FERC Issues Final Rule To Prevent Undue Discrimination In Transmission Service

On February 16, 2007, the Federal Energy Regulatory Commission ("Commission" or "FERC") issued Order No. 890, amending Order Nos. 888 and 889 regarding the provision of electric transmission services on a non-discriminatory basis. Order No. 890: (1) strengthens FERC’s pro forma open-access transmission tariff ("OATT") to better achieve its purpose of remedying discrimination; (2) provides greater specificity to facilitate Commission enforcement; and (3) increases the transparency of the rules for planning and use of the transmission system. To accomplish these goals, the Commission adopted several significant provisions, described below.

Order No. 890 requires transmission providers to have a coordinated, open and transparent planning process on both local and regional levels, and to describe that process clearly in their tariffs. Transmission providers must submit a proposal for a coordinated and regional planning process that complies with the 9 planning principles articulated in the order, including: coordination, openness, transparency, information exchange, comparability, dispute resolution, regional coordination, economic planning studies, and cost allocation.

To increase the transparency of availability transfer capability ("ATC") calculations, Order No. 890 requires each transmission provider to set forth its ATC calculation methodology in its OATT. Beyond simply stating the methodology, transmission providers must also provide: (1) a detailed description of the specific algorithm used to calculate firm and non-firm ATC for scheduling, operating, and planning horizons; (2) a process flow diagram describing the various steps taken in making the calculation; and (3) a definition of each ATC component and an explanation of how each is derived.

In Order No. 890, the Commission determined that current OATT provisions addressing energy and generator imbalance charges were excessive, too varied and unrelated to service costs. Accordingly, FERC adopted a new Schedule 9 to the pro forma OATT to require imbalances to be based on a tiered structure similar to the imbalance provision used by the Bonneville Power Administration. Under the Commission’s new provisions, imbalance charges escalate as the imbalance increases and are based on incremental costs. Intermittent resources, such as wind generation, are exempt from the highest deviation band.

To make existing methods for evaluating requests for long-term firm point-to-point transmission service less discriminatory, the Commission modified the pro forma OATT to amend the existing planning redispatch provisions, and to implement conditional firm point-to-point service. The Commission also revised the rollover provision in the pro forma OATT to apply to contracts that have a minimum term of 5 years, rather than the current 1 year minimum. The new term provision requires customers to provide notice regarding whether the customer plans to exercise its right of first refusal to renew no less than 1 year prior to the expiration date of the transmission service agreement.

All transmission providers will be required to make various Commission filings during 2007 to demonstrate their compliance with the provisions of Order No. 890.

On February 15, 2007, the Commission issued an order clarifying its policy regarding when the Commission may exercise its jurisdiction over offshore gathering lines owned by affiliates of interstate natural gas companies.

The Commission had issued a Notice of Inquiry ("NOI") in this proceeding in September 2005 to evaluate the criteria established in the Arkla Gathering Service Co decision. Arkla established that gathering affiliates of interstate pipelines are generally exempt from the Commission’s Natural Gas Act ("NGA") jurisdiction. Arkla also held that where "an affiliated gatherer acts in concert with its pipeline affiliate in connection with the transportation of gas in interstate commerce and in a manner that frustrates the Commission’s effective regulation of the interstate pipeline, then the Commission may look through, or disregard, the separate corporate structures and treat the pipeline and gatherer as a single entity." The Arkla decision resulted in a U.S. appeals court vacating and remanding several orders in which the Commission had sought to reassert jurisdiction over certain affiliated gathering activities under the Arkla standard.

After reviewing comments received in response to the NOI, the Commission determined not to change its current policies regarding affiliate gatherers, but FERC did clarify the existing test that was established in Arkla. The Commission explained that it would reassert jurisdiction over a gathering affiliate of an interstate pipeline when: (1) the gatherer has used its market power over gathering to benefit the pipeline in its performance of jurisdictional transportation or sales service; and (2) that benefit is contrary to the Commission’s policies concerning jurisdictional service adopted pursuant to the NGA. If the Commission determines that a gatherer is involved in conduct that warrants reassertion of jurisdiction, the Commission need not make a determination of "concerted action" between the pipeline and the gathering affiliate, as it had prior to the issuance of this order and the clarification of the Arkla test.

On January 18, 2007, Senator Evan Bayh and several bipartisan co-sponsors introduced the Dependence Reduction through Innovation in Vehicles and Energy Act, or the DRIVE Act, to reduce the dependence of the United States on foreign oil through the use of alternative fuels and new technologies. According to its sponsors, the DRIVE Act would reduce the United States’ oil use in twenty years by 7 million barrels per day. The DRIVE Act is a revised version of the Vehicle and Fuel Choices for American Security Act introduced last year during the 109th Congress.

The purposes of the Act are to: (1) accelerate market penetration of advanced technology vehicles, flexible fuel vehicles, biofuels, and other oil saving technologies; (2) enable the accelerated market penetration of efficient transportation and clean alternative fuels without adverse impact on air quality; (3) provide financial incentives on a time-limited basis to encourage production and purchase of oil saving technologies; and (4) promote a nationwide diversity of clean alternative motor vehicle fuels and advanced vehicle technology. To accomplish these purposes, the key provisions of the DRIVE Act would:

• Increase availability of home-grown, renewable fuels, such as ethanol;

• Provide tax credits for manufactures who retool their factories to build hybrid electric, plug-in hybrid electric, and flex fuel vehicles;

• Require federal and state vehicle fleets to cut oil use by 30 percent by 2016 and ensure that 23 percent of their fleets are advanced diesels, hybrids or plug-in hybrids;

• Encourage the development and mass marketing of plug-in hybrid electric vehicles; and

• Lift the per manufacturer cap on consumer tax credits for the purchase of hybrids and advanced diesels.

The DRIVE Act also proposes several other tax credits as motivators to reduce oil dependency. The "Idling Reduction Credit" is a credit worth up to $3,500 per vehicle when certain taxpayers utilizing a heavy-duty diesel engine vehicle purchase a device that will allow the engine to be turned off, but will still provide heat, air conditioning, lights and other amenities that otherwise would only be available if the engine was kept running. Similarly, a tax credit is available to manufacturers of vehicles if they utilize advanced technologies to create vehicles with alternate power sources. This credit will return to the manufacturers up to 35% of their qualified investment in advanced technologies. Consumers purchasing these advanced technology vehicles would also be allowed a tax credit. On the other hand, certain "gas guzzling" business vehicles eligible for depreciation deductions will find those deductions reduced, in order to discourage businesses from purchasing those types of vehicles. Finally, the small ethanol producer credit is proposed to be expanded for producers of sucrose and cellulosic ethanol, in addition to an extension to December 31, 2014, of biodiesel income and excise tax credits.

The President’s recently released 2008 Budget Proposal includes several initiatives related to energy. First, the budget provides for $385 million for the Coal Research Initiative to develop advanced coal technologies. Specifically the proposal includes $108 million for the FutureGen project to demonstrate coal power generation with carbon capture and sequestration, as well as a series of new large-scale carbon sequestration field tests. Second, the proposal includes the allocation of $1.65 billion in tax credits, authorized under the Energy Policy Act of 2005 to foster more than $9 billion in total investment to construct highly efficient, low-emitting power facilities.

The budget also includes initiatives for solar, biofuels, and hydrogen fuel. The solar initiative proposal provides $148 million toward the goal of making solar photovoltaic technology cost competitive with conventional electricity by 2015. The biofuels initiative provides $179 million for research in producing ethanol from sources other than corn, such as wood chips, switchgrass, and other organic materials. The budget proposal provides $309 million to support development of commercially viable hydrogen infrastructure technologies and fuel cell vehicles that produce no air pollution or greenhouse gas emissions by 2020. Further, the administration’s budget proposes to increase the current standards for alternative fuels use and for fuel economy to cut domestic gas consumption by 20 percent by 2017, and significantly reduce vehicle air pollution and CO2 emissions.

The President’s budget proposal also includes $217 million for the activities of the nation’s Power Marketing Administrations ("PMAs") – Southeastern, Southwestern, Western, and Bonneville – including construction and maintenance of Federal transmission system infrastructure. The proposal includes an initiative, beginning this year to charge the PMAs interest rates similar to those charged to governmental corporations on new capital investments occurring after September 30, 2006. The proposal also seeks to implement an initiative to allow the Bonneville PMA to apply net secondary market revenues in excess of $500 million toward prepayment of its outstanding Treasury debt.

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