Energy Industry May 2008 Updates

28 May 2008 Publication

Legal News: Energy Industry

Edison Mission Energy to Pay $9 Million Penalty for Conduct That Misled FERC Enforcement Staff
On May 19, 2008, FERC announced that it approved a settlement with Edison Mission Energy (Edison Mission) under which Edison Mission will pay a $9-million penalty to remedy its lack of candor with FERC’s Office of Enforcement staff during an investigation. Although no finding of improper market activity was announced, FERC imposed the monetary penalty on Edison Mission for failing to comply with its duty of candor as a seller authorized to engage in sales for resale of electric energy at market-based rates.

The imposition of a penalty in this case is unlike recent cases involving penalties since the penalty is based upon Edison Mission’s lack of candor with the FERC enforcement staff, not an underlying tariff violation or act of market manipulation. This is, however, a logical extension of the earlier cases where FERC repeatedly emphasized that the penalty would have been greater had the market participant not cooperated with its staff and/or self-reported its potential violation. Here, the opposite occurred — a significant penalty was imposed because the market participant did not cooperate adequately.

FERC Accepts First Round of Transmission Planning Compliance Under Order No. 890
In May 2008, FERC conditionally accepted the first set of six compliance filings for the transmission planning process required under Order No. 890. The following entities each submitted compliance filings for its transmission planning processes: (1) PJM Interconnection, LLC, (2) Midwest Independent Transmission System Operator Inc., (3) Midwest Independent Transmission System Operator and American Transmission Company, LLC, (4) MidAmerican Energy Company, (5) ISO New England, Inc., and (6) Maine Public Service Company. In Order No. 890, FERC reformed the pro forma open access transmission tariff to clarify and expand the obligations of transmission providers to provide transmission service on a non-discriminatory basis.

FERC directed transmission providers to comply with Order No. 890 in a series of compliance filings dealing with different aspects of the new rule. In December 2007, transmission providers were required to submit compliance filings to ensure that they are developing a transmission planning process that satisfies the nine principles sets forth in Order No. 890: (1) coordination, (2) openness, (3) transparency, (4) information exchange, (5) comparability, (6) dispute resolution, (7) regional participation, (8) economic planning studies, and (9) cost allocation for new projects. Regional transmission organizations (RTO) and independent system operators (ISO) were required by FERC to either reform their transmission planning processes to comply with the principles set forth in Order No. 890 or show that their current planning processes are consistent with or superior to the transmission planning requirements set forth in Order No. 890. The RTOs and ISOs were directed to indicate in their compliance filings how all participating transmission owners within their regional footprint will comply with the transmission planning requirements under Order 890. 

FERC’s goals are to ensure that transmission service is provided on a non-discriminatory basis and to strengthen the transmission grid itself. In order to continue to monitor the transmission planning processes across the country, FERC will convene regional technical conferences in 2009 to assess the progress that each transmission provider has made with respect to its transmission planning process, obtain customer and stakeholder input, and identify areas of the planning process that require improvements.

FERC Revises Regulations Regarding Ex Parte Contacts and Separation of Functions
On May 15, 2008, FERC announced that it had approved an “enforcement package” — four separate orders designed, in total, to clarify FERC’s enforcement program. FERC’s enforcement activities have taken on an increasingly important role in its regulation of the electric and gas industries since the California energy crisis in 2000 – 2001.

Of particular interest is a notice of proposed rulemaking (NOPR) that was designed to clarify FERC’s regulations governing ex parte contacts and separation of functions as they apply to proceedings arising out of internal FERC investigations. With regard to ex parte contacts, FERC specified in this NOPR that the subject of a Part 1b investigation may not communicate in person or via telephone with FERC commissioners or their staff about the investigation. Instead, such communications must be in writing. Part 1b investigations are internal investigations, not formal on-the-record proceedings, in which there are no parties or interveners other than the subject of the investigation. With regard to separation of functions, the NOPR contains a proposal to revise FERC’s current rule prohibiting litigation staff from advising in the outcome of any proceeding in which a FERC adjudication is made after hearing. The NOPR proposes to bring FERC’s current rule in line with its recent ruling on this issue in the Energy Transfer Partners case, with the additional clarification that the separation of functions restrictions will begin to apply once FERC issues a show cause order in a Part 1b investigation. Finally, the NOPR contains a proposal that intervention in enforcement proceedings arising from Part 1b investigations is not permitted as a matter of right. Comments on the NOPR are due 60 days after its publication in the Federal Register.

FERC Expands No-Action Letter Process, Clarifies Rights of Entities Subject to Show Cause Orders, and Issues Revised Enforcement Policy Statement
As part of its enforcement package, FERC also issued an order expanding the scope of the no-action letter process through which regulated entities may request a determination on whether FERC staff would recommend enforcement actions against the entities if they decided to pursue particular transactions or practices. Currently, the subject matter of a no-action letter is limited to issues relating to the Standards of Conduct for transmission providers, affiliate restrictions for electric sellers, Code of Conduct for natural gas sellers, and FERC’s market behavior rules and energy market manipulation rules. In this order, FERC expanded the scope of issues for which no-action requests may be submitted to include any issue that falls within FERC’s jurisdiction, except for issues relating to licensing of hydroelectric projects, certification of natural gas pipelines, operation of liquefied natural gas terminals, and enforcement of mandatory reliability standards. Finally, FERC reiterated that the informal advice given by FERC staff is not binding on FERC and that the official views of FERC are stated through its public orders.

In a separate recent order, FERC clarified the rights of an entity when FERC enforcement staff intends to issue a show cause order. Under current regulations, subjects of investigations by FERC enforcement staff have the right to be informed of the investigation only when the FERC’s staff finds it appropriate to do so. Under the revised regulations, FERC enforcement staff must notify the subject of an enforcement investigation that FERC intends to issue a show cause order in all but extraordinary cases. The subject will have 30 days to respond and the response will be presented to FERC along with the enforcement staff’s memorandum requesting the show cause order. Both the subject’s response and the memorandum will be non-public documents.

Finally, FERC issued a revised policy statement on enforcement to educate market participants on how FERC’s investigative process works and to set forth factors that FERC enforcement staff considers in determining whether to open an investigation, or to recommend sanctions. With regard to opening an investigation, FERC will consider the nature and seriousness of the alleged violation, an entity’s efforts to remedy the alleged violation, and the compliance history of the subject entity. With regard to closing an investigation, FERC staff may close an investigation at any time if it finds that no violation occurred, that the evidence is insufficient to warrant further investigation, or that no further action is otherwise called for based upon a “totality of the circumstances” test. With regard to a recommendation of sanctions, FERC will consider the harm caused to the efficient and transparent functioning of the market, the earnings, revenues and market share of the investigated entity, and the balance between (i) a penalty to deter improper conduct and (ii) beneficial market participation by the investigated entity. 

Energy Provisions of the New Farm Bill
The Food, Conservation and Energy Act of 2008, otherwise known as the Farm Bill, became law on May 22, 2008. It contains an energy title (Title IX) that will affect wide-ranging interests in the energy industry. Below, please find a summary of these provisions.

Biofuels, Biomass, and Ethanol Production:

  • $320 million in loan guarantees for biorefineries producing advanced biofuels.
    Loans may be up to 80 percent of the cost or a maximum amount of $250 million. Loan guarantees may cover up to 90 percent of the loan amount. The bill also authorizes grants up to 30 percent of project costs for demonstration-scale biorefineries.
  • $35 million for a new program to assist existing ethanol facilities reduce their use of traditional fossil fuels.
    This “repowering assistance” program will help existing ethanol facilities address concerns that ethanol uses more energy than it creates. Payments are to encourage biorefineries to install new biomass energy systems or to produce energy from biomass for plant operations.
  • $300 million added for Bioenergy Program.
    The United States Department of Agriculture (USDA) directed to make payments to support and ensure an expanding production of advanced biofuels. Mandatory funding of $300 million is provided.
  • $120 million for the Biomass Research and Development Program.
    Mandatory funding of $118 million for the continuation of the Biomass Research and Development program and continued collaborative implementation by the USDA and the Department of Energy.
  • Establishes a flexible fuel sugar-to-ethanol program.
    Creates a process where the USDA would purchase sugar from producers to prevent forfeiture under sugar price supports and would provide that sugar for biofuel production at competitive prices.
  • Creates the Biomass Crop Assistance Program for new sources of fuel feedstocks.
    Encourages the production of feedstocks for cellulosic ethanol and other energy production and provides for multiyear contracts for crop and forest producers to grow dedicated energy crops, including sources such as low-value forest biomass. Provides incentives for producers to harvest, store, and transport biomass to bioenergy facilities.

Rural Energy Efficiency

  • $250 million for the newly created Rural Energy for America Program (REAP).
    New program to provide $250 million in grants and loan guarantees for renewable energy systems and to improve rural energy efficiency. Organizations with energy efficiency expertise will assist agricultural producers and rural small businesses to conduct energy audits.
  • Rural Energy Self-Sufficiency Initiative.
    Authorizes $5 million annually for grants for rural communities to develop and implement energy self-sufficiency initiatives to analyze and improve their energy systems with federal cost sharing of 50-percent.
  • Community Wood Program.
    Authorizes $5 million annually for rural communities to install wood energy systems in community facilities.

Education, Research, and Marketing Assistance: 

  • $9 million for the Biobased Markets Program to allow labeling of “USDA Certified Biobased Product” for eligible producers.
    Continues the federal preference for procurement of biobased products and the biobased products and encourages the purchase of products with a greater percentage of biobased materials. Eligible producers would be able to label qualifying products as USDA certified. Mandatory funding of $9 million for this purpose.
  • $5 million for the Biodiesel Education Program.
    Provides $1 million for each of the fiscal years 2009 – 2012 to help educate government and private owners of vehicle fleets about the benefits and technical aspects of biodiesel-fueled vehicles.
  • Biofuels Infrastructure Study.
    Directs the Secretary of Agriculture to conduct a study of the infrastructure needs associated with the expanding production and use of biofuels, to be conducted jointly with the Department of Energy and the U.S. Environmental Protection Agency.
  • Renewable Fertilizer Study.
    Directs the Secretary of Agriculture to conduct a study of the potential for the production of fertilizer from renewable energy sources in rural areas.

United States Senate Committee on Agriculture
House Committee on Agriculture

Legal News is part of our ongoing commitment to providing legal insight to our clients and our colleagues.

Please contact your Foley Energy attorney if you have any questions about these topics or want additional information regarding energy matters. Authors and editors: 

Ronald N. Carroll

Vicki J. Hicks

Svetlana V. Lyubchenko

Thomas McCann Mullooly

Ann L. Warren

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