April 2009

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

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FERC Announcements

Interior/FERC Announce Renewable Energy Agreement
In a joint statement issued by Secretary of Department of the Interior (DOI), Ken Salazar, and Acting Chairman of the Commission, Jon Wellinghoff, announced that the two agencies intend to work together to facilitate the permitting of renewable energy in offshore waters. The agreement is meant to end a dispute between the two agencies as to which had the authority to permit renewable energy projects offshore of the United States. Under the agreement, the Commission will have authority over "hydrokinetic" projects, while DOI will have authority over wind projects.

Wellinghoff Named Chairman
President Obama has appointed Jon Wellinghoff, currently the Acting Chairman of the Commission, as the Chairman. A member of the Commission since 2006, the U.S. Senate reconfirmed him to a full, five-year FERC term in December 2007. Wellinghoff is an energy law specialist with more than 30 years experience in the field. Before joining FERC, he was in private practice and focused exclusively on client matters related to renewable energy, energy efficiency and distributed generation. While in the private sector, Wellinghoff represented an array of clients from federal agencies, renewable developers, and large consumers of power to energy efficient product manufacturers and clean energy advocacy organizations.

President Obama also announced his intent to nominate Suedeen G. Kelly for another term as Commissioner. She has served on the Commission since November 2003, and in December 2004, she was confirmed to a second term which expires June 30, 2009. Previously, she was a Professor of Law at the University of New Mexico School of Law, where she taught energy law, public utility regulation, administrative law and legislative process. In 2000, Kelly served as counsel to the California Independent System Operator.

Electric Utilities

FERC Proposes Smart Grid Policy/Action Plan
The Commission accelerated development of a smarter grid for the nation’s electric transmission system with a proposed policy statement and action plan that would help set the rules for a modern grid which in turn would help bring long-term savings to consumers. Smart Grid advancements will apply digital technologies to the grid and enable real-time coordination of information from both generating plants and demand-side resources. This will improve the efficiency of the bulk-power system with the goal of achieving consumer savings. Also, it will enable demand response and other transactions and activities that give consumers the tools to control their electricity costs. The proposed policy statement seeks public comment on four priority issues critical to the smooth functioning and operation of the Smart Grid. After weighing public comments, the Commission plans to adopt a final policy statement providing guidance to the electric power industry on standards for: (1) cyber security; (2) communications among regional market operators, utilities, service providers and consumers; (3) ensuring that bulk power system operators have a wide-area situational awareness with equipment that allows them to operate and monitor their systems and: (4) coordinating operation of the bulk power system with new and emerging technologies for renewable resources, demand resources, electricity storage and electric transportation systems. FERC said utilities may seek to recover the costs of the Smart Grid deployments that demonstrate system security and compliance with Commission-approved reliability standards and other criteria. (Smart Grid Policy, 126 FERC ¶61,253 (ip access users))

Reliability Standards for the Calculation of Electric Capability Proposed
The approval of six modeling data and analysis reliability standards developed by the North American Electric Reliability Corporation has been proposed by the Commission. These standards would require certain users, owners, and operators of the bulk power system to develop consistent methodologies for the calculation of available electric transfer capability or available flowgate capability. The lack of consistent methodologies in this area is a significant problem, according to the Commission, because the calculation of available transfer capability may allow transmission service providers to discriminate in subtle ways against their competitors. The calculation of available transfer capability is one of the most critical functions under the open access transmission tariff because it determines whether transmission customers can access alternative power supplies. The proposed standards would also require documentation of the detailed representations of the various components that comprise the available transfer capability equation, including the specification of modeling and risk assumptions and the disclosure of outage processing rules to other reliability entities. (FERC Statutes and Regulations ¶32,641 (ip access users))

Independent Transmission Company Wins Rate Approval
ITC Great Plains, LLC (ITC Great Plains), an independent transmission company, received approval from the Commission for transmission rate incentives for investments in high voltage transmission projects it plans to build and/or own in the Southwest Power Pool, Inc. (SPP). ITC Great Plains proposed to construct the Kansas portion of the Kansas Electric Transmission Authority Project (KETA Project), which is a 210 mile, 345 kV/765 kV transmission line from Spearville, Kansas to Axtell, Nebraska. Also, ITC Great Plains proposed to construct a 765 kV transmission project in Kansas, known as the Kansas V Plan, which would consist of 180 miles of 765 kV transmission facilities extending from Wichita, Kansas, to a substation in Comanche County, Kansas, and then to a substation near Spearville, Kansas. The Commission approved incentives for ITC Great Plains' two Kansas projects, the V-Plan and the KETA Project, as well as a base rate for the other transmission assets owned or built by ITC Great Plans in SPP. However, the Commission denied ITC Great Plains' request for approval of incentives for similar future projects because it did not provide a specific showing justifying the incentives on a project-by-project basis. (ITC Great Plains, LLC, 126 FERC ¶61,223 (ip access users)).

School, Auditorium Considered Separate Premises for Electric Service
Diverse Power Incorporated (DPI), an electric power supplier, was authorized to provide power to the Troup County school's newly-constructed Fine Arts Auditorium, located in the city of Lagrange's exclusive service area, because the auditorium was not an expansion of the school facilities, the Georgia Court of Appeals ruled. The Georgia Territorial Electric Service Act assigned every geographic area in the state to an electric supplier, who had the exclusive right to extend and continue furnishing service to any premises within that area, but allowed consumers to choose a different electrical supplier when service was furnished to one or more new premises. The city of Lagrange had been the electric supplier for the school since its construction in 1987. The Troup County Board of Education invited both DPI and the city to respond to a request to provide electrical service to the auditorium, and the Board subsequently awarded the contract to DPI. Considering the city's appeal, the Georgia Public Service Commission (PSC), examined the definition of ``premises'' under state law and found that the school and the auditorium were separate premises because they were physically separate, the auditorium would be available for use by outside groups for a fee, the auditorium and the school were separately metered, the school's electric bills were paid by the school principal while the auditorium's electric bills were paid by the county board of education, the city had separate utility accounts for the school and the auditorium, and the city could not give a plausible explanation of how the facilities could be properly billed through a single master meter when the city had agreed to match the competing supplier's rate. Because the PSC's findings of fact and conclusions of law were supported by the evidence, the court of appeals found that the trial court did not err in affirming them. (City of Latrange, Georgia v. Georgia Public Service Comm’n, Ga. Ct. App., CCH Utilities Law Reporter ¶27,044)

Street Lighting System Not Public Utility
A system of street lighting in the city of Englewood, Ohio, did not qualify as a public utility that could be acquired and operated by the city, the Ohio Court of Appeals held. For years, Englewood had contracted with Miami Valley Lighting, LLC, to design, construct, maintain, and provide energy to street lights in Englewood. In order to save money, Englewood's city council declared in 2005 that the city was a public utility, and later declared its intent to appropriate MVL's lighting system as a public utility, but MVL did not wish to sell it to them. Englewood filed in common pleas court to appropriate the property, and the court found that the city lacked the power to appropriate the MVL system. The court found that the lighting system did not meet the ``public service'' requirement because it was not generally and indiscriminately used by the public, as there were many streets in the larger municipal area that did not have street lights; the public did not have the right to demand street lighting; and the lighting company was not obligated to provide street lighting whenever and wherever requested. The lighting system did not meet the ``public concern'' requirement because it was not an essential service, and the presence of street lighting was a policy choice rather than a necessity; the lighting company did not have a monopoly, and there was competition in the area; and there was no regulation of street lighting by a government entity. Furthermore, the court reasoned, there was a distinction between declaring a system to be a public utility to regulate it, and declaring it to be a public utility in order to acquire it, and allowing the municipality to engage in the second activity would give the municipality the power to declare any item of property as a public utility in order to acquire it, which would constitute an abuse of its home rule powers. (City of Englewood, Ohio v. Miami Valley Lighting, L.L.C., Ohio Ct. App., CCH Utilities Law Reporter ¶27,046)

Natural Gas

Commission Reviews Fuel Incentive Mechanism
El Paso Natural Gas Company's (El Paso) revised tariff sheets that proposed modifications to its fuel savings sharing mechanism were accepted by the Commission, subject to further modifications. This was one of the first opportunities the Commission had to review a fuel incentive mechanism since terminating its notice of inquiry on fuel retention practices last fall. The Commission approved El Paso's fuel savings sharing proposal because it would improve the efficiency of the existing infrastructure. El Paso must project the annual fuel consumption savings from each capital improvement project based upon design conditions of the facility modifications, and the Commission will have the opportunity to review the reasonableness of the projections in each annual fuel tracker filing. The Commission also found that upon a finding by the Commission that a projection for a project is just and reasonable, El Paso may retain 80 percent of these savings for a seven-year period from the in-service date of the project, and El Paso may not include any of the capital costs of the projects in its rates in any future rate proceeding. The Commission required El Paso to clarify how its existing fuel tracker and true-up calculations will be modified to implement the sharing of the fuel savings between El Paso and its shippers. In addition, El Paso must clarify whether the adjustment to allow it to retain 80 percent of the projected fuel savings will occur through an adjustment to the determination of over- and under-recoveries for purposes of true-up calculations or through the projection of fuel to be required for the next year or a combination of the two. (El Paso Natural Gas Co., 126 FERC, ¶61,247 (ip access users)).

Oil and Gas

Oil Pipeline Not Allowed to Raise Rates to Maximum Level
MarkWest Michigan Pipeline Company, LLC's (MarkWest) request to raise its currently effective rates established under a settlement to the maximum amount permitted under the Commission's oil pipeline indexing regulations was denied by the Commission. Under the term of the settlement, MarkWest was permitted to increase its interstate rates, but for a lesser amount than would have permitted under the Commission's indexing regulations. Following the expiration of the settlement, MarkWest proposed to raise its rates to the full amount that would have resulted as if it had taken the index increases that would have been permitted under the Commission's regulations absent the settlement. The Commission first had to determine how settlement rates requiring indexing increases to a level lower than the index ceiling were to be treated once the settlement expired. Either the index rate under the settlement could be the new basis for further indexing increases under the Commission's indexing regulations, or the rates could be increased so that further indexing increases began from a rate level as if the settlement had never existed. The Commission concluded that the settlement contemplated that there would be only one adjustment during each annual period, therefore, MarkWest could not shorten the period and increase rates more than annually. Further, the Commission concluded that the current ceiling rate was the one in existence at the end of the settlement. The Commission found that MarkWest permanently surrendered the right to a maximum rate increase above the agreed levels regardless of the actual format of MarkWest's index rate filings. Therefore, the index rate under the settlement was the basis for further indexing increases. (MarkWest Michigan Pipeline Co., LLC, 126 FERC ¶61,300 (ip access users))

Offshore Leaseholders Entitled to Restitution
Offshore oil and gas leaseholders recovered for rescission and restitution against the United States for breach of contract to remedy the government's anticipatory repudiation resulting from a 1990 amendment to the Coastal Zone Management Act (CZMA), the U.S. Court of Federal Claims in Washington D.C. held. The amendment caused the government to cancel a previously granted lease (452) suspension. The court previously held (Amber Resources Co. v. United States, 68 Fed. Cl. 535 2005) that the leaseholders could treat the cancellation as a total breach, giving them the right of rescission and restitution. However, the government argued that the lease could not be returned in substantially the same condition as when issued because of drainage from an adjacent lease and the leaseholder's election to continue performance on the lease. There was acknowledged drainage from lease 452 to the lease in production (451). The government argued that the leaseholder of 452 took legal acts, allowing development near the lease boundary and waiving rights to develop 452 to facilitate development of lease 451, demonstrating an election to continue partial performance. The government contended that the owner acted with knowledge that doing so was inconsistent with the remedy of declaring total breach and seeking rescission. The court held that to prove an election, the government had the burden of showing that the owner's actions were taken to obtain benefit from lease 452 in terms of oil production, and that there was no such evidence. The second issue addressed was whether lease 452 remained in substantially as good a condition as when it was leased allowing for the leaseholder to return the lease and ask for restitution. The court concluded that no more than one barrel of oil out of ninety had been removed, and the actual amount and ratio were probably less favorable to the government. The loss of that small amount of oil did not preclude restitution. Therefore, the court ordered the government to pay restitution in the amount of $91.9 million. (Amber Resources Co., et al. v. The United States, Cl. Ct., CCH Energy Management ¶9606)

BLM Complied with NEPA in Issuing Leases
The Environmental Impact Statement (EIS) prepared in response to planned oil and gas leasing in an area of the National Petroleum Reserve-Alaska (NPR-A) by the Secretary of the Interior, the Bureau of Land Management (BLM), and the Fish and Wildlife Service complied with the National Environmental Policy Act of 1970 (NEPA) and Executive Order (EO) 11,900, the federal district court in Washington D.C. found. Environmental groups contended that the BLM failed to comply with NEPA because the EIS it prepared supporting the decision to make land in the National Petroleum Reserve-Alaska (NPR-A) available for oil and gas leasing did not contain site-specific assessments of environmental impacts. The fact that BLM would continue to assess impacts as more information became available did not indicate that it failed to take a ``hard look'' at the environmental consequences of its proposed actions the court found. The court found that considering the arguments and weighing the EIS in its entirety, it adequately addressed the foreseeable site-specific impacts. The groups also argued that BLM failed to comply with NEPA by failing to treat wilderness as a discrete resource and failing to adequately consider the impacts of the proposed leasing program on the wilderness area. The court found the EIS complied because it addressed comments that the planning area should either be designated a wilderness area or a national wildlife refuge, it sufficiently described the ``affected environment,'' including those values that the groups referred to as ``wilderness characteristics,'' and it assessed the ``environmental consequences'' of the proposed action and its alternative. (The Wilderness Society, et al. v. Ken Salazar, Secretary of the Interior, et al., D DC, CCH Energy Management ¶9607)

Nuclear Power

NRC Not Required To Examine Terrorist Threat to Nuclear Plant
The Nuclear Regulatory Commission (NRC), when it is reviewing an application to relicense a nuclear power facility, is not required by the National Environmental Policy Act (NEPA) to examine the environmental impact of a hypothetical terrorist aircraft attack on that nuclear facility. The New Jersey Department of Environmental Protection (NJDEP) contended that NEPA required the analysis of the impact of such an attack in the relicensing proceeding for the Oyster Creek Generating Station. NJDEP, however, did not show that there was a reasonably close causal relationship between the Oyster Creek relicensing proceeding and the environmental effects of a hypothetical aircraft attack. The level of risk depended on political, social, and economic factors external to the NRC licensing process. (N.J. Dept. of Environmental Protection v. U.S. NRC, 3rd Cir., CCH Nuclear Regulation Reporter ¶20,688)

Additional Security Requirements Imposed on Power Reactors
New security requirements for nuclear power reactors have been added by the Nuclear Regulatory Commission, which is also amending its existing security regulations to establish and update generically applicable security requirements similar to those previously imposed by Commission orders issued after the terrorist attacks of September 11, 2001. For example, the rule tightens requirements for physical protection of licensed activities in nuclear power reactors against radiological sabotage and personnel access authorization requirements for nuclear power plants. It also establishes nuclear reactor training for personnel performing security program duties and licensee safeguards contingency plans. The rule establishes new safety and security interface requirements, mixed oxide fuel requirements and cyber security requirements as well. The rule also updates the NRC’s security framework for the licensing of new nuclear power plants. The final rule takes effect May 26 and will be reflected in full text at that time. (CCH Nuclear Regulation Reports, No. 1413, March 31, 2009)