Energy Legal Blog

Old Dominion Considers Regulation Favorable to Dominion Virginia Power

At the instigation of dominant utility, Dominion Virginia Power (DVP), the Virginia legislature is considering legislation that would end nascent customer choice for all but the Commonwealth’s largest retail customers, accelerate lifting existing price caps and guarantee DVP a certain level of earnings and no competition going forward.  Despite the state’s 1999 restructuring legislation, full retail competition has never taken effect in Virginia, because the 1999 law capped through the end of 2010 retail electric rates at levels so low that new entrant suppliers could not compete with the incumbents.

However, the rate impact of the utility’s proposal is unclear.  It offers what is billed as re-regulation to a receptive audience of pols and interest groups who are rightfully concerned over the prospect of big price jumps when the rate caps expire, just as Maryland and Illinois recently experienced when comparable rate caps expired in those states.  In exchange, however, DVP demands an end to the prospect of retail competition and new “regulated” retail rates that would guarantee a high ─ 13-plus % ─ rate of return.  Opponents of the proposal insist that the Virginia State Corporation Commission have some role in setting DVP’s and other utility’s returns to ensure that they bear a greater relationship to risk.  DVP’s proposal would also ensure recovery of costs for new power plants, transmission lines and environmental controls.

Virginia’s potential retreat from retail competition occurs in the context of controversy in states such as Illinois and Maryland regarding the effects of retail restructuring.  Many of these concerns stem from the use of multi-year rate freezes that temporarily disconnected retail markets from increases in wholesale market prices and accustomed customers to artificially low and unsustainable rates. 

Separately, State Senator Mary Margaret Whipple from Northern Virginia has introduced a bill requiring a minimum renewable portfolio standard.  Under the Whipple bill, 12% of the state’s energy would have to be procured from renewable resources by the year 2021.  Another, far less ambitious renewable energy bill calls for legislative committees to study the creation of voluntary programs to increase renewable energy production, but wouldn't entail any mandates for production.    

FERC Proposes to Trim Applicability of Standards of Conduct to Both Electric Utility and Natural Gas Pipeline Energy Affiliates

In response to the court remand of FERC's Order No. 2004 standards of conduct as they apply to natural gas pipelines, a proposed rule to revise the standards of conduct has quickly followed FERC's interim rule on the subject, issued earlier this month.  The proposed rule would make permanent the interim rule.  The interim rule exempted from the standards of conduct restrictions on energy affiliates of natural gas pipelines. 

Application of the standards of conduct to energy affiliates of electric utilities was not challenged on appeal of Order No. 2004.  The proposed rule, however, suggests following the court's natural gas pipeline ruling and eliminating application to the energy affiliates of electric utilities as well as natural gas pipelines.  In the rulemaking proceeding, FERC will consider whether evidence of abuse or the potential for abuse involving electric utilities' energy affiliates justifies retaining the standards applicability to electric utility energy affiliates.  If FERC decides that this justification exists, then the standards will apply more broadly to electric utility operations than to natural gas pipelines. 

The proposed rule would make permanent provisions contained in the interim rule regarding other issues challenged on appeal but not addressed by the court.  These provisions include allowing risk management employees and lawyers to be shared between natural gas pipelines and their marketing affiliates, and requiring natural gas providers to post only those "discretionary acts" that waive adherence to tariff provisions.   

Finally, in an extension of FERC's Order 2004 policy that employees involved only in "bundled retail sales" were not considered "marketing affiliates" and thus not subject to the standards of conduct, the proposed rule would relax the standards of conduct as to public utilities' "planning" and "competitive solicitation" employees so that these employees can access non-public transmission information in connection with implementing state-mandated integrated resource planning and competitive solicitations.  The main focus of this proposal is on the electric transmission grid and issues of reliability and accurate long-term planning. 

FERC Flexes New Civil Penalty Muscle

FERC issued orders January 18 exercising for the first time its expanded Energy Policy Act of 2005 penalty authority.  In each of five separate investigations, FERC blessed settlements that required the targets to pay substantial civil penalties ranging from $500,000 for an isolated two-day incident to $10 million for a broad pattern of Open Access Transmission Tariff (OATT) and Standards of Conduct violations. These penalties were assessed even though the violations resulted in little actual, financial harm to customers or to the markets.  The January 18 orders underscore FERC’s preference for negotiated settlements over litigation, and illustrate the importance the agency places on self-reporting of violations and cooperation with Office of Enforcement staff during audits and/or investigations.

The most serious of the violations were uncovered in investigations of PacifiCorp and SCANA.  Both companies self-reported behavior that included numerous violations of OATT requirements and proscriptions, and in PacifiCorp's case, FERC's Standards of Conduct.  In particular, both companies admitted to misusing network transmission service to support the utility’s or its affiliates’ off-system sales.  The PacifiCorp settlement also dealt with numerous instances in which PacifiCorp's merchant and transmission functions had improperly shared information, violating the Standards of Conduct.  PacifiCorp agreed to pay a $10 million civil penalty, and to contract for independent audits of its business practices, implement a compliance program, and submit quarterly reports to Enforcement on its compliance efforts.  SCANA agreed to a $9 million penalty, disgorgement of $1.4 million in profits, and repayment of $400,000 in transmission fees.  SCANA too agreed to implement an OATT compliance program.  While the civil penalties in both cases were quite high, FERC cautioned that, absent self-reporting in both cases, "the civil penalty sought would have been considerably higher."

The other three cases involved less pervasive violations.  Entergy, as a result of employee carelessness and system malfunctioning, lost several months of hourly Available Flowgate Capacity data, which violated FPA and FERC record retention requirements, and failed to comply with several OASIS posting requirements.  Entergy's OASIS system also responded erroneously to transmission service requests on several occasions.  Entergy agreed to pay $3 million ($1 million of which would go to a New Orleans charity) and implement going-forward compliance and reporting programs.  As for NorthWestern Corp., FERC found that it had failed on numerous occasions to respond timely (within 30 days) to transmission service requests.  One of its customers had called in a complaint to FERC's Enforcement hotline.  For the violations uncovered during FERC's investigation, NorthWestern agreed to pay $1 million and implement a two-year compliance program to ensure timely responses to service requests.  Finally, NRG Energy, Inc., agreed to pay $500,000 and implement a compliance plan, after self-reporting to the ISO-New England Market Monitor that one of its plant managers had intentionally misrepresented the availability of a generation unit that was under a Reliability Must-Run contract for a two-day period.

FERC Issues Interim Rule for Standards of Conduct for Natural Gas

FERC has adopted in Order No. 690 an interim rule on the applicability of standards of conduct to interstate natural gas pipelines; the placeholder rule responds to a US Appeals Court decision in National Fuel Gas Supply Corp. v. FERC, 468 F.3d 831 (D.C. Cir. 2006) that FERC’s earlier Order No. 2004 unlawfully expanded the standards of conduct governing affiliate favoritism to apply beyond the marketing affiliates of a natural gas pipeline ─ that is, the court struck down application of the standards to non-marketing affiliates.  The placeholder defines "marketing" (including brokering) to mean a sale of natural gas to any person or entity by a seller that is not an interstate pipeline, except when (1) the seller is selling gas solely from its own production, (2) the seller is selling gas solely from its own gathering or processing facilities, or (3) the seller is an intrastate natural gas pipeline or a local distribution company making an on-system sale.  Although the case involved only the affiliate conduct standards as applied to a natural gas pipeline, the ruling cast in doubt the application of identical standards of conduct to the non-marketing affiliates of electric transmission providers.  In addition: 

• The interim rule allows sharing risk management employees between natural gas pipelines and their energy and marketing affiliates when the employees are engaged in transmission functions or sales or commodity functions.   
• The interim rule requires a natural gas pipeline to maintain a log of the tariff provisions that it waives, but only with respect to tariff provisions that provide for such discretionary waivers, and to provide the log to any person requesting it within 24 hours of the request. 
• Order No. 690 clarifies that FERC will treat natural gas pipeline lawyers as permissibly shared employees.  FERC's orders on Order No. 2004 had provided that while lawyers could provide legal or regulatory advice in their traditional roles without becoming transmission function employees ─ subject to the standards of conduct ─ to the extent that a lawyer engaged in transmission functions or in planning, directing, or organizing transmission functions, the lawyer was not exempt from also being a transmission function employee (and thus not permissibly shared between a natural gas transmission provider and its affiliates).   
• Order No. 690 clarifies that FERC will not require newly certificated natural gas pipelines to observe the standards of conduct until they commence transmission transactions with their marketing affiliates.  FERC's orders on Order No. 2004 had provided that newly formed transmission providers would become subject to the standards of conduct as soon as they began soliciting business or negotiating contracts. 

The interim rule retains provisions of Order No. 2004 not challenged on appeal.  Those provisions will continue to apply to natural gas transmission providers and their marketing affiliates.

Massachusetts REC Prices Remain High Following First Forward Auction

Massachusett’s first-ever forward auction of renewable energy credits (RECs) held on January 10 did little to decrease the price of RECs in the state.  The auction was held on behalf of the Massachusetts Technology Collaborative (MTC), a quasi-public economic development agency responsible for administering the state’s Renewable Energy Trust.  The Trust promotes clean energy technologies. 

The auction dispensed 24,000 RECs for 2007, representing the output of a 50-MW generator recently converted to burn biomass instead of coal.  The MTC previously had contracted with the facility’s owner, Public Service of New Hampshire, for a portion of the RECs expected to be produced.  The forward auction — even if just for one year at a time — should help bring a more predictable revenue stream to renewable energy projects. 

The highest bids in the auction reached $54.50/MWh, which comes close to the penalty payment that utilities and retail suppliers incur for failing to comply with state-imposed obligations to procure specified amounts of renewable energy.  With a greater supply of RECs, prices are expected to fall below the level of the penalty.  The current prices demonstrate that while interest in and demand for renewable energy is strong in the region, limited siting opportunities for renewable generation has constrained supply and kept prices higher than expected.

FERC Approves Controversial Settlement on PJM Capacity Rules

Praising the settlement process as much as the results, the Federal Energy Regulatory Commission approved, subject to certain changes, the settlement that the PJM Interconnection reached with market participants for a redesign of PJM's capacity market.

PJM's August 2005 proposal to FERC led to an order in which FERC concluded the existing capacity rules were unjust and unreasonable.  This led to settlement negotiations, encouraged by FERC, and the submission of a settlement agreement supported by a majority of market participants.  The settlement was based on the proposal PJM submitted to FERC in August 2005, but included expanded provisions deemed suitable for vertically integrated utilities.  Among the key provisions of the agreement are a sloping demand curve (which combined with generator bids determines capacity prices), forward (rather than same-year) procurement of capacity, and ultimate use of 23 locational deliverability areas (LDAs) reflecting transmission constraints, to be phased-in over several years – which some generators contended was discriminatory because of the use in the interim of an aggregated Rest-of-Market LDA that contains significant internal constraints. 

FERC Tinkers on Transmission Investment Incentives

Responding to concerns raised by state regulators, FERC closed out 2006 by amending its rules intended to induce investment in new transmission infrastructure.  FERC issued the original rule last July pursuant to EPAct 2005 (and the new FPA § 219), which decried a shortage of transmission investments and directed FERC to develop transmission incentives.  The original rule identified rate perquisites available to applicants that meet certain criteria.  While the incentives remain available to a broad range of investors, demonstrating eligibility has become more demanding. 

First, FERC clarified that its "nexus" requirement ─ that incentives must be tailored to meet the particular risks faced by the applicant ─ will be applied strictly, and will not be satisfied in every case.  Routine investments in the ordinary course of expanding an applicant's transmission system, for example, would be less likely to meet the nexus test than new projects presenting special challenges and encountering uncertain risks.  As opposed to the original approach, where the nexus test was applied to each incentive requested, now an applicant must demonstrate that the total package of incentives being applied for is tailored to address the demonstrable risks or challenges it faces.  In beefing up its nexus requirement, however, FERC declined to adopt a "but for" test ─ but for the incentives, the project would not be built ─ due to the difficulty of satisfying such a test.   

FERC also emphasized that it will not routinely grant an incentive ROE, and that any ROE it does grant will not always fall at the "top" of the zone of reasonableness.  In addition to justifying a higher ROE under the nexus test, an applicant must also justify where within the zone of reasonableness the return should lie.  FERC will continue to allow petitions for declaratory order seeking a specific ROE.  Finally, the new rule reaffirms the availability of an ROE incentive to transcos and to utilities that join or remain in ISOs and RTOs.   

Finally, the new rule seeks to alleviate state concerns that rebuttable presumptions, contained in the original rule, that would consider certain projects eligible for incentives, would not adequately measure whether the project would improve reliability or decrease congestion, as required by the FPA.  While FERC maintained a rebuttable presumption that a project is eligible for incentives if it results from a fair and open regional-planning process, or received state construction approval, if those processes do not consider whether the project ensures reliability or reduces congestion, then the applicant must independently validate that the project meets those criteria. 

Guidance on FERC Assessment of Civil Penalties

In an attempt to show it means business regarding its enhanced authority to assess civil penalties under the Energy Policy Act of 2005 (EPAct 2005), on December 21, FERC issued a statement of administrative policy detailing the procedures it will use in assessing civil penalties, but emphasized the continuing importance of negotiated settlements, which are not subject to the procedures.  In EPAct 2005, Congress authorized FERC to impose penalties of up to $1 million per day per violation, for violations of the statutes that FERC administers —  Parts I and II of the Federal Power Act (FPA), the Natural Gas Act (NGA), and the Natural Gas Policy Act (NGPA) —  and the rules, regulations, and orders issued pursuant to those statutes.  The December 21 policy statement complements a prior Policy Statement on Enforcement, issued in October 2005, which discussed the factors FERC would take into account in responding to violations and determining appropriate remedies, and emphasized the need for companies to create an internal "culture of compliance" and self-report violations.  [See FERC Explains Its Policy on New Penalty Enforcement.] 

FERC Chair Joseph Kelliher emphasized that FERC generally prefers settlement to litigation, and predicted that the majority of penalty decisions will likely be made through negotiated settlements.  Consequently, it is not entirely clear how often the civil penalty procedures will be put to use.  To the extent they are put to use, FERC explained that it will first provide notice describing a violation and the proposed penalty.  The targeted person or company will have a chance to respond and explain why the penalty should not be assessed.  Following the target's response or explanation:

• For violations of Part I of the FPA, if a final compliance order has been violated, then FERC will conduct an administrative hearing before an administrative law judge (ALJ); if no final compliance order has been violated, then an entity may choose between the ALJ hearing and an immediate assessment of the proposed penalty.
• For violations of Part II of the FPA, the entity may choose between a hearing before an ALJ or an immediate penalty assessment. 
• For violations of the NGA, FERC will require either a paper hearing or a hearing before an ALJ, depending on the circumstances involved, and will issue an order after considering an entity's response.  
• Finally, for violations of the NGPA, FERC explained that the NGPA does not provide for an on-the-record administrative hearing; rather, FERC will assess the penalties after considering the facts.

Once FERC issues a final order assessing the appeal, if the entity does not voluntarily pay the penalty within 60 days, FERC can institute a collection action in the appropriate United States district court.  At this point, proposed penalties are subject to de novo review by the district courts.  Entities assessed penalties may appeal final Commission decisions by following the usual appeal procedures, i.e., by filing a petition for review within the appropriate time to a U.S. Court of Appeal.