Energy Legal Blog

High Prices Cause Reconsideration of Model Retail Power Supply Auction

For several years, the annual basic generation service (BGS) auction New Jersey uses to procure power for retail customers who do not choose their own supplier has been touted as a model for other jurisdictions wrestling with retail competition issues.  In a somewhat surprising move, the New Jersey Board of Public Utilities (BPU) recently announced that, in light of rising power costs, it will explore alternatives to the BGS auction as part of the 2007 procurement process.

Mass Legislators Revive Fight over Participation in Northeast Emissions Reduction Plan

Balking at Governor Mitt Romney's opposition, members of the Massachusetts legislature recently introduced a petition for legislation to reduce carbon dioxide emissions in Massachusetts through participation in the Regional Greenhouse Gas Initiative (RGGI), a regional cap-and-trade program intended to reduce greenhouse gases in the Northeast.  However, because of concerns over the program's effect on electricity prices, it is questionable whether the bill can be passed before the state legislative session ends in July 2. A two-thirds majority vote of the legislators would be needed to override the Governor's anticipated veto.

In December 2005, in a move reminiscent of the Bush Administration's rejection of the Kyoto Protocols, Governor Romney announced that Massachusetts would remove itself from participation in the RGGI, but would pursue its own carbon dioxide emissions reduction plan, which went into effect on January 1, 2006.  (See Mass. Governor Announces New Carbon Dioxide Emissions Reduction Plan) The state's current plan includes a cap-and-trade system, but without price caps.

Because Massachusetts is a key contributor of gas emissions in the Northeast region, its participation in the RGGI is significant.  Currently, all other New England states, save tiny Rhode Island, which also dropped out of the RGGI plan in December 2005, have a formal agreement in place to pursue the RGGI and are now moving forward on legislation to adopt the RGGI.

Public Supports Investing in Wind Turbine Technology, but Not in My Backyard

Over the last couple of weeks the forecast for wind has been decidedly mixed.  On the one hand, a Vermont Public Service Board (VPSB) hearing officer recommended on March 10 that state regulators reject a proposed 6-MW wind energy project in East Haven, Vermont.  The project, which has been under development since 2001, would install wind turbines along a ridgeline that sits on an abandoned radar base surrounded by environmentally protected lands on East Mountain in the state's rural Northeast Kingdom area.  Opponents of the East Haven project object to how it will affect the scenic views in the area.  While the hearing officer's recommendation can be rejected, in most cases the VPSB does not reject a hearing officer's recommendation.  The decision highlights the difficulty of siting wind projects in New England due to persistent NIMBY opposition, despite the overall public and political support for non-polluting energy sources.

Meanwhile, the Department of Energy's (DOE) National Renewable Energy Laboratory in Colorado announced on March 9 that it had entered into a $27 million contract with General Electric to develop a new offshore wind power system over the next several years.  In developing the project, DOE and GE hope to design, construct, and test a multi-megawatt wind turbine that would produce electricity at significantly lower costs than achievable with existing technology.  The investment was trumpeted as a means of reducing U.S. reliance on foreign energy resources and promoting cleaner technology under the Administration's Advanced Energy Initiative.  While the federal and private investment in offshore wind energy may help advance some offshore generating technologies, it is unlikely to overcome the opposition of coastal real-estate owners who have been able to stymie offshore wind projects such as the Cape Wind project near tony Nantucket, Massachusetts.

MISO Defections ― Do They Signal a Sea Change at FERC on RTO Membership?

FERC has approved the withdrawal from Midwest ISO of two Kentucky utilities that helped establish the FERC-recognized regional transmission organization (RTO).  Both had become disenchanted with what they perceived as the inordinately high cost of membership.  FERC's approval of the withdrawals ― with virtually no strings attached ― suggests a sea change from a FERC insistent on transmitting utilities joining RTOs to a reconstituted FERC that is agnostic on whether utilities participate in RTOs and ISOs, provided they meet other relevant standards imposed by FERC, particularly regarding control over their transmission system. 

Affiliates Louisville Gas and Electric and Kentucky Utilities petitioned FERC in October for permission to withdraw from MISO.  FERC first considered whether the proposal satisfied the contractual requirements of the MISO transmission owners’ agreement, which FERC concluded it did since remaining members would continue to receive the same services at the same prices pursuant to a hold-harmless provision in the agreement.  FERC conditioned this conclusion on Louisville and KU proving going forward their continued compliance with this provision.  FERC also accepted the applicants’ proposed method of calculating their exit fee, which – in the context of very high RTO costs – had been a controversial issue.

Second, FERC evaluated whether the withdrawal would satisfy the merger conditions that FERC attached to Louisville's and KU's 1998 merger.  FERC found that these conditions would be met through the utilities’ use of the Tennessee Valley Authority as their reliability coordinator and the Southwest Power Pool as their Independent Transmission Organization, and the elimination of pancaked rates for certain customers.  Third, FERC considered whether the replacement transmission arrangements would be consistent with or superior to the pro forma OATT.  Again, the utilities’ reliance on TVA and SPP to perform reliability and transmission duties helped meet this test, but the utilities were also directed to prove in future submissions their ongoing compliance with nondiscriminatory open access.

EPA, Midwestern Blue Skyways Collaborative to Promote Renewable Power

The US EPA and several Midwestern states have formed a collaborative to begin curbing polluting emissions through voluntary measures.  The "Blue Skyways Collaborative" held its inaugural meeting last month, welcoming a diverse group of participants including representatives from EPA, the Departments of Defense and Energy, state and local officials, and corporate representatives.  It is spearheaded by the Central States Air Resource Agencies (CenSARA), the regional air planning organization for the Midwest, comprising Minnesota, Iowa, Nebraska, Kansas, Missouri, Oklahoma, Arkansas, Louisiana, and Texas.   

The Collaborative hopes to reduce emissions along major Midwestern transportation corridors and in various sectors, including aviation, water and rail transport, on-road diesel vehicles, and heavy off-road equipment, through retrofitting diesel-powered vehicles and encouraging renewable energy and energy efficiency projects.  A focus on renewable power sources sets this initiative apart from other regional voluntary emissions-reducing efforts, and reflects the regional economic interest of Collaborative participants in spurring use of ethanol and biodiesel, both of which derive from corn and other regional crops.   

While it has yet to establish numerical emissions reduction targets, the Collaborative's first meeting showcased the types of voluntary efforts and public-private initiatives that it hopes to foster.  For example, railroad industry representatives described their efforts to replace diesel-burning switch-engines with battery-operated engines.  The EPA has promised a modest $9 million to finance the Collaborative's projects this year, and the group anticipates several times that amount for 2007 financing.  Whether Blue Skyways proves successful likely will depend on whether this federal funding materializes ¾ a questionable proposition in light of the Administration's and Congress' recent failures to adequately fund the clean energy initiatives that they only recently enacted in the Energy Policy Act of 2005.

Forward Capacity Market Proposed in Lieu of LICAP for New England

New England generators, the ISO-New England (ISO-NE), and four out of six New England states submitted an agreement to FERC on March 6 to resolve the running debate on New England capacity markets.  The agreement would establish a forward capacity market in ISO-NE, replacing the controversial LICAP proposal that has been stuck at FERC for months.  Under the agreement, the ISO-NE would be responsible for performing forecasts of needed capacity three years in advance and for conducting an annual auction to purchase sufficient power to meet those needs.  The plan provides that generators would be paid for any capacity purchased from them, but generators would not receive payment if the capacity is unavailable when ultimately called upon.  The ISO-NE has indicated it could conduct its first auction in December 2007.  The proposal also contains a locational component that allows prices to differ between import- and export-constrained zones within New England.  Supporters of the proposal estimate that forward capacity markets will cost up to 50% less than LICAP, but acknowledge it would probably increase residential costs in the short-term during the transition period, which will last from 2006 until the summer of 2010.

The proposed mechanism for the transition period appears to be the agreement's main sticking point.  The transition proposal will compensate generators for new and existing capacity between December 2006 and May 2010, with payments increasing over time.  While the parties supporting the settlement agreement argue the transition period is necessary to allow the ISO-NE time to develop the auction process and update its software, regulators in Maine and Massachusetts, two states opposing the agreement, charge that the compensation provided to generators during the transition is excessive.  The forward capacity markets plan also faces several familiar opponents in several transmission-owning utilities and load-serving entities throughout the region that were also opposed to the LICAP proposal.  Despite this opposition, the ISO-NE reports that 78% of members of the New England Power Pool supported the deal.  

Great Lakes States Commit to Renewable Energy

Wisconsin and Ohio have each taken steps to increase the power generation from wind.   These steps are illustrative of the growing interest among states in the region to avail themselves of this resource for environmental and economic reasons.

The Wisconsin legislature unanimously passed a bill that would increase the state’s renewable portfolio standard (RPS) significantly, which should prompt the state’s utilities to procure a greater portion of their energy from renewable resources, primarily wind.  Under the RPS established in 1999, Wisconsin utilities are required to procure only 2.2% of their energy from renewable resources by 2011.  The new legislation takes into account utilities’ average level of renewable energy procurement, and calls for an increase from those levels.  By 2015, utilities would be required to increase their renewable energy mix by six percentage points beyond the baseline numbers, which translates into an average of approximately 11% renewable energy.

Ohio did not go as far.  Along with neighbors Michigan and Indiana, Ohio does not yet have an RPS.  However, citing the economic benefits of wind energy development, Ohio Gov. Robert Taft has proposed a pilot incentive program to encourage wind power production in the state.  It would entail a set-aside of $25 million from Ohio’s existing Energy Loan Fund over five years and provide a grant for up to 1.2 cents per kilowatt-hour of electricity produced by wind. The proposal requires legislative approval.

Legislator Questions Value of Post-PUHCA Consolidations to Ratepayers

National Grid USA (National Grid) announced its proposed acquisition of Keyspan, the largest distributor of natural gas in the Northeast and New York state's largest electricity generator.  At the completion of the merger, National Grid will have a combined 3.4 million natural gas customers and 8 million electric consumers in the New York and New England area.  Keyspan will continue to operate in its own name, although it will be a wholly owned subsidiary of National Grid.  The companies have targeted to close the transaction by early 2007.

This announcement comes on the heels of Exelon's purchase of PSEG, Mid-American's purchase of PacifiCorp, Duke Energy's planned acquisition of Cinergy, and the merger of  Florida-based FPL Group with Constellation Energy ― all made feasible by last year's repeal of  the Public Utility Holding Company Act of 1935 (PUHCA).  (See Energy Policy Act of 2005 Hands FERC a Long To-Do List, FERC Pares Back Accounting & Record Keeping, but Retains Strict Transfer Pricing for Public Utility Holding Companies under PUHCA 2005 and Congress Enacts Energy Bill)  Some legislators, such as Rep. Edward Markey, have begun to question whether these consolidations will benefit utility ratepayers, and have expressed concern that FERC may not properly scrutinize utility mergers and acquisitions, even though FERC was given authority to do so in connection with PUHCA's repeal.  Rep. Markey has called on the states to strengthen state laws concerning such mergers because due to the repeal of PUHCA, the Securities and Exchange Commission no longer has the authority to review debt financing associated with such transactions.

NAESB Recommends Natural Gas-Electric Power Coordination

The Gas-Electric Interdependency Committee (GEIC) of the North American Energy Standards Board (NAESB) has submitted to FERC a final status report on its strategies for fostering increased cooperation between the natural gas and electric industries.  The New England cold snap of January 2004 spurred this effort by straining the area's gas infrastructure and highlighting the different operating practices in the natural gas and electric power industries.  In response, the GEIC began its investigation into both industries and in June 2005 submitted to FERC a preliminary report that identified issues related to coordination between the industries and highlighted potential actions to address those issues. 

The final status report identifies six activities that would benefit from better coordination:  (1) the development of standards for capacity release pricing for pipelines with negotiated rate authority from FERC; (2) adding another nomination cycle to allow shippers and power generators with firm transportation rights the flexibility to nominate gas in coordination with their market clearing times; (3) giving pipelines the ability to shift gas for primary firm transportation within a pipeline path to another market without having to re-offer that gas as secondary firm transportation; (4) clearing RTOs/ISO markets sufficiently far in advance to facilitate timely gas flow nominations ; (5) requiring generators offering power into day-ahead market to have appropriate commercial arrangements in place to fulfill needed obligations; and (6) defining certain terms, including alternative fuel capability, firm transportation service, and must-run generator. 

DOE Gears Up to Receive Comments on National Interest Electric Transmission Corridors

Recommendations to the Department of Energy (DOE) on whether and how to designate particular geographic areas exhibiting transmission constraints as National Interest Electric Transmission (NIET) Corridors must be submitted by March 6, 2006.  NIET Corridor designations are intended to facilitate the construction of new transmission facilities along these corridors.  Section 1221 of the Energy Policy Act of 2005 gives DOE the authority to conduct a study on transmission congestion and to designate particular geographic areas as NIET Corridors.  Once an area is designated as a NIET Corridor, the statute grants the Federal Energy Regulatory Commission (FERC) permitting and siting authority for new transmission lines within the corridor in the event that state and local officials fail or are otherwise unable to act.  In particular, this authority is thought to aid transmission projects that would span multiples states, which may have difficulty winning over all affected state and local regulators.   

Reportedly among the entities lining up early to advocate NIET designations is the PJM Interconnection, which has announced that it will propose two corridors – one from western Pennsylvania to Philadelphia, northern New Jersey, and Delaware, and the other from the Ohio Valley through West Virginia and to the Washington, D.C./Baltimore area.  If DOE agrees, companies will then be free to ask FERC for authority to build new transmission facilities along these corridors, assuming the necessary approvals are not forthcoming from state and local officials.  Even if DOE fails to designate the requested corridors on an accelerated basis, either corridor could be designated a NIET Corridor as part of DOE's standard study process.  While the timing difference may be only a matter of months, early designation is obviously attractive to fledgling transmission projects looking for investment.

Arizona Regulators Increase Renewable Energy Requirements

Arizona may be joining the list of states that procure a significant amount of their power from renewable energy, as the state’s Corporation Commission voted to require utilities to procure 15% of their power from renewable resources by 2025.  This requirement is expected to go into effect in late 2006.

Arizona’s current renewable energy requirement requires the state’s utilities to procure only 1.25% of their power in 2006 from renewable resources.  A certain minimum of that is from solar power, an abundant, if costly, source of energy in the Southwest.  The new requirements would allow utilities to procure the renewable energy from solar, wind, biomass, biogas, geothermal, and other similar technologies, and leaves room for new technologies to be added as they become feasible.  Another feature of the plan is that the utilities must procure a certain amount of the renewable energy from distributed generation – residential or non-utility owned installations.  The distributed energy requirement starts at 5 percent of the total portfolio in 2007 and grows to 30 percent of the total renewable mix after 2011.

Utilities that fail to meet the standard could apply for a waiver but might also be subject to a penalty for non-compliance.  The Corporation Commission also approved an increased surcharge on customer bills to help pay for the renewable energy.