January 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

NRC to Continue Expanded Oversight of Indian Point in 2008
The Nuclear Regulatory Commission will continue to conduct additional inspections at the Indian Point nuclear power plant throughout 2008 to ensure that issues associated with on-site groundwater contamination and the facility’s new siren system are being properly addressed. Entergy Nuclear operates Indian Point, which is located in Westchester County, New York. Although, overall, NRC considers Entergy’s operation of Indian Point to be acceptable, the agency also believes that these two issues present unique challenges to the NRC’s regulatory oversight of the plant. In the near future, Entergy is expected to submit to the NRC a final report regarding its efforts to characterize on-site ground water contamination. With regard to the siren system, NRC continues to work with the Federal Emergency Management Agency, the state of New York, and local counties to monitor Entergy’s progress in resolving technical issues that must be addressed before the system can be placed in operation. (CCH Nuclear Regulation Reporter, No. 1384, January 15, 2008)

Electric Utilities

FERC Adequately Explained Denial of TEP Remedial Measures
The Federal Energy Regulatory Commission's (FERC) denial of a remedy for transmission facility owners (load-serving entities (LSEs)) who complained the New York Independent System Operator (NYISO) violated its tariff and “operated under several market design flaws” by failing to accept bids from other qualified suppliers was not arbitrary and capricious or contrary to law, the U.S. Court of Appeals for the District of Columbia Circuit held. The court found that FERC had remedial discretion in determining whether to require refunds, and that FERC’s explanation for the exclusion of a certain reserve source from the reserve market was a rational explanation and was due deference. The court also rejected the LSEs’ challenge to FERC's decision on remand not to order refunds for high spinning reserve (SR) prices. The court determined that FERC considered the relevant factors, balancing the several interests at stake, before concluding that the refunds were not appropriate. FERC's decision was consistent with the FPA's ``core purpose'' as the FPA has multiple purposes in addition to preventing excessive rates, including protecting against inadequate service. FERC's explanation of the need to protect the availability of high quality SR provided a reasoned basis for not ordering refunds, according to the court. (Consolidated Edison Co. of New York, et al. v. FERC (DCCir), CCH Utilities Law Reporter ¶14,680)

Market-Based Rate Policy for Electricity Wholesalers Clarified
In response to uncertainties regarding Order No. 697, Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities (CCH FERC Statutes and Regulations Edition ¶31,252), the Commission has issued the following clarifications:

• Sellers are required to comply with all of the requirements of Order No. 697 as of September 18, 2007, the effective date of the rule, even if they have previously-approved tariff provisions to the contrary;
• Both transmission-owning utilities with market-based rate authority and their affiliates with market-based rate authority are required to file updated market power analyses for the Commission’s regional review;
• The Commission will require the use of actual historical data through November of the previous calendar year, including data from December of the prior year, for both the horizontal market power screens and the Delivered Price Test analysis; and
• "Seller-specific terms and conditions" are those tariff provisions that are commonly found in power sales agreements, such as creditworthiness, force majeure, dispute resolution, billing and payment provisions (Market Based Rates for Wholesale Sales of Electric Energy, Capacity, and Ancillary Services by Public Utilitie,s December 20, 2007.

Natural Gas

FERC’s Deference to Gas Company’s Standards Affirmed
The Federal Energy Regulatory Commission's (FERC) allocation of the burden of proof in a proceeding addressing issues related to establishing natural gas quality and interchangeability tariff standards to accommodate the introduction of re-gasified natural gas (LNG) into the market area of Florida Gas Transmission Co., LLC (Florida Gas), was appropriate and consistent with FERC policy. In FERC Opinion 495 [see CCH Utilities Law Reporter ¶14,641], FERC affirmed an administrative law judge's (ALJ) decision to accept as just and reasonable Florida Gas's proposed interchangeability standards, but found that these standards should be applied to all gas entering the market area, not just to LNG. On rehearing, generator companies (Generators), consisting of Florida Power & Light Co., Florida Gas Utility, and Seminole Electric Cooperative, Inc., argued that FERC erred in deferring to Florida Gas's proposed standards rather than crafting its own remedy based on the best approach presented. FERC, however, correctly stated its policy as set in its own precedent, which held that to the extent a pipeline's NGA section 5 proposal was just and reasonable, FERC would approve it even if other just and reasonable remedies existed. Also, the policy did not blur the distinctions between NGA sections 4 and 5, according to FERC, but was consistent with the structure of the NGA in delegating to the pipeline the primary initiative to propose rates, terms, and conditions for services on its own system. Moreover, the Generators did not provide any reason for FERC to deviate from its policy. FERC also addressed in its order on rehearing in Opinion No. 495-A, issues pertaining to the appropriate Wobbe Index range; the appropriate Wobbe Index rate of change; constituent limits relating to propane, ethane, and sulfur; the application of the gas quality and interchangeability standards to gas entering the market area from the western division, and mitigation costs. Florida Gas also sought rehearing on its alleged right to receive low Btu gas. (AES Ocean Express LLC v. Florida Gas Transmission Co., et al., FERC Opinion No. 495-A, 121 FERC ¶61,267 and CCH Utilities Law Reporter ¶14,681)

FERC Launches Plans for Increased Transparency in Gas Markets
The Federal Energy Regulatory Commission (FERC) has approved a final rule and proposed a new rule to increase transparency in the wholesale markets for physical natural gas. While the final rule will require certain natural gas market participants to file information annually on their wholesale, physical natural gas transactions, the proposal seeks public comment on a plan to require both interstate and certain major, non-interstate pipelines to post daily information on capacity, actual flows and scheduled flows. The new rule, Docket No. RM07-10-000, will require certain natural gas market participants to file information annually on their wholesale, physical natural gas transactions. The new form, Form No. 552, must be filed by May 1 of each year, starting in 2009 for transactions delivered in the previous year. For its proposal, FERC is seeking comment on requiring both interstate and certain major non-interstate pipelines to post on a daily basis capacity, scheduled flow information, and actual flow information. FERC suggests that the proposal would facilitate transparency of price and availability of natural gas by providing a complete picture of daily supply and demand information across the United States. Comments on the proposed pipeline posting requirements are due February 21, 2008, and must cite the docket number, RM08-2-000. (CCH FERC Statutes and Regulations Edition ¶31,260 (ip access user) and ¶32,626 (ip access user); CCH Utilities Law Reporter ¶5803)

Belle Fourche’s TSA for Expansion Capacity Invalid
Certain provisions of Belle Fourche Pipeline Company’s transportation service agreement (TSA) for expansion capacity offered during its 2007 open season to determine shipper interest in expanded capacity have been ruled invalid by the Commission. Nexen Marketing U.S.A. Inc. brought a complaint before the Commission alleging that Belle Fourche’s TSA violated the Interstate Commerce Act (ICA), was discriminatory and unlawfully abrogated shippers’ rights. Nexen’s major allegation was that by applying its current prorationing procedures to the allocation of expansion capacity during the open season, Belle Fourche provided an undue preference for its historic shippers and limited new shippers (of which Nexen was one) to no more than 10 percent of expansion capacity. (Nexen Marketing U.S.A., Inc. v. Belle Fourche Pipeline Co. 121 FERC ¶61,235.

Oil & Gas

MMS Addresses Issues Related to Oil Royalties
The Minerals Management Service has issued a final rulemaking regarding its regulations dealing with valuation of oil produced from Indian leases for royalty purposes to replace the 1988 Indian Oil Rule. Indian lease oil will now be valued at the gross proceeds received by the lessee or its affiliate in an arm's-length sale, rather than using NYMEX or spot prices. MMS states that virtually all Indian lease oil is sold in arm's length transactions at the lease, whereas much of other federal oil leases are transported before an arm's-length sale.

MMS has also proposed amendments to the rules governing royalty relief for deepwater oil and gas leases on the Outer Continental Shelf (OCS). A federal court of appeals found that MMS regulations implementing the Deep Water Royalty Relief Act were inconsistent with the statute, forcing MMS to rewrite the regulations. The proposed rules would conform the regulations to follow the court's decision, meaning that more leases would be eligible for royalty relief, costing the government an estimated $3.1 billion to $10.3 billion between 2000 and 2034.

Lessees, operators, pipeline right-of-way holders, and permittees would be required to submit payments for cost recovery service fees electronically, under another MMS proposal. This would apply to fees for the processing of plans, applications, and permits. The federal government maintains a secure web site to accept credit card and Automated Clearing House (ACH) payments, and 94 percent of MMS cost recovery fees currently being paid are paid electronically. If the proposal were to become finalized, checks, money orders, and cashier's checks would not be accepted after the rule's effective date.

Finally, MMS is also is requesting comments from interested parties regarding the experiences of refiners who qualify under the Royalty-in-Kind (RIK) program in gaining access to adequate supplies of crude oil in the marketplace at equitable prices. Under the RIK program, the Department of the Interior can take federal royalty crude oil in kind, instead of royalty payments, and sell it to eligible refiners, which are those that are considered small and independent. MMS notes that, as of October 2007, only two refiners were participating in the program. MMS is preparing a new Determination of Need to decide whether the federal government should continue selling federal royalty crude oil under the RIK eligible refiner program. (CCH Energy Management ¶9530, 9316, 9315, and 9791, respectively).