GTH Energy & Natural Resources Law Blog

In a June 14 decision substantially clarifying and expanding federal open access transmission rights, the Federal Energy Regulatory Commission ("FERC") ruled that open access transmission rights cannot be limited to Points of Delivery ("PODs") established for scheduling purposes, but must allow third-party shippers to deliver power across the entire system of a regulated transmitting utility. The decision also reaffirms the right of PURPA "Qualifying Facilities" ("QFs") to transmit power to remote sellers rather than selling to the utility with which the QF directly interconnects.

The June 14 decision (Kootenai Electric Cooperative, Inc., 143 FERC P 61,232 (2013)) addresses one skirmish in a broader regional conflict pitting regional investor-owned utilities, especially Idaho Power Company, and state utility commissions against regional renewable energy producers seeking to enforce the obligations of utilities to purchase output from QFs under the 1978 Public Utility Regulatory Policies Act ("PURPA"). The June 14 decision arises from the efforts of Kooentai Electric Cooperative ("KEC") to sell output from its 3.2-MW Fighting Creek Landfill Gas Project, which is certified QF. After failing to reach terms to sell Fighting Creek output directly to its neighboring utility, Avista, KEC determined that it could instead sell power indirectly to Idaho Power at relatively favorable PURPA rates established by the OPUC for sales into Idaho Power's Eastern Oregon service territory.

Continue reading "FERC Affirms Open Access Rights for QFs in Complaint Against the Oregon PUC" »

In a decision with important implications for both renewable energy and transmission developers, the U.S. Court of Appeals for the Seventh Circuit last week largely upheld a cost-spreading mechanism developed by the Midwest Independent Transmission System Operator ("MISO") to encourage expansion of high-voltage transmission facilities. Written by the renowned Judge Richard Posner, the decision (Illinois Commerce Commission v. Federal Energy Regulatory Commission, 7th Cir. Docket Nos. 11-3421 et al., issued June 7, 2013) may in time be most remembered for lighting the fuse that ultimately brought down the many state renewable energy policies that artificially favor in-state renewable producers at the expense out-of-state producers.

The holding is a response to Michigan's argument that it does not benefit from the high-voltage transmission lines favored by the MISO policy. Because its Renewable Portfolio Standard does not allow Michigan utilities to count out-of-state renewables toward meeting the requirement that they obtain ten percent of their power from renewables by 2015, improving transmission for out-of-state renewables does not benefit Michigan ratepayers. Thus, Michigan argued, it should not be required to bear a share of the cost of these facilities. Judge Posner rejected this argument in strikingly plain terms: "Michigan cannot, without violating the commerce clause of Article I of the Constitution, discriminate against out-of-state renewable energy." This holding threatens to unravel state laws from California to Massachusetts that, in various ways, artificially favor in-state renewable producers over out-of-state producers.

Continue reading "Casting A Constitutional Cloud On In-State Renewable Preferences, Seventh Circuit Upholds Transmission Cost-Spreading" »

We're proud to announce that GTH partner Eric Christensen penned the cover story in the May 2013 issue of the Northwest Public Power Association Bulletin. Here is the text of the article:

The rapid rise of variable renewable resources, especially wind power, has put increasing pressure on the West's electric system to balance the rapidly fluctuating output often produced by these resources. In response, a regional Energy Imbalance Market ("EIM") is now under active consideration. The EIM would allow Balancing Area Authorities ("BAAs") to obtain balancing reserves from across a broad region, in theory allowing more economic and reliable operation of the region's balancing capacity. Public power has greeted EIM with considerable skepticism, observing that Regional Transmission Organizations ("RTOs") and other "organized markets" have often failed to produce expected benefits.

Public power is equally concerned that an EIM could subject public power systems to Federal Energy Regulatory Commission ("FERC") jurisdiction. Centralized control by FERC is, of course, the antithesis of local control, one of public power's keystone values. FERC's recent tendency to pursue its jurisdiction aggressively on behalf of renewable producers heightens this concern. For example, FERC in 2011 for the first time asserted its "FERC-lite" jurisdiction, invalidating the Bonneville Power Administration's approach to managing periods of excess wind generation.
As this article explains, public power is right to be concerned that an EIM could result in both expanded FERC jurisdiction and a broader push toward a West-wide RTO. Both risks, however, can be mitigated by insisting on specific structures and conditions for EIM participation.

Relevant Precedents: FERC Jurisdiction Over Consumer-Owned Utilities Operating in Organized Markets

In the industry's first few decades, federal jurisdiction was of little concern to public power. Public power operated in its own sphere, governed by elected representatives of the citizens it serves, generally free from either state or federal rate regulation. With increasing integration of the industry and regulatory restructuring, these jurisdictional lines have blurred. In some cases, Congress added new statutory authority giving FERC jurisdiction over specific aspects of consumer-owned systems. In other cases, FERC leveraged its existing statutory authority. For example, to enforce its "open access" transmission regime, FERC required consumer-owned transmission systems to adopt "Safe Harbor" open access tariffs so that they could obtain "reciprocal" access to IOU-owned transmission facilities.

An examination of recent precedents from Western RTOs and cooperative transmission ventures demonstrates that there is some basis for concern that participation in an EIM could subject a consumer-owned utility to new FERC jurisdiction. Perhaps most notoriously, after the meltdown of Western power markets in 2000-01, FERC attempted to force public power entities that had participated in the California ISO and PX markets to disgorge refunds. Ultimately, the Ninth Circuit rejected those attempts, concluding that the Federal Power Act plainly prohibits FERC from exercising its refund authority over public power entities. The Court, however, left the door open for California to pursue refunds in court. This opening has proved costly for public power. For example, in April, the U.S. Court of Claims allowed California's contract-based lawsuit against the Bonneville Power Administration ("BPA") to move forward. This is a particularly bitter pill for Northwest public power ratepayers, many of whom suffered greatly from California's missteps during the 2000-01 market meltdown and were generally denied relief by FERC. They now face the prospect of paying again for California's mistakes, this time through inflated BPA rates.

The Courts have also concluded that consumer-owned utilities participating in the California Independent System Operator ("ISO") may be subject to just-and-reasonable rate regulation where the rates charged by the consumer-owned utility affect the FERC-jurisdictional rates charged by the ISO. When the City of Vernon, California's municipal utility joined the ISO, the rates charged by Vernon for ISO-administered access to Vernon's transmission system became an element of the transmission rates charged by the ISO. FERC concluded that, because Vernon's transmission rates were an element of the ISO's transmission rates, Vernon's rates must be subject to FERC oversight to ensure that the resulting transmission rates charged by the ISO are just and reasonable. After extended litigation, the Ninth Circuit ultimately upheld this result.
FERC has asserted a similar form of jurisdiction over public power entities in other regions, as well. For example, where Basin Electric Cooperative entered into a joint-use transmission arrangement with a FERC-jurisdictional IOU, FERC asserted jurisdiction to review Basin's transmission rates because Basin's rates are a component of the rates charged by the joint-use system.

On the other hand, the courts have flatly rejected FERC attempts to force changes in the management structure of the RTOs and ISOs. Following the 2000-01 crisis, FERC concluded that the ISO's management structure was partly to blame for market dysfunctions, and attempted to force a change in the composition of the ISO Board. The U.S. Court of Appeals for the D.C. Circuit rejected FERC's assertion of authority. Of particular interest, the Court of Appeals rejected FERC's claim that its authority to regulate the "practices" of jurisdictional utilities allows FERC to order specific changes in the management of those utilities. FERC's reading of the statute, the Court concluded, ignores the surrounding statutory language, which is aimed at providing FERC with authority to regulate rates, not every aspect of utility operations. Thus, the Court reasoned, FERC can regulate utility "practices" only if they are directly connected with the utility's rates. Because there was no clear connection between the structure of the ISO's board and the rates it charged, the Court concluded, FERC's attempt to dictate the structure of the ISO's governing board exceeded its statutory authority.
In summary, the participation of consumer-owned utilities in "organized markets" such as the California ISO is a mixed bag. FERC has on a number of occasions asserted jurisdiction over consumer-owned utilities participating in ISOs or RTOs. And, while the Courts have rejected some of these assertions, they have upheld others. Consumer-owned utilities contemplating participation in the EIM are therefore well-advised to exercise caution if they wish to avoid becoming subject to increased FERC jurisdiction.

Limiting FERC Jurisdiction in an EIM
While exposure to FERC jurisdiction is a valid concern, expanding FERC jurisdiction need not follow inevitably from a decision to participate in the EIM. For example, a number of consumer-owned utilities participate along with FERC-jurisdictional IOUs in regional transmission bodies such as ColumbiaGrid and WestConnect. FERC precedent regarding these and similar regional ventures demonstrate that, with appropriate safeguards, FERC's assertion of jurisdiction over consumer-owned participants can be limited.

Such safeguards include:

• Defining off-ramps for consumer-owned utilities. Perhaps the best safeguard for consumer-owned utilities is a clear "off-ramp," allowing them to terminate their participation in EIM if FERC attempts to extend its jurisdiction over them. For example, WestConnect proposed a transmission pilot project aimed at reducing the "pancaking" of transmission rates across the systems of its members, which included both jurisdictional IOUs and non-jurisdictional co-ops and consumer-owned utilities. FERC approved an agreement allowing participants to withdraw at any time prior to the start-up of the pilot, at any time after start-up as a result of adverse regulatory action, and after ninety days' notice for any other reason occurring after start-up. Similarly, the Nebraska Public Power District ("NPPD") and Omaha Public Power District ("OPPD") in the Southwest Power Pool are authorized to withdraw from the Southwest Power Pool if FERC does not accept their rates or transmission revenue requirements. The ability to withdraw from the organization administering EIM in response to an unjustified claim of FERC jurisdiction gives consumer-owned participants powerful leverage to prevent FERC from overstepping its bounds.

• De-coupling jurisdictional and non-jurisdictional rates. It may be possible to structure an EIM so that the rates paid to non-jurisdictional utilities remain separate and distinct from the rates paid to FERC-jurisdictional IOUs. For example, before the WestConnect transmission pilot discussed above went into effect, FERC declared that the rates charged by non-jurisdictional utilities were not subject to FERC review because they did not affect rates charged by jurisdictional IOUs and additional safeguards, such as rate caps, were in place to ensure that jurisdictional rates remain just and reasonable. Similarly, FERC has approved participation of NPPD and OPPD in the Southwest Power Pool subject to agreements that explicitly limit FERC's authority to review the NPPD's and OPPD's rates or revenue requirements. As these examples demonstrate, it may be possible to limit FERC jurisdiction by separating EIM rates paid to non-jurisdictional utilities from rates paid to jurisdictional utilities, or by insisting upon specific contractual limits on FERC jurisdiction over public power.

• De-coupling the EIM market from transmission rates. The EIM should be limited to the specific function of allowing regional exchange of regulating reserves and other sub-hourly products. It should not operate a centrally-administered transmission market. Limiting the EIM's functions in this manner will prevent FERC from attempting to leverage its jurisdiction over interstate transmission.

• Recognizing public power authorities. The authority of public power governing bodies to set their own rates and policies is, of course, a cornerstone of the public power movement. Similarly, consumer-owned utilities operate under unique limitations arising from, for example, state law and from federal rules governing municipal bonds. Consumer-owned utilities participating in the EIM should insist on language in governing agreements that will prevent the actions of the EIM from violating state law, putting tax-exempt financing at risk, or displacing the basic functions of publicly-elected governing bodies. Such mechanisms not only assure consumer-owned utilities that they are operating within the boundaries of existing law, but also serve to limit FERC jurisdiction by requiring FERC to abide by the legal limits faced by consumer-owned utilities.

It is important to recognize that, in the Energy Policy Act of 2005, Congress granted FERC new refund authority over consumer-owned utilities. This new authority allows FERC to order refunds from consumer-owned utilities for short-term sales (sales for periods of less than one month) if the sales are "through an organized market in which the rates for sale are established by [FERC]-approved tariff (rather than by contract)" and the sale violates that tariff. FERC has yet to provide any clear guidance as to the meaning of this new authority. Hence, consumer-owned entities contemplating participation in an EIM must recognize the existence of the new authority, devise strategies for limiting the authority, and consider the possibility that their short-term sales on the EIM could be subject to FERC-ordered refunds.

Limiting EIM Expansion
As with FERC jurisdiction, public power is rightly concerned that, even if an EIM is wise, it could pave the way for a full-fledged RTO, with its attendant costs, complications, and market manipulation risks. In the same way that public power participants in an EIM should insist on limits to FERC jurisdiction, they should also insist on limits that prevent EIM from becoming a "slippery slope" to a West-wide RTO.

Two considerations are key. First, there is no reason that the EIM itself should be considered an RTO. On the contrary, if the functions of the EIM are strictly limited to its core mission, it would not be an RTO because it would not operate all the functions of an RTO. Rather, it would be more like ColumbiaGrid or WestConnect, organizations which perform limited transmission functions but are neither registered as an RTO nor considered to be an RTO by FERC.

Second, the governing documents of EIM should either prohibit expansion of the organization or else require a supermajority to move forward with any new functions. For example, ColumbiaGrid's governing documents allow it to take on new functions only with a super-majority vote of its members. Such a supermajority requirement can prevent movement toward in RTO unless a strong regional consensus, which necessarily must include public power, develops in favor of RTOs.
 

Conclusion
Public power has good cause to be concerned that participation in an EIM could result in expanded FERC jurisdiction over consumer-owned utilities and could be a step toward a West-wide RTO. These are not inevitable consequences of an EIM, however, and a number of proven safeguards are available to prevent these outcomes if consumer-owned utilities elect to participate in the EIM.

(Note: While the article is officially the "Cover Story" of the May NWPPA Bulletin, the photo on the cover is in fact a vendor from NWPPA's recent Engineering and Operations Conference. This is because, despite a valiant effort, NWPPA's editors could not find a compelling graphic concerning the EIM or FERC jurisdiction.)

At its April meeting, the Federal Energy Regulatory Commission ("FERC") issued Order No. 773-A, which generally reaffirms its December order (Order No. 773, discussed here) approving the definition of "Bulk Electric System" proposed by the North American Electric Reliability Corporation ("NERC"). The Commission also proposed to adopt Version 5 of NERC's Critical Infrastructure Protection ("CIP") standards. These standards incorporate the BES definition, demonstrating the importance of the BES definition to the regime of mandatory electric reliability standards.

Order No. 773 capped a years-long process to define one of the fundamental terms used in the mandatory electric reliability system adopted by Congress in the Energy Policy Act of 2005. By clarifying the legal landscape, Orders No. 773 and 773-A lay the groundwork for a number of different strategies regulated utilities may employ to reduce the sometimes daunting burdens of reliability compliance.

Similarly, the CIP proposal is an important way-point in a years-long effort to develop and improve cybersecurity standards. In the proposed rule, FERC proposes to skip directly from CIP version 3 to CIP version 5 standards, jumping over the version 4 standards it previously approved. The proposal demonstrates the importance of the BES definition approved in Orders No. 773 and 773-A because the new standards, if adopted, classify facilities based on whether they have "low," "medium," or "high" impact on the BES, and impose compliance obligations depending on this classification.

Continue reading "FERC Refines "Bulk Electric System" Definition, Adopts New Cybersecurity Standards Proving Value of the Definition" »

The U.S. Court of Appeals for the Ninth Circuit today revived a class-action antitrust case against a large assemblage of natural gas sellers and marketers who were allegedly involved in manipulating Western natural gas prices during 2000-01. Manipulation of gas prices was one factor contributing to the meltdown of Western electricity markets during the same period. The court's decision, entitled In re: Western States Wholesale Natural Gas Antitrust Litigation, limits the extent to which the Federal Energy Regulatory Commission's exclusive jurisdiction under the Natural Gas Act ("NGA") preempts private antitrust claims under both state and federal law.

While the immediate effect of the court's decision is to allow plaintiffs harmed by the alleged gas market manipulation to seek potentially substantial antitrust remedies, the decision is likely to have long-term import well beyond the specifics of the particular facts addressed by the court. This is so because the NGA is one of a family of similar New Deal-era statues which also includes statutes like the Federal Power Act and the Federal Communications Act, and the court's decision turns on language that is common to this family of statutes. Further, the court opens the way for antitrust damage claims that allow injured private parties to seek damages, including treble damages, against market manipulators. These private actions will serve to bolster FERC's recently-intensified battle against energy market manipulation, which extends to the power markets as well as the natural gas markets.

Continue reading "Market Manipulation, Preemption, and FERC Jurisdiction: Antitrust Claim from 2000-01 Crisis Revived By Ninth Circuit" »

Fulfilling a promise made in a November order, the Federal Energy Regulatory Commission ("FERC") on March 22 filed suit against the Idaho Public Utilities Commission ("IPUC"), asserting that the IPUC violated FERC rules under the Public Utility Regulatory Policies Act ("PURPA"). The lawsuit follows on the heels of a March 15 FERC order (Grouse Creek Wind Park LLC, EL13-39-000), in which FERC found another IPUC PURPA violation, meriting a second enforcement action against the IPUC. FERC's actions are extraordinary, marking the first time FERC has exercised its PURPA enforcement authority directly against a state commission.

PURPA, passed in 1978, was the first blow struck against the traditional industry model of regulated, vertically-integrated utility monopolies. Passed in response to the energy crises of the 1970s, PURPA was intended to open the generation market to small, independent producers. Thus, PURPA mandates that utilities purchase power from "Qualifying Facilities" ("QFs") -- generally, smaller, independently-owned renewable generation facilities -- at "avoided cost" rates, equal to the cost of the marginal resource the utility would have to purchase if it did not buy from the QF. This purchase obligation lies at the heart of the FERC-IPUC controversy.

Continue reading "New Front In Western Wind War: FERC Files Suit Against Idaho PUC, Finds Second PURPA Violation " »

On Friday, the U.S. Court of Appeals for the D.C. Circuit concluded that the Federal Energy Regulatory Commission ("FERC") lacks jurisdiction to enforce a $30 million fine against accused natural gas market manipulator Brian Hunter. The D.C. Circuit's opinion provides some needed clarity to the lines of regulatory jurisdiction where manipulation involves both physical natural gas and electricity markets and forward commodity futures markets. In such cases, the D.C. Circuit's opinion makes clear that FERC's jurisdiction is limited to the physical markets, while the Commodity Futures Trading Commission's ("CFTC") exclusive jurisdiction extends to the energy commodity futures markets.

As reported in more detail previously, the case arose from alleged manipulation of the NYMEX futures market for natural gas by Brian Hunter, then a trader for the Amaranth hedge fund. According to FERC's investigation, Hunter "shorted" his position in the natural gas market, then sold very large volumes of gas futures contracts during the February, March and April 2006 NYMEX settlement periods. The sales of commodity futures were intended to artificially depress natural gas prices, thus artificially benefitting Hunter's short position in the physical markets. In 2007, both FERC and the CFTC launched investigations of Hunter's activities, resulting in competing jurisdictional claims.

Continue reading "D.C. Circuit Rejects FERC Jurisdictional Claims Over Natural Gas Commodity Market Manipulation" »

One of the most difficult questions in energy regulation is how best to encourage technological innovation in the an electric industry still dominated by comprehensively-regulated utility monopolies. Because new technologies carry with them significant risks and generally lack solid data upon which to establish ratepayer benefits, regulators are loath to approve investments in new technology and regulated utilities therefore tend to shy away from such technologies. But a range of new technologies now on the horizon promise to revolutionize the electric utility industry. How best to pave the regulatory path for technological innovation is therefore one of the most important questions facing the industry today.

The "Smart Grid" (best thought of as a range of new digital technologies that can provide benefits in all phases of generation and delivery of power) demonstrates the enormous stakes at issue in properly answering this question. The Smart Grid promises to revolutionize the electric system as completely as digitization, the internet, and cellular technology have revolutionized the telecommunications industry. But the state-federal system of utility regulation raises a variety of barriers to adoption of this new technology. In an article published in the most recent Harvard Environmental Law Review, Joel B. Eisen, Professor of Law at the University of Richmond, offers an important and intriguing solution to this regulatory puzzle.

Continue reading "The Smart Grid and "Cooperative Federalism": The Path Forward for Technological Innovation in the Electric Utility Industry?" »

Yesterday, the Federal Energy Regulatory Commission ("FERC") and the U.S. Coast Guard ("USCG") released a Memorandum of Understanding ("MOU") designed to simplify and expedite the process of licensing hydrokinetic projects. Hydrokinetic technology, described by FERC Chairman Jon Wellinghoff as an "up and coming resource," includes projects designed to capture the energy of waves, tides, currents, and the free-flow of rivers and streams. The MOU will help coordinate the FERC licensing authority for non-federal hydropower projects with the USCG's authority to over navigation safety, maritime security, and stewardship of marine environmental resources.

The MOU requires applicants for a preliminary FERC hydrokinetic permit to notify the USCG, among other agencies. The USCG will then become a participant in FERC's pre-filing process, and will provide comments to the FERC and the applicant setting forth any concerns it has with a proposed project and identifying any needed studies. If a NEPA process is undertaken, FERC will be the lead agency, with the USCG providing input on, for example, scoping, as well as identifying any USCG concerns a regarding the project that should be considered in the environmental analysis process. The MOU also provides that, by participating in the NEPA process, the USCG agrees not to become a party to the licensing process.

Yesterday's MOU, along with guidelines issued jointly by FERC and the Bureau of Ocean Energy Management, Regulation & Enforcement last year for hydrokinetic projects on the Outer Continental Shelf, demonstrate that FERC intends to encourage hydrokinetic resources by reducing regulatory barriers to new hydrokinetic technologies.

If you have any questions about the MOU, FERC licensing, hydrokinetic technology, or other matters involving the development of renewable energy projects, please contact a member of GTH's Energy, Telecommunications, and Utilities practice group or Environment & Natural Resources practice group. These practice groups are consistently recognized as among the best, both nationally and in the Pacific Northwest.

Bonneville Power Administration ("BPA") and the Pacific Northwest's wind producers have been frequent and intense antagonists in the region's ongoing wind wars. But a tariff filing last week by one of the primary antagonists, Iberdrola Renewables, LLC, provides one avenue for relieving the pressure on BPA to integrate the region's large and growing wind fleet. And, because the difficulties of integrating the wind fleet are the ultimate cause of the wind wars, the Iberdrola tariff suggests the problem may be soluble without pursing litigation to the bitter end.

Iberdrola's proposed tariff (FERC Docket No. ER13-1058) would allow it to supply wind balancing services to third parties. The proposed wind balancing service is based on a successful pilot program Iberdrola has used to balance its wind resources since 2011 using its own natural gas resources, in addition to contracted resources owned by TransAlta Corp. and Grant County PUD. Iberdrola now proposes to expand this service by offering wind balancing services to other wind producers. The new service is being encouraged by BPA, which is now allowing third parties to supply wind balancing services.

Continue reading "Iberdrola's Proposed Wind Balancing Tariff May Offer A Path Out of the Wind Integration Woods" »

In his State of the Union address on Tuesday evening, President Obama singled out cybersecurity as major national security priority, stating:

We know hackers steal people's identities and infiltrate private e-mail. We know foreign countries and companies swipe our corporate secrets. Now our enemies are also seeking the ability to sabotage our power grid, our financial institutions, and our air traffic control systems. We cannot look back years from now and wonder why we did nothing in the face of real threats to our security and our economy.

The President then called on Congress to enact cybersecurity legislation. In addition, the Administration released a new Executive Order and accompanying Presidential Policy Directive providing for greater coordination between national security agencies and the private sector, and for the development of cybersecurity standards through the National Institute of Standards and Technology ("NIST"). The Administration's actions lay the groundwork for addressing at least one problem commonly expressed in the electric industry -- that detailed and specific information about cybersecurity threats is rarely shared by the government, greatly complicating the industry's efforts to address such threats.

Continue reading "Obama Executive Order on Cybersecurity Promises Greater Information Sharing With Industry" »

Eric Christensen published an article in this month's Northwest Public Power Bulletin entitled "Electric Reliability and the Bulk Electric System Definition: Next Steps for Reducing Regulatory Burdens." The article is a follow-on to the article he published in the November 2012 Bulletin concerning the development of the keystone "Bulk Electric System" definition. We've reprinted the new article here:

ELECTRIC RELIABILITY AND THE "BULK ELECTRIC SYSTEM" DEFINITION:
NEXT STEPS FOR REDUCING REGULATORY BURDENS

By
Eric Christensen, Partner
Gordon Thomas Honeywell

On December 20, the Federal Energy Regulatory Commission ("FERC") issued Order No. 773, adopting a new "Bulk Electric System" ("BES") definition. The BES definition is foundational to FERC's reliability regime because it defines the universe of facilities over which FERC can exercise its reliability authority. Order No. 773 also includes new procedural tools for public power utilities seeking to reduce their reliability compliance burdens. The order represents a major victory for public power, but, to obtain its full benefits, utilities should consider additional steps. This article outlines the major options now available.

As reported in the November 2012 Bulletin, Order No. 773 culminates two years of work by the NERC Standards Drafting Team, with strong participation of Western public power coordinated through NWPPA, to develop a rational and workable BES definition. The new definition, developed with what FERC Commissioner Lafleur describes as "creativity and care," initially defines facilities operating above 100-kV as BES, but then refines this "core definition" with "a thoughtful and nuanced list of specifically included and excluded facilities, and an exception process to add or remove specific facilities." The new BES definition is a huge improvement over the disastrous approach originally proposed by FERC. As Commissioner LeFleur observed, the BES definition "illustrates the success" of FERC's "new paradigm" for reliability standards development, which employs NERC's industry-centered process rather than "unduly prescriptive" FERC mandates, to find the most efficient and effective solutions for meeting reliability goals.

NEW OPTIONS FOR PUBLIC POWER

Under Order No. 773 and existing NERC rules, public power agencies now have several options for reducing reliability compliance burdens. Choosing the best options will depend on each utility's specific circumstances. The available procedures include:

1. Phase II of the BES Definition Standards Development Process.
As it developed the new BES definition, the Standards Drafting Team identified many issues that could not be resolved in the limited time allowed by FERC. These issues were deferred to Phase II of the standards drafting process, which is now underway. Phase II will examine several questions of great importance to public power and refine the BES definition accordingly. These questions include, for example, how the new definition will affect functional registrations, the technical justification for the 100-kV threshold in the "core" definition, the appropriate capacity thresholds for classifying generators as BES, and the points of demarcation between BES and non-BES facilities. Western public power agencies should focus as closely on Phase II as they did on Phase I, and NWPPA should continue its critical coordination function.

2. Petition for Deregistration.
Entities are responsible for complying with reliability standards based on their registration in one or more of fifteen NERC-defined functional categories, ranging from "Distribution Provider" to "Balancing Authority." In the West, the initial registration process generally assumed a very broad definition of the BES, with the result that many purely local distribution utilities were inappropriately registered as Transmission Owners, Transmission Operators, or under other functions that assume ownership of BES facilities. If the new BES definition means that a utility no longer owns or operates BES facilities, the utility can, on the strength of the new BES definition, file a Petition for Deregistration with WECC seeking to deregister from transmission-related functions (e.g., "Transmission Owner" and "Transmission Operator") .

 
3. Exceptions Process.
In addition to approving the BES definition, Order No. 773 approved a new "Exception Process," which allows utilities inappropriately categorized as BES under the definition to file an "Exception Request." If the utility can demonstrate, based on technical studies, that its facilities are "not necessary for the Reliable Operation of the interconnected bulk-power transmission system," NERC will reclassify the facilities as non-BES. If the utility successfully pursues an Exception Request, it may then be able to deregister from transmission-related functions. The Exception Process can also be used to demonstrate that specific utility-owned facilities are non-BES, thereby removing those facilities from the obligation to comply with BES-related reliability standards.

4. Petition for Declaration That A System is "Used for Local Distribution."
In the most surprising aspect of Order No. 773, FERC imposed a new procedure requiring owners of local distribution facilities to petition FERC directly if they believe their facilities are "used in the local distribution of electric energy," and are therefore excluded from the BES under Section 215(a)(1) of the Federal Power Act. In making this determination, FERC will focus on the function of the system, in contrast to the system's material reliability impacts that would be examined in an Exception process. FERC will use, among other factors, the "Seven Factor Test," developed in the 1990s to distinguish local distribution from transmission as traditional industry structures were changing. This procedure gives local distribution utilities a chance to escape BES classification even if they cannot do so under the BES definition or the Exception process. The procedural path is likely to be less time-consuming and expensive than the Exception process because utilities can petition FERC directly rather than having to go first to WECC and NERC, and the issues to be resolved by FERC are likely to be less technical and fact-intensive than in the Exception process.

5. Facility-Specific Notification to WECC.
In addition, Order No. 773 allows a utility to notify WECC if it determines that specific facilities it owns are no longer classified as BES under the new BES definition. The procedure is simple - nothing more than a notification is required. Reclassification in this manner could significantly reduce a utility's compliance burden because removing facilities from the BES will reduce or eliminate the obligation to comply with reliability standards applicable to BES owner/operators.

6. Standard-by-Standard Negotiation.
Following earlier FERC precedent, Order No. 773 FERC invites utilities to bargain with NERC for exemption from reliability standards that do not make sense in a utility's specific circumstances, which could substantially reduce compliance burdens. NWPPA could serve a valuable function in this regard by organizing a group of its members to analyze and develop a list of reliability standards that should not apply to specific types of utilities (i.e, full-requirements customers of Bonneville Power Administration, utilities with no scheduling function) and assist in helping members seek exemptions from unnecessary requirements.

7. Agreed Transfer of Responsibilities.
Finally, individual utilities may be able to transfer compliance obligations to other entities by agreement. NERC rules allow reliability obligations to be transferred to, for example, joint action agencies, G&T cooperatives, or other entities with appropriate functional registrations. A utility transferring compliance responsibilities in this way could deregister from specific functions, or even completely deregister. NWPPA could render assistance in this area by, for example, exploring whether economies of scale can be achieved by transferring compliance responsibilities to a joint entity or negotiating with Bonneville Power Administration to take responsibility for its customers' transmission-related compliance obligations.

CONCLUSION
After Order No. 773, public power managers interested in reducing the cost of reliability compliance can choose from a menu of options. In making this choice, managers will need to carefully evaluate the specific circumstances of their utility. But Order No. 773 substantially increases the chances that meaningful reductions in compliance obligations can be achieved by NWPPA members.

At this time of year here in the Pacific Northwest, months of damp and dreary weather leave even the hardiest natives yearning for the brighter days of spring and summer. In February, Northwest gardeners can often be found digging, planting, composting, and weeding in the hope that this will somehow hasten the coming of more pleasant weather. Of course, spring cannot be rushed, but comes only in its own time. Yesterday, PacifiCorp and the California ISO ("CAISO") announced a Memorandum of Understanding ("MOU") committing the two entities to implementing a real-time Energy Imbalance Market ("EIM") by October of 2014. Like Northwest gardeners attempting to rush the spring, the MOU appears to be an attempt to jumpstart an EIM in the West. Because PacifiCorp and the CAISO are two of the largest transmission operators in the West, the effort must be taken seriously.

The EIM is one proposed solution to the problems of integrating increasing volumes of variable generation from renewable resources such as wind power. The core aim of EIM is to establish a market for regulating and balancing reserves that would allow system operators to draw on a wide range and diversity of resources to maintain electric system balance as renewable generation rises and falls, which theoretically will improve the efficiency of balancing operations. The EIM idea has been under consideration in the Northwest for the last couple of years, and has advanced to the point that detailed studies are being performed.

Continue reading "Rushing the Spring? PacifiCorp, California ISO Announce Energy Imbalance Market" »

In an unusual, and rather unseemly, display, the Federal Energy Regulatory Commission ("FERC") and the Commodity Futures Trading Commission ("CFTC") have brought their long-standing battle concerning which agency has jurisdiction over energy commodity markets to the U.S. Court of Appeals for the D.C. Circuit, which yesterday heard oral arguments on the subject. While a final decision is not expected for several months, early reports suggest that the Court was skeptical of FERC's jurisdictional claims.

The jurisdictional squabble arises from accusations of market manipulation lodged against former natural gas trader Brian Hunter. In 2006, Hunter, then working for the Amaranth hedge fund, took very large positions attempting to capitalize on anticipated steep increases in gas prices during the winter of 2006-07, but those bets went spectacularly wrong. Amaranth lost roughly $6 billion and collapsed. Following the collapse, both FERC and CFTC accused Hunter of manipulating natural gas prices on the New York Mercantile Exchange ("NYMEX"), dumping large volumes on that exchange in order to drive down prices with the aim of benefiting Amaranth's position in related swap markets.

Continue reading "CFTC and FERC Battle It Out in Court, Continuing Jurisdictional Uncertainty Over Energy Commodity Trading" »

In a recent Final Policy Statement, the Federal Energy Regulatory Commission ("FERC") has added another girder to the regulatory structure it has recently assembled supporting entry of independent transmission companies into the electric transmission market. The Final Policy Statement provides simplified and less-burdensome procedural requirements for independent transmission companies seeking to construct transmission based on financial commitments from "anchor tenants" or pre-subscribed transmission contracts.

The policy statement abandons FERC's prior policy requiring independent companies seeking to construct new transmission to go through a formal "open season" process, with the results posted on an OASIS site. Instead, independent transmission companies will be allowed to use less formal processes to identify a subset of interested transmission users, and to negotiate financial commitments from those transmission users. For example, FERC will allow subscriptions to be obtained through an informal solicitation process and will allow transmission rates to be negotiated individually between the transmission owner and customers, so that, for example, customers taking a greater risk by being the "first mover" can receive more favorable rates.

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