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Complicating "Coal By Wires" Regulation, Minnesota Court Strikes Down Greenhouse Gas Regulation

April 21, 2014

In a ruling with potentially far-reaching consequences for state-level attempts to regulate greenhouse gases, the U.S. District Court for the District of Minnesota on April 18 issued a ruling striking down key elements of Minnesota's Next Generation Energy Act ("NGEA"). For the Pacific Northwest, in particular, the ruling could complicate efforts by Washington, Oregon, and California to limit "coal by wires" -- the importation of coal-generated electricity from plants located in states like Montana and Arizona. State of North Dakota et al. v. Heydinger et al., No. 11-cv-3232 (SRN/SER) (issued April 18, 2014).

Passed by Minnesota's legislature in 2007, the NGEA is aimed at reducing the carbon footprint of electricity consumed in the state. The statute prohibits new power plants within Minnesota that "would contribute to state power sector emissions." To address the "coal by wires" problem, the statute also broadly prohibits importing power generated outside Minnesota if that generation "would contribute to statewide power sector carbon dioxide emissions," and also prohibits long-term power purchase contracts from facilities larger than 50 MW that would contribute to Minnesota's power sector carbon dioxide emissions.

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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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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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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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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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Pew Study Documents Progress in Military Renewables, Reliability and Efficiency Efforts

January 28, 2014

The U.S. military is making substantial progress toward its goals of acquiring 3 GW of renewable energy by 2025, substantially reducing energy use, and improving the reliability of power delivery to military bases, according to a recent report from the Pew Charitable Trusts. The progress attained so far demonstrates the seriousness of the military's commitment to renewable energy, energy conservation, and reliability, and confirms that the Department of Defense ("DOD") energy initiatives represent a huge opportunity for private-sector energy developers.

The DOD initiatives arise from both Congressional mandates requiring increased use of renewable fuels and from recognition within the armed services that continued reliance on fossil fuels and an aging electric infrastructure creates unacceptable security vulnerabilities. For example, the Defense Science Board's influential 2008 report, "More Fight, Less Fuel," identified the military's continued reliance on fossil fuels, and the fragile supply lines associated with that dependence, as a major security problem for military operations around the world. "Unleashing the tether" that ties troops to vulnerable fuel supplies therefore became a major strategic objective. Similarly, the report concluded that serious security risks arise from the dependence of U.S. military bases on an aging electricity infrastructure that exposes bases to increasingly frequent power outages.

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Over Heated Dissent, Ninth Circuit Rejects Rehearing in Low Carbon Fuel Standards Challenge, Setting Up Possible Supreme Court Commerce Clause Showdown

January 23, 2014

The U.S. Court of Appeals for the Ninth Circuit today rejected petitions for rehearing of its decision in Rocky Mountain Farmers Union v. Corey, the opinion issued last September which rejected constitutional challenges to California's low-carbon fuel standard. Seven judges dissented from the decision and took the unusual step of publishing their dissent which, in strongly-worded language, accused the majority of disregarding "longstanding dormant Commerce Clause doctrine" and placing the circuit "squarely at odds with Supreme Court precedent." This prompted Judge Ronald Gould to take the equally unusual step of issuing a written opinion defending the majority's decision to deny the petitions for rehearing.

As we have previously discussed, last fall, the Ninth Circuit, in a 2-1 split decision, upheld California's low-carbon fuel standard against challenges brought by out-of-state ethanol manufacturers, farmers, and allied interests. The challengers argued that, by using a geographically-based system for assessing the carbon footprint of different sources of ethanol and assigning higher default scores to Mid-Western producers than to California producers, California's system discriminated on its face against these out-of-state producers, and therefore violated the Commerce Clause of the U.S. Constitution. Under a doctrine known as the "dormant Commerce Clause," the courts have long held that states are prohibited from imposing constraints on interstate commerce that discriminate against out-of-state economic interests and artificially favor in-state interests. The panel's majority concluded that the low-carbon fuel standard is not facially discriminatory because California's system for assessing the carbon footprint of different ethanol sources is based on objective scientific evidence rather than on impermissible discrimination against out-of-state producers. Nonetheless, the Court remanded the case to the trial court to review evidence that might prove whether the low-carbon fuel standard discriminates against out-of-state producers in practice.

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California Throws Down Challenge to Energy Storage Entrepeneurs: Bring Us Cost-Effective Options

November 1, 2013

The California Public Utilities Commission ("CPUC") has thrown down the gauntlet, creating a 1325-MW market for energy storage in California, but requiring California's regulated utilities purchase storage only if cost-effective options are available. The CPUC's novel approach upends the usual after-the-fact prudency review of utilty purchase decisions, forcing energy storage sellers to leap the cost-effectiveness barrier in order to access the new CPUC-mandated market.

The CPUC's order, adopted in response to legislation enacted in 2010 (AB 2514), is a new approach to an old idea -- technology forcing. Environmental legislation dating back to the 1960s aimed to force manufacturers to develop new pollution control technology by imposing health-based standards even if those standards could not be achieved with known technology. Rather than following this command-and-control regulatory approach, the CPUC order imposes only general requirements for energy storage: storage must (1) optimize the grid, contribute to reliability needs, or defer upgrades on the T&D system; (2) help integrate renewable resources; and, (3) help achieve greenhouse gas reduction goals. The order requires California's regulated utilities to purchase 1325 MW of storage meeting these requirements by 2024, but allows them to defer these obligations if no cost-effective options can be found. The CPUC order, then, uses the incentive of a huge, mandated market to try to force rapid development and deployment of new energy storage technologies.

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Ninth Circuit Rejects Petition Seeking Regulation of Greenhouse Gases in Washington

October 25, 2013

Two October decisions of the federal courts are likely to have significant implications for regulation of greenhouse gases ("GHG") under the Clean Air Act. Of greatest note for the State of Washington, the Ninth Circuit last week overturned a lower court's order that would have required the Washington Department of Ecology ("Ecology") to set standards limiting GHG emissions from Washington's five oil refineries. The Court of Appeals concluded that the environmental plaintiffs lacked standing to bring their complaint. (Washington Environmental Council v. Bellon, No. 12-35323 (issued Oct. 17, 2013)).

In that case, two environmental groups filed a lawsuit in U.S. District Court under the Clean Air Act's citizen suit provisions arguing that Ecology, which administers the Clean Air Act in Washington under an EPA-approved State Implementation Plan, is obligated to set GHG emissions limits on the five refineries under the Act's "Reasonably Available Control Technology" requirements. The District Court agreed, ordering Ecology to develop GHG emissions limits for the five oil refineries by 2014.

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Getting a CLEW About Climate Legislation: Report to Governor's Climate Workgroup Suggests Future Course of Greenhouse Gas Regulation in Washington

October 18, 2013

Earlier this week, Leidos (formerly SAIC International) delivered its final report evaluating greenhouse gas ("GHG") reduction policies from other jurisdictions to the Climate Legislative and Executive Workgroup ("CLEW"). The CLEW was created by ESSB 5802, the first piece of legislation sponsored by Gov. Jay Inslee, which is intended to establish the future legislative agenda for climate issues in our state. Leidos was retained as the CLEW's technical consultant. This week's Leidos report aims to help the CLEW quantify both the need for new climate legislation and the effectiveness of several approaches taken in other jurisdictions. The CLEW is scheduled to release its final report and recommendations at the end of 2013.

The Leidos report incorporates the GHG emissions reduction targets adopted by the legislature in 2008. Those targets are: (a) to reduce Washington's GHG emissions to 1990 levels by 2020; (b) to reduce GHG emissions to 25% below 1990 levels by 2035; and, (c) to reduce overall emissions to 50% below 1990 levels by 2050, or 70% below the state's expected emissions in that year. Evaluating current policies at both the state and federal level, the report concludes that existing policies (for example, Initiative 937 and policies encouraging energy efficiency) will achieve substantial reductions in Washington's GHG emissions, but will fall well short of the 2008 targets.

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