Energy Legal Blog

The coal and electric utility industries in the FutureGen Alliance have started selecting a site for the state-of-the-art FutureGen project, a coal-fired, zero-emissions power plant the Alliance will build in cooperation with the U.S. Government.  If successful, the project may devise ways of harnessing abundant U.S. and world coal reserves without exacerbating the world’s increasingly worrisome dynamic of greenhouse gas emissions overheating the global climate.

Members of the Alliance include two large U.S. utilities, American Electric Power and Southern Company, as well as BHP Billiton, the China Huaneng Group, CONSOL Energy Inc., Foundation Coal, Kennecott Energy, and Peabody Energy.  They will pay a portion of the plant’s costs, while the U.S. government, acting through the DOE, will fund the balance.  The Alliance has announced it will issue a request for proposals in March 2006 for selection of the site for the project.  A draft RFP is already available.  Candidate sites will be evaluated based on technical, environmental, regulatory and financial criteria.  In addition to possessing the usual attributes that are keys to successful power plant siting, such as the availability of water, transmission, and fuel delivery, potential sites must be in an area where the geology is amenable to sequestration of carbon dioxide for permanent storage.  The Alliance expects to select a site by late 2007.  With lengthy periods expected for permitting and construction, the plant is unlikely to be operational before 2012.

The DOE will serve as lead agency in preparing an environmental impact statement (EIS), pursuant to the National Environmental Policy Act (NEPA), to determine which of the candidate sites are acceptable from an environmental impact perspective.  Comments related to the NEPA process are due to DOE by March 20, 2006.

After seemingly endless delays, the California Independent System Operator (“CAISO”) on February 9, 2006, finally submitted to FERC its long-promised market redesign and technology upgrade (“MRTU”) tariff.  Originally proposed in 2002 in response to FERC findings that the California markets were dysfunctional, the CAISO undertook to redesign its markets and software.  The CAISO itself acknowledges the MRTU tariff remains incomplete; before the MRTU system can come on-line, the CAISO will have more work to do, including developing business practices and determining the appropriate methodologies for designating resources needed to meet day-ahead procurement targets, releasing post-day ahead resource adequacy capacity, and allocating CRRs to merchant transmission projects.  Comments on the tariff are due March 27, 2006, with reply comments due April 17. 

The CAISO’s new tariff includes several prominent changes to its market design and market mitigation, including the implementation of a day-ahead market, an hour-ahead scheduling process, and a real-time market that uses locational marginal pricing (“LMP”) and security-constrained unit commitment to dispatch resources and manage congestion.

In its filing, the CAISO extols the virtues of LMP, claiming its version of LMP is similar to the system in place in other of the country’s organized markets.  The CAISO also claims it does not expect prices to rise as a result of LMP.  For the most part, MRTU will settle charges on an aggregated basis with three load aggregation points (“LAPs”), which correspond to the territories of California’s three investor-owned utilities.  However, certain transactions (such as those involving pump loads, exports, metered sub-systems, existing transmission contracts, and transmission ownership rights) will be scheduled and settled on a more “granular” level – i.e., on the basis of nodes that will often be confined to an area smaller than an LAP.  MRTU will also implement congestion revenue rights (“CRRs”) to help customers hedge congestion costs.  On the contentious issue of how to allocate such rights, the CAISO proposes to allocate CRRs first to California’s load-serving entities (“LSEs”), who, the CAISO reasons, helped pay for the transmission system.  Any remaining CRRs will be auctioned off to all creditworthy parties.  Entities serving load outside of California may obtain CRRs by pre-paying certain wheeling charges. 

MRTU will implement a residual unit commitment (“RUC”) process that should help ensure reliability by allowing the CAISO grid operator to secure on a day-ahead basis incremental capacity it forecasts it will need in real-time.  The CAISO hopes for the RUC process to work in concert with the California Public Utilities Commission’s (“CPUC’s”) resource adequacy program.  The CAISO will also undertake to perform local capacity studies to assess the amount of capacity needed in transmission-constrained areas.  It will procure capacity to make up for any shortfalls and allocate the costs to any LSEs that fail to maintain sufficient reserves.

In addition to redesigning its market, the MRTU proposal adds several market power mitigation provisions, based on similar measures in PJM.  The filing includes an initial $500/MWh cap for energy bids, with a plan to raise the cap to $1000/MWh over the next two years in increments of $250/MWh.  The CAISO also proposes to implement a $250/MWh cap for ancillary services and RUC availability bids.  The MRTU proposal would also revise the vexatious must-offer obligation so that only those units whose capacity is needed to meet a utility’s resource adequacy requirements would be required to offer their capacity into the CAISO’s markets.

The CAISO is aiming for MRTU to become effective in November 2007.  In order for its software vendors to have sufficient time to develop appropriate software, the CAISO thus asked FERC to approve the MRTU tariff by this June, without holding any hearings or requiring any changes.

Companion House and Senate bills to create a new quasi-agency to plan and finance interstate transmission lines did not survive a filibuster mounted by New Mexico's Republican leaders at the end of the legislative session.  Proposed by Governor Bill Richardson, the new agency would have issued state bonds to finance transmission line construction, exercised the power of eminent domain to obtain rights of way for transmission corridors, and entered into leases with utilities to operate the new transmission lines.  This transmission expansion would proceed in tandem with the goal of building more wind and solar power generation that, using the new transmission lines, could be exported to surrounding states with renewable portfolio standards, such as Arizona, California and Colorado.   

The measure's supporters justified creating the new agency on the ground that it was needed to fill the transmission void in federal programs.  In particular, they pointed to the fact that FERC's transmission pricing policy that is intended to spur transmission investments has bogged down amidst opposition from state regulators and consumer groups.  They also doubt that FERC's backstop authority to approve transmission siting will, on its own, spur new transmission construction.  They further note that DOE's new authority under the Energy Policy Act of 2005 (EPAct 2005) to help finance new transmission lines in the West and Southwest applies only to constrained areas and would not ensure that renewable energy would benefit from the new lines. 

Critics of the proposal argued that the new agency would be redundant with new federal authority over transmission siting and construction.  Rather than furthering the development of renewable power resources, the critics countered that the a new agency would instead promote coal and nuclear development.  In addition, they felt that granting a new agency eminent domain set a dangerous precedent.  Despite these criticisms, the bills passed both houses with overwhelming support and simply became caught up in the end-of-session crunch as Republican legislators debated other issues.  Governor Richardson may raise the legislation again in a special session of the state's legislators, in an effort to catch up with states like Wyoming that already have a transmission siting authority in place.  The strong support for such an authority in New Mexico will likely produce the result the Governor seeks, and exemplifies the impatience of a number of states with the cumbersome procedures surrounding DOE's and FERC's new authorities under EPAct 2005 to promote transmission expansions.

In Order No. 675, FERC finalized its revised rules on challenges to its operational audits.  Last October, FERC proposed to allow regulated companies to challenge not only financial audits, but also operational audits, [See Rulemaking to Establish Procedures for Challenging FERC Operational Audits], which include reviews of compliance with standards under the Federal Power Act, as well as audits conducted under the Natural Gas Act and the Interstate Commerce Act.  FERC proposed to allow the subject of the audit to choose whether to challenge the audit in a shortened procedure or to request a trial type hearing.  The final rule takes effect March 29, 2006.   

The final rule makes only slight changes to the initial proposal.  One adjustment permits entities subject to operational audits to change their choice of a shortened procedure to a trial-type hearing if an interested party raises a new issue during the course of the procedures.  Also, FERC clarified that the final rule will not apply to audits or compliance reviews conducted by an Electric Reliability Organization (ERO), nor to audits conducted by FERC under its ERO rules, though this latter exception may change once FERC approves an ERO, which it is expected to do later this year.  In addition, an audited entity may target its challenge to the audit finding of a violation, the remedy FERC selects, or both.  Audited companies have 30 days from when they receive notice of the audit to inform FERC as to whether they have chosen the shortened procedure or the trial-type hearing.

In Order Nos. 673 and 674, FERC has eliminated from natural gas wholesaler codes of conduct and from electric power wholesaler market behavioral rules (MBRs) a controversial provision that prohibited these natural gas and power merchants “from engaging in actions that are without a legitimate business purpose and that are intended to or foreseeably could manipulate market prices, market conditions, or market rules” for natural gas, electric energy or electricity products.  Also eliminated is an MBR prohibiting collusion with others to manipulate market prices, conditions or rules.  These eliminations are effective upon publication in the Federal Register, likely to occur the last week of February or the first week of March. 

The “legitimate business purpose” requirement, which had been challenged in court as unlawfully vague, is replaced by an anti-fraud rule that FERC recently adopted to implement 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 adopt a scheme pioneered in securities laws for combating fraud.  [Prohibition of Energy Market Manipulation, Order No. 670, (2006)]  The new rule makes it unlawful for any “entity, directly or indirectly (1) to use or employ any device, scheme, or artifice to defraud, (2) to make any untrue statement of material fact or to omit to state a material fact” needed to make a statement “not misleading, or (3) to engage in any act, practice, or course of business that operates . . . a fraud or deceit . . . in connection with purchase or sale of” natural gas or electricity or the purchase or sale of transmission or transportation subject to FERC’s jurisdiction.   

In addition to mooting the pending legal challenge, replacing the “legitimate business purpose” requirement with the new anti-fraud rule is significant in two other important respects.  First, since it is based on longstanding anti-fraud rules under the Securities Exchange Act, the new anti-fraud rule not only articulates a clearer standard, but it is also informed by a body of decisional precedents that illustrate and clarify how it should be applied.  Second, it replaces culpability based on “intended to or foreseeably could manipulate” with culpability based on scienter ― a showing of intent to defraud or deceive.  This should prevent a natural gas or electric power wholesaler from being prosecuted for actions that are simply short-sighted. 

Together with other concurrent rulings, the two new orders retain requirements that natural gas and electric power wholesalers notify FERC if they report their prices to price index publishers and that reporting companies take steps to ensure the accuracy of the prices that they report.  Additionally, a requirement that these wholesalers retain documentation on their natural gas and electric power transactions for three years was extended to five years in order to coincide with the statute of limitations on prosecutions for violations of the new anti-fraud rule.

After a pile-on of pleadings, a hearing, months of settlement talks, most parties have agreed on a settlement regarding ISO-New England's controversial locational installed capacity model (LICAP).  While Connecticut led the opposition to LICAP, now it's Maine that fiercely opposes the settlement and has threatened to withdraw from NEPOOL to spare its citizens what it considers excessive costs under the settlement.  

Development of capacity markets has led to tension between regions and market participants based on perceptions of capacity gluts or shortages, prices being too low or high, the level of the reserve margin to be procured, the creation of distinct capacity regions, and other issues.  [See No Consensus on Securing Long-term Generation Adequacy.]  There appears to be a growing awareness that capacity development and procurement must take into account the deliverability of energy from a capacity resource.  This in turn would provide for higher capacity payments to generators in constrained areas.  Connecticut authorities balked at this outcome and instead steadfastly insisted that the rest of New England subsidize supplying it with imported energy.

The current settlement agreement has yet to be filed at FERC.  Its outlines include dropping LICAP in place of a forward procurement market that would be implemented through competitive auctions.  During a transitional period of several years, generators would receive capacity payments to help cover their costs.  Overall, this plan is to cost consumers less, but some state officials remain unhappy, particularly those in Maine.  Its industrial customers already feel the brunt of higher energy costs, and fear greater price increases.  Withdrawal from NEPOOL may be an option: the Maine legislature's Utilities and Energy Committee has even held hearings on a bill that would allow the state's regulators to order utilities to leave the power pool.  A major energy marketer testified in opposition to the bill, urging lawmakers to not cast the blame for high energy prices on ISO-NE, which administers the energy markets and transmission in the NEPOOL region.  Other concerns include numerous administrative, operating, legal and market issues that would require resolution were Maine utilities to withdraw.    

Meanwhile, on the federal front, a FERC judge who shepherded the settlement has scheduled meetings with the parties to try to resolve these differences before ISO-NE files a revised capacity plan at FERC.  [FERC Docket ER03-563]