Energy Update July 2007

July 2007

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

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Electric Utilities

FERC's Authority to Set Market Behavior Rules Upheld
A petition by consumer advocates seeking review of a Federal Energy Regulatory Commission (FERC) order finding market-based rates unjust and unreasonable and establishing Market Behavior Rules prohibiting anticompetitive and market manipulative practices was denied by the U.S. Court of Appeals for the District of Columbia Circuit. The consumer advocates argued that FERC, having found the rates unjust and unreasonable, violated the Federal Power Act (FPA) by failing also to “fix” a new rate. The court said that the plain language of the FPA did not require that FERC, having found only one aspect of the tariffs to be unjust and unreasonable, revisit all elements of its market-based rate tariffs. While the statute required that FERC must act upon a finding that rates are unjust or unreasonable, the court said that the FPA did not mandate that having made such a finding pertaining to a discrete issue, FERC then had to reopen and reevaluate all other aspects of the filed rate. Having on its own motion initiated an investigation into the specific issues of anticompetitive behavior and market manipulation, FERC proposed conditioning all market-based rate tariffs on new Market Behavior Rules that would prohibit those practices. By enacting the Rules, the court concluded, FERC “fixed” the rate with respect to the only issues it had set forth in its order initiating the proceeding. (Colorado Office of Consumer Counsel, et al. v. FERC (DCCir) CCH Utilities Law Reports ¶14,649)

Reforms to Strengthen Wholesale Power Markets Proposed
Public comment on potential reforms to improve operations in organized wholesale power markets is being sought by the Federal Energy Regulatory Commission. An advance notice of the proposed rule will help the Commission identify challenges facing competitive wholesale power markets operated by regional transmission organizations (RTOs) and independent system operators (ISOs) and propose workable solutions. The four areas in which the Commission seeks comment are: (1) the role of demand response in organized markets, including greater reliance on market prices to elicit demand reductions during power shortages; (2) increasing opportunities for long-term power contracts; (3) strengthening market monitoring; and (4) the responsiveness of RTOs and ISOs to customers and other stakeholders. The Commission is not seeking to fundamentally redesign organized markets or to appropriate jurisdiction from the states. Its goal is to make incremental improvements to the operation of organized markets without undoing the significant efforts that have already been made in providing demonstrable benefits to wholesale customers. (FERC Statutes and Regulations Edition, ¶32,617)

Regional Reliability Standards Approved for WECC
Eight proposed regional reliability standards submitted by the North American Reliability Corporation (NERC) for the Western Electricity Coordinating Council (WECC) were approved by the Commission. The proposed regional reliability standards would apply in the Western Interconnection in addition to the 83 mandatory reliability standards developed by NERC that took effect on a nation-wide basis beginning in June 2007 [118 FERC ¶61,218]. The additional regional reliability standards allow the continuation of certain reliability practices currently in effect in the Western Interconnection. WECC was directed by the Commission to develop several specific modifications to the regional reliability standards when WECC develops permanent, replacement reliability standards (North American Reliability Corp., 119 FERC ¶61,260).

BPA Improperly Exercised Settlement Authority Under NWPA
The Bonneville Power Association (BPA) was bound by the power exchange requirements of the Northwest Power Act (NWPA) when it reached settlement agreements in 2000 with six investor-owned utilities (IOUs) to settle out of power contracts with the IOUs, but exercised its settlement authority contrary to the power exchange requirements of the NWPA, the U.S. Court of Appeals for the Ninth Circuit ruled. The court said that BPA ignored the exchange program that Congress created under the NWPA and that BPA had implemented through its regulations. Settlement of BPA's Residential Exchange Program (REP) obligations had to be grounded in the program authorized by the NWPA section that created the occasion for settlement in the first place: the settlement agreement could not be a means of bypassing congressionally mandated requirements, according to the court. (Portland General Electric Co., et al. v. Bonneville Power Administration, et al. (9thCir) ¶14,645)

BPA Preference Rate OK, Use of Settlement Authority Improper
The Bonneville Power Association (BPA) acted lawfully when it allocated to its preference customers part of the cost of acquiring power to serve its direct-service industrial (DSI) customers, the U.S. Court of Appeals for the Ninth Circuit ruled. Under the Northwest Power Act (NWPA), rates for electric power sold to meet the general requirements of preference customers must recover the costs of that portion of the Federal base system (FBS) resources needed to supply those loads until those sales exceed the FBS resources. BPA contended that it was entitled to charge preference customers a rate that reflected the total cost of all FBS resources, including those acquired to replace losses in the generation capabilities of BPA's primary resources. BPA's approach did not contravene the NWPA because FBS resources were not limited to ``unaugmented'' FBS resources. Once FBS replacement resources were acquired, the court said, nothing in the NWPA precluded BPA from considering the costs of those replacement resources when calculating its preference rate, even though the BPA would not have incurred those costs absent its DSI contracts. Thus, BPA’s setting a preference rate that reflected the cost of FBS replacement resources was based on a permissible construction of the NWPA.

The court also held, however, that BPA acted contrary to law when it allocated to its preference customers part of the cost of a global settlement BPA reached with its investor-owned utility (IOU) customers. The proposed settlement guaranteed the IOUs a certain amount of power at rates no higher than the rates charged to preference customers. In exchange, the IOUs agreed to release BPA from future obligations relating to the Residential Exchange Program (REP)—a mechanism under the Northwest Power Act (NWPA) created to ensure that IOUs would continue to enjoy access to low-cost power. Even though the NWPA normally ensured that the costs of the REP were not passed along to BPA's preference customers, BPA had classified the cost of the REP settlement as ``an ordinary cost of doing business'' that could be recovered through higher rates on all its customers. By burdening its preference customers with part of the cost of the REP settlement, the court said, BPA ignored its obligations under the NWPA and plainly violated the rule that the rates it charges preference customers must be calculated as if no purchases or sales were made under the REP program. (Golden Northwest Aluminum, Inc., et al. v. Bonneville Power Administration (9thCir) CCH Utilities Law Reports ¶14,647)

Cleco Settlement Provides for $2 Million Civil Penalty
A Stipulation and Consent Agreement (Agreement) between the Office of Enforcement (Enforcement) and Cleco Power, LLC (Cleco Power), Cleco Support, LLC (Cleco Support), and Cleco Midstream Resources, LLC (Cleco Midstream) (collectively, Cleco) resolving an investigation of violations of a 2003 settlement agreement [104 FERC ¶61,125] was approved by the Commission. The Agreement provided for a $2,000,000 civil penalty and a compliance plan (In re Cleco Power, LLC, et al. 119 FERC ¶61,271).

Natural Gas

Natural Gas Pipeline/Utility Communication Protocols Approved
Communication protocols between interstate natural gas pipelines and public utilities, including power plant operators and transmission owners and operators, have been approved by the Federal Energy Regulatory Commission. The protocols are being established by incorporating by reference definition and business practice standards promulgated by the North American Energy Standards Board into Commission regulations. These standards provide for coordination and communication between natural gas pipelines and various electric industry operators. This coordination will improve communications about scheduling gas-fired generators and enhance the reliability of both gas and electric industries by insuring that all parties have accurate information relevant to their scheduling and dispatch. (FERC Statutes and Regulations Edition ¶31,251)

Phase Out of Interruptible Load from Calculation Was FERC Error
The Federal Energy Regulatory Commission (FERC) acted arbitrarily and capriciously by allowing a public utility holding company to phase interruptible load out of the company's calculation of peak load for the purpose of allocating costs among the company's operating companies after FERC had determined inclusion of the interruptible load in the determination of peak load responsibility was unreasonable and, therefore, unlawful, the U.S. Court of Appeals for the District of Columbia Circuit held According to the court, FERC erred insofar as it suggested that the lingering inclusion of interruptible load in the calculation of peak load was justified on the ground that it properly recovered an actual cost incurred in the provision of service. The cost of providing interruptible service was, by definition, avoidable, the court said, and, therefore, not an expense that justified an increase in capacity. Thus, the cost was not the type of expense for which one operating company could recover from others under the holding company's system agreement. The court also said that whether or not including interruptible load in the holding company's calculation of peak load enabled it to recover actual costs via deferred billing or served as a proxy for actual costs in a fixed rate formula, FERC had not explained why the holding company could continue to bill for costs FERC had determined could not be justly and reasonably recovered. (Louisiana Public Service Comm'n v. FERC (DCCir) CCH Utilities Law Reports ¶14,648)

Oil & Gas

Extension of Proprietary Term for Geophysical Info Proposed
The proprietary term for reprocessed geophysical information would be extended by up to five years, under a proposed rulemaking issued by the Minerals Management Service. This would apply to geophysical information processed by a permittee or third party 20 or more years after MMS issued the germane permit. Permittees and third parties would be able to apply for an extension upon completing the reprocessing of the geophysical information. There would be a one-year grace period, beginning on the date the final rule takes effect, during which MMS would not release information that might be eligible for an extension to give applicants time to meet application requirements. Prior to the current rules, which went into effect May 1, 2006, reprocessed information enjoyed its own 25-year proprietary term, beginning on the date it was submitted to MMS. After the rule change, reprocessed data was subject to the same 25-year term as the original information, which means that the confidentiality period now ends much earlier than it did under the previous rules. MMS believes that the extension would give incentives to reprocess, market, or use information that would otherwise not be reprocessed because the shorter confidentiality term reduces the incentive to generate new geophysical information. (CCH Energy Management and Federal Energy Guidelines ¶9313)

Nuclear Power

Improved Performance Indicator for Scrams Unveiled
The Unplanned Scrams with Complications (USWC) performance indicator, which tracks events that can increase the risk associated with a reactor’s unplanned or manual or automatic shutdowns (scrams) has been developed by the Nuclear Regulatory Commission (NRC) to improve its Reactor Oversight Process. The USWC will monitor conditions whose absence could complicate a plant’s recovery from a scram. These include: Maintaining control over conditions needed for a chain reaction; providing electricity to emergency systems; activating emergency sources of cooling water; maintaining availability of normal cooling water sources; and using emergency operating procedures to address complicated scrams. (CCH Nuclear Regulation Reporter, No. 1372, July 12, 2007).

More Efficient New Reactor License Review Process Adopted
Recommendations designed to lead to a more efficient review of applications for new reactor licenses while maintaining a focus on safety have been approved by the Nuclear Regulatory Commission. An NRC task force made recommendations to improve the processes involved in license reviews, which can take up to 42 months for a combined license (COL) application. The task force’s goal was to conserve resources and speed the reviews by six to 15 months. NRC approved a number of the group’s recommendations, including: Using Environmental Impact Statements issued by other governmental agencies for COL reviews where appropriate; seeking legislative authority from Congress to eliminate the statutory requirement to conduct a mandatory hearing if no one has asked for one; and pursuing rulemaking to resolve issues that are generic to COL applications so that resolution is through the public rulemaking process rather than in individual contested proceedings. (CCH Nuclear Regulation Reporter, No. 1372, July 12, 2007).