Energy Legal Blog

For several years, the annual basic generation service (BGS) auction New Jersey uses to procure power for retail customers who do not choose their own supplier has been touted as a model for other jurisdictions wrestling with retail competition issues.  In a somewhat surprising move, the New Jersey Board of Public Utilities (BPU) recently announced that, in light of rising power costs, it will explore alternatives to the BGS auction as part of the 2007 procurement process.

The BPU first used the BGS auction in 2002.  The process consists of a descending-clock auction that is conducted over the internet and intended to procure the lowest-cost power.  New Jersey’s utilities enter into rolling three-year contracts with the winners of the auction.  The latest BGS auction led to impending rate increases of 12-14 percent for utility customers.  While the BPU has not renounced the auction, and still posts articles touting the auction’s benefits on its website, it commenced this inquiry to explore the procurement process and related regulatory and political issues.  Under the BPU’s procedural schedule, initial comments on the procurement process are due April 6, an open meeting to discuss comments will convene the week of April 17 and a hearing on April 24, final comments are due on May 4, and a final decision is expected by June 7.

Balking at Governor Mitt Romney's opposition, members of the Massachusetts legislature recently introduced a petition for legislation to reduce carbon dioxide emissions in Massachusetts through participation in the Regional Greenhouse Gas Initiative (RGGI), a regional cap-and-trade program intended to reduce greenhouse gases in the Northeast.  However, because of concerns over the program's effect on electricity prices, it is questionable whether the bill can be passed before the state legislative session ends in July 2. A two-thirds majority vote of the legislators would be needed to override the Governor's anticipated veto.

In December 2005, in a move reminiscent of the Bush Administration's rejection of the Kyoto Protocols, Governor Romney announced that Massachusetts would remove itself from participation in the RGGI, but would pursue its own carbon dioxide emissions reduction plan, which went into effect on January 1, 2006.  (See Mass. Governor Announces New Carbon Dioxide Emissions Reduction Plan) The state's current plan includes a cap-and-trade system, but without price caps.

Because Massachusetts is a key contributor of gas emissions in the Northeast region, its participation in the RGGI is significant.  Currently, all other New England states, save tiny Rhode Island, which also dropped out of the RGGI plan in December 2005, have a formal agreement in place to pursue the RGGI and are now moving forward on legislation to adopt the RGGI.

Over the last couple of weeks the forecast for wind has been decidedly mixed.  On the one hand, a Vermont Public Service Board (VPSB) hearing officer recommended on March 10 that state regulators reject a proposed 6-MW wind energy project in East Haven, Vermont.  The project, which has been under development since 2001, would install wind turbines along a ridgeline that sits on an abandoned radar base surrounded by environmentally protected lands on East Mountain in the state's rural Northeast Kingdom area.  Opponents of the East Haven project object to how it will affect the scenic views in the area.  While the hearing officer's recommendation can be rejected, in most cases the VPSB does not reject a hearing officer's recommendation.  The decision highlights the difficulty of siting wind projects in New England due to persistent NIMBY opposition, despite the overall public and political support for non-polluting energy sources.

Meanwhile, the Department of Energy's (DOE) National Renewable Energy Laboratory in Colorado announced on March 9 that it had entered into a $27 million contract with General Electric to develop a new offshore wind power system over the next several years.  In developing the project, DOE and GE hope to design, construct, and test a multi-megawatt wind turbine that would produce electricity at significantly lower costs than achievable with existing technology.  The investment was trumpeted as a means of reducing U.S. reliance on foreign energy resources and promoting cleaner technology under the Administration's Advanced Energy Initiative.  While the federal and private investment in offshore wind energy may help advance some offshore generating technologies, it is unlikely to overcome the opposition of coastal real-estate owners who have been able to stymie offshore wind projects such as the Cape Wind project near tony Nantucket, Massachusetts.

FERC has approved the withdrawal from Midwest ISO of two Kentucky utilities that helped establish the FERC-recognized regional transmission organization (RTO).  Both had become disenchanted with what they perceived as the inordinately high cost of membership.  FERC's approval of the withdrawals ― with virtually no strings attached ― suggests a sea change from a FERC insistent on transmitting utilities joining RTOs to a reconstituted FERC that is agnostic on whether utilities participate in RTOs and ISOs, provided they meet other relevant standards imposed by FERC, particularly regarding control over their transmission system. 

Affiliates Louisville Gas and Electric and Kentucky Utilities petitioned FERC in October for permission to withdraw from MISO.  FERC first considered whether the proposal satisfied the contractual requirements of the MISO transmission owners’ agreement, which FERC concluded it did since remaining members would continue to receive the same services at the same prices pursuant to a hold-harmless provision in the agreement.  FERC conditioned this conclusion on Louisville and KU proving going forward their continued compliance with this provision.  FERC also accepted the applicants’ proposed method of calculating their exit fee, which – in the context of very high RTO costs – had been a controversial issue.

Second, FERC evaluated whether the withdrawal would satisfy the merger conditions that FERC attached to Louisville's and KU's 1998 merger.  FERC found that these conditions would be met through the utilities’ use of the Tennessee Valley Authority as their reliability coordinator and the Southwest Power Pool as their Independent Transmission Organization, and the elimination of pancaked rates for certain customers.  Third, FERC considered whether the replacement transmission arrangements would be consistent with or superior to the pro forma OATT.  Again, the utilities’ reliance on TVA and SPP to perform reliability and transmission duties helped meet this test, but the utilities were also directed to prove in future submissions their ongoing compliance with nondiscriminatory open access.

The two Kentucky utilities hoped to withdraw from MISO by this summer.  Stay tuned to see if others follow suit.

The US EPA and several Midwestern states have formed a collaborative to begin curbing polluting emissions through voluntary measures.  The “Blue Skyways Collaborative” held its inaugural meeting last month, welcoming a diverse group of participants including representatives from EPA, the Departments of Defense and Energy, state and local officials, and corporate representatives.  It is spearheaded by the Central States Air Resource Agencies (CenSARA), the regional air planning organization for the Midwest, comprising Minnesota, Iowa, Nebraska, Kansas, Missouri, Oklahoma, Arkansas, Louisiana, and Texas.   

The Collaborative hopes to reduce emissions along major Midwestern transportation corridors and in various sectors, including aviation, water and rail transport, on-road diesel vehicles, and heavy off-road equipment, through retrofitting diesel-powered vehicles and encouraging renewable energy and energy efficiency projects.  A focus on renewable power sources sets this initiative apart from other regional voluntary emissions-reducing efforts, and reflects the regional economic interest of Collaborative participants in spurring use of ethanol and biodiesel, both of which derive from corn and other regional crops.   

While it has yet to establish numerical emissions reduction targets, the Collaborative's first meeting showcased the types of voluntary efforts and public-private initiatives that it hopes to foster.  For example, railroad industry representatives described their efforts to replace diesel-burning switch-engines with battery-operated engines.  The EPA has promised a modest $9 million to finance the Collaborative's projects this year, and the group anticipates several times that amount for 2007 financing.  Whether Blue Skyways proves successful likely will depend on whether this federal funding materializes ¾ a questionable proposition in light of the Administration's and Congress' recent failures to adequately fund the clean energy initiatives that they only recently enacted in the Energy Policy Act of 2005.

New England generators, the ISO-New England (ISO-NE), and four out of six New England states submitted an agreement to FERC on March 6 to resolve the running debate on New England capacity markets.  The agreement would establish a forward capacity market in ISO-NE, replacing the controversial LICAP proposal that has been stuck at FERC for months.  Under the agreement, the ISO-NE would be responsible for performing forecasts of needed capacity three years in advance and for conducting an annual auction to purchase sufficient power to meet those needs.  The plan provides that generators would be paid for any capacity purchased from them, but generators would not receive payment if the capacity is unavailable when ultimately called upon.  The ISO-NE has indicated it could conduct its first auction in December 2007.  The proposal also contains a locational component that allows prices to differ between import- and export-constrained zones within New England.  Supporters of the proposal estimate that forward capacity markets will cost up to 50% less than LICAP, but acknowledge it would probably increase residential costs in the short-term during the transition period, which will last from 2006 until the summer of 2010.

The proposed mechanism for the transition period appears to be the agreement's main sticking point.  The transition proposal will compensate generators for new and existing capacity between December 2006 and May 2010, with payments increasing over time.  While the parties supporting the settlement agreement argue the transition period is necessary to allow the ISO-NE time to develop the auction process and update its software, regulators in Maine and Massachusetts, two states opposing the agreement, charge that the compensation provided to generators during the transition is excessive.  The forward capacity markets plan also faces several familiar opponents in several transmission-owning utilities and load-serving entities throughout the region that were also opposed to the LICAP proposal.  Despite this opposition, the ISO-NE reports that 78% of members of the New England Power Pool supported the deal.