Energy Update February 2009

February 2009

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

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Hot Topic – Stimulus Package Contains Appropriations for Energy Efficiency and Reliability

Stimulus Bill Approves Billions for Energy Projects
The recently enacted American Recovery and Reinvestment Act of 2009 (Act) provides for large investments, tax credits, bonds, and loan guarantees aimed at doubling renewable energy products and modernizing the existing energy grid. The Act provides $4.5 billion for “Electricity Delivery and Energy Reliability.” The funds are intended to modernize the electric grid by increasing the development and use of demand responsive equipment; enhancing the security and reliability of energy infrastructure; researching energy storage development, demonstration and deployment; facilitating recovery from disruption to the energy supply; and implementation of programs authorized under Title XIII (Smart Grid) of the Energy Independence and Security Act of 2007 (P.L. 110-140). The Act increases the amounts available to the Bonneville Power Administration (Bonneville) and the Western Area Power Administration (Western). Bonneville’s borrowing authority is increased to $3.25 billion, while the Secretary of the Treasury is directed to loan to Western the same amount. The Secretary of Energy is further directed to complete a 2009 National Electric Transmission Congestion Study.

The Act provides $6 billion in loan guarantees for the Innovation Technology Loan Guarantee Program established by the Energy Policy Act of 2005. The loans are for renewable energy power generation and transmission projects. The Renewable Energy Production Tax Credit for electricity produced from renewable resources is extended from 2010 to 2013. Renewable facilities that go into service between 2009 and 2012 can elect an investment credit in lieu of a production credit. The tax credit for qualifying advanced energy projects is set at an amount equal to 30 percent of the qualified investment for the tax year. The national new clean renewable energy bond limitation is increased by $1.6 billion. The limitation on issuance of qualified energy conservation bonds was amended by increasing the limit to $3.2 billion. The full text of the bill can be found at www.thomas.gov

Electric Utilities

Commission Provides Guidance on Compliance Audits
NERC and eight Regional Entities conduct compliance audits into whether particular users, owners, and operators of the bulk-power system comply with FERC's mandatory reliability standards. Commission staff observed that these audits needed to be conducted with greater consistency, and suggested guidelines that would ensure more effective enforcement. The Commission urged the NERC staff to lead compliance audit teams on which Regional Entity staff participates, and to control the scope and conduct of the audit without seeking advice from the Regional Entity staff. Implementation of this guideline will resolve any possible perception that the Regional Entity compliance staff was not sufficiency independent from the audited entity, according to the Commission. (Compliance with Mandatory Reliability Standards, 126 FERC ¶61,038 (ip access users)

Commission Orders Rate Revisions and Refunds
The Commission affirmed in part and reversed in part an initial decision (120 FERC ¶ 63,014) concerning Idaho Power Company’s (Idaho Power) proposal to implement formula rates in place of the rates stated in its open access transmission tariff (OATT) and the proper ratemaking treatment of Idaho Power’s existing contracts under the formula rates. Idaho Power provides point-to-point transmission service and integration service to jurisdictional customers pursuant to its OATT. Pacific Power & Light Company, Utah Power & Light Company, and PacificCorp have long-term transmission service agreements with Idaho Power, referred to as the “Legacy Agreements.” The Commission affirmed the initial decision that the transmission service under the Legacy Agreements is a firm service that must be accounted for in the Idaho Power formula rate by including the associated demands in the rate divisor. Also, the Commission affirmed that the transmission services under the Legacy Agreements were more appropriately considered firm services for ratemaking purposes and therefore subject to cost allocation in Idaho Power’s formula rate. Finally, the just and reasonable rate design required that the transmission service under the Legacy Agreements be accounted for in the Idaho Power formula rate by including the associated demands in the rate divisor. The Commission directed Idaho Power to file revisions to its rate schedule reflecting the above-stated findings and to make refunds from the refund effective date with appropriately-calculated interest. (Idaho Power Company, 126 FERC ¶61,044 (ip access users))

Google and GE Hold Meeting on Plugging Into the Smart Grid
As President Obama was signing the stimulus bill, Carol Browner, the President’s Assistant on Climate Change addressed a group of more than 500 people that had come to hear experts discuss questions regarding building a bigger smarter electricity grid that provides every household in the United States with real-time energy information and enables the scale-up of hundreds of thousands of megawatts of clean renewable power. Google and General Electric held the gathering on February 17, 2009 at Google’s Washington, DC office. Google and GE launched a partnership last fall to focus on exploring the potential of research and development in developing the smart grid. Bob Gilligan, the Vice President of GE Energy explained that the smart grid is the marriage of information technology and energy that can empower consumers. GE’s smart meter provides the consumer with real-time information about how much money they are spending minute by minute in energy consumption. John Podesta, the President of the Center for American Progress and the head of Obama’s transition team, stated that one of the top policy issues in developing the recovery and stimulus package was to fund renewable energy and develop efficiencies in producing and delivery energy. Chris Miller, from the Office of Senate Majority Leader Harry Reid, said that we will soon see new legislation that is an expanded of version of last Congress’s energy bill. In response to the moderator’s question regarding the Department of Energy’s (DOE’s) ability to put tens of billion of dollars out on the street, Andy Karsner, Former Assistant Secretary for Energy Efficiency and Renewable Energy of DOE, said that the agency would have not problem with getting out the money that is contained in formulaic grants. However, he believes that agency can do better in most other areas. Miller said that DOE works well as a research and development agency but is not well situated to disburse large amounts of money. (FERC Opinions, Orders, & Decisions, Report No. 1441, Feb. 25, 2009)

Connecticut Electric Market Not Unjust or Unreasonable
The Federal Energy Regulatory Commission (FERC) was not required to determine that Connecticut's electricity market as a whole was workably competitive before it could conclude that it was just and reasonable for any generator to receive market-based rates, the U.S. Court of Appeals for the District of Columbia Circuit ruled. In 2002, FERC approved a set of operating rules to address the problems caused by transmission constraints and the inability of many higher-cost generating units in the state to make a profit selling power at market rates. The result of the rules was the creation of a hybrid market, under which some generators received market rates, others were compensated through Reliability-Must-Run (RMR) agreements, and others operated under Peaking Unit Safe Harbor (PUSH) bidding rules. The court found that Connecticut offered no evidence that the hybrid nature of the market allowed high-cost generators to exercise market power. The court also found that the hybrid electricity market was not inherently unjust or unreasonable. Until the Forward Capacity Market is implemented, FERC reasonably chose to employ interim measures to ensure system reliability and to spur further improvements, while Connecticut made little attempt to prove that its alternative was just and reasonable. (Blumenthal v. FERC, DCCir. 2009, CCH Utilities Law Reporter ¶14,730).

Natural Gas

FERC Fraud Investigations Result in Settlements/Penalties
The Commission has approved four stipulation and consent agreements, representing more than $8 million in civil penalties and disgorgement of approximately $4 million. These actions resulted from an 18-month investigation into allegedly fraudulent conduct in open season bidding for natural gas transportation capacity on the Cheyenne Plains Natural Gas Company pipeline. The civil penalties in this case reflect the fact that the bidding conduct involved occurred on a single day. The settlements resolve investigations by FERC's Office of Enforcement (OE) into whether bidding by Tenaska Marketing Ventures LLC and its affiliates, ONEOK Energy Services Company and its affiliates, Klabzuba Oil & Gas FLP (Klabzuba), Jefferson Energy Trading Company LLC (Jetco), Wizco, Inc. (Wizco) and Golden Stone Resources LLC (Golden Stone) in Cheyenne's March 2007 open season violated FERC's anti-manipulation regulation. The Tenaska settlement also resolves bidding by Tenaska on two other pipelines, Colorado Interstate Gas Company (CIG), and Northern Natural Gas Company. FERC’s OE investigation found that 20 percent of the bidders secured more than 50 percent of the capacity awarded by means of their multiple bidding. Based on all of the facts and circumstances of each case, FERC's OE maintains that these entities violated the Commission's anti-manipulation regulation in connection with their submission of multiple bids with the intent to defeat the pro rata allocation method relied upon by Cheyenne to ensure fair allocation of scarce and valuable capacity. Tenaska Marketing Ventures was ordered to pay a civil penalty of $3 million and to disgorge $1.97 million. ONEOK Energy Service Company was required to pay a civil penalty of $4.5 million and to disgorge $1.9 million, plus interest. Klabzuba was ordered to pay $300,000. Jetco, Wizco and Golden Stone were required to pay a civil penalty of $585,000. (FERC News Release, January 15, 2009)

MLPs Used in Proxy Group to Determine Gas Pipeline ROE
A 12.50 percent return on equity (ROE) for Kern River Gas Transmission that would have been set by a proposed contested settlement agreement was excessive and would result in unjust and unreasonable rates, the Commission ruled. Instead, FERC determined that the rate should be 11.55 percent, based upon the record in a FERC paper hearing. The settlement arose out of a generalized rate case originally filed in 2004. In 2006, the Commission issued Opinion No. 486 (117 FERC ¶61,077 (ip access users)), in which it reversed a recommendation by an Administrative Law Judge (ALJ) that the ROE be set at 9.34 percent. FERC found that two corporations should have been excluded from the proxy group used to calculate the ROE, and determined the ROE should be 11.20 percent. Subsequently, in Opinion 486-A, FERC ordered the paper hearing on the issue of the proxy group. FERC used a proxy group composed of three Master Limited Partnerships (MLPs) and two corporations. The Commission stated that in determining the makeup of the proxy group, it applied for the first time a 2008 Policy Statement on the Composition of Proxy Groups for Determining Gas and Oil Pipeline Return on Equity, which permitted the use of MLPs. FERC found that Kern was a pipeline of average risk and, therefore, its ROE should be set at the median of the proxy group, which was 11.55 percent. (Kern River Gas Transmission Company, Opinion No. 486-A, 126 FERC ¶61,034 (ip access users))

Oil and Gas

OCS Royalty Price Threshold Not Enforceable
The Department of the Interior (DOI) could not collect royalties on leases issued under the Outer Continental Shelf Deep Water Royalty Relief Act (DWRRA) before those leases had produced the specified volume of oil or gas, the U.S. Court of Appeals for the Fifth Circuit ruled. The DWRRA authorized the DOI to suspend the collection of oil and gas royalties from all new and preexisting federal, deepwater leases and to impose price or volume thresholds in order to determine when royalty payments should recommence. Further, for new deepwater leases issued between 1996 and 2000 for specific areas in the Gulf of Mexico, the Act explicitly waived all royalty payments until the leases produced a specific volume of oil or gas. Under an analysis performed according to the standard adopted in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 476 U.S. 837 (1984), the court held that the DOI did not have the authority to suspend royalty relief for new leases at production volumes less than those set by Congress. Because Congress refrained from specifically establishing price thresholds, the DOI was unable to enforce the price thresholds in the leases. (Kerr-McGee Oil and Gas Corp. v. U.S. Department of Interior, et al., 5th Cir., CCH Energy Management ¶9604)

Nuclear Power

Air Crash Assessments Required for New Reactors
Applicants seeking to build new power reactors will be required by the Nuclear Regulatory Commission to assess the ability of their reactor designs to avoid or mitigate the effects of a large commercial aircraft impact. Under the rule, any design feature or functional capability adopted solely to comply with the rule will meet high quality standards but is exempt from NRC design-basis regulations, such as those for redundancy. These design features and functional capabilities must address core cooling capability, containment integrity, spent fuel cooling capability, and spent fuel pool integrity following an aircraft impact. The agency does not believe nuclear plant operators should be required to prevent the impact of large commercial aircraft—that responsibility rests with the federal government. Should such an unlikely event take place at a new plant designed in accordance with this rule, however, the NRC expects that the plant would be better able to withstand such a crash than the same design without the changes resulting from the rule. The rule will be reflected in full text following its publication in the Federal Register. (CCH Nuclear Regulation Reports, No 1411, February 24, 2009)

EPA Radiation Standards for Yucca Mountain Incorporated into NRC Rule
A final rule incorporating the Environmental Protection Agency’s (EPA) radiation protection standards for the proposed high-level waste repository at Yucca Mountain, Nevada for a period of up to 1 million years has been approved by the Nuclear Regulatory Commission. The rule make NRC’s regulations consistent with the EPA ‘s revised standards, required by law. The new regulations retain EPA’s standard dose limit for individuals of 15 millirem for the first 10,000 years after disposal and adopt EPA’s 100 millirem dose limit for the period after 10,000 years and up to 1 million years. The rule will be reflected in full text following its publication in the Federal Register. (CCH Nuclear Regulation Reports, No 1411, February 24, 2009)