Energy Legal Blog

Congress Enacts Energy Bill

One month after the Senate approved its version of a comprehensive energy bill, see Senate Votes in Favor of Energy Bill, Tumultuous Conference Awaits, Congress enacted the Energy Policy Act of 2005.  Although maligned by energy and taxpayer watchdogs as a "piñata of perks and pork" for big oil, big nuclear and other entrenched energy industries, the 2005 Act, as it affects certain aspects of the power and natural gas industries, promises to profoundly change the structure and prospects of new energy business organizations and the viability of new liquefied natural gas and power transmission projects.

For several years the demand for relatively clean-burning natural gas has increasingly outstripped North American production, giving impetus to efforts to import liquefied natural gas ("LNG").  But concerns over the safety of LNG re-gasification facilities in this country, both on- and off-shore, have seen myriad LNG development proposals from coast-to-coast crash in the face of public opposition.  The 2005 Act will override that opposition in part by consolidating many of the needed approvals, including siting, in one agency – FERC.  State and local authorities are effectively stripped of authority to block the siting of LNG importing and processing facilities.

The 2005 Act also promises to effect fundamental changes in the future structure and operation of power markets.  It does so by repealing the Public Utility Holding Company Act of 1935 ("PUHCA") and amending the Public Utility Regulatory Policies Act of 1978 ("PURPA").  At the same time, it gives FERC the authority to certify a new Electric Reliability Organization ("ERO") that (under regulatory supervision from FERC and its Canadian counterpart) will set and enforce standards for the reliable operation of the Eastern and Western Interconnections and the Electric Reliability Council of Texas.  The confluence of these developments will be profound and will likely force further consolidation of the power industry. 

Since its enactment 70 years ago, PUHCA was amended twice to allow limited holding company investment in power generation — in qualifying facilities under PURPA and in exempt wholesale generators under the Energy Policy Act of 1992.  But otherwise PUHCA confined utility holding companies to a single integrated public-utility system and has policed intra-holding company transactions to prevent cross subsidization.  Repeal of the PUHCA will knock down the barriers to consolidation of geographically and operationally diffuse utility systems.  Pending consolidations, such as Duke-Cinergy and MidAmerican-PacifiCorp, which may well have been barred by PUHCA's single integrated public-utility system requirement, now appear to have been prescient in anticipating PUHCA's repeal.  They likely will prove to be harbingers of other consolidations.

The so-called PURPA put also falls victim to the 2005 Act.  The PURPA-imposed obligation of traditional public utilities to buy the output of qualifying cogenerators and small, renewable generators at an avoided-cost price ushered competition in wholesale power markets into the 1980s.  The Energy Policy Act of 1992 later swelled the ranks of competitive generators by creating an additional class of PUHCA-exempt competitive generators with exempt wholesale generators ("EWGs").  Going forward after implementation of the 2005 Act, qualifying facilities and EWGs will no longer exist.  There will simply be power generators selling at wholesale and, where permitted by local law, at retail.  FERC is empowered by the 2005 Act to review and approve utility acquisitions of existing generating facilities in order to prevent (among other things) undue concentrations of generation market power.  Unclear, however, is who will build new generation under the largely deregulated scheme of the 2005 Act.   Arguably, without the price support of the PURPA put and the investment restrictions of PUHCA, only a shrinking universe of highly capitalized investors or existing utilities will build new generation in the future.  Some of these may ally with Indian tribes and construct power plant on tribal lands since the 2005 Act has special provisions for encouraging Indian energy development.  These provisions include the creation of an Office of Indian Energy Policy and Programs within the Interior Department with authority to pre-approve tribal-energy-resource agreements.

The 2005 Act will also tend to consolidate markets through its introduction of an ERO.  While the stated purpose of the ERO is to standardize, and make enforceable for the first time, rules for reliably operating the bulk power systems of North America, the indirect effect of that standardization will be the consolidation of formerly balkanized markets and the facilitation of increased trading in bulk power.