GTH Energy & Natural Resources Law Blog

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.)

The Washington Supreme Court late last week issued a pair of opinions that provide a road map for public agencies struggling to reconcile disclosure obligations under the Washington Public Records Act ("PRA") with the thicket of state and federal laws protecting information from public disclosure. Read together, the decisions clarify how public agencies should treat information that is protected from disclosure under either federal law or under the multitude of exemptions from public disclosure provided by Washington law. The cases also serve as a powerful reminder that Washington public agencies must have public disclosure policies in place and carefully follow those policies -- with assistance from legal counsel, if required -- when responding to requests for disclosure of public records. Finally, the Court seems to have gone out of its way to provide guidance on its view of how the Public Records Act should be applied. It may therefore be advisable for public agencies with a disclosure policy in place to review the policy in light of the Court's new guidance.

The opinion in Resident Action Council v. Seattle Housing Authority leaves the reader with a sense of the Court's frustration that Washington public agencies seem regularly to misunderstand or misapply the PRA. The Court seems to imply that such errors help make the PRA one of the most litigated statutes before the Court. Despite Chief Justice Madsen's concurrence arguing that the Court goes well beyond what is required to decide the case, the opinion expends a good deal of ink setting forth the analytical framework the Court believes public agencies should follow when responding to PRA requests.

As an over-arching framework, the Court identifies five "indispensable steps" an agency must go through in responding to a PRA request, and even includes a flow chart to illustrate these steps. In essence, the flowchart is simply a way to illustrate the familiar principle that public agencies have an obligation to disclose public records unless the record is subject to an exemption and, if the record is subject to an exemption, to disclose redacted records. If the agency has properly determined that the information is protected, it can be released only "in rare cases" where a judge concludes that continued protection of the information is "clearly unnecessary."

The Court adds a new step to this analytical framework, identifying a system for classifying the PRA's141 exemptions and explaining how the different classes of exemptions should be analyzed. The Court divides the PRA's exemptions into "categorical" exemptions and "conditional" exemptions. Categorical exemptions are those that "exempt without limit a particular type of information or record." For example, RCW 42.56.230(a) categorically exempts debit card numbers from public disclosure. Conditional exemptions are those that exempt a particular type of information from public disclosure, "but only insofar as an identified privacy right or vital governmental interest is demonstrably threatened in a given case." For example, the PRA exempts from disclosure the identity of crime victims but only "if disclosure would endanger any person's life, physical safety, or property." RCW 42.56.240(2). The Court's opinion includes an appendix that categorizes all 141 PRA exemptions as either categorical, conditional, or, in the case of four exemptions, "ambiguous."

Continue reading "Public Records at the Intersection of Personal Privacy, Public Disclosure, and Litigation: Washington Supreme Court Clarifies Public Records Act Obligations" »

The Washington State Court of Appeals today issued an opinion finding that Washington Public Utility Districts ("PUDs") have the statutory authority to condemn state school trust lands in order to construct transmission lines and other utility infrastructure. Today's opinion is the latest chapter in a twisting saga that began in 1996, when Okanogan County PUD began planning a new transmission line between existing substations in Pateros and Twisp in the Methow Valley. The opinion confirms that, unless state lands have been dedicated to a particular public use, PUDs have authority to condemn those lands for utility purposes. By extension, the opinion should allow other Washington municipalities, such as Port Districts, cities, and towns, to condemn state lands for public purposes because they have statutory condemnation authority similar to that of PUDs.

The long and winding road of litigation began with a decade of environmental review, culminating in a Court of Appeals opinion confirming that Okanogan PUD's environmental review met required standards and that the PUD did not act arbitrarily in selecting the route for the transmission line. (Gebbers v. Okanogan County Public Util. Dist. No. 1, 144 Wn.App. 371, 183 P.3d 324, rev. denied, 165 Wn.2d 1004, 198 P.3d 511 (2008)). The PUD then began obtaining easements covering the selected route. After negotiating easements for about 85% of the required land, the PUD then filed a petition for condemnation against the remaining property owners. Among the parcels involved in the condemnation proceeding was a tract of state school trust lands.

Continue reading "Washington Appeals Court Finds PUDs Have Authority to Condemn Public Trust Lands" »

The Washington Supreme Court today rejected tort claims based on exposure to Electromagnetic Fields ("EMF") from a utility substation. The Court's rejection of the EMF claim, which is consistent with similar conclusions reached by, for example, the California Supreme Court, is perhaps the final brick in the wall for EMF claims against electric utilities. The decision is therefore an important milestone in the effort, played out over the last several decades, to protect electric utilities from EMF claims with dubious scientific support. In addition, the Court rejected an inverse condemnation claim against the City of Kirkland, broadly protecting local land use decision-makers against tort liability.

The case, entitled Lakey v. Puget Sound Energy, arises from Puget Sound Energy's ("PSE") routine upgrade of an electric substation in a Kirkland, Washington neighborhood. Because the upgrade required relatively minor variances from the local zoning code, PSE sought variances from the City of Kirkland. Neighboring property owners unsuccessfully fought the variance. They then sued PSE, seeking damages for exposure to EMF from the substation and the City of Kirkland under an inverse condemnation theory. The trial court rejected both claims. After a Frye hearing, the trial court rejected the plaintiffs' expert scientific testimony as unreliable. And it rejected the inverse condemnation claim on legal grounds. The Court of Appeals certified the case for direct appeal to the Washington Supreme Court, which heard argument on October 18, 2012.

Continue reading "Washington Supreme Court Rejects EMF Damages Claim Against PSE and Kirkland, Relieving Major Liability Concern" »

In a decision of great interest to Washington's Public Hospital Districts, Public Utility Districts, Port Districts, and many other state and local government entities, the Supreme Court this week issued an opinion clarifying and narrowing antitrust immunity for state and local governments. As a result of the decision, public agencies will need to exercise great care when taking actions that could restrict competition.

Under the "state-action immunity doctrine," the courts have long recognized that local government entities are immune from federal antitrust liability if they act under state law intended to restrict competition. But, for immunity to apply, a local government entity must act under a "clearly articulated and affirmatively expressed state policy to displace competition." This week's Supreme Court decision, FTC v. Phoebe Putney Health System, Inc., clarifies how this "clearly articulated and affirmatively expressed" test should be applied. The Court concludes that, while state legislatures need not explicitly state that they intend to restrict competition, limitation of competition must be the natural and logical consequence of the policy adopted by the state.

Continue reading "U.S. Supreme Court Narrows Antitrust Exemptions for Local Government Entities" »

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" »

The Federal Energy Regulatory Commission ("FERC") last week issued a Final Rule extending its long-standing requirements for reporting data on wholesale power trading to PUDs, municipal power providers, rural electric coops, and other publicly-owned utilities. While investor-owned utilities ("IOUs") have been required to file power trading data in Electronic Quarterly Reports ("EQRs") since 2001, that requirement was not extended to public power utilities until now. But, beginning with the third quarter of 2013, public power agencies engaging in more than 4 million MWh of wholesale transactions will be required to file EQRs with FERC.

FERC's action is based on Section 220 of the Federal Power Act ("FPA"), which was added to the FPA in the Energy Policy Act of 2005. In Section 220, Congress directed FERC to "facilitate price transparency in markets for the sale and transmission of electric energy" by prescribing rules for reporting information about "availability and prices" of wholesale energy and transmission service. Section 220 authorizes FERC to obtain market information from "any market participant" except for those having a "de minimis market presence." By extending the reach of Section 220 to "any market participant," Section 220 explicitly sweeps in public power entities that are engaged in wholesale transactions. The jurisdictional sweep of Section 220 is therefore much broader than most other provisions of the FPA, which generally apply only to IOUs.

Continue reading "FERC Extends Power Trade Reporting Requirements to Public Power" »

Many in the electric utility industry thought that the threat of liability arising from human exposure to Electromagnetic Fields ("EMF") had been put to rest years ago. The Washington Supreme Court, however, recently accepted review of a case that will decide whether lawsuits claiming damages from EMF exposure will be entertained in Washington courts despite the nearly unanimous rejection of such suits in other states. Because EMF is associated with almost all electric equipment, the case has potentially enormous consequences for Washington's electric utilities, as well as other industries that use electric or electronic equipment in almost any form, ranging from housing to telecommunications. Because the Court has accepted review of the plaintiffs' claims of inverse condemnation based on EMF exposure on their properties, the case also has serious implications for cities, counties, and other government agencies that may become involved land use decisions allowing the construction of substations, distribution and transmission lines, and other electric utility infrastructure.

The case arises from construction of a new substation by Puget Sound Energy ("PSE") in a residential neighborhood of Kirkland, Washington. PSE requested, and Kirkland granted, relatively modest zoning variances to allow construction of the substation. The Plaintiffs, owners of property adjacent to the substation, then brought suit against PSE under theories of trespass and nuisance, claiming that a "reasonable fear" of EMF radiation from the substation caused reduction of their property values. Plaintiffs also sued the City of Kirkland claiming that Kirkland's approval of the zoning variances reduced their property value and therefore amounted to an inverse condemnation of their property.

Continue reading "Just When You Thought It Was Safe To Go Near The Wires: Washington Supreme Court Accepts Review of EMF Damages Case" »

Earlier today, the U.S. Court of Appeals for the Ninth Circuit issued an opinion confirming that the Federal Energy Regulatory Commission ("FERC") cannot order publicly-owned utilities to pay refunds. However, the opinion may leave the door open for damages to be awarded against public power entities in other forums such as federal courts.

Today's opinion, City of Redding, California v. FERC, comes more than a decade after the events giving rise to the litigation, the rampant dysfunction of the California electricity market and the resultant meltdown of markets across the West that occurred from May 2000 through June 2001. The litigation revisits a fundamental question under the Federal Power Act, namely, whether FERC has authority to disgorge refunds from federal power marketing agencies like Bonneville Power Administration and publicly-owned utilities like the City of Redding's municipal utility. In 2005, the Ninth Circuit appeared to have settled this question. In Bonneville Power Administration v. FERC, the Court held that FERC's authority to order refunds is limited to investor-owned utilities, and that it therefore lacks authority to order Bonneville and other publicly-owned entities to pay refunds. The Court suggested, however, that its opinion would not necessarily bar lawsuits against Bonneville and other non-jurisdictional entities in state or federal courts.

Continue reading "Still Not Out of the Woods: Ninth Circuit Affirms Limits on FERC Jurisdiction Over Publics But Leaves Damages Door Ajar" »