Energy Legal Blog

FERC Blesses Midwest ISO Plan for Resource Adequacy

The Federal Energy Regulatory Commission has conditionally accepted a Midwest Independent Transmission System Operator (Midwest ISO) plan for ensuring long-term resource adequacy in the RTO’s 15-state territory.  Most other RTOs and ISOs have spent years grappling with how to ensure sufficient capacity is available to meet peak demand, and contentious FERC proceedings have led to different market models in NYISO, PJM, and ISO-NE.  FERC directed MISO to develop its own resource adequacy plan after having operated for years without one.   The first planning year under the resource adequac plan will start June 2009.

MISO’s responsibilities under the new plan will include determining capacity obligations, monitoring compliance, and assessing penalties to deficient load servers.  Unlike the PJM, ISO-NE, and NYISO models, the MISO plan does not entail a centralized capacity market, but does require any load server in the Midwest ISO region to maintain access to sufficient planning resources, whether generation or demand response.  

Standards of Conduct Proposal Retreats from Structural to Functional Separation

A recent FERC Standard of Conduct rulemaking proposal retreats from its Order 2004 expansion of the standards of conduct, expressly finding that expansion too complex and unworkable.  FERC proposes a return to its 1990s vintage functional separation model of Order 497 (natural gas) and Order 889 (electric power), eliminating both Order 2004's concept of "Energy Affiliates" and its emphasis on corporate separation.  FERC concludes that returning to mere functional separation will encourage compliance by making the rules clearer, which the agency indicates is necessary in light of the new penalty regime of the Energy Policy Act of 2005 (EPAct 2005).  Comments on the proposed rule must be filed with FERC by May 12. 

In retreating to functional (from structural) separation, the proposal rulemaking appears to validate vertically integrated utilities by conceding that Order 2004 was hindering the advantages that accrue from vertical integration.  Nevertheless, the agency seems to be adrift between acknowledgment of the planning and integration advantages of the historical utility model and distrust of the  non-competitive characteristics of that model.  

Specifically, the proposed Standard of Conduct reform would implement:  

(1)  An “independent functioning rule” that defines the two groups of employees — “transmission function" and "marketing function" — who must function independently.  This division is based on what the employees do, not where they are employed.  Employees not directly engaged in transmission or marketing -- for example attorneys, accountants, and certain supervisors -- will not have their functions constrained by the proposed rule.   

(2)  A “no-conduit rule” to ensure independent functioning by prohibiting transmission function employees from communicating non-public transmission-related information with marketing function employees.  The no-conduit rule bars both communicating and receiving non-public transmission information, and everyone, regardless of function, is prohibited from being a conduit.   

(3)  A “transparency rule” to help detect, correct, and sanction violations of the independent functioning and no-conduit rules.  Whenever information is communicated in violation of the independent functioning or no-conduit rules, then, as provided in the current rules, the transmission function employee must immediately post that information on OASIS.  In addition, any interaction of transmission and marketing function employees would have to be contemporaneously recorded (handwritten notes may suffice) and made available to FERC on request, so the agency can monitor compliance with the rules.     

Unclear from the transparency rule is whether the damage of an improper disclosure of non-public transmission information can be undone.  Penalties for violations would remain unchanged from those enacted under EPAct 2005.

ERCOT blames inaccurate wind predictions for February emergency event

The Electric Reliability Council of Texas (ERCOT) recently released its Operations Report to explain why it was forced to cut electric supply to interruptible customers on February 26, 2008. The emergency event was caused largely by the convergence of the normal rapid load growth that occurs around 6:00 p.m. and a simultaneous unexpected and sudden drop in wind that decreased the power output from windfarms.

ERCOT was primarily relying on day-ahead schedules to judge wind capacity, which predicted 1294 MW. However, only 335 MW were actually available during the relevant hour. To address this problem, ERCOT stated it would try to adopt in the near term the generation forecasting model it will use when the market transfers to a nodal operating system in 2009, since that model creates more accurate short term planning values for wind generation.

Managing reliable integration of wind generation is a high priority for ERCOT, since Texas is now the state with the largest wind energy production in the United States and has almost 3000 MW of additional wind development with signed interconnection agreements waiting to come online.

DC Circuit Orders Immediate Tightening of Mercury Control Rules

On March 21, a three-judge panel of the US Court of Appeals for the District of Columbia Circuit made clear that its February 8, 2008 order mandating a return to tighter mercury control rules on coal-fired power plants must go into effect immediately.  The court's February order threw out the Bush Administration's Clean Air Mercury Rule (CAMR), which was implemented in 2005 and established a cap-and-trade program for mercury emissions from coal- and oil-fired power plants, and directed a return to the more stringent standards enacted in 2000 under the Clinton Administration.  The court's most recent ruling requires the Environmental Protection Agency (EPA) to begin implementing the tighter rules immediately, instead of allowing time for the EPA and others to request rehearing of the court's February order.

In its February order, the court rejected the EPA's CAMR standards as violating the Clean Air Act.  The CAMR standards required coal- and oil-fired plants to reduce mercury emissions by 70% by 2018, and permitted utilities to trade mercury emissions to allow them to reduce compliance costs.  The CAMR standards also reversed the 2000 mercury standards, which had required mercury emissions to be regulated under a maximum achievable control technology (MACT) standard.  The MACT standard that will now take effect again requires proposed power plants to adopt emissions controls in use at the best controlled similar pollution source, which will likely require power plants to remove an estimated 85% to 90% of the mercury from their emissions. 

The court's ruling will have an immediate impact on coal-fired plants that are currently in the planning and permitting stages, as these plants will have to revise their plans and permit applications in order to remove higher amounts of mercury.  However, the EPA and several utilities that supported it have indicated they plan to seek rehearing of the court's February order, and thus the ruling could be modified or reversed following en banc review.  In the meantime, the court's recent order requires the EPA to begin tightening its controls immediately.

CAISO Says It Will Announce MRTU Start in July

It is still unclear when the California Independent System Operator's long-awaited Market Redesign and Technology Upgrade (MRTU) will take effect, but the CAISO recently suggested it will announce the startup date in July 2008. 

Ever since the California energy crisis, the CAISO has worked on designing and implementing a new wholesale power market with features such as locational marginal pricing, financial transmission rights (called congestion revenue rights), and a day-ahead market energy market.  The CAISO filed the MRTU proposal with FERC in February 2006, and proposed a market startup date of November 2007.  Due to technical issues and ongoing administrative litigation over the details of the market design, the proposed startup date has been delayed several times, first to February 2008, then April 2008, and now again to an unknown time.   The latest delay raised the prospect of MRTU not taking effect until next fall, after the high-demand summer season, which the CAISO's latest announcement appears to confirm. 

FERC Proposes Sundry Changes to Organized Power Market Rules

In a new rulemaking, the Federal Energy Regulatory Commission (FERC) has resisted pressure from various groups to examine the foundations of organized wholesale power markets administered by RTOs and ISOs, and instead proposes various tweaks to the rules in these markets. 

FERC rejected the calls by the American Public Power Association and others who have argued that organized power markets are failing to produce just and reasonable rates and that FERC should engage in fundamental reform of RTOs and ISO.  Instead, FERC focused its proposals on areas where it stated that improvements were supported by the law, facts and economic theory, but which have also been high-profile of late, whether due to advocacy by individual Commissioners (such as demand response) or because of bitter disputes within or about RTOs (such as market monitoring).  The specific proposals fall into four categories.

          Demand Response

o        Require RTOs and ISOs to accept bids from demand response resources in their markets for certain ancillary services comparable to other resources.

o        During a system emergency, require RTOs and ISOs to eliminate a charge to a buyer for taking less energy in the real-time market than it purchased in the day-ahead market.

o        Require RTOs and ISOs to permit an aggregator of retail customers to bid demand response on behalf of retail customers.

o        Modify market rules to allow market-clearing prices, during a period of operating reserve shortage, to reach a level that rebalances supply and demand so as to maintain reliability while providing sufficient provisions for mitigating market power.

Long-term Power Contracting

o        Require RTOs and ISOs to dedicate a portion of their websites for market participants to post offers to buy or sell power on a long-term basis.

Improved Market Monitoring

o        Require each RTO and ISO to provide its Market Monitoring Unit (MMU) with access to market data, resources and personnel necessary to carry out its duties.

o        Require the MMU to report directly to the RTO or ISO board.

o        Expand the list of recipients who would receive MMU recommendations regarding rule and tariff changes, and broaden the scope of behavior reported to FERC.

o        Remove the MMU from tariff administration, including mitigation, and require each RTO and ISO to include in its tariff ethics standards for MMU employees.

o        Expand dissemination of MMU market information to a broader constituency, with more frequent reports.

Responsiveness to Customers and Stakeholders

o        Adopt principles for RTOs and ISOs to ensure inclusiveness, fairness in balancing diverse interests, representation of minority positions, and ongoing responsiveness.

Comments on the proposed rules are due April 21.  In addition to the proposed reforms, FERC also ordered a technical conference to be held to consider proposals for modifying the design of organized markets, as well as a separate technical conference to discuss barriers to demand response in organized markets.

Southern California Edison Asks FERC to Step into Arizona Transmission Siting Dispute

In the first test of the "backstop" transmission siting authority given to FERC in the Energy Policy Act of 2005 (EPAct 2005), Southern California Edison (SCE) recently discussed with FERC staff the siting of a 230-mile, 500 kV transmission line from the Palo Verde nuclear plant near Phoenix, Arizona to Devers, California, near Palm Springs (known as the Palo Verde-Devers II Line).  SCE representatives met with FERC staffers to begin a "pre-filing" consultation process in advance of filing an application for FERC to approve the proposed siting of the line. 

California covets the line as a means to bring more power into the state, and the California Public Utilities Commission (CPUC) approved the line.  However, SCE's plans hit a obstacle at the Arizona Corporation Commission (ACC).  The ACC rejected SCE's application in May 2007, stating it refused to allow SCE to plug a "230-mile extension cord" into Arizona's generation supply.  The ACC found the line would cost Arizona ratepayers $242 million, could have detrimental environmental impacts, and would significantly reduce available generation in the state, which has a rapidly growing population. 

Arizona's rejection of the line will test the extent of FERC's authority under the national interest electric transmission corridors (NIETC) provisions of EPAct 2005.  Under these provisions, Congress gave FERC authority for the first time to approve, in certain circumstances, the siting of transmission lines in areas of congestion, designated as NIETCs by the US Department of Energy.  These circumstance include when a state public utility commission has "withheld approval for more than 1 year" after a siting application is filed.  In a controversial 2006 rulemaking decision, FERC interpreted the word "withheld" in the statute to mean "deny," indicating that FERC believes it has authority to approve siting of a transmission line even when a state has rejected the line.  This order has been appealed to the US Court of Appeals for the Fourth Circuit.

Following the meeting with SCE, FERC emphasized that no application has yet been filed.  FERC also contacted the CPUC and ACC to inform them of the meeting and seek their input as to whether FERC has authority in this case.  If SCE eventually files an application, FERC will review the records developed before the CPUC and ACC, coordinate actions required by federal law, including federal environmental review, and conduct an independent evaluation.  FERC must issue a decision within one year of the filing of the application.

FERC Takes Action to Prevent Cross-Subsidization between Affiliates

FERC continues to tweak its rules regarding mergers and acquisitions under section 203 of the Federal Power Act (FPA), issuing new regulations that impose restrictions on affiliate transactions between certain public utilities and their unregulated affiliates.  FERC explained that it intends to fill a perceived regulatory gap in its current affiliate sales rules, and stated that this final rule, combined with an order issued the same day allowing for grants of blanket authorization for a public utility to dispose of voting securities, marks the completion of the "initial implementation" of the rules governing transactions conducted under section 203. 

Order No. 707 extends the affiliate transaction restrictions already in place for entities with market-based rates and utilities requesting merger approval to franchised public utilities that have captive customers or that own or provide transmission service over jurisdictional transmission facilities.  Under the new rules, wholesale sales of power between such public utilities and power sales affiliates with market-based rate authority will require FERC approval.  In addition, such a public utility that sells non-power goods and services to an affiliate with market-based rate authority or an unregulated affiliate will be required to do so at a price that is the higher of either cost or market price.  Lastly, a public utility subject to the rules will not be permitted to purchase non-power goods or services from an affiliate at a price above market price, except that the public utility cannot receive non-power goods and services from a centralized service company above cost.