May 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

Pennsylvania Becomes 35th Agreement State
The Nuclear Regulatory Commission and the Commonwealth of Pennsylvania have concluded an arrangement under which the state will assume part of the agency’s regulatory authority over certain radioactive materials in the state. Pennsylvania becomes the 35th state to sign such an agreement with NRC. Under the agreement, NRC transferred to Pennsylvania the responsibility for licensing, rulemaking, inspection and enforcement activities for: (1) radioactive materials produced as a result of processes related to the production or utilization of special nuclear material (SNM—defined as enriched uranium or plutonium); (2) uranium and thorium source materials; (3) SNM in quantities not sufficient to form a critical mass; and (4) accelerator-produced or other radioactive materials under NRC jurisdiction as provided by the Energy Policy Act of 2005. (CCH Nuclear Regulation Reporter ¶19,001)

Refusal To Release Unredacted Terrorist Threat Data Affirmed
An NRC decision not to release unredacted information dealing with a potential terrorist threat to a proposed independent spent fuel storage installation at the site of the Diablo Canyon nuclear power reactor in California has been affirmed by the agency. A public interest group argued that, under the National Environmental Policy Act (NEPA), it should have access to the unredacted information contained in the source documents and its index. On the basis of a U.S. Supreme Court ruling that security considerations may permit or require modification of some of the NEPA procedures, however, NRC affirmed its earlier decision that certain information cannot be made public because of safety concerns. (CCH Nuclear Regulation Reporter ¶31,559)

Oil & Gas

DOE Temporarily Suspends SPR Shipments
By: Sarah Borchersen-Keto, CCH Washington News Bureau Staff Writer
The Department of Energy (DOE) said May 16 that it will not sign contracts this year for the receipt and transportation of up to 13 million barrels of crude oil into the strategic petroleum reserve (SPR). The move follows votes in both houses of Congress to temporarily suspend shipments to the SPR through the end of the year, as long as the price of crude oil remains above $75 per barrel. The legislation, previously opposed by the President, passed the House of Representatives and the Senate by veto-proof margins. The SPR, which has a capacity of 727 million barrels, has increased its inventory from approximately 540 million barrels at the beginning of the Bush administration to its current inventory of 702.7 million barrels. (CCH Energy Management and Federal Energy Guidelines, Report No. 1276, May 16, 2008)

House Passes Bill Targeting OPEC
By: John Scorza, CCH Washington News Bureau Staff Writer
The House passed legislation that would allow the U.S. government to sue foreign nations, including members of OPEC, for price fixing and artificially limiting the amount of available oil. The Bush administration opposes the legislation, saying it could lead to retaliation against American interests abroad and cause a decline in foreign investment in this country. The House approved the legislation – the Gas Price Relief for Consumers Act (H.R. 6074) – on May 20 by a 324-84 vote, which is a wide enough margin to override a presidential veto. Under the bill, the Justice Department could sue foreign oil cartels for anticompetitive behavior. OPEC and other foreign nations enjoy immunity from U.S. antitrust laws because their actions are considered governmental, rather than commercial. The legislation approved by the House would effectively reverse that classification. The bill would also instruct the department to establish an antitrust task force to monitor the oil industry. (CCH Energy Management and Federal Energy Guidelines, Report No. 1276, May 16, 2008)

MMS Will Establish Indian Oil Valuation Rulemaking Committee
The MMS is planning to establish an Indian Oil Valuation Negotiated Rulemaking Committee that will propose revisions to Indian Oil regulations, especially the major portion valuation requirement. The existing rule was issued in 1998, and three proposed rules that would have updated the regulations issued in 1998, 2000, and 2006 were not adopted because of changes in the market or opposition from commenters. The committee will have no more than 25 members consisting of representatives of parties that would be affected by a final rule, including oil and gas companies who produce oil and pay royalties on Indian leases and Indian tribes and individual Indian members who receive royalties from Indian leases located on their lands. MMS will terminate the committee if a consensus on a proposed rule cannot be reached within two years of the first meeting. (CCH Energy Management and Federal Energy Guidelines ¶9763)

Electric Utilities

New Market-Based Rate Policy Affirmed
The Federal Energy Regulatory Commission’s market-based rate policy [Order No 697, CCH FERC Statutes and Regulations Edition, Regulations Preambles 2006—2007 ¶31,252 (ip access user)], enacted last year to strengthen competitive markets and protect consumers by reinforcing regulations for just and reasonable wholesale electric power sales, has been largely affirmed by the agency. The new rule (Order No. 697-A) affirms several basic determinations made in Order No. 697, including the horizontal and vertical market power analysis, the use of a balancing authority area or the regional transmission organization/independent system operator market as the default relevant geographic market, a regional approach for triennial market power studies that separates the country into six geographic regions, and codification of restrictions on affiliate abuse in the regulations. (CCH FERC Statutes and Regulations Edition ¶31,268 (ip access user))

Rate Schedule Compliant with TransAlta Settlement
Chehalis Power Generating L.P.’s proposed rate schedule for providing reactive supply and voltage control from Generation Sources Service for its electric power generating facility interconnected to the transmission system of the Bonneville Power Administration (BPA) generally complies with the terms of the TransAlta settlement agreement, the Federal Energy Regulatory Commission has determined. The TransAlta settlement specified, among other things, procedures for the filing of reactive power service rates by each of the generator settling parties. Among the findings affirmed were: (1) the TransAlta settlement authorized annual adjustments only to the service factor, not the fixed rate component; (2) , the BPA 500 kilovolt switchyard is a transmission facility and is not properly included in the total production plant and accessory electric equipment; (3) the transmission reservation fees Chehalis paid to BPA were not properly includable in total production plant because the reservation fees served only Chehalis’ purpose of selling its real power and were unrelated to reactive power service; (4) Chehalis was not entitled to recover a separate heating losses component because heating losses related to fixed costs of producing reactive power were included in the fixed capability component of the rate-making methodology specified in the TransAlta settlement; and (5) Chehalis’ proxy cost of debt was 6.725 percent, which reflects the average costs of debt of the TransAlta subsidiaries Centralia and Big Hanaford. (CCH FERC Statutes and Regulations Edition ¶32,629 (ip access user))

Midwest ISO Emergency Demand Response Initiative OK’d
Revisions to the Midwest Independent Transmission System Operator, Inc.’s (Midwest ISO) tariff implementing an Emergency Demand Response (EDR) initiative that would provide for compensation to demand resources during North American Electric Reliability Corporation (NERC) Alert 2 or Alert 3 events have been approved by the Commission. Compensation provisions are intended to encourage market participants with demand response capabilities to submit standing offers to reduce load or increase generation during Emergency Alert 2 and 3 events. In order to be eligible for compensation, participants must submit an EDR offer to the Midwest ISO no later than 30 days before the operating month and the offer must remain in effect for the entire operating month. Once the EDR offers are received, the ISO will issue dispatch instructions regarding the amount, timing and duration of the demand reduction. EDR participants that reduce their demand in response to an instruction will be compensated at the higher of either the real time locational market price or their EDR offer. EDR offers are capped at $3,500 per MWh. (Midwest Independent Transmission System Operator, Inc., 123 FERC ¶61,070 (ip access user))

Fuel Costs Under Market-Based Contracts Addressed
In an opinion addressing requirement service sales by Southwestern Public Service Company (SPS) to several cooperatives and how those sales relate to the fuel cost adjustment clause provisions of SPS’s wholesale customers rate schedules, the Commission has affirmed in part and reversed in part an initial decision by an administrative law judge (ALJ) [115 FERC ¶63,043]. The Commission affirmed the ALJ’s determination to use the trail staff’s proxy group, as well as the ALJ’s use of median value for the zone of reasonableness to determine the just and reasonable return on equity (ROE). It disagreed, however, with the ALJ’s decision to use open-ended rates to determine the ROE, and, following the Commission’s methodology for adjustments applicable to locked-in period rates ( the rates at issue were for a locked-in period), calculated that a just and reasonable ROE was 9.33 percent. The Commission also affirmed the ALJ’s determination that revenue crediting was the proper cost of service treatment for the sales at issue—a conclusion FERC said was consistent with its finding that SPS’s market-based intersystem sales were opportunity sales. (Golden Spread Electric Cooperative, Inc. et al. v. Southwestern Public Service Co., FERC Opinion No. 501, CCH Utilities Law Reporter ¶14,691; 123 FERC ¶61,047 (ip access user))

Natural Gas

ROE Proxy Group Issue To Be Reheard in Kern River Proceeding
Requests for rehearing of Opinion No. 486 [CCH Utilities Law Reporter ¶14,615], in which the Federal Energy Regulatory Commission found that Kern River Gas Transmission Company's (Kern River) rates should continue to be designed based upon a ``levelized'' methodology that Kern River had proposed in its original certification procedures were generally denied by FERC. However, the Commission granted rehearing on the issue of Kern River's return on equity (ROE) in order to permit appropriate master limited partnerships (MLPs) to be included in the composition of the proxy group used to determine the ROE, consistent with the Commission's contemporaneous Policy Statement on the Composition of Proxy Groups for Determining Gas and Oil Pipeline Return on Equity [123 FERC ¶61,048 (ip access user)]. (Kern River Gas Transmission Co., FERC Opinion No. 486-A, CCH Utilities Law Reporter ¶14,690; 123 FERC ¶61,056 (ip acces user))