February 2008

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

Nuclear Power

More Assurances for Decommissioning Plans Proposed
Environmental and financial improvements to the decommissioning planning process have been proposed by the Nuclear Regulatory Commission (NRC) to reduce the likelihood that any current operating facility will become a legacy site—a facility whose owner, faced with complex radiological issues, cannot complete the decommissioning process for technical or financial reasons. Facilities that process large quantities of material, especially in liquid form, have the potential for significant environmental contamination through leakage. The proposed rule would require licensees to conduct their operations in a manner that would minimize the introduction of residual radioactivity into all strata of the site, including the subsurface soil and groundwater. Licensees would also be required to survey certain concentrations of residual activity, including those in subsurface areas, and keep records of these surveys along with other records important for decommissioning. (CCH Nuclear Regulation Reporter ¶4233)

$1.02 Billion NRC Budget Proposed for 2009
The Bush administration has proposed an NRC budget of $1.02 billion for fiscal year 2009. Approximately $91 million more than the 2008 agency allocation, the budget would continue to be funded in large part through user fees, which are estimated at $856 million for the year. The additional funds reflect increased regulatory activities, driven primarily by continued industry interest in constructing new nuclear facilities, oversight of existing reactors, and materials and waste licensing. Among budget highlights, the agency allocation for nuclear reactor safety would be increased by $76 million over the 2008 appropriation, to over $787 million, including approximately $237.5 million for new reactor activities. $221.3 million has also been requested by the Commission for the nuclear materials and waste safety program, which is an increase of $21 million over the previous year. The allocation would be used to conduct regulatory programs at fuel cycle facilities, provide for pre-licensing activities at the proposed Yucca Mountain repository, and support programs for nuclear materials users. (CCH Nuclear Regulation Reports, No. 1386, February 12, 2008)

Electric Utilities

Three NERC Electric Reliability Standards Approved
Three new planning and operating reliability standards have been approved by the Commission to further ensure the reliability of the nation’s bulk power electricity market. The standards were proposed by the North American Electric Reliability Corp. (NERC), the FERC-certified electric reliability organization (ERO). In July 2006, FERC designated NERC as the ERO under Section 215 of the Federal Power Act, a new provision added by the Energy Policy Act of 2005 to establish a system of mandatory, enforceable reliability standards under the Commission's oversight (Facilities Design, Connections and Maintenance Reliability Standards, Order No. 705, 73 FR 1770, January 9, 2008, 121 FERC ¶61,296 (ip access user)).

New Reliability Standards for Cyber Security Approved
Eight new mandatory critical infrastructure protection (CIP) reliability standards to protect the nation’s bulk power system against potential disruptions from cyber security breaches have been approved by the Commission. These reliability standards were developed by the North American Electric Reliability Corporation (NERC), which the Commission has designated as the electric reliability organization (ERO) and are the first enforceable reliability standards that address cyber security concerns in the context of the bulk power system. The mandatory reliability standards, which take effect April 7, require certain users, owners and operators of the bulk power system to establish policies, plans, and procedures to safeguard physical and electronic access to control systems, to train personnel on security matters, to report security incidents, and to be prepared to recover from a cyber attack. (Mandatory Reliability Standards for Critical Infrastructure Protection, 73 FR 7368, February 7, 2008, 122 FERC ¶61,040 (ip access user)).

FERC Rejects Challenge to PJM Rate Design.
In finding that PJM Interconnection, L.L.C.'s (PJM) existing license plate rate design governing the allocation of costs for existing facilities was not shown to be unjust and unreasonable, the Federal Energy Regulatory Commission (FERC) affirmed its conclusions from a prior FERC Opinion [Opinion No. 494 at CCH Utilities Law Reporter ¶14,640]. FERC balanced a variety of conclusions to affirm its earlier Opinion concerning the regional transmission organization's (RTO) transmission rate design, including that the existing transmission system was built to serve local needs, that the transmission system, although integrated, was not equally available or valuable to all users of the system, the extensive impact of changing rate design on customers, and the potential effects of such a change on RTO membership. (PJM Interconnection, L.L.C., FERC Opinion No. 494-A, CCH Utilities Law Reporter ¶14,684)

Hydroelectric Power

FERC's Denial of Permits, Licenses for Hydroprojects Okayed
The Federal Energy Regulatory Commission (FERC) did not err when it denied preliminary permits and licenses for certain hydroelectric power project applicants to construct and operate hydroelectric power plants on existing dams, the U.S. Court of Appeals for the District of Columbia Circuit ruled. FERC denied the permits and then the licenses because it found the projects' responsible individuals, who had previous records of noncompliance, unfit. The court said that FERC could consider fitness in evaluating applications for new permits and licenses under the Federal Power Act (FPA). Also, the court pointed out that in considering a license application, FERC assesses the public interest, broadly defined, and that in deciding whether to grant a permit, FERC also has discretion to consider the fitness of the applicant. Moreover, FERC had precedent for looking to the individuals behind the corporation when deciding on a new license and could base its decision on who would actually run the project, according to the court. (Energie Group, LLC, et al. v. FERC (DCCir), CCH Utilities Law Reporter ¶14,682)

Natural Gas

Natural Gas Project Cost Limits Increased for Inflation
The project cost limits for construction, acquisition and operation of natural gas facilities authorized under blanket certificate procedures have been adjusted for inflation by the Director of the Office of Energy Projects. The automatic project cost limit was increased from $9.9 million in 2007 to $10.2 million in 2008, while the prior notice project cost limit was increased from $28.2 million to $29 million. The calendar year dollar limit on underground storage testing and development has been increased from $5.4 million in 2007 to $5,550,000 in 2008. The new limits became effective January 1, 2008. (CCH FERC Statutes and Regulations Edition ¶31,263)

Expanded Scope for Blanket Certificate Abandonments Affirmed
In an order denying rehearing of Order No. 686-B [CCH Statutes and Regulations Edition ¶31,255], the Federal Energy Regulatory Commission has affirmed its controlled expansion of the number of facilities that may be abandoned pursuant to blanket certificate authority. The Interstate Natural Gas Association of America (INGAA) and Northern Natural Gas Company (Northern Natural) argued in their rehearing request that the Commission did not provide sufficient justification for directing companies to determine if a facility could be abandoned by comparing the current blanket project cost cap to an estimate of the cost to replicate an existing facility today, rather than to the original cost to construct that facility.

INGAA’s and Northern Natural’s proposal to rely on a facility’s original cost would effectively lift the lid on the size of projects subject to blanket abandonment authorization, since the original cost remains fixed while the project cost cap ratchets up. Thus, over time, companies could abandon increasingly more significant portions of their systems, particularly their older facilities, such as mainline installed in the 1930s. If the Commission permitted the scale of blanket abandonment projects to grow with each annual adjustment to the blanket project cost limit, it could no longer guarantee that blanket abandonments would continue to be consistent with the public convenience and necessity criteria of the Natural Gas Act. (Revisions to the Blanket Certificate Regulations and Clarification Regarding Rates, 122 FERC ¶61,028 (ip access user) )

FERC Failed To Distinguish Between Pipeline Refund Settlement
The Federal Energy Regulatory Commission (FERC), in reaffirming orders requiring a natural gas producer, Burlington Resources Inc. (Burlington), to refund excess revenues to two pipeline gas purchasers and denying effect to settlement between the parties, failed to explain adequately its approval of similar settlements between the two pipelines and other gas producers, the U.S. Court of Appeals for the District of Columbia Circuit held. The court said the distinctions that FERC provided between the producer's settlement and the other similar settlements were “illusory,” and, therefore, the court vacated FERC's orders and remanded the case to the agency. According to the court, FERC misinterpreted the court's precedent, and this led to FERC's incorrect reasoning that a settlement of past ad valorem tax disputes was invalid unless a determination could be made of the precise consideration the producer gave to satisfy its refund obligations. While it was true that for each past overpayment the maximum-price rule provided that the purchaser had a right to a full refund, the court said, the law did not prevent purchasers from later exchanging those accrued rights for other valuable consideration. As such, FERC could not insist that the exchange match the parties' exact obligations. Moreover, the settlement agreements created no liabilities for future gas sales, but merely resolved disputes over liabilities already accrued, settling claims of past price-ceiling violations. (Burlington Resources Inc. v. FERC (DCCir), CCH Utilities Law Reporter ¶14,683)

Oil and Gas

BLM Amends Alaska National Petroleum Reserve Rules
Changes to oil and gas administrative procedures for the National Petroleum Reserve-Alaska implementing amendments to the Naval Petroleum Reserves Production Act of 1976 that were changed by the Energy Policy Act of 2005 (EPAct 2005) have been issued by the Bureau of Land Management. BLM may waive, suspend, or reduce the rental, royalty, or minimum royalty on leases in the NPR-Alaska if necessary to promote development or if BLM determined the lease could not be successfully operated under the lease terms. The provision is intended to keep open producible wells that would otherwise be shut in. BLM may require additional bonding for any NPR-Alaska lease if BLM determined that the operator posed a risk, including factors such as a history of previous violations, an MMS notice of uncollected royalties due, or if BLM estimates the cost of plugging existing wells and reclaiming lands exceeded the present bond amount. BLM is required to extend lease terms as long as oil and gas is produced from the lease in paying quantities or drilling or re-working operations, actual or constructive, are being conducted on the lease. The final rule has added the requirement that BLM grant an extension when it has determined that oil or gas is capable of being produced in paying quantities from the lease. NPR-Alaska leases expire on the 30th anniversary of their original issue date unless oil or gas is being produced from the lease, up from ten years before the passage of EPAct 2005. (Energy Management ¶9531)

Credits for Relinquishing Leases Offshore Florida Proposed
Certain leases located offshore of Florida would be eligible for a bonus or royalty credit if relinquished, under a proposal from the Minerals Management Service. The proposed rule is designed to implement the Gulf of Mexico Energy Security Act of 2006. The law defined leases eligible for the credits as those in existence on the date of the law's enactment that were located within certain OCS planning areas as well as within specified distances from the Florida coastline. The credit would be equal to the original bonus paid plus the cumulative rental paid on the lease since its issuance, not including any exploration costs or interest costs. To obtain the credit, parties holding title would be required to apply within one year from the effective date of the final rule. Multiple owners of a lease would receive a percentage share of the credit based upon their percentage share in total ownership interest at the time the request is submitted to MMS. A bonus or royalty credit could be applied to a successful bid for a new lease or for royalties reported due on Form MMS 2014. The credits could be redeemed only in lieu of a monetary payment owed, and not for any royalty-in-kind deliveries. The credits would have no expiration date, but MMS proposes that it be permitted to apply any unused credits after five years to the credit holder's obligations to MMS at the discretion of MMS. Credits would be transferable. (Energy Management ¶9317)