Energy Legal Blog

FERC issued a final rule October 17 to strengthen competition in organized wholesale electric markets.  The rule (generally consistent with the proposed rule FERC issued last February) seeks to improve wholesale markets by establishing a more forceful role for demand response and long-term contracts in organized markets, strengthening market monitoring, and improving the responsiveness of regional transmission organizations' (RTO) and independent system operators' (ISO) to their customers. 

• As to demand response, FERC directs each RTO/ISO to:  accept bids for ancillary services from demand response resources; eliminate charges to buyers for voluntarily reducing demand during emergencies; permit market participants to aggregate retail demand responses (unless otherwise prohibited by state law); and allow market prices to reflect more accurately the value of energy during shortages, by adopting scarcity pricing to allow prices to rise during times of shortages and encourage an increase in supply.  FERC also requires the RTOs/ISOs to assess and report on any remaining barriers to comparable treatment of demand response resources.  Commissioner Suedeen Kelly dissented from the Commission's scarcity pricing decision, arguing her belief that before allowing scarcity pricing, FERC should ensure that the necessary generation and demand response infrastructure are in place to give consumers the ability to respond to higher prices.

• Because long-term contracts help market participants hedge against potential volatility in market prices and can help improve price stability, FERC urges more long-term contracting in organized markets.  Finding there is no fundamental barrier to long-term contracts in organized markets, FERC sought to improve transparency in such contracting by requiring RTOs/ISOs to dedicate a portion of their websites to a transparent exchange of long-term sale offers and buy bids.

• To enhance the effectiveness of RTO/ISO market monitoring, the rule addresses  the independence and functioning of RTO/ISO market monitoring units and information sharing.  In apparent response to some of the difficulties faced by the PJM Interconnection and its market monitor last year, the final rule requires that market monitors report directly to RTO/ISO boards, as opposed to management.  FERC also broadened market monitors' reporting duties by clarifying that market monitors must refer to FERC any instances of misconduct by the RTO or ISO, as well as by market participants, and by expanding market monitors' referral obligations to include perceived market design flaws.

• Finally, FERC sought to improve RTO/ISO responsiveness by requiring that they provide customers and other stakeholders with some form of direct access to their boards.  FERC emphasized the importance of RTO/ISO boards being willingness to directly receive concerns and recommendations from customers and other stakeholders, and to consider fully and take action in response to such concerns and recommendations.

These reforms come on the heels of a report by the Government Accountability Office (GAO), issued last month, that questioned how well FERC has quantified the benefits of RTOs to electric consumers.  Although not a direct response to the GAO report, the new rule appears aimed at some of the problems that have typically been identified with organized markets. 

Jurisdictional jockeying between FERC and the Department of Interior threatens development of Outer Continental Shelf  (OCS) ocean power projects. The issue calls out for agency cooperation and possibly an interagency agreement similar to that between FERC and the U.S. Forest Service for licensing and permitting hydroelectric projects on Forest Service lands. Absent such cooperation, the matter will have to be resolved by the courts.

The dispute flared most recently when Pacific Gas & Electric Co. asked FERC to issue preliminary permits for two sites located partially in state waters and partially on the OCS. PG&E contemplates placing between 8 and 200 wave energy conversion devices in water with depths of 60 to 600 feet and delivering the energy from the two projects via underwater cables connected to the PG&E transmission grid. The two projects would each generate about 40 MW. FERC considers them hydroelectric projects because they generate electricity through ocean waves.

While Interior does not contest FERC’s jurisdiction over such projects in state waters, it contends that FERC has no authority over the OCS sites. Interior argues that “navigable waters” (the touchstone for FERC jurisdiction) does not include waters beyond the 3 mile boundary of the U.S. territorial waters. Interior’s position derives from the definition of navigable waters in a number of statutes, including the Clean Water Act and the Rivers and Harbors Act of 1899. Rejecting this argument, FERC says the Federal Power Act (FPA) definition of navigable waters is broader and extends to “bodies of water over which Congress has jurisdiction” under the commerce clause, including OCS waters. FERC also asserts authority under the FPA to issue licenses for projects located on “lands and other interests in lands owned” by the U.S., again including the OCS.

By empowering Interior to lease the OCS for non-oil and gas energy sources, the Energy Policy Act of 2005 (EPAct 2005), according to Interior, made Interior the lead agency for OCS wave energy projects. Not so, says FERC, asserting EPAct 2005 limited Interior’s authority to OCS activities not otherwise authorized by “other applicable law” and that hydro licensing is otherwise authorized by the FPA. No end to the debate is in sight.

The Federal Energy Regulatory Commission adopted revised Standards of Conduct (Standards of Conduct) for Transmission Providers ― both natural gas pipelines and electric transmission systems ― in its October 16 Order No. 717.  The single largest change from earlier SC is replacement of corporate separation requirement adopted in 2003 with an “employee functional approach” that dates back to the original 1988 natural gas Standards of Conduct and the 1996 electric transmission Standards of Conduct.  Order No. 717 will take effect 30 days after publication in the Federal Register, likely sometime in late November.

In order to prevent preferential access to natural gas pipelines and electric transmission systems, the Standards of Conduct originally separated employees engaged in transmission from others engaged in natural gas or electricity marketing and required them to operate independently of each other.  In response to the unbundling of gas sales and transportation and the proliferation of electric power marketers, FERC in 2003 changed the Standards of Conduct to require a corporate separation of transmission employees not only from those in marketing, but also from employees broadly and ambiguously characterized as “energy affiliates.”  The found these changes difficult to implement and an obstacle to both competitive procurement and integrated resource planning.  The natural gas industry sought judicial review, and a court invalidated the 2003 Standards of Conduct revisions on “energy affiliates” as to the natural gas industry.  Order No. 717 responds to the natural gas and power industries’ complaints and the court’s decision by jettisoning the “energy affiliate” concept and reverting to separation of employees by transmission and marketing function and no longer requiring corporate separation.

In regard to merchant employees, FERC clarified that designation comprises only employees involved in natural gas or electricity sales.  The Standards of Conduct do not apply to purchases and should therefore have not adverse effect on competitive procurement.  And as to transmission employees, the Standards of Conduct apply only to employees involved in the day-to-day operation of pipelines or electric transmission systems; they do not apply to planning activities and therefore should not be a limitation on integrated resource planning, which has a long history in the electric power industry.

In addition to the adoption of the employee functional approach and the elimination of the concept of “energy affiliates,” Order No. 717 also made a variety of other clarifications to its Standards of Conduct regulations in response to industry comments.  FERC’s hope is that the narrowing of the scope of its Standards of Conduct regulations will facilitate compliance.  For that reason, the new Standards of Conduct is likely to take center stage in future FERC enforcement actions.

If the “discussion draft” carbon cap-and-trade bill recently released by Congressmen John Dingell (D-MI) and Rick Boucher (D-VA) becomes law, then FERC would run the carbon market. Within FERC, the bill would create a new Office of Carbon Market Oversight possessing jurisdiction over brokers, dealers and certain others involved in carbon trading. The draft bill would amend the Federal Power Act to add provisions empowering FERC to regulate carbon markets.

One might fairly ask what expertise or special competence FERC brings to running a carbon market. Only some of the emission sources are energy utilities that FERC historically has regulated. Why not instead the EPA, with its expertise in administering the Clean Air Act? Alternatively, in recognition that carbon allowances may need to trade internationally, comparable to currency, why not the Department of the Treasury? Some suggest that the answer is politics. By selecting FERC, representatives Dingell and Boucher appear to take jurisdiction over the program away from the Senate Committee on the Environment and Public Works, chaired by Sen. Barbara Boxer (D-CA), and transfer it to the Senate Committee on Energy and Natural Resources, chaired by Sen. Jeff Bingaman. Sen. Bingaman is on record favoring less aggressive carbon controls less than Sen. Boxer, a position more in sync with the Boucher-Dingell discussion draft.

Congressmen Dingell and Boucher have stressed that their “discussion draft” is aptly named; it is a draft only, and it is meant to stimulate discussion.  Indeed, the bill contains blanks on some fundamental elements.  For example, it proposes—and asks for comment—on four different mechanisms for allocating emissions allowances, running the gamut from free allocations to auctions.

The Federal Energy Regulatory Commission (FERC) revised its Policy Statement on Compliance October 16.  The revision posits four factors FERC will take into account when considering whether to reduce or eliminate civil penalties for violations: (1) The role of senior management in fostering compliance; (2) Effective preventative measures to ensure compliance; (3) Prompt detection, cessation, and reporting of violations; and (4) Remediation efforts. 

FERC adopted a “compliance credit” approach resembling that of the Securities Exchange Commission and the Federal Sentencing Guidelines.  Where a violation is not serious (does not involve significant harm or damage to the integrity of FERC’s regulatory program), and the company has all 4 elements of vigorous compliance in place, FERC may then reduce a company’s penalty to zero.

The Energy Improvement and Extension Act of 2008 embedded in the economic stimulus legislation (H.R. 1424) that President Bush signed into law on October 3, 2008, provides nearly $17 billion in various tax credits to promote clean power generation technologies, alternative fuels, renewable energy and energy efficiency.

Renewable Energy Initiatives

While the 2008 Act provides notable incentives for investments in several emerging technologies such as hydrokinetics, fuel cells, geothermal and open-loop biomass facilities, solar and wind emerged as the biggest winners. For commercial-scale wind power producers, the Act provides a brief, although relatively costly, extension of the production tax credit as well as a variety of incentives for microturbines and residential-scale wind projects. For the solar industry, the Act extends the existing 30 percent investment tax credit for solar energy facilities and, perhaps most notably, eliminates the cap on the existing 30 percent tax credit for investments in residential solar. (more…)