Pot, Power & Pollution: The Overlooked Impacts of Marijuana Legalization on Utilities and the Environment

April 17, 2014

Last month, Washington issued its first license for a legal marijuana grow operation under Initiative 502 ("I-502"), the marijuana legalization measure adopted by Washington voters in November 2012. A wave of additional operations will follow, as about 2,800 producers have applied for licenses to grow marijuana. While the implications of I-502 for the criminal justice system, land use, taxation and many other issues have been widely debated, the potentially significant changes in electricity and water use that are likely to follow from I-502's implementation have received almost no scrutiny. Nor have the important implications for environmental protection. Given the stakes, Washington utilities and environmental regulators should pay close attention to I-502 and the ongoing process of implementing the initiative.

At the outset, it is important to understand that the United States already produces huge amounts of cannabis. Official estimates suggest that U.S. production was somewhere in the range of 10,000 to 24,000 metric tons in 2001, making it America's largest cash crop by value. A more recent study suggests that production may actually be far higher - 69,000 metric tons. Given that marijuana production generally remains illegal, these estimates are highly uncertain. But there is little doubt that, as marijuana production comes out of the shadows and into the realm of legitimate business, power and water utilities will need to confront a number of serious and complex issues.

Implications for Electric Utilities
For electric utilities, legalization is a major concern because cannabis production, which generally relies on energy-intensive indoor growing operations, uses huge amounts of electricity. One recent study estimates that marijuana production may account for as much as 1% of the nation's entire electric consumption, accounting for a total bill of approximately $6 billion. In California, the numbers are even higher. Marijuana production in that state is estimated to use 3% of all electricity consumed there, equivalent to 9% of all residential electricity use.


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I-937 Updates: New Legislation and New Administrative Rules May Alter Washington's Renewable Portfolio Standard

April 7, 2014

As a result of both legislative and administrative action, several notable changes to Washington's Initiative 937 ("I-937", also known as the Washington Energy Independence Act) are on the horizon. While rejecting large-scale reform, the legislature made significant course corrections related to treatment of conservation and conduit hydro projects under the initiative. Those changes, and possibly several others, will be addressed in ongoing rulemaking proceedings at the Washington Department of Commerce and Washington Utilities & Transportation Commission ("UTC").

Two changes to I-937 were enacted in the 2014 session of the Washington Legislature. First, HB 1643, popularly known as the "conservation smoothing" legislation, allows utilities that achieve conservation in excess of specified targets to credit the excess toward future compliance periods, within limits. As originally enacted by the voters in 2006, I-937 required all covered utilities to obtain all "achievable cost-effective conservation." This mandate was carried out in a two-year process, which requires utilities first to identify conservation targets, then to adopt a plan to achieve those targets. In carrying out this mandate, many utilities, especially smaller utilities, found that conservation is not achieved in neat blocks, but instead is often achieved in major increments that may exceed specific biennial conservation targets. In these circumstances, I-937 both denied utilities the benefit of conservation achieved above biennial targets and created a perverse incentive to delay these conservation achievements.

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Texas Supreme Court Blows Away Wind Generator Claims, Finds Contracts Assigned Risk of Transmission Congestion to Generators

April 2, 2014

Transmission congestion between the wind-rich plans of western Texas and population centers to the east frequently force curtailment of deliveries of electricity from Texas wind farms. In a contract dispute worth tens of millions of dollars, the Supreme Court of Texas recently concluded that wind energy producer FPL Energy assumed the risk of transmission curtailments and therefore must pay contractual damages for delivery failures caused in large part by transmission curtailments. The decision, which turns on specific language addressing transmission curtailments in a contractual "Uncontrollable Forces" clause, once again underscores the peculiar importance of such clauses in energy contracts.

The Court also disallowed a lower court's $29 million judgment against FPL Energy under the liquidated damages provisions of the relevant contracts. The Court found that the liquidated damages clause was intended to compensate the purchaser for undelivered Renewable Energy Credits ("RECs"). The clause provided for recovery of $50 per each undelivered REC, an amount based on the penalty to be paid by utilities in Texas if they do not purchase enough RECs or renewable energy to satisfy the state's Renewable Portfolio Standard. The Court concluded that the liquidated damages provision crossed the line from an acceptable estimate of actual contract damages to an unacceptable contractual penalty for breach because it assumed TXU would pay the $50 penalty rate for all RECs not delivered, but in fact the Texas regulatory scheme excuses compliance for any RECs not delivered because of transmission constraints or curtailments. As a result, the liquidated damages provision required FPL Energy to pay approximately $29 million, whereas the actual losses suffered because the RECs were not delivered was only about $6 million, possibly less. Thus, there is an "unacceptable disparity" between the results of the liquidated damages provision and the actual damages incurred by TXU as a result of FPL's failure to deliver.

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Please Join Us for "Clean Water and Stormwater" Conference

March 25, 2014

We're pleased to announce that Eric Christensen will be speaking at Law Seminars International's 14th Annual Comprehensive Conference on Clean Water and Stormwater. Eric will be participating in a panel discussing renewal of the Columbia River Treaty and how this may affect water flows and water quality in the Columbia. We hope to see you there!

More Clouds for Coal: Oregon PUC Questions PacifiCorp Expenditures on Coal Fleet

March 24, 2014

March 17 was not a happy St. Patrick's Day for PacifiCorp's coal fleet. Echoing recent actions by the Washington Utilities & Transportation Commission ("WUTC"), the Oregon Public Utility Commission ("OPUC") expressed serious reservations about the assumptions embedded in PacifiCorp's Integrated Resource Plan ("IRP") concerning anticipated expenditures for pollution control equipment at its fleet of coal-fired generators. While the OPUC did not take any specific action, it made clear that PacifiCorp will be required to engage in a substantially more robust modeling of the costs of pollution control and other upgrades for its coal generators.

The stakes for PacifiCorp's coal fleet, which consists of 26 units scattered across five Western states, are substantial. According to current estimates, PacifiCorp will be required to invest more than $4.2 billion for pollution control retrofits before 2023, not including any upgrades that may be required to comply with limits on greenhouse gas emissions. Based on a report from the Commission's staff, as well as comments from interest groups ranging from the Oregon Department of Energy to the Sierra Club, the OPUC raised a number of serious questions about the IRP's economic modeling, baseline assumptions, and timing of proposals for coal-related upgrades embedded in PacifiCorp's 2013 IRP update.

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LEO Still Roars: FERC Declares Montana PURPA Rules Illegal

March 21, 2014

After the Federal Energy Regulatory Commission's ("FERC") recent lawsuit against the Idaho Public Utilities Commission ended in something of a whimper, many industry observers speculated that FERC would retreat from aggressively challenging states that attempt to unduly restrict the rights of power sellers on the Public Utility Regulatory Policies Act of 1978 ("PURPA"). A long-awaiting FERC decision, issued yesterday, suggests this speculation may have been premature. The decision declares that Montana's PURPA program, which requires many PURPA-eligible projects to win irregularly-scheduled competitive bidding processes and also imposes a 50-MW limit on wind generation acquired under PURPA, does not comply with FERC's "legally enforceable obligation" or "LEO" rules. Hydrodynamics, Inc., 146 FERC P 61,193 (issued March 20, 2104).

The controversy centers on how to interpret PURPA's basic mandate, which requires utilities to purchase power from PURPA-eligible generators, called "Qualifying Facilities" or "QFs", at avoided-cost rates. Generally, QFs are small, renewable generators owned by independent power producers. The law was designed to help non-utility developers overcome barriers to entry in the power generation market created by vertically-integrated utility monopolies. Hence, a basic requirement of FERC's PURPA rules is that, if an independent producer presents a utility with a PURPA-eligible contract, it creates a LEO, requiring the utility to honor the contract, even if the utility refuses to sign the contract. This prevents utilities from defeating PURPA's intent by dragging their feet on signing contracts that otherwise meet all PURPA requirements.

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BPA Attempts to Split the Baby on Oversupply Management Costs

February 28, 2014

In its latest effort to put to rest the years-long controversy that has swirled around its efforts to address excessive electricity production during periods when high winds coincide with high water in the Columbia River system, the Bonneville Power Administration ("BPA") recently issued a draft Record of Decision ("ROD") allocating the costs of such events. While wind generators argued for allocating all such costs to BPA's power customers and BPA's power customers urged BPA to assign all such costs to its transmission customers, BPA chose a third path. In the recent draft ROD, issued by newly-minted BPA Administrator Elliot Mainzer, BPA concluded that it should allocate oversupply costs to those generators operating within its balancing authority area that have scheduled power during an oversupply event. BPA's chosen alternative was supported by only one out-of-region entity, so it is unlikely to end either the controversy or the protracted litigation that has resulted.

As we have previously reported, the oversupply problem is an unintended consequence of the rapid expansion of wind generation in the Pacific Northwest. The wind fleet's capacity in the region now exceeds 7,000 MW, with 4,500 operating in BPA's balancing authority area. The oversupply problem arises when strong spring winds coincide with high spring runoff in the Columbia River Basin. In this situation, the combined electric power produced by federal dams on the Columbia River and wind generators in the region can exceed electrical loads. Further, the obligation to maintain dissolved gases within limits set by environmental authorities in order to avoided gas bubble trauma in fish (especially endangered salmon and steelhead runs), limits the amount of water dam operators can release over spillways, which adds to dissolved gas loads, requiring them instead to run the water through generators.

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Bully for Biomass: Washington Supreme Court Rejects Greenhouse Gas Claims, Upholds Finding of No Significant Environmental Impact for Biomass Facility

February 27, 2014

The Washington Supreme Court today rejected claims that the potential for greenhouse gas ("GHG") from a biomass facility triggers the requirement to prepare a full Environmental Impact Statement under Washington's State Environmental Protection Act ("SEPA"). Today's decision promises to greatly simplify the permitting process for projects planning to use woody biomass and should help clarify how GHG emissions are treated for biomass-fired facilities, a question that has bedeviled courts and regulators in other contexts. PT Air Watchers et al. v. State of Washington et al., No. 88208-8 (issued Feb. 27, 2014).

The controversy arose from Port Townsend Paper Company's plans to modernize the boiler at its paper mill by increasing the use of woody biomass to fuel the boiler, increase the boiler's firing efficiency, and adding a 25 megawatt generator to produce electricity. The paper company prepared a SEPA "checklist" in accordance with WAC 197-11-960. The checklist concluded that, because the project would reduce burning of fossil fuels by burning woody biomass instead, it would produce a net reduction in GHG emissions. The Department of Ecology agreed, concluding that no EIS was required because the project would not produce significant environmental impacts. A coalition of local environmental groups challenged this finding, but the challenges were rejected both in an administrative appeal and by the reviewing courts. The Washington Supreme Court accepted review and today affirmed Department of Ecology's finding that no significant environmental impacts requiring preparation of an EIS would result from the project.

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Ninth Circuit Denies Rehearing in Greenhouse Gas Case, Continues to Struggle With Standing in Climate Litigation

February 13, 2014

A recent order of the U.S. Court of Appeals for the Ninth Circuit illustrates the extent to which courts continue to struggle with otherwise routine legal issues when confronting claims related to climate change and greenhouse gas emissions. The order denies rehearing of last year's Ninth Circuit panel decision in Washington Environmental Council v. Bellon, which concluded that a group of environmental plaintiffs seeking to force the Washington Department of Ecology to issue greenhouse gas regulations lacked standing to bring the claim.

The rehearing order was unusual in several respects. Ordinarily, a dissatisfied party to the case seeks rehearing and, in nearly all cases, rehearing is denied in a short order simply noting that an insufficient number of judges supported the request for rehearing. Perhaps the most unusual aspect of the Ninth Circuit's order is that it arose from a Ninth Circuit judge seeking rehearing, rather than from one of the parties. This suggests that at least some of the Ninth Circuit's judges view the October panel opinion as not just incorrect, but so seriously wrong that the Court should re-examine the decision even in the absence of any request to do so by the losing parties. The order is also unusual in that it included two impassioned opinions alternatively defending and attacking the October panel opinion.

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The Department of Defense Seeks Contracts for Purchase of Renewable Energy Credits

February 11, 2014

The Defense Logistics Agency today issued a presolicitation notice indicating that it will seek Basic Ordering Agreements ("BOAs") for the purchase of Renewable Energy Certificates ("RECs") by the Department of Defense and associated civilian agencies. RECs will be purchased from solar, wind, geothermal, and biomass generators during the five-year period from May 2014 through May 2019. The notice indicates that a formal Request for Proposals will be issued in March.

A BOA is akin to the master agreements, such as the WSPP Agreement, familiar to many in the power industry. While the BOA does not guarantee that any particular quantity of RECs will be purchased, it sets forth the basic terms of the contract so that purchases can be made on an expedited basis.

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Transmission Terrorism: As Details of Substation Attack Come to Light, Senators Call for Action

February 7, 2014

Just before 1 a.m. on April 16, 2013, as-yet unidentified assailants launched an attack on the Metcalf substation in Silicon Valley. The attack lasted nearly an hour, disabling ten high-voltage transformers and three high-voltage transformer banks. Occurring just hours after the Boston Marathon bombings, the attack garnered little press coverage at the time and, as a federal investigation dragged on, details were slow to emerge. Beginning with an article published in Foreign Policy magazine in late 2013, information suggesting that the attack may have been the work of terrorists rather than vandals has started to come to light. In response to these revelations, group of four U.S. Senators today sent a letter to federal regulators calling for swift action to address the threat.

Earlier this week, the Wall Street Journal published a long article providing many details of the attack. In the article, former Federal Energy Regulatory Commission Chairman Jon Wellinghoff noted several pieces of evidence suggesting that the attack was carefully orchestrated. For example, before the attack began, someone lifted a large cover off an underground vault and cut communications cables, knocking out communications in the area around the substation and interfering with emergency response. More than 100 empty shell cases, likely from AK-47 assault rifles, were found in the area around the substation. None had fingerprints and military experts found small piles of rocks that may have been left by an advance scout to mark the best vantage points for the attack. The number of shell cases and the fact that the vault cover probably could not have been lifted by a single person suggest that multiple individuals were involved in the attack. Many of these details were corroborated in subsequent accounts from media outlets such as National Public Radio and Bay Area newspapers.

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Beginning of the End for Colstrip? Washington UTC Rejects Puget Sound Energy's Analysis of Coal Plant Economics

February 7, 2014

The Washington Utilities & Transportation Commission ("UTC") yesterday rejected Puget Sound Energy's ("PSE") economic justification for continued operation of its Colstrip coal plant. The UTC's action, while not sealing the fate of Colstrip, sends PSE back to the drawing board and casts doubt on the future of the plant, which is already the subject of legal action brought by a coalition of environmental groups.

The UTC's findings were made in the context of PSE's 2013 Integrated Resource Plan. Under Washington law, the state's investor-owned utilities are required to develop and submit an Integrated Resource Plan to the UTC, which must be updated every two years. The Integrated Resource Plan is intended to analyze the alternatives available to meet the utility's anticipated load, and to identify the least-cost alternatives.

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Western PURPA War Update: Retreats, Advances, But Little Clarity

February 4, 2014

As we discussed last summer, the expansion of renewable energy generation, especially wind generation, has produced an escalating conflict between the Federal Energy Regulatory Commission ("FERC") and several Western states over the application of the Public Utility Regulatory Policies Act ("PURPA"). In recent months, at least one major conflict has been resolved, while other conflicts continue to develop. While future developments may depend upon whether newly-nominated FERC Chairman Norman Bay adopts the aggressive enforcement policy of his predecessor, Jon Wellinghoff, recent action provides some hints as to the future legal landscape.

PURPA is a 1978 law that, among other requirements, mandates that utilities purchase power produced by smaller renewable generators. Recent conflicts have arisen over PURPA's basic mandate, which requires utilities to purchase power from PURPA-eligible generators, called "Qualifying Facilities" or "QFs", at avoided-cost rates. Conflicts have also arisen from efforts to square PURPA with recent industry developments, such as ownership of Renewable Energy Credits and integration of variable renewable resources..

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SLAPP Suit Blocked: Court of Appeals Rejects SLAPP Claim in Public Records Act Case

February 3, 2014

The Washington Court of Appeals today concluded that Washington's "anti-SLAPP" statute cannot be invoked when a municipality seeks a declaratory judgment to clarify its obligations under the Public Records Act. The Court's conclusions should be a welcome relief for Washington municipalities seeking to clarify their obligations under the Public Records Act and thereby to minimize their exposure to the substantial penalties that are sometimes imposed under the Act. City of Seattle v. Egan, No. 69129-5-I (Wash. App. Div. I, filed Feb. 3, 2014).

The Court of Appeal's decision arises from a Public Records Act request for documents related to an internal investigation of complaints filed against four Seattle police officers. Among the documents requested are 36 "dash-cam" videos. Believing the videos are exempt from disclosure under RCW 9.73.090(1)(c), which prohibits cities from providing videos to the public when legal action involving those videos is pending, the City withheld 35 of the 36 videos. In the face of threat of lawsuit seeking to force disclosure of the videos, the City filed a motion for declaration and preliminary injunction, asking the lower court to declare that the 35 videos are exempt from Public Records Act disclosure. The Public Records Act authorizes this procedure under RCW 42.56.540.

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New FERC Chairman: President Obama Nominates Norman Bay, Director of FERC Office of Enforcement

January 30, 2014

Today, President Obama announced that he will nominate Norman Bay to become the next Chairman of the Federal Energy Regulatory Commission ("FERC"). Mr. Bay currently directs FERC's Office of Enforcement. In that role, he has been the architect of a substantial ratcheting up of FERC's enforcement role. For example, under his watch, the Office of Enforcement has "grown adult teeth," aggressively pursued charges of market manipulation, obtaining, among other significant results, a settlement of $410 million against the energy trading arm of JP Morgan Chase.

Prior to his FERC career, Mr. Bay had a long career in the Justice Department, including a stint as the U.S. Attorney for New Mexico in 2000-01. Mr. Bay then taught at the University of New Mexico law school before moving to FERC in 2009.

This is President Obama's second attempt at replacing recently-departed FERC Chairman Jon Wellinghoff. The President's first nomination, of former Colorado PUC Chairman Ron Binz, turned into a political fiasco when, amid charges of pro-renewables "activism," Mr. Binz failed to achieve majority support in the Senate Energy Committee and was forced to withdraw his nomination. Because Mr. Bay has little track record in this area, his nomination appears calculated to avoid similar controversy.

If confirmed, Mr. Bay will take over the Chairman's mantle from current Commissioner Cheryl LaFleur, who has been acting Chair since Mr. Wellinghoff's departure. Confirmation is likely to take at least several months and could take longer if, like several recent FERC nominations, it becomes bogged down in partisan disputes and poltical gamesmanship.