April 2011

From the editors of Wolters Kluwer Law & Business, this update describes important developments from CCH energy publications.

If you have any comments or suggestions concerning the information provided or the format used, we'd like to hear from you. Please send your comments to pamela.maloney@wolterskluwer

Electric Utilities

Higher Compensation for Demand Response Affirmed

The Commission has affirmed that Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) with tariff provisions permitting demand response providers to participate as resources in energy markets by reducing consumption of electricity from their expected levels in response to price signals be required to pay demand response providers, in all hours, the market price for energy (i.e., the full locational marginal price (LMP)) for such reductions. The LMP represents the value of additional supply or reductions in consumption at each node within the RTO or ISO, and, as a result, reflects the marginal cost of the last unit necessary to efficiently balance supply and demand. The new rule establishes this specific compensation approach for demand response resources participating in organized wholesale energy markets such as the day-ahead and real time markets administered by the ISOs and RTOs. The action is being taken because of Commission concern that inadequate compensation structures have hindered the development and use of demand response. To implement the net benefits test, the Commission directs each RTO and ISO to develop a mechanism as an approximation to determine a price level at which the dispatch of demand response resources will be cost-effective. The RTO or ISO should determine, based on historical data as a starting point and updated for changes in relevant supply conditions such as changes in fuel prices and generator unit availability, the monthly threshold price corresponding to the point along the supply stack beyond which the overall benefit from the reduced LMP resulting from dispatching demand response resources exceeds the cost of dispatching and paying LMP to those resources.(CCH FERC Statutes and Regulations Edition ¶31,322 (ip access users) (Intelliconnect)

Settlement Rates Are Not ``Contract Rates''

On remand from the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit), the Commission determined several issues relating to a redesign of the New England market for installed electric generation capacity. At issue was whether the auction results and transition payments arising from a contested settlement previously approved by the Commission constituted "contract rates" or whether challenges could only be reviewed by the Commission under a more rigorous application of the statutory "just and reasonable" standard of review; that more rigorous application was often characterized as the Mobile-Sierra "public interest" standard. Further, if the auction results and transition payments were not "contract rates," could the Commission act within its discretion in nevertheless approving a settlement provision imposing the Mobile-Sierra "public interest" standard on some future challenges to the auction results and transition payments. The Commission found that the settlement rates at issue were not "contract rates" where future challenges would necessarily be subject to a Mobile-Sierra "public interest" presumption. Nevertheless, the Commission also found that the Commission had discretion to consider and decide whether future challenges to rates should be evaluated under a more rigorous application of statutory "just and reasonable" standard of review. (Devon Power LLC, 134 FERC ¶61,208 (ip access users)(Intelliconnect)

FERC Affirms NERC's Turlock Penalty

The North American Electric Reliability Corporation's (NERC) proposal to assess an $80,000 penalty against Turlock Irrigation District (Turlock) for alleged violations of requirements of eight Commission-approved Reliability Standards, was approved by the Commission upon review of the penalty. The alleged violations related to a vegetation-caused outage of transmission facilities, which led to a loss of firm load in the service areas of Turlock and a neighboring registered entity, Modesto Irrigation District (Modesto). In order to provide guidance to the industry, the Commission reviewed the penalty. The Commission noted that had its staff not issued a data request seeking additional information and had the Commission not initiated review on its own motion, it would have not discovered facts that it believed were critical in evaluating and assessing Turlock's penalty and subsequent efforts to increase compliance and improve reliability. The Commission stated that NERC should file a complete and accurate record for each notice of penalty, whether it reflected an adjudicated determination or a settlement with the registered entity. The Commission also stated that it disagreed with Turlock that NERC's Sanction Guidelines did not allow load shedding resulting from a violation of a Reliability Standard to be considered in a penalty determination.(North American Electric Reliability Corp., 134 FERC ¶61,209 (ip access users)(Intelliconnect)

NERC Updates Standards Development Process

In response to a Commission directive [130 FERC ¶61,203 (ip access users)(Intelliconnect)], the North American Reliability Organization (NERC) revised its Rules of Procedure governing the development of Reliability Standards. The Commission directed NERC to propose revisions that would address the conflict between NERC's existing Standards Development Process and its obligation as the Electric Reliability Organization (ERO) to comply with Commission directives. NERC proposed three changes to its Standards Development Process. First, NERC had already approved a change in the NERC Standards Processes manual, which clarified the responsibility of the Standards Committee and its authority over the standards drafting teams, including the authority to accept or reject the work of the team. Second, NERC expanded the mandate of the Board level Technology Committee to become a Standards Oversight and Technology Committee, with responsibility for monitoring overall results and timeliness of Standards development work, including responding to directives related to Reliability Standards. Third, NERC proposed revisions to its Rules of Procedure, to provide an alternative means for developing or modifying a Reliability Standard in response to a Commission directive, including the Board's development of a draft Reliability Standard, in the event that the regular development process failed to produce a responsive Reliability Standard. The Commission found that the proposed revisions to NERC's rules of procedure, coupled with its previous changes to its Standards Development Process, complied with the Commission's previous directive, and it approved NERC's rules of procedure as filed. (North American Electric Reliability Corp., 134 FERC ¶61,216 (ip access users)(Intelliconnect))

Natural Gas

Certificate of Public Convenience and Necessity Not Transferrable

The Commission determined issues arising from an initial decision by an administrative law judge (ALJ) concerning a general rate case filed by Portland Natural Gas Transmission System (Portland). The Commission affirmed the ALJ's findings with regard to levelized rates, two out of four cost-of-service issues, negative salvage and in part on determinations relating to depreciation. Portland operates import facilities near the United States-Canada border and pipeline facilities in the northeastern United States. Further, the Commission determined that the proxy group chosen by the ALJ was not risk appropriate for Portland. The Commission's preference is that a proxy firm's natural gas pipeline business account for at least 50 percent of its assets or operating income. The Commission substituted a company with the proper percent of assets and then approved the proxy group. (Portland Natural Gas Transmission System, Opinion No. 510 134 FERC ¶61,129)(ip access users)(Intelliconnect)

Nuclear Power

NRC Task Force To Review Agency's Response to Japan Nuclear Event

The Commission has named six senior managers and staff to its task force for examining the agency's regulatory requirements, programs, processes, and implementation in light of information from the Fukushima Daiichi site in Japan, following the March 11 earthquake and tsunami. According to the charter, the task force will conduct a near-term review and identify topics for assessment for a longer term review. Initially, the task force will identify potential near-term actions that affect U.S. power reactors, including their spent fuel pools. Areas to be reviewed include station blackout (loss of all A/C power for a reactor), external events that could lead to a prolonged loss of cooling, plant capabilities for preventing or dealing with such circumstances, and emergency preparedness. The task force will draw from ongoing NRC inspections to verify availability of plant equipment, procedures, and other resources currently required for dealing with such events. The task force will also gather information from domestic and international sources while remaining independent of any industry initiatives. ( CCH Nuclear Regulation Reports No. 1462, April 12, 2011)

Proposal To Certify ESBWR Reactor Design Reflected
The Commission is seeking comments on a proposed rule that would certify GE-Hitachi Nuclear Energy's Economic Simplified Boiling-Water Reactor (ESBWR) design for use in the United States. The design to be certified is fully described in a "design control document," which would be approved (incorporated by reference) in the design certification rule. The NRC has also prepared an environmental assessment of the design to support the rulemaking. The environmental assessment discusses possible design alternatives that could be included in the design certification to mitigate potential severe accidents. The ESBWR is a 1,594 megawatt electric, natural circulation reactor. The ESBWR includes passive safety features that would cool down the reactor after an accident without the need for human intervention. These passive features include: (1) enhanced natural circulation via a taller reactor vessel, a shorter core and improved water flow through the vessel; (2) an isolation condenser system to control water levels and remove decay heat while the reactor is pressurized, and; (3) a gravity-driven cooling system to maintain water levels when the reactor pressure has dropped. (CCH Nuclear Regulation Reports ¶4216)

Oil Pipelines

Substantially Changed Circumstances Analysis Updated
In response to complaints regarding Calnev Pipe Line LLC's (Calnev) interstate rates that raised substantially changed circumstances issues, the Commission addressed methodological and technical issues involved in the 2007 Calnev complaints and set those issues for hearing. Following the decision in America West Airlines, Inc. v. Calnev Pipe Line, LLC [121 FERC ¶61,241 (ip access users)(Intelliconnect)], the Commission recognized that there were differing interpretations among the parties regarding the Commission's conclusions on substantially changed circumstances. Therefore, the Commission addressed the methodological approach related to substantially changed circumstances that should be used at hearing, taking into consideration guidance from the record in the SFPP proceeding [125 FERC ¶63,018 (ip access users)(Intelliconnect)]. First, in measuring a change in return for purposes of determining substantially changed circumstances, the Commission considered the pipeline's change in profitability, which was measured by the change in the rate of return on equity from that embedded in the grandfathered rate. Second, when calculating the change in return on equity, the change should be quantified in terms of actual dollar amounts of the pipeline's revenues and expenses. Third, when analyzing whether there are substantially changed circumstances, the analysis must use total jurisdictional revenues. Fourth, the Commission acknowledged that in considering whether there are substantially changed circumstances, increases in revenues resulting from the pipeline's annual indexing should be considered. Fifth, any change in the embedded rate return on equity must occur after the enactment date of Energy Policy Act of 1992 (EPAct). Sixth, the Commission set 25 percent as the minimum percentage change in return on equity necessary to establish substantially change circumstances. If the change in return on equity was 25 percent or greater, the Commission could consider other factors to confirm that the change was not anomalous or unrepresentative. Finally, the Commission confirmed that a change in return on equity must be measured using the current version of the rate methodology that was applicable to the particular year under analysis. (Tesoro Refining and Marketing Co. v. Calnev Pipe Line LLC, et al., 134 FERC ¶61,214(ip access users)(Intelliconnect))

Federal Energy Management

Claims Regarding BP's Atlantis Platform Allowed

BP Exploration and Production Inc., BP American Inc., BP Plc., and BP Products North America Inc's (collectively BP) motion to dismiss a former control supervisor's and fisherman's association's (jointly, parties) False Claims Act (FCA) claim was dismissed because the parties' allegation, taken as true, stated FCA violations, a U.S. District Court in Texas held. The parties alleged that BP knowingly submitted, and then attempted to fraudulently conceal, false documents to obtain oil and gas that was government property. The parties alleged two specific violations of the FCA: (1) that the company knowingly presented MMS with a false fraudulent claim for government payment or approval; and (2) that the oil company made use of a false record to get a false or fraudulent claim paid or approved by the MMS. The parties alleged that the company committed these FCA violations by making two expressly false certifications to obtain possession of government oil and gas in violation of regulations, and that the government issued the oil company a permit to drill for and produce oil and gas based on those false certifications. The court found that these actions were sufficient to allege a "claim" under the FCA.BP argued that the DOI was an indispensible party to the litigation and that the parties' failure to join them meant that the court should issue an injunction. However, the court found that the DOI's absence from the case would not affect the determination of whether the oil company should be forced to comply with MMS regulations because the OCSLA's citizen suit statute expressly provided courts with the authority to make such determinations without mandating DOI participation. Finally, the court noted that the parties claim was not enjoined because the complaint alleged a specific factual basis concerning the regulatory violation, the risk of an accident continued to increase the longer the required documents were not on file, and an accident would harm the Gulf and cause the permanent loss of the facility which would be a greater economic impact than a temporary injunction. (Kenneth W. Abbott, et al. v. BP Exploration and Production Inc., et al. (DSDTex) CCH Energy Management ¶9629)