Energy Legal Blog

Eight WestConnect utilities, including Arizona Public Service Company, El Paso Electric, Nevada Power, Public Service Company of Colorado, Public Service Company of New Mexico, Southwest Transmission Cooperative, Tri-State, Tucson Electric Power, and WAPA, petitioned FERC on June 10 for guidance on a proposed two-year experimental transmission pricing initiative that would eliminate rate pancaking in the Southwest.  The proposed experiment will offer customers the option to purchase hourly non-firm point-to-point transmission service at a single regional transmission rate instead of having to pay pancaked rates under each provider’s open-access tariff.

WestConnect proposes to charge the transmission customer a single, flat rate that would be equal to the highest non-firm ceiling rate charged by a participating transmission owner.  In addition to an administrative charge for the experiment, the transmission customer would pay for scheduling and dispatch, along with reactive and voltage control.  Under the experiment, regional service would result in a lower rate than is currently available.  By charging this flat rate, WestConnect expects the reduced and simplified rates will increase transmission use.  Revenues will be distributed on a pro rata basis to each participating transmission provider. 

The WestConnect utilities have asked FERC to respond by September 15, 2008, and anticipate beginning the experimental pricing on February 1, 2009 for two years.  At the end of the two year period, WestConnect would evaluate the experiment’s effect on grid utilization and the participants’ revenues.

A divided US Supreme Court in June 26 opinions argued over the meaning and existence of the eponymously named, half-century-old Mobile-Sierra doctrine.  Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1 of Snohomish County ruled on consolidated buyer challenges to the prices in long-term wholesale energy contracts entered during the 2000-01 western energy market meltdown.  The buyers’ complaints were initially raised at the Federal Energy Regulatory Commission, which denied the challenges on the ground that the Federal Power Act authorized FERC to change the terms of a bilateral contract only if the contract were improperly induced (for example, through fraud or duress) or found to be contrary to public (as opposed to private) interest.  The buyers had made neither showing, FERC ruled.  On appeal, the United States Court of Appeals for the Ninth Circuit reversed on the ground that Mobile-Sierra’s presumption of lawfulness never attached to the contracts since FERC had not at the outset reviewed and found the market-based prices at issue to be just and reasonable.  Even if the presumption did attach, the Ninth Circuit held that FERC erred by holding a buyer to the same high burden of proof that a seller confronts in proving a contract violates the public interest.  According to the Ninth Circuit, a buyer challenging a wholesale power price as too high confronts a lesser burden than a seller challenging a price as too low, and need show only that a contract price exceeds a “zone of reasonableness” defined as marginal cost.

Justice Scalia’s (5-2) majority decision, with Justice Ginsburg concurring, Stevens and Souter dissenting (Chief Justice Roberts and Justice Breyer did not participate), affirmed FERC’s determination that Mobile-Sierra applies to the challenged contracts and rejected the Ninth Circuit’s interpretation of Mobile-Sierra as an “estoppel doctrine” that attaches only after a necessary threshold determination of price justness and reasonableness is made and thereafter “prevents [FERC] from modifying the rates absent serious future harm to the public interests.”  It also affirmed FERC’s conclusion that its contract abrogation authority is confined to “extraordinary circumstances where the public will be severely harmed” and rejected the Ninth Circuit’s asymmetric interpretation of Mobile-Sierra as requiring only that a challenging buyer show that price exceeds a marginal-cost zone of reasonableness.  Weirdly, however, the majority went on to affirm the Ninth Circuit decision to send the buyers’ complaints back to FERC on remand.  It did so for two reasons.

First, the majority erroneously conjectured that FERC “appears . . . to have looked simply to whether consumers’ rates increased immediately upon the relevant contracts’ going into effect, rather than determining whether the contracts imposed an excessive burden on consumers ‘down the line . . . .”  Not only is this factually wrong — FERC made explicit findings as to the rate effects over the life of many of the challenged contracts — it is also inconsistent with the majority’s validation of market “stabilizing force of contracts” that Mobile-Sierra enforces by “holding sophisticated parties to their bargains” over time.

Second, the majority explained that Mobile-Sierra’s presumption that a contract is just and reasonable should not attach “if it is clear that one party to a contract engaged in such extensive unlawful market manipulation as to alter the playing field for contract negotiations” because (as in instances of fraud or duress) no contract is legally formed in the first place under such circumstances.  The Court directed FERC on remand to explain “whether it found the evidence inadequate to support the claim that respondents’ alleged unlawful activities affected the contracts at issue here.”  The referenced allegations, which are sure to be repeated, come from a 2003 FERC staff report that the agency never adopted and which has since been called into question for using allegedly falsified data.

 The majority decision is noteworthy in two additional respects.  First both the majority held and dissent agreed that the three showings that a rate violates the public interest — impairs the financial ability of a public utility to provide service, excessively burdens consumers, or is unduly discriminatory — are not exclusive.  And second, at one point the majority seems to invite a facial challenge to FERC’s market-base ratemaking —“We reiterate that we do not address the lawfulness of FERC’s market-based-rates scheme, which assuredly has its critics” — notwithstanding the recent decision of the US Court of Appeals for the DC Circuit rejecting such a challenge. 

Justice Stevens’ dissenting opinion questions whether there is a Mobile-Sierra doctrine or public interest standard independent of the Federal Power Act requirement that rates be just and reasonable and faults both the Ninth Circuit and the majority for “hobbl[ing]” FERC from different sides in making a required determination whether contracts are just and reasonable.

In an effort to counter opponents of its proposal to expand an existing coal-fired generating station by 300 MW, Wisconsin Power & Light (WP&L) has offered to take several steps to offset the increased greenhouse-gas emissions that would result from the expanded plant's operation.  In a draft environmental impact statement, the Wisconsin Public Service Commission criticized WP&L's proposed use of a circulating, fluidized bed (CFB) boiler, which results in higher CO₂ emission.  In response, rather than abandon CFB, WP&L has offered to retire the oldest coal-fired plant in its fleet, develop an additional 200 MW of wind power above the 300 MW it has already pledged to develop in the next several years, increase the amount of biomass co-firing planned for the new unit, and increase energy efficiency and conservation efforts.  WP&L's estimated cost for these proposed efforts are $500-$550 million. 

The approach taken by WP&L proved successful for another Alliant Energy Corp. subsidiary.  Interstate Power & Light offered to the Iowa Public Utility Board a package of actions, including retiring older plants, building more wind power and increasing biomass co-firing in order to win the Board’s approval of a new coal-fired plant.  More quid-pro-quos of this sort can be expected.  Even as federal greenhouse gas legislation recently failed to overcome a threatened filibuster, its eventual passage appears probable and will impact state regulatory decision making.

The Michigan Legislature currently is considering legislation that would enact a renewable portfolio standard (RPS) and that would limit electric choice in the state.  At issue are three bills that have been passed by the state's House of Representatives and are now under Senate consideration. 

House Bills 5548 and 5549 would require the state's utilities to obtain at least 10% of their power from renewable energy resources by 2015.  These bills, however, do not currently propose to allow competitive bidding for renewable resources.  Senate Republicans have indicated they will seek to amend the legislation to require competitive bidding when the Senate takes up the measures. 

H.B. 5524 proposes to impose a 10% hard cap on participation in electric choice programs.  Opponents of the measure say it would effectively end electric choice in the state.  The state's largest utilities, Detroit Edison and Consumers Energy, have supported the bill, asserting that electric choice has limited their ability to secure financing for new power plants and to implement energy efficiency and renewable energy programs.

The Senate Energy Policy and Public Utilities Committee passed all three bills last week, by identical votes of 5-3.  The bills will now come before the full Senate, although it is unclear when they are slated to do so.

The Electric Reliability Council of Texas (ERCOT) reduced its shadow price cap from $5,600 to $5,000/MWh and collared the market-clearing price for energy (MCPE) between a cap of $2,250/MWh and an floor of -$1,000/MWh. These price controls, which took effect on June 18, 2008, are designed to prevent the MCPE from rising above the current offer cap for balancing energy services of $2,250/MWh. This is the second system change implemented in June to address recent price volatility in the ERCOT market. Earlier in June, the ERCOT board adopted a protocol change designed to allow more efficient management of transmission congestion.

The new limits on price volatility come in the wake of steep increases in the price for wholesale power in the Houston and South zones of the ERCOT region. The new measures come at the direction of the Public Utility Commission of Texas, which recently ordered two stakeholder committees to review the issue. The stakeholders considered the recommendation of Dan Jones of Potomac Economics (the Independent Market Monitor for ERCOT), along with two other proposals, and unanimously recommended implementation of the Potomac Economics’ proposal.

The City and County of San Francisco Board of Supervisors on June 10, 2008, approved a program that will create a fund to provide rebates for residents and businesses that install solar power systems. Under the Solar Energy Incentive Program, the nation's largest municipal solar program, residents could receive between $3,000 and $6,000 for photovoltaic systems. Businesses could receive $1,500 per kilowatt installed, with a cap of $10,000 per building. The 10-year program will use up to $50 million from the city's energy-conservation account. The Board of Supervisors also voted to approve a complimentary one-year pilot program that would budget $1.5 million to buildings owned and operated by low-income residents and non-profit organizations.

The Solar Energy Incentive Program would supplement incentives from the federal investment tax credit and the California Solar Initiative. Creation of the program is propitious since the federal investment tax credit is set to expire at the end of this year.

Supervisor Dufty, a co-sponsor of the measure, believes that the program will provide an important opportunity to encourage the development of the solar industry in San Francisco. The incentives provided by the program will help with installation costs, which are more expensive in San Francisco than in surrounding counties. The program also seeks to help San Francisco increase its amount of solar generation. Currently, the city ranks last in the Bay Area in terms of the solar energy installed per capita, according to data compiled by the California Energy Commission and the California Public Utilities Commission.