Energy Legal Blog

Western Climate Initiative Seeks 15 Percent Reduction in Greenhouse Gas Emissions

Achieving one of the goals set for itself at its inception, the Western Climate Initiative (WCI) has pledged to reduce aggregate regional greenhouse gas emissions to 15 percent below 2005 levels by 2020.   

Initially composed of Washington, Oregon, Arizona, New Mexico and California, the WCI was established in February 2007 with the goal of collaborating on climate action initiatives across the Western U.S., Canada and Mexico.  Since that time, Utah and the Canadian provinces of British Columbia and Manitoba have joined.  Several other states and provinces have signed on as "observers" to the WCI, including Sonora, Mexico; Wyoming; Colorado; Kansas; Nevada; and Ontario and Quebec, Canada. 

According to the Statement of Regional Goal that WCI issued last week, the regional 15 percent goal reflects the cumulative emission reduction goals of the "partner" states and provinces, and does not replace those partners' existing reduction goals, some of which — such as California's — are more aggressive than the WCI goal.   

Connecticut Blocks Pipeline Across Long Island Sound

A US District Court vindicated Connecticut´s opposition to construction of a pipeline across Long Island Sound, ruling that the US Secretary of Commerce's decision to overrule the state's opposition to the pipeline was arbitrary and capricious.  Barring a reversal at some future stage of the case, Connecticut thus prevailed in the latest of its numerous high-profile energy disputes, which in recent years have included opposition to a direct-current transmission cable across Long Island Sound and disputes over electric power prices and market rules.  The case is of further interest because it involves litigation under the Coastal Zone Management Act (CZMA), a statute intended to balance decisional authority between state and federal agencies.

The Islander East Pipeline, which is jointly owned by Spectra Energy and Keyspan Energy, proposes to lay a 45-mile pipeline from Long Island to Connecticut.  To proceed, the project requires the go-ahead from the Federal Energy Regulatory Commission under the Natural Gas Act, but is also subject to the CZMA.  Under the CZMA, a state may develop a coastal management plan to help manage infrastructure and activities along its coast.  Connecticut determined that the Islander East Pipeline project was not consistent with is coastal management plan.  The Secretary of Commerce overruled the State, finding no alternatives to a project that met the CZMA requirement of advancing a national interest that outweighed local harms. 

Following an appeal by the State, the Court found shortcomings in the Secretary's analysis regarding the harm from the project and the potential for alternatives.  In particular, the Court found that the Secretary had failed to consider adequately the environmental impact of constructing the pipeline, including on shellfish habitat.  The Court further concluded that the Secretary had not considered adequately alternatives such as expansion of the Iroquois Gas Transmission System pipeline, which already crosses the sound, or placement of Islander East along that corridor. Following the Court's remand, the Department of Commerce will now reconsider its decision.

FERC Shows Zero Tolerance in $500,000+ Settlement for Reporting Violations

Stressing the harm to the regulatory process and to rules central to the mission of the agency, the Federal Energy Regulatory Commission (FERC) on August 20 approved a settlement of $500,000 civil penalties plus disgorgement of profits against Gexa Energy, LLC, (Gexa) despite:  (1) new owner FPL Energy's (FPL) prompt self-report, cooperation during the investigation, and demonstrated commitment to compliance; and (2) FERC's admission that Gexa's violations resulted in no harm to the market or market participants.  The order, issued notationally, explained that "absent the self-report and these remedial measures, the civil penalty would have been substantially higher" — FERC is authorized to impose civil penalties of up to $1 million per violation per day.

In May 2004, Gexa obtained market-pricing authority under the Federal Power Act (FPA).  On June 17, 2005, power marketer Gexa merged with FPL, but failed to disclose to FPL that Gexa had obtained authority for and was making sales at market-based rates.  As a consequence, the parties violated section 203 of the FPA by failing to seek permission from FERC for disposition of jurisdictional facilities.  In addition, Gexa violated FPA section 205 "by entering into a series of unauthorized wholesale balancing transactions to sell excess generation in interstate commerce into the ISO-NE's hourly or day[-]ahead market" three weeks before obtaining market-based rate authority to do so for which Gexa must disgorge $12,498.41 in profits.  In addition, Gexa failed to file change in status notifications with FERC consistent with Order No. 652 and failed to timely file Electric Quarterly Reports for market-based rate sales from March 2005 to February 2006.

FERC noted among FPL's cooperative actions and prompt steps to prevent future violations, FPL removed Gexa's senior management involved in the violations that Chairman Kelliher characterized as "knowing", "deliberate" and "blatant."

UPDATE: PJM Proposes External Market Monitor to Quell Independence Issues

In an effort to resolve complaints concerning PJM management's alleged interference in the operations of PJM's internal market monitoring unit's (MMU) activities, last week PJM submitted to FERC a settlement proposal that would establish a fully independent external MMU.  The new unit would be modeled on the market monitor that FERC approved for the Midwest ISO, and would be a separate legal entity, unaffiliated with PJM.  PJM and the external MMU would enter into a contract, with an initial term of two years, for market monitoring services.  FERC approval would be required to replace the external MMU or decline to renew the contract. 

PJM is offering the head position at the external MMU to Joseph Bowring, the current internal market monitor whose earlier complaints about interference prompted two formal complaints, the resulting investigation currently underway, and the resignation of two PJM executives, including former PJM President and CEO Phil Harris. 

In a departure from the current, internal MMU structure, the proposed Settlement would grant the MMU explicit authority to file comments and testimony in FERC proceedings regarding PJM wholesale market issues, and the MMU alone would decide whether and how to respond to requests from FERC or state commissions for additional MMU data or analysis of the PJM market.  In a direct response to the complaints filed against PJM, the new external MMU would exercise exclusive control over data and information systems developed for market monitoring.  To provide continuity, until the external MMU is established, Bowring will continue to operate as the internal market monitor, and will report only to the PJM Board. 

Amaranth Trader Must Wait for Decision on Injunction of FERC Enforcement Action

On August 7, Judge Richard Leon of the U.S. District Court for the District of Columbia delayed ruling on ex-Amaranth trader Brian Hunter's suit to enjoin the Federal Energy Regulatory Commission (FERC) from continuing its show-cause investigation into Hunter's and hedge fund Amaranth Advisors' 2006 gas futures trading activities.  Judge Leon promised a ruling as fast as possible, but not "in the next few days."

Hunter filed his suit on July 23 alleging that FERC lacked jurisdiction to bring an enforcement action against him because the alleged actions pertain to futures rather than physical natural gas.  Hunter argued that only the Commodity Futures Trading Commission (CFTC) possesses authority to take enforcement actions in connection with commodity futures.  Hunter claimed that the FERC action harms his new commodities trading fund, Solengo Capital Advisors, in that traders are deterred from taking employment with the fund and Solengo is being denied registration as an investment advisor due to Hunter's ownership of it.  How either allegation bears on FERC's jurisdiction is not explained.

The case against Hunter is the first in which FERC has claimed jurisdiction over commodity futures trading.  FERC brought its show cause order for $291 MM in fines against Amaranth and its former heads under the FERC's anti-manipulation rule from 2005's Energy Policy Act.  The CFTC and FERC are working in tandem to investigate the hedge fund's collapse late last year. FERC Chair Joe Kelliher explained that the outcome of the two investigations may be different as the CFTC operates under a tougher intent standard and under different statutory guidance.

Both the CFTC and FERC allege Hunter and Amaranth attempted to manipulate natural gas futures prices by, in one example, acquiring more than 3,000 New York Mercantile Exchange (NYMEX) contracts in advance of the closing price range timeframe and then selling those contracts during the closing session which consequently impacted the settlement prices of swaps traded on the IntercontinentalExchange (ICE).  These actions allegedly lowered prices on the NYMEX, which in turn benefited Amaranth's derivative positions on the ICE and other exchanges.

Amaranth and its former leaders are not the only ones to come under recent scrutiny regarding trading practices.  FERC issued a show-cause letter on July 26 to Energy Transfer Partners that asked for $167 MM in penalties, including $97.5 MM for what is being called the alleged Houston Ship Channel manipulation and Oasis bias/collusion and $69.2 MM in disgorgement of profits.  In addition, FERC is seeking a one-year revocation of Energy Transfer Partner's blanket certificate to sell natural gas.  

Concurrent with these regulatory enforcement actions, the US Congress has been demanding better oversight and transparency of energy exchanges, and the CFTC is under pressure for both rulemaking and enforcement actions since Amaranth's collapse.  It will convene a hearing on September 18 to investigate trading on regulated futures markets like NYMEX and on exempt commercial markets like ICE.  The hearing is intended to form the basis of recommendations from the agency to Congress.

House Passes Energy Bill with 15% RPS Requirement, Other Clean Energy Initiatives; House and Senate Must Now Reconcile Vastly Different Legislation

On the heels of a Senate bill passed in June, the House of Representatives on August 4 passed a comprehensive energy bill by a vote of 241 to 172.  The House bill is drastically different from the Senate's energy legislation, and it appears the House and Senate face an arduous conference to reconcile the two versions, which contain drastically different approaches to energy policy.

In summary, the House bill:

• Incorporates a 15% renewable portfolio standard (RPS), requiring utilities to produce at least 15% of their electricity through the use of renewable energy resources (e.g., wind or solar power) by 2020;
• Sets a goal of eliminating greenhouse gas emissions by federal agencies by 2050;
• Establishes new efficiency standards for appliances, lighting and buildings, while promoting new technologies for transmitting and delivering energy to create a "smart grid;"
• Authorizes billions of dollars for research into sustainable energy sources and alternative fuels, including research into carbon dioxide sequestration efforts;
• Resolves the sticky issue of numerous "faulty" leases in the Gulf of Mexico that arose when the Department of the Interior erroneously executed leases with several oil and gas companies that provided the companies with excessive royalties, by requiring the oil and gas companies to either renegotiate the leases or pay a conservation fee before bidding on future leases; and
• Promotes international energy-efficiency standards and U.S. involvement in other international partnerships to address energy issues and climate change.

The House also passed a companion package of changes to the tax code, by a vote of 221-189.  The tax bill offers various incentives to encourage the use and production of renewable energy and energy conservation, including new tax credit bonds to encourage energy efficiency in residential property and more production of clean energy, and $3.6 billion in bonds for state and local governments to fund energy conservation efforts.  The bill pays for these tax incentives by repealing approximately $16 billion worth of tax breaks for oil and gas companies.

There are several notable absences in the House's bill.  For instance, the bill does not revoke or condition the backup transmission siting authority given to FERC in 2005's Energy Policy Act in so-called "national interest electric transmission corridors," a provision that has raised significant concern in states with controversial transmission projects, like New York and Virginia. Similarly, the House bill does not set new corporate average fuel economy (CAFE) standards for cars and trucks, nor does it provide any support for coal-to-liquid production, both of which were contained in the Senate's energy bill.

It may prove a substantial battle to reconcile the House's and Senate's legislation.  While both bills included some of the same provisions, including requirements for research and development of carbon sequestration, biomass resources, and cellulosic ethanol and biodiesel, the two versions appear to be quite far apart on several major policy issues.  Key differences include:

• the House's inclusion of an RPS, which the Senate bill did not contain;
• the House bill's expanded energy efficiency provisions, which are more expansive than the Senate's version, which only included new standards for appliances and lighting;
• the House tax bill's rescission of approximately $16 billion in tax breaks for oil and gas companies, which the Senate bill does not contain;
• the Senate's inclusion of increased CAFE standards, requiring 35 mpg by 2020 for cars, SUVs, and small trucks, which the House bill omitted;
• the Senate bill's ethanol mandates, which require that the use of ethanol increase by sevenfold by 2022 and that 85% of cars manufactured by 2015 be capable of running on E-85 fuel (a blend of 85% ethanol and 15% gasoline); the House's bill did not contain such ethanol provisions; and
• the Senate bill's provision making it unlawful to charge an "unconscionably excessive price for oil products, including gasoline, which the House bill does not include.

The House and Senate will likely convene a conference committee this fall to attempt to iron out these differences.  Even if able to come to a compromise, White House approval is not assured.  Shortly after the passage of the House bill, the White House indicated its opposition to many of the bill's major provisions, stating that it would not "deliver American consumers or businesses more energy security, but rather would lead to less domestic oil and gas production, higher energy costs, and higher taxes." 

Illinois Rate Settlement Bill Awaits Governor’s Approval

Following months of contentious litigation and recriminations, Illinois power companies, politicians, and regulators have negotiated legislation to settle to the state’s retail electricity pricing dispute.  The settlement package would extend for four years, provide $1 billion in rate relief, and revise how utilities procure power going forward.  However, the tense uncertainty has not yet fully abated as Gov. Rod Blagojevich is reportedly studying the bill and has not yet decided to sign it.

The origins of the crisis extend back to the 1997 Illinois Electric Service Customer Choice and Rate Relief Law (Restructuring Law), which forced the state’s utilities to sell their generating units, although purchasers included the utilities’ independent merchant generation affiliates.  The Restructuring Law also reduced retail rates by 20 percent and froze electricity rates for bundled retail customers until 2006. 

Predictably, when the rate freeze expired, power prices spiked, consumers kvetched, and everyone pointed accusing fingers at the politician authors of the Restructuring Law and the power companies.  In March 2007, the state’s attorney general alleged sellers had manipulated 2006 auctions through which utilities bought power for resale to consumers for the period following the rate freeze.  In a complaint to FERC, the Attorney General asked FERC to order refunds and even revoke the market-pricing authority of some of the energy vendors who sold into the auction.  In response, wholesale sellers as well as ComEd and Ameren point out that the rate freeze had kept the retail electricity rates artificially low, and that increased fuel costs and inflation ― not manipulation ― were the main cause for the higher power prices. 

The most interesting part of the rate settlement is the method to be used for wholesale power procurement going forward.  In a move reminiscent of California's creation of a state power purchaser in 2001, a new state agency, the Illinois Power Agency, will oversee power procurement by utilities, and may even build generators and sell their output to municipal utilities and cooperatives.