Energy Update February 2011

February 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

Ninth Circuit Overturns DOE's NIETC Designation Study
The designation by the Department of Energy (DOE) of two geographic areas as national interest electric transmission corridors (NIETCs), as well as the issuance of a related electric transmission congestion study undertaken by DOE, were vacated by the U.S. Court of Appeals for the Ninth Circuit. The Energy Policy Act of 2005 (EPAct) directed DOE to designate NIETCs to address the problem of electrical brownouts and blackouts. EPAct instructed DOE to conduct a study of electric transmission congestion in consultation with affected states. The court ruled that DOE had failed to consult as required with the states in preparing the study. The statute did not define "consultation," but the court found that it required greater interaction than simply providing an opportunity for comment from affected states. The court also ruled that DOE's designation of the two NIETCs was invalid because DOE failed to undertake any environmental study for either of the two areas. Although the siting of specific transmission facilities is not approved during the designation of a NIETC, DOE must still consider their environmental impacts. (California Wilderness Coalition, et al. v. U.S. Dep't of Energy (9thCir) CCH Utilities Law Reporter ¶14,799)

Survey Shows Rise in Demand Response, Advanced Metering Use
The use of demand response and advanced metering programs has risen significantly since 2008 to cover more consumers around the country, says a new report issued recently by the Federal Energy Regulatory Commission. FERC's 2010 Demand Response and Advanced Metering Survey, which covers calendar year 2009, showed that more than 500 entities reported offering demand response programs in the United States, with the potential demand response contribution from those programs estimated at more than 58,000 megawatts (MW), or 7.6 percent of U.S. peak demand. This is an increase of about 17,000 MW from the 2008 FERC survey. The regions with the largest estimated demand response resources were the Midwest-to-Mid-Atlantic region, and also the Upper Midwest and the Southeast. The survey also indicated that advanced metering use has reached 8.7 percent of the U.S. market, up from 4.7 percent levels outlined in the 2008 report. Advanced meters reach more than 13 percent of the market in the upper Midwest, West and Texas. As in previous surveys, electric cooperatives had the largest penetration of advanced metering use, nearly 25 percent, among categories of organizations. (CCH FERC Statutes and Regulations Edition No. 527 February 21, 2011)

Ethical Conduct Standards for FERC Employees Expanded
The Supplemental Standards of Ethical Conduct for FERC Employees have been expanded by the Commission. The new rule covers prohibited financial interests and codifies existing reporting, divestiture, and disqualification requirements. It also clarifies that an employee may be eligible to defer the tax consequences of divestiture. These standards were issued to provide an additional degree of assurance that agency decisions are not influenced by non-merit considerations and were designed to prevent Commission employees from taking actions that violate conflict of interest laws or criminal statutes. Specifically, the Commission has recognized that the existing general prohibition is not broad enough to expressly give the agency the flexibility to prohibit the acquisition or holding of securities in all FERC—regulated entities. To close the gap and to protect the integrity of the Commission's programs and processes, the Commission is amending the general prohibition by prohibiting an employee, and the spouse or minor children of an employee, from owning securities of a "transmitting utility" and a liquefied natural gas terminal as defined by the Natural Gas Act. (Supplemental Standards of Ethical Conduct for Employees of the Federal Energy Regulatory Commission, 134 FERC ¶61,003(ip access users)(Intelliconnect))

Violation Risk Factors for Reliability Standards Approved
The North American Electric Reliability Corporation's proposed Violation Risk Factors (VRF) and Violation Severity Levels (VSL), designed to address Version 2 Critical Infrastructure Protection (CIP) Reliability Standards, have been approved by the Commission. A VSL is a post-violation measurement of the degree to which a Reliability Standard Requirement was violated. NERC considers the Commission-approved VSL, together with the VRF approved for the requirement, to determine a Base Penalty range for violation. NERC proposed for review and approval 26 VRFs for Requirements selected across CIP-003-2 and CIP-006-2. The Commission found that the proposed VRFs were consistent with its guidelines as established in prior VRF orders. However, the Commission rejected NERC's modification to the VRF for CIP-003-2 Requirement R2. CIP-003-2 specifically imposed the requirement that there be a single senior manager responsible for implementation of, and compliance with, the CIP Reliability Standards. NERC changed the VRF associated with the Requirement R2 from "medium" to "lower" without an explanation or justification. The Commission found that the change was not warranted and directed NERC to re-assign a "medium" designation to the VRF. (North American Electric Reliability Corp., 134 FERC ¶61,045 (ip access users)(Intelliconnect))

Notice of Violations Policy Clarified
In response to three separate requests for rehearing and clarification, the Commission denied rehearing but did issue a clarification of its previous decision [129 FERC ¶61,247 (ip access users)(Intelliconnect)] regarding preliminary notice of violations. The requests for clarification were: (1) whether a Notice would automatically issue or whether the Director of the Office of Enforcement had discretion not to order issuance of a Notice; (2) whether staff would provide advance notification to the subject that it planned to direct the Secretary to publicly issue a Notice; (3) the manner in which the Commission would treat submittals and an opportunity to review and respond to them; and (4) the point at which the previous order would take effect and how it would apply to ongoing investigative proceedings. The Commission clarified that it anticipated that a Notice would issue in every investigation in which staff, after careful consideration of the subject's response to the preliminary findings letter, decided to forward the matter to the Commission for settlement authority. Further, the Commission clarified that the Notice would not issue unless and until Enforcement staff had satisfied that, in its view, a violation of a Commission requirement had occurred and it was prepared to seek settlement authority from the Commission. (Enforcement of Statutes, Regulations, and Orders, 134 FERC ¶61,054 (ip access users)(Intelliconnect))

Pipeline Equity Calculation Unreasonable
In an initial decision, an administrative law judge (ALJ) determined the proper amount that should be included in El Paso Natural Gas Company's (EPNG) capital account for ratemaking and accounting purposes, whether EPNG's proposed capital structure was consistent with Commission precedent and policy, and whether EPNG's proposed short-term firm and interruptible (IT) rate proposal was just and reasonable. The case arose out of EPNG's proposal to increase its base transportation rates by 25 percent over its previously effective rates, to institute a new service, and to change certain terms and conditions of service. The ALJ first determined that EPNG's proposal to roll-in and recover in its cost-of-service $36.2 million, the purchase price of the All-American pipeline, was unjust and unreasonable. The ALJ found that EPNG was seeking to recover costs for facilities that were not "used or useful," and that EPNG could not recover costs for facilities that were not "used and useful." EPNG could only roll-in $10.5 million of the total, as it originally proposed.
EPNG proposed a capital structure of 39.2 percent debt and 60.8 percent equity, which the ALJ found was not just and reasonable because the equity component of EPNG's capital structure included $145,307,340 of undistributed subsidiary earnings and a $615,456,458 loan balance. The ALJ found that EPNG customers were not benefited because the accounts included EPNG's undistributed subsidiary earnings, which were equity, and should not be included in the rate base. All those monies did was to inflate artificially the rates for EPNG's customers. The ALJ determined that a previously agreed to settlement provision which stated that rates for capacity then under contract by eligible shippers would be capped, subject to annual inflation adjustments, until the termination of the shippers' transportation service agreement, should continue. (El Paso Natural Gas Co., 134 FERC ¶63,002 (ip access users)(Intelliconnect))

Filed Rate Doctrine Blocks Claim Against Gas Utility for Reporting Error
A claim by two customers of a natural gas company that a reporting error by the company to the Energy Information Administration (EIA) cost consumers an estimated $200 million to $1 billion in higher natural gas costs was barred under the filed-rate doctrine, the U.S. District Court for the Southern District of West Virginia held. A clerk working for the company inadvertently filed a weekly gas report with data from an earlier report. When EIA released its compiled report for that week showing a higher-than-normal gas withdrawal, natural gas spot future prices increased until a revised report was issued. The filed-rate doctrine provides that federal agencies are given exclusive jurisdiction to set rates for certain utilities. Because a filed rate carries the force of federal law, a suit to enforce or invalidate it as unreasonable arises under federal law and implicates the filed-rate doctrine. Market-based rates for natural gas transactions under FERC jurisdiction are FERC-authorized rates, the court said. The court also determined that the claim for damages was an indirect attack upon the filed rate. The court would have been required to determine the rate they would have paid had the error not been made, which would, in effect, result in a judicial determination of the reasonableness of the rate paid. (Jacquet v. Dominion (SDWVa) CCH Utilities Law Reporter ¶14,798

New Security Event Notification Guidelines Proposed
The Commission is proposing to revise existing regulations governing security event notifications. The NRC previously proposed new regulations on October 26, 2006 that would have implemented this new authority as part of a
larger proposed rule entitled ``Power Reactor Security Requirements.'' However, based upon changes to the final Firearms Guidelines the NRC is now proposing further revisions in these implementing regulations that address the voluntary application for enhanced weapons and the mandatory firearms background checks. These implementing regulations would only apply to nuclear power reactor facilities and Category I strategic special nuclear material (SSNM) facilities. In addition, the NRC is also proposing revisions addressing security event notifications from different classes of facilities and the transportation of radioactive material consistently and would add new event notification requirements on the theft or loss of enhanced weapons.( CCH Nuclear Regulation Reporter ¶4234A)

Compliance with Aircraft Impact Assessment Rules Proposed
The Commission is proposing to amend the U.S. Advanced Boiling Water Reactor (ABWR) standard plant design to comply with the NRC's aircraft impact assessment (AIA) regulations. This action would allow applicants or licensees intending to construct and operate a U.S. ABWR to comply with the NRC's AIA regulations by referencing the amended design certification rule (DCR). The applicant for certification of the amendment to the U.S. ABWR design is STP
Nuclear Operating Company (STPNOC). The public is invited to submit comments on this proposed DCR, the STPNOC design control document (DCD) that would be incorporated by reference into the DCR, and the environmental assessment (EA) for the amendment to the U.S. ABWR design. NRC confirmed that the applicant adequately described key AIA design features and functional capabilities in accordance with the AIA rule and conducted an assessment reasonably formulated to identify design features and functional capabilities to show, with reduced use of operator action, that the facility can withstand the effects of an aircraft impact. In addition, the staff determined that there will be no adverse impacts from complying with the requirements for consideration of aircraft impacts on conclusions reached by the NRC in its review of the original U.S. ABWR design certification. ( CCH Nuclear Regulation Reporter ¶4234)

President Calls for Ending Oil and Gas Tax Breaks
In his recently released budget proposal, President Obama proposes to remove several tax provisions that preferentially benefit fossil fuel production. Part of the goal of removing the subsidies is to reduce greenhouse gas emissions and generate $43.6 billion of additional revenue over the next 10 years. Some of the credits that are proposed for repeal are those for enhanced oil recovery, oil and gas produced from marginal wells, expensing of intangible drilling costs, deduction for tertiary injectants, percentage depletion for oil and natural gas, and domestic manufacturing tax deduction. Further, the President's budget also calls for eliminating provisions in the 2005 Energy Policy Act for the mandatory oil and gas research and development (R&D) program that promotes fossil fuel production. The budgetary explanation for removing this program is that it funds research into technologies that could be commercialized quickly, which are activities that should be undertaken by the companies that benefit from the projects. For more information, see the full text of the President's proposed budget at www.whitehouse.gov/omb/budget. (CCH Energy Management, Report No. 1309, February 17, 2011)