Energy Legal Blog

PR News announced that Bracewell & Giuliani’s Energy Legal Blog will be recognized as the best “Legal PR Blog” at its annual Corporate Social Responsibility & Legal Awards Luncheon on February 24, 2010 at the National Press Club in Washington, D.C. This award recognizes an outstanding and influential law-related weblog or online journal written by a representative of the organization with the goal of espousing the brand or a certain message and written with flair and personality.

“Managing a crisis and working with legal counsel are two areas of communication that will always be a part of a PR professional’s responsibilities,” notes Diane Schwartz, vice president of PR News. “The Legal PR Awards shines a light both on how law firms are communicating to their stakeholders and to how the PR industry is in the driver’s seat when a crisis hits.”

More information on the award program and this year’s winners is available at http://www.prnewsonline.com/awards/csr2009_event-finalists.html.

The Cogeneration Association of California and the Energy Producers and Users Coalition and the Midland Cogeneration Venture Limited Partnership have sought rehearing of FERC's Order No. 696, which overhauled regulations governing small power production and cogeneration by eliminating previous exemptions of qualifying facilities (QFs) from compliance with the mandatory reliability standards of new section 215 of the Federal Power Act.

The rehearing requests contend that Order No. 696 discriminates against QFs by neglecting to assure QFs that they will be able to recover their costs of complying with the new standards.  In contrast, FERC did provide that assurance to traditional public utilities that own generation.  “[B]y saddling [QFs] with significant new reliability compliance costs without also providing a cost recovery mechanism,” argue the challengers, the Commission is actually discouraging energy efficient cogeneration and renewable small power production technologies that FERC otherwise has a duty to promote under the Public Utility Regulatory Policies Act of 1978, section 210 of the Federal Power Act, and the Energy Policy Act of 2005.

The parties to the rehearing requests represent the interests of approximately 20 individual companies, including the likes of the El Paso Corporation,  BP West Coast Products, Inc., Chevron U.S.A. Inc., ConocoPhillips Company, ExxonMobil Power and Gas Services Inc., Shell Oil Products US, Kern River Cogeneration Company, Salinas River Cogeneration Company, and other additional small QFs in California.

On May 18, FERC made good on its promise to extend reliability standards to Qualifying Facilities (QF).  Order No. 696 overhauls regulations governing small power production and cogeneration facilities by eliminating previous exemptions of QFs from compliance with section 215 of the Federal Power Act.  According to the final rule, FERC believes “there is not a meaningful distinction between QF and non-QF generators that warrants a generic exemption of QFs from reliability standards.”  QF generators, FERC explained, affect the bulk-power systems as much as non-QF generators and should therefore be similarly subject to new mandatory reliability standards that become effective on June 4, 2007.  

Commenters during the Notice of Proposed Rulemaking process for Order No. 696 urged FERC to consider a number of factors in its evaluation.  FERC was not persuaded and denied generic exemptions, including exemptions for QFs below a certain size or ones serving only behind the meter load.  FERC instead directed that North American Electric Reliability Corporation (NERC) or Regional Entities could consider factors warranting specific exemptions when an individual QF is evaluated for registration (the general procedures for registration are outlined at Section 500 of NERC's Rules of Procedure).   FERC explained that, in this regard, Order No. 696 puts QFs and non-QFs on equal footing “to not be subject to reliability standards” since the registration process is designed to determine applicability of the standards on a case-by-case basis.  FERC also pointed out that QF's still have the opportunity to appeal to the agency if the QF believes its registration was in error.

Putting into place for the first time mandatory standards to ensure reliability in the nation's electric transmission system, on March 16, FERC issued an order adopting 83 out of 107 reliability standards that were proposed by the North American Electric Reliability Corporation (NERC) last year.  Certified as the Electric Reliability Organization (ERO) contemplated in the Energy Policy Act of 2005, NERC will play a primary role in developing, monitoring, and enforcing the reliability standards.  Most of the standards take effect this summer; FERC rejected calls by some industry participants for a phase-in or transition period

FERC directed substantial changes to many of the standards, but approved them as mandatory and enforceable nonetheless.  NERC can iron out details through its stakeholder process, FERC advised.  Those standards that were not adopted were remanded back to NERC for further development or for NERC to provide additional information.  FERC declined to adopt a blanket waiver from the standards for small entities; rather, FERC approved the continued use of the existing NERC compliance registration process and Functional Model to register entities who must comply with the standards.  Under this process, NERC will register:  distribution providers or load-serving entities with a peak load of 25 MW or greater and are directly connected to the bulk electric system or that are responsible entities as part of a required demand management (load-shedding) program; individual generating units that are 20 megavolt-amperes (MVA) or greater; generating plants with an aggregate MVA above 75; and transmission owners and operators with 100 kV or higher facilities.

In a separate notice of proposed rulemaking issued the same day, FERC proposed to extend the reliability standards to Qualifying Facilities (QF) above 20 MW, despite the fact that QFs are exempt from most FERC regulation.  Comments in this proceeding are due April 17, 2007. 

To address the energy shortages of the 1970s, the Public Utility Regulatory Policies Act was enacted to empower qualifying cogenerators or small power producers (from renewables) ― qualifying facilities or QFs ― to “put” their electric generation to an interconnected electric utility and charge the utility an avoided-cost rate, and also demand backup power from the utility.  Because the avoided-cost rate was often locked in at relatively high prices, utilities for years sough repeal or amendment of the “put.”  In the Energy Policy Act of  2005, Congress agreed and directed FERC to end prospectively the “put” for post-October 8, 2005, power sales by QFs that are found to enjoy nondiscriminatory market access.

Responding to this directive, FERC originally proposed to end generically the “put” for all electric utilities participating in independent transmission system operations that offer auction-based day-ahead and real-time energy markets ― the so-called Day 2 markets of ISO New England, the Midwest ISO, the New York ISO and the PJM Interconnection.  But in an October 20 ruling, the agency retreated to a more nuanced approach that creates rebuttable presumptions as to when a QF enjoys nondiscriminatory market access and when it doesn't.

One presumption is that QFs of 20 megawatts or less do not have nondiscriminatory market access.  But for a QF larger than 20 megawatts the “put” presumptively ends if, on a utility purchaser's application, FERC finds the QF is connected to an open-access transmission system that can access a Day 2 market, a Day 1 (an auction-based real-time market only) RTO that also includes sufficiently competitive markets, or the functional equivalent of these.  New England, the Midwest, New York and PJM qualify as Day 2; pending implementation of scheduled new market redesigns, SPP and the California ISO will remain Day 1 (leaving to case-by-case determinations the question whether the markets are sufficiently competitive); and FERC deemed ERCOT a functional equivalent.  The larger QFs can rebut the presumption of nondiscriminatory access by showing that characteristics of how they operate ― for example erratic cogeneration available for sale or non-dispatchability, or where they operate ― for examples in proximity to a binding transmission constraint ― preclude market access.

The new rule provides not only for termination of the “put” in circumstances where a QF fails to rebut the presumption of nondiscriminatory market access, but also for its reinstatement where a QF later shows that the nondiscriminatory market access it once enjoyed is no longer accessible.   

In a final rule issued February 2, FERC largely adopted its earlier proposed rulemaking implementing the Energy Policy Act of 2005’s (EPAct 2005) significant scaling back of the 1978 qualifying facility (QF) program of the Public Utility Regulatory Policy Act (PURPA).  As reported in an earlier entry, [Long-Term Transmission Rights Proposed for Organized Markets] FERC already has adopted a rule implementing EPAct 2005’s biggest change to the nearly 30-year-old QF program — prospectively terminating in organized electricity markets the mandatory purchase or “PURPA Put,” which empowered qualifying cogenerators and small power producers to force traditional electric utilities to buy their electrical output at attractive, avoided-cost prices.  The February 2 rule further tightens the eligibility requirements for future cogenerator QFs, reduces the benefits accessible to QFs, and eliminates the prohibition against an electric utility owning more than 50 percent of existing and future QFs.

In addition to the now largely defunct PURPA Put, an important benefit of being a QF has been exemption from various state and federal regulatory laws.  For new (but not existing) QF contracts, the new rule eliminates one of the most valuable exemptions that removed QFs from price regulation under the statutory just and reasonable requirement of the Federal Power Act.  Going forward, QF contracts for cogeneration and small power production facilities of greater than 20 megawatts will be subject to price regulation, albeit probably pursuant to market-based rate schedules.   QFs retain their exemption of regulation as electric utilities under the new Public Utility Holding Company Act of 2005, but will be subject to the new market transparency and anti-fraud provisions that EPAct 2005 added to the Federal Power Act.

In order to qualify as a QF, PURPA required that the thermal energy that a cogenerator produces in tandem with electricity be “useful.”  FERC implemented that requirement by simply presuming that the thermal output of a cogenerator was useful and making that presumption irrebuttable.  Much  to the consternation of utilities forced to by cogenerated electricity, this irrebuttable presumption, on occasion, countenanced thermal applications that were plainly not useful, such as distilling water only to dispose of the distilled water.  Responding to complaints that these thermal applications were a “sham,” Congress directed in EPAct 2005 that FERC change its QF eligibility rules to require that a cogenerator’s thermal energy output be “productive and beneficial” and that its electrical, chemical and thermal output be used “fundamentally” for “industrial, commercial or institutional purposes” and not “fundamentally” to make electricity sales to an electric utility.   The February 2 rule adopts this language verbatim and requires and will require that an applicant for status as a cogenerator QF prove both that its thermal energy is productive and beneficial and that all of its ouput is fundamentally for purposes other than making electricity sales to an electric utility.  

Importantly, FERC clarified that residential uses are subsumed within permissible “institutional” purposes, and rejected the demand of the Edison Electric Institute that formal economic and financial reports support any finding that thermal energy is productive and beneficial.   Also importantly, FERC instructed that thermal uses that were irrebuttably presumed useful under the old rule will be presumed rebuttably to be productive and beneficial under the new rule.  And once certified as a QF cogenerator, the owner will not lose that status even if the economics of its thermal energy output later reverse.  Cogenerators with 5 megawatts or less are also rebuttably presumed productive and beneficial.

 With regard to the new fundamental-use requirement, the February 2 rule adopts a straightforward safe harbor:  If 50 percent of the aggregated annual energy output of a facility is used industrially, commercially or institutionally and not sold to an electric utility, then the fundamental-use requirement will be presumed irrebuttably to be satisfied.   And again, cogenerators with less than 5megawatts or less are rebuttably presumed to satisfy this new requirement.

Pre-existing efficiency standards for oil- and gas-fired cogenerators are unchanged in the new rule, and FERC rejected demands that it establish efficiency standards for coal-fired cogenerators.  Also retained is the existing practice by which both cogenerator and small power QFs can self-certify and self-recertify.  The only difference is that such self-certifications will be publicly noticed in the federal register and can be challenged by the public or by FERC on it own initiative.