's objections, the American Wind Energy Association (AWEA) and NERC negotiated a settlement that formed the basis of the standards that FERC has how adopted.  See AWEA and NERC Settle Reliability Dispute.  These provide for a transitional period for qualifying wind generators, requiring them to ride through low-voltage events down to a voltage of 0.15 per unit for normal clearing times up to a maximum of nine cycles.  After the transition period, wind generators would have to ride through low-voltage events down to a zero voltage level for location-specific clearing times up to a maximum of nine cycles, after which the generator could disconnect if necessary.  Despite objections from various parties, FERC let stand its conclusion from the previous order that wind generators must meet specified reactive power standards only if the transmission provider shows it is necessary to ensure the safety or reliability of the transmission system. 

Other battles remain for the wind energy industry, including the potentially seminal FERC proceeding exploring potential changes to its pro forma open access transmission tariff.  Wind energy interests are advocating for more flexible use of the grid to accommodate wind energy, while various other interests object to what they call preferential treatment for wind.  But a precedent may be established in the instant rule, as FERC stated it “is necessary to recognize the technical differences between wind plants and traditional plants to ensure that the entry of wind generation into markets is not unnecessarily inhibited.” 

Of some concern for wind interests, however, is the partial dissent of Chairman Kelliher in this order.  He argued that exempting wind generators from the power factor standard applicable to other generators might threaten reliability and constituted an “undue preference” for wind generators. [Interconnection for Wind Energy, 113 FERC ¶ 61,254 (2005) (Order 661-A)]

After pulling out of the Regional Greenhouse Gas Initiative (RGGI) earlier this month, Massachusetts Gov. Mitt Romney (R) announced that the Bay State would pursue its own new carbon dioxide emissions (CO2) reduction plan.  The reductions go into effect January 1, 2006, but power generators will not be required to comply until 2007.

In particular, the plan targets Massachusetts' six oldest coal- and oil-fired power plants.  It calls for generators to cap emissions at 1997-99 levels, and includes a production limit of 1800 pounds/MWh.  The Governor's plan allows generators to meet limits by finding offsets in the Northeast region.  Additionally, the plan provides a “safety valve” meant to guard against excessive price increases:  If the price of available offsets reaches $6.50/ton for 12 months, then the generators would be able to shop for offsets anywhere in the world, and if the price reaches $10/ton, they could meet their obligations by paying into a new Greenhouse Gas Expendable Trust.  The money in the trust would be used to invest in CO2 emission offset projects.  The plan also includes reductions for sulfur dioxide, nitrogen oxides, and mercury.

Gov. Romney's intent is to work side-by-side with the RGGI, which is an emissions reduction work-in-progress of nine Northeastern states, and includes a cap-and-trade system, without price caps.  The Governor explained that if Massachusetts joins the RGGI,  its regulations could be modified to act in coordination with RGGI's plan.  However, critics of the Governor's plan claim that it is not compatible with the RGGI plan, and that the RGGI plan would better protect ratepayers by auctioning allowances and using the money for energy efficiency improvements, instead of allowing plant owners to avoid pollution reductions by paying a fee.

Responding to complaints that the cost of joining an RTO or ISO  is too high or unknown, on December 15 FERC issued Order No. 668, which will revise its Uniform System of Accounts and financial reporting requirements as they are used to publish the capital and operating costs of RTOs/ISOs and the cost to public utilities of  RTO/ISO membership.  In a statement, FERC Chair Joseph Kelliher promised that the rule “will make RTO costs more transparent and enable a cost comparison among RTOs, as well as between RTOs and traditional public utilities” transmission operations.  He also vowed to take additional steps if needed to achieve greater transparency.  The new rule joins other recent FERC proceedings intended to make RTOs and independent transmission organizations more palatable to utilities and their customers.  See Rule Would Encourage Transmission Investment & Membership in Transcos & Transmission Organizations.

The increased disclosure of expenses required by Order No. 668 is aimed at helping regulators ascertain a utility's RTO costs and determine whether they are excessive.  One of the primary criticisms of RTOs has been that the associated costs are too high or are not transparent.  These concerns have prompted some utilities to pull out of existing RTOs/ISOs.  See We Gotta Get Out of this Place: LG&E and KU Ask to Leave MISO.   FERC Commissioner Nora Brownell approached the issue from a different perspective, however, when she suggested that if RTOs/ISOs are taking on increasing responsibility for transmission grid and wholesale market operations, then the question might not be why are their costs increasing, but rather why aren't the costs of traditional utilities decreasing since the RTO or ISO is performing operations that they formerly did.

Order No. 668 establishes new capital and operating expense accounts to record what RTOs/ISOs bill their members and a separate accounts for expenses incurred in managing and monitoring regional market activity.  The new rule also provides for the recording of regional transmission and market operations, as well as new schedules for quarterly and annual financial reports for reporting revenues collected by RTOs.  The rule also provides utilities with several new sub-accounts, including three sub-accounts in which to record their share of costs billed to them by RTOs and a new revenue sub-account to record revenue received for providing transmission services.    The amended regulations will become final 30 days after publication in the Federal Register, likely sometime in late January or early February, and the accounting and financial reporting changes and updates will become effective on January 1, 2006.  [Docket No. RM04-12]

Implementing a recommendation of the President’s National Energy Policy Development Group that federal agencies work to increase renewable energy production, last week the Bureau of Land Management (BLM) established a Wind Energy Development Program (Program) to promote wind energy generation on federal lands.  The Program purports to strike a balance between streamlining processes for the development of wind energy resources and protecting public lands’ wildlife and scenic resources.   

Finalized after numerous stakeholder meetings and rounds of comments over two years, the Program will administer the development of wind resources in 11 western states that jointly host vast wind energy potential:  Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming.  BLM’s management strategy for the Program consists of policies, which map how BLM will administer the Program and identify best management practices (BMP) for mitigating environmental impacts.  These policies and BMPs will apply to all wind energy development projects on BLM-administered public lands.   

The policies identify certain lands where wind energy development will not be permitted.  These include Wilderness Areas, National Monuments, Wild and Scenic Rivers, and National Trails.  Thy also establish requirements for public involvement, consultation with other federal and state agencies, and government-to-government consultation; explain how project-level environmental review will occur; require entities seeking to develop wind energy projects on BLM-administered public lands to propose a project-specific Plan of Development (Plan) that incorporates all the BMPs; and require project operators to consult with BLM and other agencies on planned upgrades and to develop programs to monitor environmental conditions.  The BMPs, on the other hand, will be adopted as required elements of project-specific Plans or as conditions on right-of-way authorizations.  BMPs address various development activities, from site monitoring and testing, Plan development, and construction to operation and decommissioning.  The BMPs for project-specific Plan development identify required mitigation elements of the Plan needed to address potential impacts associated with subsequent phases of development, and consider impacts to wildlife, visual resources, noise, cultural and historic resources, and human health and safety. 

With its provision of a more uniform procedure for wind energy projects, and its requirements that project plans include uniform policies and BMPs, the Program seeks to provide a streamlined approval process and to balance the interests of project developers, environmental groups and property owners.  For real progress to be made in the development of wind, however, these efforts will need to be combined with solutions to the technological and financial challenges of moving wind generation from typically remote areas of the country to the urban centers.  Unfortunately, the Program and national energy policy generally have not taken up this challenge.