Energy Legal Blog

Following months of acrimony over power procurement and electric retail rates, the Illinois Commerce Commission (ICC) unanimously decided the state’s utilities should use a state-run reverse auction to procure power for consumers that do not choose competitive suppliers.  While the ICC agreed with state utilities Commonwealth Edison and Ameren on the benefits of this procurement method, other state officials, including Gov. Rod Blagojevich, have stridently opposed it.  But their opposition appears to have less to do with the use of an auction than the soon-to-end state-imposed retail rate freeze that has kept rates under market for several years during a transition to deregulation.   The Governor has vowed to continue his opposition.

Reverse auctions have been used successfully in New Jersey and elsewhere.  See New Wholesale Power Procurement Model Emerges: All-Source Auctions.  They entail successive rounds of offers by qualified wholesale power suppliers that drive the price of contracts lower until there is a match between the quantity needed and the supply offered.  The ICC said the auction, covering customers of ComEd and the Ameren companies, would take place in September, for deliveries commencing in January 2007.  To address concerns about market power and lack of competition, the ICC committed to create a market monitor within the agency and test auction results for prudence.  The latter would seem inconsistent with the auction mechanism, but the ICC is trying to stave off further political criticism that it is not doing enough to protect power consumers. 

The ICC concurrently denied ComEd’s request to purchase a quarter of its electricity under five-year contracts, concluding this would raise costs, and instead approved a plan under which all of the utilities will procure power up to a maximum of three years in advance.

FERC has adopted final rules implementing the new sections 4A and 222 of the Natural Gas and Federal Power Acts, respectively, which were added by the Energy Policy Act of 2005 (EPAct 2005) and adopts a scheme pioneered in securities laws for combating fraud.  [Prohibition of Energy Market Manipulation, Order No. 670, (2006)]  The texts of the natural gas and power rules are the same.  See FERC Looks to Past for Future Anti-fraud Enforcement.  These final rules adopt word-for-word the rules as FERC originally proposed them last October 20, with one exception.  The prohibition against engaging in any act, practice or course of business “that operates as a fraud or deceit upon any person” was changed to bar any such act, practice or course of business “that operates a fraud or deceit upon any entity.”   This change reflects the scope of the of the new law, which prohibits any entity from engaging in frauds or misrepresentations that affect wholesale energy market transactions subject to FERC’s jurisdiction.  Since the relevant statutes exclude municipal power and gas companies from the definition of “person,” the originally proposed rules asymmetrically would have penalized munis for their frauds but not the frauds perpetrated on them.  The final rules go into effect as soon as they are published in the Federal Register – probably some day early in February.

In its announcement of the final rules, FERC emphasized that the intent is not to punish negligent practices or corporate mismanagement.  Instead, the rules seek to punish misconduct that is intentional, knowing or reckless.  This distinguishes these anti-fraud rules from FERC’s market behavioral rules, which, for the most part, prohibit certain conduct irrespective of the actor’s state of mind. Under the new rules, FERC will seek sanctions whenever an entity “(1) uses a fraudulent device, scheme or artifice, or makes a material misrepresentation or a material omission as to which there is a duty [to disclose] under a tariff or FERC ruling, or engages in any act . . . that operates or would operate as a fraud or deceit upon any entity,”  (2) with an intentional, knowing or reckless state of mind, (3) in connection with a natural gas or power purchase or sale or transportation/transmission over which FERC has jurisdiction.  Notably, there is no requirement that the victim rely on the misrepresentation, fraud or deceit or that the victim damage due to the misrepresentation, fraud or deceit.   Sanctions for violations include disgorgement of profits and possible civil penalties.  See Policy Statement on Enforcement of Statutes, Orders, Rules and Regulations.
 
In public comments, critics of the proposed rules objected forcefully to FERC’s adoption of the vilification of material omissions from securities laws.  According to these critiques, omitting material information (e.g., potential litigation exposure) in connection with securities sold to the general, non-expert public finds no parallel in wholesale power transactions in which all parties are typically large and sophisticated.  Why make these sophisticated players report all material information, much of which may be proprietary and commercially valuable, they asked.  But FERC rejected these arguments and retained the material omission proscription.  The agency clarified, however, that the final rule creates no new affirmative disclosure rule, and sanctions will be doled out only when there is an affirmative duty under a tariff or other directive to disclose the omitted information.

FERC also clarified that entities alleged to have violated the new antifraud rules will be given an opportunity to counter the allegation before charges are formally brought.   The agency deferred ruling on whether to eliminate its market behavioral rules as redundant or unnecessary in light of its implementation of the antifraud rules.

Acting on a directive from the Energy Policy Act of 2005 (EPAct 2005), FERC has proposed new regulations that automatically would relieve some utilities of their nearly 30-year old obligation to purchase qualifying facility (QF) power. [New PURPA Section 210(m) Regulations Applicable to Small Power Production and Cogeneration Facilities, 114 FERC ¶ 61,043 (2006)].  Enacted as a provision of the Public Utility Regulatory Policies Act of 1978, the purchase obligation is known as the “PURPA put” because it enabled QFs — both cogenerators and small power producers — to put their output to traditional utilities operating in the vicinity.   EPAct 2005 directed FERC to end the PURPA put in “sufficiently competitive” markets that provide QFs with the ability to deliver their generation to buyers.  To be considered by the agency, public comments on the proposed regulations must be submitted by approximately the end of February. 

FERC would end the QF-purchase mandate generically for utilities operating in the organized markets that have so-called Day 2 markets — MISO, ISO-New England, PJM, and NYISO — because they offer transparent spot markets into which all generators can sell.  Utilities operating in the CAISO or SPP, as well as utilities operating outside of organized markets will have to establish their eligibility on a case-by-case basis.  To ease this burden somewhat, FERC suggests establishing a rebuttable presumption of eligibility for utilities providing nondiscriminatory open-access transmission under an Order No. 888 tariff or a reciprocity tariff.   

In a nod to wind energy advocates and others who harbor concerns that the proposed rule would disadvantage numerous small wind facilities that do not have meaningful market access, the proposed rule seeks comment on whether certain types of QFs should be exempted from the rule and retain their ability to force a sale of their power. 

Outside of Day 2 markets, what rises to the level of “sufficiently competitive” is likely to be contentious.  FERC plainly hopes that relief from the PURPA put will induce utilities to join organized markets rather than risk being found insufficiently competitive and becoming a magnet for future QF development.  Within Day 2 markets such as MISO, however, the eventual Final Rule should eliminate QF obligations for utilities such as Alliant Energy Corp., whose earlier request for relief FERC denied on a technicality.  [See Alliant Becomes First to Try for EPAct Waiver QF Purchase Requirement and FERC Shoots Down First Public Utility to Seek Waiver of QF Purchase Requirement]

Earlier this month, Illinois Governor Rod Blagojevich (D) announced he would mandate reductions in mercury emissions from the state's 22 coal-fired power plants by 90 percent by June 30, 2009, joining Connecticut, New Jersey, Maryland, Massachusetts, Minnesota, North Carolina and Wisconsin, in calling for mercury reductions stricter than those called for by the U.S. Environmental Protection Agency in its March 10, 2005 Clean Air Mercury Rule.  The EPA Rule calls for reductions of 47 percent by 2010 and 79 percent by 2018.  Power plants emit approximately 43 percent of mercury emissions in the United States, making power plants the leading man-made source of mercury emissions.

Lauded by environmentalists, Governor Blagojevich's proposal is the most aggressive in the nation: mercury emissions must be reduced by an average of 90 percent by June 30, 2009, and each coal-fired plant is required to reduce emissions by 75 percent by 2009 and by 90 percent by the end of 2012.  Under the Governor's plan, practices that permit plants to get around emissions controls, such as purchasing allowances or trading emissions credits with other companies or states, are prohibited.  The proposal will go before the Illinois Pollution Control Board in February, and if adopted, could become a model for other major coal-producing states considering mercury emissions reductions.  [See Maryland Governor Proposes Plan to Reduce Plant Emissions]

Rhode Island Governor Donald L. Carcieri (R) issued an executive order in mid-January creating the Office of Chief Energy Advisor to the Governor, and named Andrew Dzykewicz, Senior Project Manger at the Rhode Island Economic Development Corporation (RIEDC), to fill this new role.  Mr. Dzykewicz will be responsible for coordinating tiny Rhode Island's energy policy, and one of the first tasks assigned to the new Advisor is to oversee the enactment of a five-point energy agenda intended to assist in accessing affordable energy supplies and increasing energy conservation.

The Governor's five-point plan includes: 1) increasing natural gas supplies by offering support for regional siting of liquefied natural gas (LNG) terminals under construction in Eastern Canada, which, once up and running will increase the state's supplies and could allow Rhode Island to avoid the need for placement of LNG terminals along Narragansett Bay; 2) assisting FERC in reforming wholesale electricity pricing; 3) assisting low-income state residents to pay energy bills through a state assistance program that would supplement federal assistance; 4) completing a joint State Energy Office-RIEDC project intended to facilitate wind power development; and 5) performing a statewide audit of energy use to identify inefficiencies and to devise strategies to reduce energy consumption.

The potential for an independent transmission operator in the Pacific Northwest grew murkier in January, as the two principal factions headed in opposite directions.  On January 10, the remaining members of Grid West released a cost/benefit analysis examining the organization’s continued viability following the decision by the Bonneville Power Administration (BPA) not to participate.  The report touted decreased cost estimates, and, perhaps stating the obvious, determined that BPA's decision not to join will both create operational complexities and at the same time simplify internal procedures.  Hopes are that operations could begin in 2008.

In the meantime, several utilities that are not (or are no longer) members of Grid West announced formal plans to create an alternative to Grid West, which proposes a different path to integrated operation of the region's transmission system.  BPA, Puget Sound Energy, Seattle City Light, and the PUDs of Chelan and Grant Counties are in the process of asking other entities to become shareholders of the organization that would build upon last year's Transmission Integration Group (TIG) proposal.  See Pacific Northwest Grid Restructuring Proposal Fails.  A number of BPA's customers (primarily municipal utilities and public power agencies) that feared Grid West ceded too much control over the grid to an RTO-like organization developed TIG as the alternative to Grid West.  The as-yet-unnamed group plans to meet January 27 in Portland to determine their next step and hammer out a structure for their organization.  The group contends that its plan is intended to complement, but not compete with Grid West.  They hope some type of “seams” agreements could eventually be coordinate the portions of the regional transmission grid controlled by the two groups.