Energy Legal Blog

Incentive Rates to Support Transmission from Midwest Wind Projects

The Federal Energy Regulatory Commission (FERC) granted Xcel Energy Services, Inc.’s request for incentive transmission rates as part of Xcel’s plan for a $1 billion upgrade of its transmission grid inside the territory of the Midwest Independent Transmission System Operator (Midwest ISO).  The upgrades will help Xcel’s utilities meet state renewable electricity standards and serve increased power demand in the Upper Midwest.

Reflecting concerns that the Nation's transmission grid was not being adequately maintained and expanded, the Energy Policy Act of 2005 directed FERC to develop incentive-based rate provisions for transmission projects.  FERC did so in a later rulemaking, establishing numerous rates incentives comprising cost recovery, accelerated depreciation, and higher rates of return on equity for assets operated by ISOs/RTOs.  Utilities can establish eligibility for these incentives by demonstrating a relationship between the incentive sought and the transmission investments being made.   

Xcel proposed changes to its transmission rate formula under the Midwest ISO tariff to avail itself of two of the incentive rates.  FERC approved the proposal, which will grant Xcel (1) recovery of return on 100% of prudently incurred construction work in progress and (2) recovery of prudently incurred costs of transmission facilities that are canceled or abandoned for reasons beyond the control of Excel and its parent, the NSP companies.  FERC stated that the transmission upgrades will help bring renewable energy projects on-line, in compliance with various state renewable energy procurement requirements.  Xcel Energy has stated that it is seeking to build transmission to accommodate between 300 and 700 MWs of wind power.

FERC Rules to Promote Transparency in Natural Gas Markets

On December 21 the FERC adopted a Final Rule that establishes an annual reporting requirement designed, as Chairman Kelliher said, "to boost our efforts to carry out Congress’ mandate [in the Energy Policy Act of 2005] to protect consumers by protecting the integrity of the markets for physical [natural] gas."

The final rule directs buyers and sellers of more than 2.2 million MMBtus of physical natural gas annually to file information pertaining to the size of physical natural gas markets, the relative importance of indexed and fixed price transactions, and the identity of major traders.   Specifically, Form No. 552 filings will report on the total volume of sales and purchases, the volumes of transactions that were priced at fixed prices, and the volumes of transactions that were reportable to price index publishers.  In addition, affected buyers and sellers must indicate whether sales of natural gas are transacted under a blanket sales certificate.  Form No. 552 must be filed by May 1 of each year, starting in 2009 for transactions delivered in the previous year.

Simultaneously, FERC issued a Notice of Proposed Rulemaking (NOPR) in which it proposes "to require both interstate and certain major non-interstate natural gas pipelines to post capacity, daily scheduled flow information and daily actual flow information" in order to achieve price transparency in natural gas sale and transportation markets.  Chairman Kelliher stated, however, that "the new proposed rule has a narrower application on major non-interstate pipelines [because it would] limit the reporting requirement to major non-interstate pipelines with significant gas flows that do not fall entirely upstream of a processing plant or deliver gas almost exclusively to retail consumers."  Commissioner Spitzer invited comments as to "whether the posting requirements for both interstate and non-major interstate pipelines should be similar" and "how the posting requirements should apply to storage facilities."   Comments on the NOPR are due in mid March.

First Hydrokinetic Energy Project Conditionally Approved

On December 21, the Finavera Renewables Ocean Energy, Ltd conditionally secured a FERC license for its hydrokinetic power project located 1.9 nautical miles offshore Washington State.  The 5-year license to the Makah Bay Offshore Wave Pilot Project is designed "to demonstrate the economic and environmental benefits of wave energy conversion power plants near coastal communities."   The project will generate an average of 1,500 MWh annually.

The innovative technology is powered by a closed-loop hydraulic system inside four (4) 19.5 feet x 16.4 feet buoys filled with 1,850 gallons of fresh water.  An acceleration tube converts a wave's kinetic energy into pressurized water through a piston system that lowers and stretches with each wave motion, thereby pressurizing water to the nozzles of a turbine housed near the top of a buoy.  A 3.7 mile submarine transmission cable anchored to the ocean floor will lead to an onshore connection to the utility grid.  

FERC Commissioner Moeller lauded the license since “[c]onsumers are demanding more renewable energy options, especially those sources that are domestic, renewable, and carbon-free."  Commission Moeller added that "it demonstrates this Commission’s proactive approach to enable the development of this and other sources of hydropower.” 

The license is conditioned on, among other things, Finavera's written notification to FERC that all other authorizations have been obtained as required under federal law.  This condition is consistent with the agency’s November 2007 Policy Statement on Conditioned Licenses for Hydrokinetic Projects in which FERC enumerated its policy of conditioning licenses to hydrokinetic projects “on the licensee being precluded from commencing construction until the necessary authorizations are received."

Finavera filed its application on November 8, 2006, and construction must be completed within three years from the effective date of the license.

Senate Joins House in Passing Measures to Expand CFTC Authority over Energy Markets

The U.S. Senate reauthorized the Commodity Exchange Act (CEA) in a farm bill, strengthening the Commodity Futures Trading Commission's (CFTC) authority over energy (and other commodity) trading platforms such as the Intercontinental Exchange (ICE) that are currently "exempt commercial markets."  This closes the so-called "Enron loophole" that allows these exchanges to avoid federal regulation of their trading activities.  

In language very similar to a CEA reauthorization that the House Agriculture Committee also passed last week, the Senate amendment to the CEA would require electronic exchanges to monitor trading for manipulative trading behavior and price distortions, limit position sizes to prevent excessive speculation, and reduce the holdings of traders who have violated position limits.  Exchanges would be required to collect data on trading activity, report large traders to the CFTC, and publish daily price and trading volume data.  These requirements would apply only to futures and financials contracts that offer a "price discovery function" for energy commodities.  The CFTC is directed to review all currently exempt contracts to determine which ones affect market prices and, for that reason, should be brought within the expanded purview of the CEA, with the main target being ICE's financial Henry Hub swap.

The main distinction between the House and Senate measures is that the Senate amendment permits an electronic trading platform to determine whether a previously unregulated product serves a price discovery function, while the House measure includes no such provision.  The House measure could be attached to that body’s farm bill. 

Expanded CFTC oversight of commercial futures and financials markets enjoys broad bipartisan support.  The CFTC itself now supports the measure after abandoning its resistance to calls for expanded oversight.  If the expanded authority is enacted — which now appears likely — that authority would validate the CFTC's evaluation the actions of energy markets and traders, including ICE as well as Amaranth Advisors.

No Free Pass for Absconding Duquesne Light, Say PJM and Capacity Suppliers

In December 4, 2007 pleadings to FERC, PJM Interconnection and several PJM member utilities and power suppliers did not oppose Duquesne Light's right to exit PJM’s organized market, but did ask the agency to impose conditions on Duquesne’s withdrawal.  Among those conditions, they asked that Duquesne be required to hold other PJM participants harmless and satisfy all of its PJM contractual agreements, including its existing forward capacity obligations. 

Rising capacity costs were one of the primary reasons Duquesne sought to leave PJM in the first place.  Duquesne applied to FERC in early November for approval to leave PJM and to join the Midwest Independent Transmission System Operator (MISO).  In its filing, Duquesne explained that PJM's reliability pricing model (RPM) has drastically increased its capacity costs—from the $1-$5/MW-day range to over $100/MW-day.  Duquesne also asked that FERC confirm that the utility will not be liable for any RPM-related costs for deliveries that occur after it leaves PJM.

In its December 4 response, PJM argued that Duquesne should be required to “uphold the commitment and obligations it has assumed and [ensure] that other parties do not unfairly shoulder the cost of those obligations.”  PJM also laid blame on Duquesne itself for the Western Pennsylvania utility's unhappiness with the new capacity market, suggesting that Duquesne had relied solely on PJM's capacity auction instead of contracting bilaterally for other sources of capacity.  The Pennsylvania Office of Consumer Advocate asked FERC to ensure that Duquesne's departure does not injure other PJM load servers.  Others, including several PJM capacity suppliers, attacked Duquesne's filing as inadequately supported to justify the drastic measure of leaving PJM. 

No Common Denominator on Capacity Markets

While organized energy market operators generally agree on locational marginal pricing (LMP) as the basic framework for valuing energy, no similar consensus attends capacity markets.  The New York Independent System Operator (NYISO) presently is retooling its capacity market for New York City in response to a FERC order, and the California Independent System Operator (CAISO) continues to wring its hands over the issue of capacity markets. 

Even though Consolidated Edison divested most of its New York City generation when the NYISO was created in 1999, ownership of in-city generation remained concentrated, requiring rules to mitigate installed capacity (ICAP) prices.  When talks about revising the ICAP rules broke down last July, FERC announced its expectation that the NYISO, working with market participants, would develop market rules that ensured long-term reliability without overcompensating generators.  In response, the NYISO proposed to continue to use auctions and a demand curve for pricing capacity, but also to add features such as must-offer obligations for larger suppliers, as well as an offer ceiling and price floors based on a percentage of the cost of new entry, in order to mitigate seller and buyer market power.  The market's response has been mixed.  Some have urged the use of forward capacity markets in the NYISO.  PJM and ISO-NE have adopted variations of that model, which entails procurement of capacity several years in advance, rather than only several months in advance.

Meanwhile, the CAISO continues its stakeholder process to develop a capacity market.  None will be in place as of the commencement of the CAISO’s LMP market in the spring of 2008.  This won’t be unique for organized market operators.  The Midwest ISO has no centralized capacity market, but instead relies on utility compliance with reliability obligations imposed by the applicable states and reliability organizations.  The Electricity Reliability Council of Texas likewise operates an energy-only market.  Concern by the CAISO and state authorities, however, have driven analysis of a potential capacity market in this energy-import dependent state.   But in November the CAISO’s market surveillance committee (MSC) recommended holding off on development of specific capacity market rules.  It pointed out that capacity market rules typically emphasized generator must-offer obligations, whereas the California’s needs tended to be more specific due to its environmental and renewable energy mandates, and reliance on imports, hydropower and intermittent resources.  Generator interests responded to the MSC’s opinion by pointing out capacity market rules were needed to help promote infrastructure development. 

Live from Platts Global Energy Awards: Interviews with industry leaders

New York City welcomed leaders from more than a dozen sectors within the global energy industry at the 2007 Platt’s Global Energy Awards, held last Thursday at Cipriani Wall Street. Platt’s Global Energy Awards annually recognize the highest achievements in the industry.  For the second consecutive year, Bracewell & Giuliani LLP co-sponsored the event.

Firm representative Kayla Zerby spoke with a few nominees and winners about their accomplishments in ‘07 and what the future of energy holds.

Listen to the podcast here.

About the interviewees:

Kim Bowers is Senior Vice President and General Counsel for Valero Energy Corporation and oversees the company’s Commercial and Environmental Law departments as well as the Litigation, Labor and Ad Valorem Tax departments. Valero was awarded with the “Downstream Business of the Year” award.

Larry Pierce is Vice President of Corporate Communications, of Knight Inc., Kinder Morgan Energy Partners, L.P. and Kinder Morgan Management, LLC and leads the public relations and external and internal communications activities for the Kinder Morgan companies. He also oversees the Kinder Morgan Foundation.  Kinder Morgan was a finalist in the “Energy Transporter of the Year” category.

Arthur (“Art”) Wiese is vice president of corporate communications at Entergy Corporation and oversees corporate communications for Entergy, including internal and external communications, advertising, community relations, and opinion research.  Entergy took home the “Power Company of the Year” award.

Jeff Mobley is Senior Vice President of Investor Relations and Research at Chesapeake Energy and oversees all of Chesapeake’s energy industry and macroeconomic research initiatives.  Chesapeake was named this year’s “Hydrocarbon Producer of the Year.”

(Click here for a list of all the winners.  Click here for a list of all the 2007 finalists.)

Competing FERC and CFTC Jurisdictional Claims Are Court Bound

FERC in a November 30 order refused to reconsider its July 26 decision to impose $291 million in civil penalties against Amaranth Advisors (Amaranth) for gaming the natural gas futures market and manipulating the price of natural gas.  FERC upheld its own jurisdiction to impose penalties on Amaranth, rejecting the Commodities Futures Trading Commission's (CFTC) insistence that it alone has jurisdiction over manipulation of gas futures contracts.  FERC found instead that "the language and statutory purpose of Section 315 of the Energy Policy Act of 2005" (EPAct 2005) gave FERC "broad authority to sanction manipulative conduct by any entity 'in connection with' the purchase, sale or transport of natural gas within its jurisdiction." 

In the earlier July order, FERC had directed Amaranth to show cause why it had not violated the Natural Gas Act and FERC's anti-market manipulation rules, and proposed a $291 million civil penalty for allegedly manipulating the gas futures market by selling New York Mercantile Exchange (NYMEX) futures contracts just before they expired.  In an August request for rehearing, Amaranth argued that FERC did not have jurisdiction to impose the proposed civil penalties, and that the CFTC had exclusive enforcement authority for manipulation of gas futures markets.  The case has set up a turf war between FERC's expanded enforcement authority under EPAct 2005 and the CFTC's traditional regulation of commodities markets, and led the CFTC to argue that it has exclusive jurisdiction over this case.  Amaranth may now appeal FERC's orders to a US Court of Appeals, which may ultimately delineate the boundaries of FERC's expanded enforcement authority in relation to the CFTC's authority over commodity futures markets. 

Also in the November 30 order, FERC gave Amaranth 14 days to responds to the original show-cause order.