Originally published in Powell Goldstein LLP’s Energy Alert, May 2007
On April 19, 2007, the Federal Energy Regulatory Commission ("FERC") granted the California Independent System Operator Corporation’s ("CAISO") petition for a declaratory order approving CAISO’s proposed financing mechanism for the construction of interconnection facilities to connect location constrained resources, such as wind power resources, to the CAISO transmission grid. In accepting the proposal, the Commission explained that "the difficulties faced by generation developers seeking to interconnect location-constrained resources are real, are distinguishable from the circumstances faced by other generation developers, and such impediments can thwart the efficient development of needed infrastructure." FERC also noted that the proposal satisfied its responsibilities under the FPA to further initiatives encouraging the development of renewable generation on the state, regional and federal levels.
CAISO’s proposed financing mechanism was developed primarily to connect multiple location-constrained renewable resources to the CAISO grid and to roll-in the costs of these facilities through the transmission revenue requirement of the Participating Transmission Owner that constructs the facility, via the CAISO Transmission Access Charge ("TAC"). Under the proposal, generators that interconnect to the grid would only be responsible for paying a pro rata share of the going-forward costs of the line (through TAC), until the line is fully subscribed. Eligibility for this rate treatment will be contingent upon the interconnection facility being approved in the CAISO transmission planning process as a facility that provides needed system benefits.
PJM Rate Design Orders May Influence Other Regions
On April 19, 2007, FERC issued two rate design orders concerning PJM Interconnection, L.L.C. ("PJM") that may influence future FERC Network Upgrade proceedings. FERC held that: (1) existing PJM transmission facilities costs should continue to be recovered based upon a license plate rate design; (2) PJM should allocate costs for new facilities of 500 kV or higher to all of its customers with postage stamp rates; and (3) PJM should re-design its cost allocation procedures for new facilities of less than 500 kV, in part, because PJM’s tariff lacks sufficient detail and thus has resulted in considerable litigation. Under a "license plate" rate design, the costs of existing transmission facilities in a particular zone are divided among its load and customers pay for such service based on the zone(s) in which their loads are located. In contrast, under a "postage-stamp" rate design the costs of all existing transmission facilities in a region are rolled-in and allocated to all customers according to each customer’s share of the region’s load.
FERC has emphasized in recent orders that different levels of transmission cost allocations are appropriate for different regions of the country. Thus, the subject PJM orders do not call into question existing FERC rate design orders. However, with a clear signal from FERC in these orders that costs for facilities at 500 kV or higher located within the PJM region should be allocated on a postage stamp basis, transmission owners in other regions may begin referring to the PJM orders as precedent for the cost allocation of new high voltage facilities in their region. It will also be interesting to observe, after PJM develops more definitive cost sharing provisions to address lower voltage Network Upgrades, whether PJM’s new "beneficiary pays" procedures will influence other regions.
FERC Issues NOPR Regarding Price Transparency In Natural Gas Markets
To facilitate transparency in natural gas markets, FERC issued a Notice of Proposed Rulemaking ("NOPR") on April 19, 2007 proposing to: (1) require daily postings of natural gas flow information by intrastate pipelines; and (2) require annual filings by buyers and sellers of natural gas (that transact more than de minimis volumes) of aggregate annual purchase and sales information. Under the proposal, intrastate pipelines would be required to post capacity and volume data for major receipt and delivery points and mainline segments on a daily basis.
Current practice dictates that holders of blanket marketing certificates or blanket unbundled sales service certificates are required to notify FERC only when reporting practices are modified. The NOPR requires these certificate holders to inform FERC as to whether their transactions are reported to publishers of electricity or natural gas price indices and whether any such reporting complies with the set standards.
In a statement released on the issuance of the NOPR, Chairman Kelliher explained that while FERC considered mandatory price reporting, it found that "there may be less liquidity at gas price indices if we mandated price reporting, as the number of fixed price transactions decline in favor of index pricing." In addition, Chairman Kelliher acknowledged that although the NOPR applies to entities beyond FERC’s "traditional jurisdiction," FERC interpreted the transparency provisions of the Energy Policy Act of 2005 to provide such authority.
FERC chose not to propose a similar rule for electricity markets because it determined that the issue is addressed in other proceedings (such as Order No. 890, the final rule modifying the Open-Access Transmission Tariff.) Comments on the NOPR are due 45 days after publication in the Federal Register, with reply comments due 30 days afterward.
FERC Accepts NERC Regional Reliability Delegation Agreements
On April 19, 2007, FERC approved the North American Electric Reliability Council’s ("NERC") pro forma Delegation Agreement, which will act as the precept for the contractual relationship between NERC and the eight designated reliability entities. The pro forma Delegation Agreement includes the Uniform Compliance Program, which describes eight monitoring processes, including: compliance audits, self-certification, spot checking, investigations, self-reporting, periodic data submittals, exception reporting, and complaints.
FERC also approved the eight individual Regional Entity Delegation Agreements, through which NERC will designate "frontline" responsibility for reliability standards to the eight regional entities. Chairman Kelliher explained in a statement released by FERC that the regional entities would be "the first line of enforcement," and that their enforcement efforts would be reviewed by both NERC and FERC. Specifically, the regional entities will be responsible for auditing, investigating and ensuring that entities abide by the approved reliability standards.
While FERC approved the pro forma and eight individual Delegation Agreements, it also determined where clarification and modification of the agreements were necessary. FERC directed NERC and the designated Regional Entities to make a compliance filing within 180 days of the order addressing these modifications. Nonetheless, FERC determined that the Delegation Agreements would become effective on May 19, 2007.
Court Of Appeals Remands Decision Regarding FERC Jurisdiction
On April 20, 2007, the United States Court of Appeals for the District of Columbia Circuit issued a decision granting the Connecticut Department of Public Utility Control’s ("DPUC") petition for review regarding FERC’s jurisdiction to regulate generation resource adequacy. In its initial order, FERC did not adequately explain why FERC possessed the requisite jurisdiction over resource adequacy. In a request for rehearing DPUC argued that FERC’s explanation was unsatisfactory because FERC’s order did not point to any statutory authority. Later, in both its brief and oral argument before the Court of Appeals, FERC contended that section 201 of the Federal Power Act provided it with the necessary statutory authority.
Despite FERC’s arguments that the court should accept the reasoning set forth in its brief and oral argument, the Court of Appeals held that FERC should have described this line of reasoning in its earlier decisions. The Court of Appeals explained that it "may not accept appellate counsel’s post hoc rationalizations for agency action," and granted DPUC’s petition for review, remanding the matter back to FERC for further proceedings. Although FERC may be able to satisfy the Court of Appeals that it possesses the requisite authority to regulate generation resource adequacy, which has been a traditional area of state authority, the Court made it clear that such justification must appear in a FERC order and not for the first time during appellate arguments.
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