Energy Update May 2009

May 2009

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

DOE Announcements

Initial Smart Grid Interoperability Standards Released
U.S. Commerce Secretary Gary Locke and U.S. Energy Secretary Steven Chu announced an initial batch of 16 National Institute of Standards and Technology (NIST)-recognized interoperability standards for the Smart Grid on May 18, 2009. The standards are needed for the interoperability and security of the Smart Grid and awarding $10 million in Recovery Act funds by the Energy Department to NIST to support the development of interoperability standards. The Energy Department is the lead federal agency responsible for Smart Grid development. Coordinating these standards and achieving industry buy-in is the responsibility of the Commerce Department.

The initial batch of 16 NIST standards will help ensure that software and hardware components from different vendors will work together seamlessly, while securing the grid against disruptions. The list of standards is based on the consensus expressed by participants in the first public Smart Grid Interoperability Standards Interim Roadmap workshop. Public comments on the initial standards will be accepted for 30 days after their upcoming publication in the Federal Register. (FERC Opinions, Orders, & Decisions Edition, Report No. 1454, May 28, 2009)

FERC Announcements

Interior/FERC Announce OCS Renewable Energy Agreement
The Commission and the Department of the Interior have signed an agreement that clarifies their agencies’ jurisdictional responsibilities for leasing and licensing renewable energy projects on the U.S. Outer Continental Shelf. This Memorandum of Understanding clears the way for developing wind, solar, wave, tidal and ocean current energy sources. The agreement establishes a comprehensive process through which Interior’s Minerals Management Service (MMS) and FERC will lease, license, and regulate all renewable energy development activities on the Outer Continental Shelf , including hydrokinetic sources (wave, tidal and ocean current). Under the provisions of the memorandum: (1) FERC has exclusive jurisdiction to issue licenses and exemptions from licensing for the construction and operation of hydrokinetic projects on the Outer Continental Shelf and will conduct any necessary analysis related to those actions. FERC’s licensing process will actively involve relevant federal land and resource agencies, including Interior; and (2) FERC will not issue a license or exemption for an Outer Continental Shelf hydrokinetic project until the applicant has first obtained a lease, easement, or right-of-way from MMS for the site. FERC will not enter preliminary permits for hydrokinetic projects on the Outer Continental Shelf. (FERC News Release, No. R-09-17, April 9, 2009)

Electric Utilities

Commission Orders PJM To Return Excess Revenues
A complaint by BJ Energy LLC, Franklin Power, LLC, GLE Trading LLC, Ocean Power LLC, and Pillar Fund LLC (Tower Companies) seeking an order from the district court requiring the preservation of funds allegedly due to several Tower Company affiliates by PJM interconnection, LLC (PJM) was granted without prejudice by the Commission. On March 25, 2008, the Commission rejected PJM's proposed tariff revision that would have required affiliated companies trading in financial transmission rights markets to be one another's guarantors in defined circumstances [122 FERC ¶61,279 (ip access user)]. The Commission directed PJM to return the excess collateral and revenues to the Tower Companies. Although PJM argued that it had a right under its tariff to set off the amounts owed to the Tower Companies based on its claim that the companies owe it money, the Commission found that PJM was stretching the meaning of the set-off provision. The provision deals with amounts that a single member owes PJM for which PJM can offset amounts that it owes that member; it does not apply to different affiliates. (PJM Interconnection, LLC, 127 FERC ¶61,006) (ip access user)

PJM's Allegations of Market Manipulation Dismissed
The Commission dismissed PJM Interconnection, LLC's (PJM) complaint against several energy companies for allegedly manipulating PJM's day-ahead energy and financial transmission rights markets. PJM alleged that certain Tower Companies affiliates committed fraud by entering into coordinated, offsetting positions in the market for financial transmission rights markets, concentrating high-risk or losing positions in one affiliate, Power Edge, and deliberately caused Power Edge to default on its obligations by saddling it with these positions, and hedging its risk, not in Power Edge, but in its more profitable affiliates. PJM also alleged that Power Edge was deliberately under- or de-capitalized in order to trigger its collapse. Additional allegations by PJM remain under investigation by the Commission and are not addressed in this order. The Office of Enforcement found that there was insufficient evidence to support PJM's allegations of manipulation. PJM needed to show: (1) a scheme or artifice to defraud, (2) made with scienter, and (3) in connection with a transaction subject to the jurisdiction of the Commission. There was no evidence that the Tower Companies' dealings with Power Edge constituted a scheme to defraud made with the requisite knowledge and malice. (PJM Interconnection, LLC, 127 FERC ¶61,007)(ip access user)

Green Power Express's Rate Incentives Approved
Green Power Express LP's (Green Power) request for transmission infrastructure investment incentives and establishment of a regulatory asset for development and pre-construction costs was approved by the Commission. Green Power's request concerned its proposal to build a 765 kV green power "superhighway" transmission network that would eventually include approximately 3,000 miles of transmission lines and bring up to 12,000 MW of wind energy and stored energy from the Dakotas, Minnesota, and Iowa to Midwest load centers in Chicago, southeastern Wisconsin and Minneapolis. The Green Power Express Project is a network of transmission lines that will transport 12,000 megawatts of power from wind-abundant areas of the Upper Midwest to Midwestern and Eastern states. The Commission approved an incentive return on common equity of 12.38 percent; deferred recovery for start-up, development and pre-construction costs through the creation of regulatory assets; inclusion of 100 percent of construction work in progress in rate base; abandoned plant treatment; and use of a hypothetical capital structure comprised of 60 percent equity and 40 percent debt until any portion of the project is placed in service. (Green Power Express LP, 127 FERC ¶61,031 (ip access user))

Filed Rate Doctrine Barred Claim for Damages, Not for Injunction
Claims brought against Northern States Power Company by certain of its retail customers alleging that the utility breached its duty to inspect and maintain the point of connection between its service facilities and each customer's electrical equipment and seeking injunctive relief were not barred by the filed rate doctrine, the Minnesota Supreme Court held. The customers argued that the tariff required inspection and maintenance, and demanded relief in the form of compensatory damages and an injunction requiring Northern to perform the maintenance. The filed rate doctrine bars a claim for damages that would constitute a collateral attack on the terms of a lawful tariff. The language of the tariff, when construed in a light most favorable to the customers, provided that the utility had a duty to maintain certain specified equipment, the Court found. The customers' request for injunctive relief sought only to enforce the language of the tariff, rather than to add to the terms of the tariff. However, the claims for compensatory damages were barred by the filed rate doctrine. Finally, the Court ruled that claims seeking injunctive relief were required to be referred to the Minnesota Public Utility Commission (PUC) because interpretation of the tariff would require the court to construe technical terms relating to particular electrical utility equipment, and the PUC was in the best position to bring its expertise to bear on defining the technical terms in the tariff. (Hoffman v. Northern States Power Co. (MinnSCt 2009) CCH Utilities Law Reporter ¶27,048).

Natural Gas

More Efficient Capacity Release Market Affirmed
The changes in the market for short-term transportation services on interstate natural gas pipelines and the improved efficiency of the Commission's capacity release program, as established by Orders No. 712 and 712-A [FERC Statutes and Regulations ¶31,271 (ip access user); ¶31,284 (ip access user)], have been affirmed by the Commission. These two orders also lifted the maximum rate ceiling on secondary capacity releases of one year or less, provided that such releases take effect within a year of the date the pipeline is notified of the release. The revised regulations further facilitated asset management arrangements (AMA) by relaxing the Commission's prohibition on tying and on its bidding requirements for certain capacity releases. The Commission additionally clarified that its prohibition on tying did not apply to conditions associated with gas inventory held in storage for releases of firm storage capacity. Finally, the Commission waived its prohibition on tying and bidding requirements for capacity releases made as part of state-approved retail access programs. (Promotion of a More Efficient Capacity Release Market, Order No. 712-B, 127 FERC ¶61,051)(ip access user)

Puget Sound Energy To Pay $800,000 in Civil Penalties
The Commission approved a stipulation and consent agreement between the Office of Enforcement and Puget Sound Energy (PSE) that resolved the investigation of PSE regarding charges of flipping and shipper-must-have-title requirement violations. In late 2007, the Office of Enforcement began investigating PSE for apparently releasing firm pipeline capacity in flipping transactions. The Office of Enforcement found that PSE improperly released discounted rate capacity between April 2005 and March 2006, and did not comply with posting and competitive bidding requirements. PSE self-reported that certain transactions may have violated the Commission's shipper-must-have-title requirements. The Office of Enforcement concluded that 12 transactions between 2005 and 2007 violated the requirement. The Commission accepted the stipulation and consent agreement settled on by the Office of Enforcement and PSE because it was in the public's best interest. PSE agreed to pay $800,000 in civil penalties to the U.S. Treasury and submit semi-annual monitoring reports to the Office of Enforcement for a year. (In re Puget Sound Energy, 127 FERC ¶61,070) (ip access user)

Renewable Energy

Renewable Energy Regulations Finalized
The Mineral Management Service has finalized regulations that establish a program to grant leases, easements, and rights-of-way (ROW) for alternative energy project activities on the Outer Continental Shelf. Two types of alternative energy leases have been finalized: a commercial lease of up to 25 years following a 5-year site assessment term-for full-scale commercial energy production, and a limited lease for up to 5 years for site assessment, technology testing, and other activities that do not include commercial operations. A rental fee of $3 per acre will be collected on the entire leased acreage for commercial leases and limited leases. The operating fee rate on a commercial lease will be determined by a formula related to the anticipated value of the electricity generated on the lease. There is an annual rent rate of $5 per acre for project easements, or a minimum of $450 per year. Rent rates for renewable energy ROWs will be due in the amount of $70 per statute mile that a ROW crosses. MMS will charge rent rates for Alternate Use Right-of-Use (RUE) at an annual rate of $5 per acre, or a minimum of $450 per year. MMS will share 27.5 percent of the revenues generated from these energy projects with adjacent coastal states. A state is eligible for payment of revenues if any part of the state's coastline is located within 15 miles of the announced geographic center of the qualified project area. The final rule becomes effective June 29, 2009. For more information, see the full text of the preamble to the amending order in CCH Energy Management ¶9451. Changes to the regulations will be reflected in a future report.

Oil and Gas

OCS Five-Year Plan Vacated
The Department of the Interior's (DOI) proposed five-year leasing plan for the Outer Continental Shelf (OCS) was vacated because the program's environmental sensitivity rankings were irrational, the U.S. Court of Appeals for the District of Columbia held. The Center for Biological Diversity (CBD) brought a claim alleging that DOI's proposed OCS plan violated the National Environmental Protection Act (NEPA) and the Outer Continental Shelf Lands Act (OCSLA). A NEPA-based climate change claim, NEPA baseline data claim, and an Endangered Species Act claim were not yet ripe for review. The OCSLA states that an agency must assess the environmental sensitivity of “different areas of the Outer Continental Shelf” in order to make its determination of when and where to explore and develop additional areas for oil. DOI ranked the environmental sensitivity of the various program areas in terms of only one fact: the “physical characteristics” of the shoreline. The ranking was based on DOI's use of the Environmental Sensitivity Index, developed by NOAA. DOI's use of the NOAA study ran afoul of OCSLA because it assessed only the effect of oil spills on shorelines. The court found DOI's failure to properly consider the environmental sensitivity of different areas of the OCS areas beyond the Alaskan coastline had hindered its ability to comply with OCSLA's requirement that it balance between the potential for environmental damage, potential for discovery of oil and gas, and the potential for adverse impact on the coastal zone. Therefore, the court vacated and remanded the program to DOI for additional reconsideration. (CCH Energy Management, Center for Biological Diversity v. U.S. Department of the Interior, et al. (D.C. Cir.) ¶9608)

Nuclear Power

Hanford Waste Not Exempt from Disposal Prohibitions
The 1996 Waste Isolation Pilot Plant (WIPP) Amendments did not exempt designated mixed radioactive and hazardous waste stored at the Hanford Nuclear Reservation, Washington, from the land disposal prohibitions or the storage prohibition of the State's Hazardous Waste Management Act (HWMA), which acts in lieu of the federal provisions of Resource Conservation and Recovery Act, the U.S. Court of Appeals for the Ninth Circuit has ruled. While the Department of Energy argued that it no longer had an obligation under HWMA to treat radioactive waste or to limit the length of time such waste is stored at Hanford or any other location because the waste had been designated by the Secretary of Energy for disposal at WIPP, in accordance with the WIPP Land Withdrawal Amendment Act of 1996, this interpretation had to be rejected because neither the plain text of the statute nor the legislative history demonstrated that the designation exemption reached waste at any location other than WIPP. (State of Washington v. Chu (9thCir) CCH Nuclear Regulation Reporter ¶20,689))

NRC Will Consider Request for New Accident Safety Rule
The issues raised in a petition for rulemaking (PRM) submitted by Bob Christie will be considered by the Nuclear Regulatory Commission (NRC) in an ongoing agency rulemaking process. Christie requested the NRC to eliminate the requirement for assuming a loss-of-offsite power (LOOP) coincident with postulated accidents. The petitioner believes this requirement is detrimental to safety because it results in fast start time requirements for emergency diesel generators (EDG) and because it requires operator training to focus on unrealistic events. The rulemaking process in question is directed at decoupling an assumed LOOP from a coincident loss-of-coolant accident as currently required by agency regulations. The NRC believes that the underlying technical considerations regarding a postulated accident coincident with a LOOP are sufficiently related to this ongoing rulemaking activity to make the rulemaking an appropriate vehicle for resolution of the PRM. (74 FR 16802, April 13, 2009) (CCH Nuclear Regulation Reporter, No. 1415, April 28, 2009)