On November 16, 2007, the Federal Energy Regulatory Commission ("FERC") issued three orders approving requests by Southern California Edison ("SCE"), Baltimore Gas and Electric Co. ("BG&E") and Pepco Holdings, Inc. ("Pepco"), for transmission investment incentives, as follows:
Southern California Edison: FERC granted the request of SCE for incentive rate treatments for three new transmission projects. FERC authorized a 125-basis point return on equity ("ROE") incentive for the Devers-Palo Verde II and Tehachapi Projects and a 75-basis point ROE incentive for the Rancho Vista Project that SCE is proposing to construct. FERC also determined that the construction work in progress ("CWIP") and abandoned plant cost recovery incentives SCE was granted reduced SCE’s overall risk, so FERC slightly reduced its authorization of incentive rate treatments from what SCE originally requested. FERC also granted a 50-basis point ROE incentive for SCE’s continued participation in the California Independent System Operator, Inc.
FERC found that SCE satisfied the nexus test requiring that the incentives sought be tailored to address the demonstrable risks and challenges faced by the applicant in undertaking the project. Of SCE’s three projects, the Tehachapi Project is of particular note because it will allow significant amounts of wind generation to interconnect with SCE’s transmission system and will support California’s renewable portfolio standard and efforts to require reductions in greenhouse gas emissions. Commissioner Wellinghof noted that the SCE investments reflect a commitment to advanced technologies and provided incremental benefits beyond standard minimum requirements. Commissioner Wellinghof noted that the Tehachapi investment should be rewarded "[i]n light of the broad and substantial benefits associated with increasing the availability of renewable energy resources…."
Baltimore Gas and Electric Company: In a similar order, FERC granted BG&E’s requested transmission rate incentives on transmission owner-initiated ("TOI") projects proposed by BG&E because they were non-routine and therefore qualified for the ROE transmission rate incentive adder. FERC ordered BG&E to file revised tariff sheets to incorporate a 100-basis point ROE incentive for the TOI facilities. FERC granted the incentive in part because FERC found BG&E demonstrated a nexus between the 100-basis point ROE adder and the investment being made in the proposed TOI projects. FERC explained that investment in such transmission facilities and improvements to infrastructure will encourage competition and improve the overall reliability, safety and operation of BG&E transmission facilities, as well as improving the reliability in the PJM Interconnection L.L.C. ("PJM") service area.
Pepco Holdings, Inc.: FERC accepted the revised tariff sheets submitted by Pepco and implemented a transmission rate incentive (a 50-basis point ROE adder) in recognition of Pepco’s membership in PJM. Pepco filed the revised tariff sheets with PJM on behalf of its transmission-owning public utility affiliates, Atlantic City Electric Company, Delmarva Power and Light Company and Potomac Electric Power Company. FERC explained that it intends to continue to allow incentive-based rate treatment for public utilities that continue to be a member of an RTO, as stated in Order No. 679-A, as the membership creates consumer benefits, such as an increase in grid operation reliability. In the order FERC stated, "the best way to ensure that these benefits are spread to as many consumers as possible is to provide member utilities of an RTO with incentives for joining and remaining a member."
FERC Approves Midwest ISO Proposal To Continue Grandfathering Of Transmission Contracts
On November 15, 2007, FERC approved a proposal by the Midwest ISO to continue to allow grandfathering of transmission contracts ("GFAs") that have been carved out of the Midwest ISO region’s energy markets. FERC determined that the Midwest ISO had "sufficiently supported to extend the carve-out of those GFAs protected by the Mobile-Sierra doctrine because the public interest does not require their modification."
In 2004, FERC had approved the Midwest ISO’s proposal to implement an Energy Markets Tariff to provide for market-based congestion management and energy markets. In order to have an efficient, functioning energy market, the Midwest ISO needed to address transmission service being provided under approximately 232 long-term grandfathered contracts in existence at that time.
In a series of decisions, FERC ordered the Midwest ISO to carve out certain grandfathered agreements and accepted the Midwest ISO’s proposed treatment of other grandfathered agreements for a specified transition period ending February 1, 2008. In the November 15 Order, FERC agreed to extend the carved-out grandfathering of transmission contracts past the February 1, 2008 expiration date in order to preserve the bargains made by the transacting parties. The Midwest ISO currently has 101 carved-out grandfathered agreements, which make up approximately 6.7% of the Midwest ISO’s total load.
FERC Proposes New Rules To Promote A More Efficient Capacity Release Market
On November 15, 2007, FERC issued a Notice of Proposed Rulemaking ("NOPR") proposing new rules designed to increase the efficiency of the natural gas pipeline capacity release markets. The proposed rule originated from petitions for rulemaking made earlier this year that sought to modify the existing capacity release program, established in 1992 by the gas pipeline restructuring rule, Order No. 636.
The NOPR proposes to modify Order No. 636 by permanently removing the rate cap on capacity release transactions of one year or less, thereby allowing for market-based pricing for short-term capacity releases. This proposal is a familiar one, as price ceilings for short-term released capacity were previously waived for an experimental two-year period under Order No. 637, issued in 2000. Although FERC found that the data was inconclusive concerning the waiver and the increase in available short-term peak capacity, FERC Commissioner Marc Spitzer stated that "removing the rate cap on capacity release transactions would improve the efficiency of the capacity market by giving releasing shippers a greater incentive to release their capacity during periods of constraint. Doing so is consistent with our longstanding goal of allocating capacity to the shipper that values it the most." According to Commissioner Spitzer, this order will continue to allow shippers to compete with the pipelines and will allow "releasing shippers to offer competitively-priced alternatives to the pipelines’ negotiated rate offerings." FERC is not proposing to remove price caps for primary pipeline capacity, noting that pipelines are currently able to negotiate rate transactions above the maximum rate.
FERC also proposed to modify its regulations to promote asset management arrangements ("AMAs") and increase the number of options for shippers obtaining natural gas supplies. AMAs are contractual relationships that allow third parties to manage the gas supply and delivery arrangements, including transportation and storage capacity, of capacity holders. Use of AMAs has increased over time and the proposed rule would exempt capacity releases made under these arrangements from the prohibition on particular instances of tying, found in Order No. 636-A, and from the bidding requirements found in Section 284.8 of FERC’s regulations.
Order No. 636-A also prohibited tying the release of capacity to any outside conditions; the NOPR proposes to allow arrangements tying the release of capacity with the release of capacity on other pipelines, taking assignment of gas purchase obligations or paying other compensation to the releasing shipper. Commissioner Wellinghoff noted that the majority of commenters on the issue indicated that such arrangements provide significant benefits to the industry, such as a more load responsive use of the gas supply, greater liquidity, an increased use of transportation capacity, cost effective procurement vehicles for end users and overall enhanced competition. The proposed rule would continue to require asset managers to follow the posting and reporting requirements and to require pipelines to provide notice of the released capacity. FERC also proposed to retain the shipper-must-have-title requirement to increase transparency.
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