June 2005 - Posts

FERC Takes a Second Look at the Independent Ownership and Operation of Power Transmission Systems

Hoping to encourage the formation of independent transmission companies ("ITC"), FERC adopted in June a new Policy Statement on the ownership of ITCs.  The Policy Statement addresses the types of ownership structures that are eligible for ITC status.  The Policy Statement clarifies that FERC will consider ITC proposals from applicants in which market participants have passive minority equity interests, based on FERC's evaluation of certain criteria.  

Under the Policy Statement, FERC will consider proposals involving passive participation of up to 49 percent ownership by a single market participant, as well as proposals involving multiple market participants owning greater than 49 percent of an ITC applicant's equity.  In evaluating ITC rate proposals, FERC will also consider various issues that could affect the independent operation, planning and construction of their transmission systems, including the composition of the applicant's board of directors and their responsibilities; the corporate governance structure of the applicant; and the nature of the applicant's capital investment policies and any relationship between those policies and policies governing capital contributions or dividend reinvestment by passive equity holders.  Ultimately, FERC will focus on the applicant's ability to operate free of market participant control or influence.

The new policy goes into effect immediately.  FERC views it as a complement to the transmission incentives contained in the Jobs Creation Act that Congress enacted last year, which allows companies that sell transmission assets to an ITC to realize their taxable gains over an eight-year period.  The policy comes on the heels of FERC's hitherto-unsuccessful attempts at implementing a transmission pricing policy by granting certain return on equity incentives.  Notably, the currently-pending Senate energy bill would require FERC to initiate a formal rulemaking to establish rate incentives for various investments in transmission systems.  With the departure of Pat Wood from the FERC Chairman's post, development of transmission rate incentives may be one of the key tasks for the incoming Chair.  [Policy Statement Regarding Evaluation of Independent Ownership and Operation of Transmission, 111 FERC ¶ 61,473 (2005)  [UPDATE]

posted Wednesday, June 29, 2005 3:45 PM by Gunnar Birgisson

FERC Proposes Changes to Accounting and Financial Reporting Rules to Gain Further Insight into RTO Operations

Responding to the increasingly controversial issue of escalating RTO and ISO operating costs, FERC has proposed a new rule that would change its accounting and financial reporting requirements for public utilities, including independent system operators and regional transmission organizations (collectively "RTOs") that file financial reports with FERC.  Specifically, FERC is seeking more detailed information about regional transmission and RTO market operation assets, RTO revenues, and other market-related expenses.

FERC states it is proposing the rulemaking to accommodate the industry restructuring that has resulted from introduction of open-access transmission service and increased competition in wholesale bulk power markets.  Currently, financial reporting requirements cover only traditional functional utility plant classifications - generation, transmission and distribution of electric energy, but do not cover RTO-related costs.  According to the proposed rule, this is because many of the current asset and associated expense accounts are not applicable to RTOs.

FERC intends for the new regulations to provide information regarding activities specifically reserved to RTOs, such as overseeing markets and conducting long-term system planning.  The proposed rule would also create accounting and financial reporting requirements that will illuminate expenses incurred in providing service and the revenues collected from RTO members.  In addition, a unified reporting format for RTOs will provide FERC and the market with a better understanding of RTO expenses and whether they are legitimate and reasonable.  [Accounting and Financial Reporting for Public Utilities Including RTOs, 111 FERC ¶ 61,352 (2005)] [NEW MATTER]

posted Wednesday, June 29, 2005 3:44 PM by Gunnar Birgisson

FERC Administrative Law Judge Issues Initial Decision Largely Adopting ISO-New England Proposal for Locational ICAP

The contentious battle over capacity markets in New England moved a step closer to conclusion when a FERC judge recently upheld for the most part the details of ISO-New England’s locational ICAP ("LICAP") proposal.  See UPDATE (09/30/2002).  LICAP would replace the simpler ICAP regime that allowed load-servers to satisfy their ICAP obligations without regard to whether the capacity was actually deliverable where needed.

The judge found that use of LICAP and demand curves for capacity pricing was the only proposed methodology that would appropriately compensate generators needed for reliability and ensure there was adequate infrastructure while balancing the interests of generators and load.  The judge also recommended that the New England capacity market include Capacity Transfer Rights ("CTRs") to allocate constrained interfaces among competing uses.  CTRs would be allocated to those who pay for the transmission system, including those that funded specific upgrades that increase transfer capacity, and would not be given to load-servers outside of import constrained regions.  There would ultimately be five LICAP regions with separate capacity requirements and prices:  Maine, Connecticut, Southwest Connecticut, Northeast Massachusetts/Boston, and the remainder of New England.  

The transition from ICAP to LICAP in New England began with the submission to FERC of four reliability-must-run agreements in 2003.  FERC rejected the agreements, and directed the ISO to propose a mechanism that would implement location or deliverability requirements so that capacity within constrained area would be appropriately compensated for reliability.  Underlying this directive was the recognition that transmission constraints caused generation within congested areas to be of greater value than generation capacity located elsewhere.  In March 2004, ISO-NE proposed a LICAP model, supported by a coalition of generators, but opposed by most load servers who thought it would generate a windfall of revenue to generators.  Those opponents can be expected to appeal the judge's ruling.   [Devon Power LLC, et al., 111 FERC ¶ 63,063 (2005)] [UPDATE]

posted Wednesday, June 29, 2005 3:43 PM by Gunnar Birgisson

Sempra Tries For a 'Hail Mary' to Keep Jury From Hearing State Antitrust Suit

On June 22, 2005, Sempra Energy and its utility subsidiaries, Southern California Gas Company and San Diego Gas & Electric Company (collectively "Sempra"), petitioned FERC for an order declaring that the claims made in an antitrust lawsuit pending in state court in San Diego impermissibly intrude upon FERC's jurisdiction.  A FERC decision due on the petition is anticipated on the eve of trial and as a consequence may undercut the claims in the massive litigation stemming from the western power crisis of 2000-2001.

The litigation under California state antitrust and unfair competition laws commenced in September 2000 and now includes as plaintiffs classes representing most of the natural gas consumers served by the Golden State’s regulated utilities between July 2000 and July 2001, most of the electricity customers served by the state’s regulated utilities between July 2000 and August 2003, and a number of individual companies, counties and municipalities ("Plaintiffs").  The core allegation is that Sempra and El Paso Corporation ("El Paso") in 1996 agreed to, and thereafter undertook a variety of acts in furtherance of, a conspiracy enabling them to restrict supply of natural gas in California, and, ultimately, to raise the commodity price.  (El Paso eventually settled the case, leaving Sempra to defend itself alone.)  Restricted natural gas supply, the Plaintiffs contend, caused (or least exacerbated) the western energy crisis and resulted in charges that were much higher than they would have been absent the alleged Sempra-El Paso conspiracy.

The Plaintiffs have successfully navigated numerous obstacles throughout the course of this litigation and are now poised to begin presenting their case to a jury starting in early September of this year.  Sempra's petition seeks to pull the rug out from under the Plaintiffs' claims.  Sempra seeks a FERC declaration that the task for the antitrust jury – deciding the proper level of wholesale electric and gas rates during the California energy crisis – would invade matters subject to FERC's exclusive jurisdiction, and hence, are preempted.  Congress' decision to deregulate most natural gas prices, the petition claims, does not mean that states can step in to regulate those same prices by means of state antitrust laws.

Sempra asked FERC to rule on its petition by August 1st.  (FERC Docket No. EL05-130) [UPDATE]

posted Tuesday, June 28, 2005 7:06 PM by Gunnar Birgisson

Ohio Governor Statements Harbinger Possible Electric Industry Re-regulation

Storms of re-regulation in the Buckeye state appear to be building as Ohio Governor Bob Taft (R) hinted in a speech delivered at the NAE Regional Conference held on June 3 in Cleveland that unless competition in the electric industry registers a pulse, re-regulation could be in the state's future.  De-regulation in Ohio began in 1999 when S.B. 3, the Electric Restructuring Bill was passed providing customer choice effective January 1, 2001.  The results of de-regulation have been mixed; local government aggregation programs, primarily in Northern Ohio where FirstEnergy operates, have won some gains and many large customers have switched suppliers, but small customers have been slow to take advantage of competition, specifically in areas supplied by Ohio Power, Columbus Southern Power, Cincinnati Gas & Electric and Dayton Power & Light.  

A decision on potential new energy regulation legislation could follow from a series of hearings investigating the effectiveness of S.B. 3.  Ohio State Senator Robert Schuler (R) will chair the hearings, which are expected to conclude before the end of the year.  [NEW MATTER]

posted Friday, June 24, 2005 9:27 PM by Gunnar Birgisson

Environmental Study Proposes Increased Wind Energy Development on Public Lands

Wind energy developers may obtain greater access to many promising wind energy sites on federal lands in the Western U.S. based on the proposals of the U.S. Department of the Interior, Bureau of Land Management ("BLM").  BLM has released a final programmatic environmental impact statement ("EIS") addressing the environmental, social and economic impacts associated with developing wind energy on public lands in Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming.  Cumulatively, these western states have great wind power potential.  The EIS recommends adopting a Wind Energy Development Program, instituting policies and best-management procedures for wind energy right-of-way authorizations on BLM-administered land, and amending 52 BLM land-use plans to facilitate wind energy development.  

BLM lands presently are host to approximately 500 MW of installed wind capacity.  But these lands could produce thousands of additional megawatts.  Not all BLM lands would be open to wind energy developers, however, as the study identified various scenic or sensitive areas that would be off-limits.  The study also considered the possibility of more limited wind energy development throughout BLM land, but proposed the pro-growth policy instead of continuing the current, more restrictive BLM Interim Wind Energy Development Policy or adopting another limited wind-energy-development alternative.  The study leaves for future consideration site-specific issues associated with individual wind energy development projects.  BLM undertook the study partly in response to the National Energy Policy issued by the White House in 2001, which asked federal agencies to take action to expedite projects to increase the production, transmission, or conservation of energy.  [UPDATE]

posted Friday, June 24, 2005 9:30 PM by Gunnar Birgisson

FERC Investigates Oklahoma Gas & Electric for Market Power; Oklahoma Regulator Proposes Competitive Bidding

Both Oklahoma state regulators and FERC recently indicated that changes in the way Oklahoma utilities get power be in order.  At a June 6 hearing, the Oklahoma Corporation Commission ("OCC") directed its staff to put together a notice of proposed rulemaking ("NOPR"), which would direct the state's utilities to procure power through a competitive bidding process, and convene a prudence review of the 2003 costs of the state's two largest electric utilities, Oklahoma Gas & Electric Co. ("OG&E") and American Electric Power-Public Service Co. of Oklahoma ("PSO").  The NOPR would explore a competitive bidding process for utilities as a means of maintaining the state's relatively low electricity rates.  Notwithstanding generally low rates, Oklahoma's industrial customers saw their electric bills rise from July 2003 to July 2004 at a rate well above the national average.  Not surprisingly, representatives of OG&E and PSO indicated that a competitive bidding process and prudence reviews are unnecessary and that the current rules provide customers with sufficient protection against price volatility.

FERC has likewise focused on generation issues in the Sooner State.  On June 7, FERC found that OG&E and its affiliate OGE Energy Resources failed the agency's wholesale market share screen and initiated an 206 investigation into whether the OGE Companies possess generation market power.  Echoing the OCC's concerns about Oklahoma utilities' power procurement processes, FERC noted concerns raised by intervenors that OG&E is effectively foreclosing all competing generation in the relevant market by refusing to buy power from even low-cost resources and is instead dispatching high-cost generation owned by affiliates, thus raising issues of "buyer market power" and affiliate abuse.  While FERC could not address these concerns in the instant proceedings, because buyer market power is not currently a part of its four-prong market power analysis, FERC did express concern over such practices and promised to take up the issue of buyer market power in its ongoing generic rulemaking proceeding to determine the adequacy of the four-part test (Docket No. RM04-7).  [Oklahoma Gas and Electric Company, 111 FERC ¶ 61,368 (2005)]  [NEW MATTER]

posted Thursday, June 23, 2005 10:03 PM by Gunnar Birgisson

Wind Interconnection Standards Final

In June FERC took further steps to aid wind energy development.  It finalized technical specifications in a new rule for interconnecting wind energy generators to the transmission grid.  The new specifications supplement FERC's earlier creation of a standard interconnection agreement and standard procedures for generator interconnections, which jurisdictional transmission providers must follow.  Because of the unique operating characteristics of wind energy generators, FERC exempted wind energy interconnections from certain requirements of the interconnection rule. 

The new rule is intended to address the unique characteristics of wind energy generation.  It requires that wind energy plants seeking grid interconnection to (1) demonstrate the ability to remain online during voltage disturbances up to certain time periods and associated voltage levels if the transmission provider’s system impact study shows that low voltage ride-through capability is required to ensure safety or reliability, (2) have supervisory control and data acquisition ("SCADA") capability to transmit data and receive instructions from the transmission provider to protect the safety and reliability of the transmission system, and (3) satisfy the reactive power requirement of maintaining a power factor within the range of 0.95 leading-lagging, measured at the point of interconnection as defined in the interconnection agreement, if the transmission provider’s system impact study shows that such a requirement is necessary to ensure safety or reliability.

FERC's other ongoing initiatives relating to wind energy include a proposed rule on imbalance charges and discussions regarding transmission services more suitable to the characteristics of wind energy.  While supported by wind energy interests, both initiatives have met with resistance from some other sectors of the energy industry who claim wind energy may be getting preferential treatment.  [Interconnection for Wind Energy, 111 FERC ¶ 61,353 (2005)] [UPDATE]

posted Monday, June 13, 2005 7:45 AM by Gunnar Birgisson