Energy Industry August 2008 Updates

28 August 2008 Publication

Legal News: Energy Industry

MISO’s Proposal to Streamline Its Generation Interconnection Queue Process Approved

This week, the Federal Energy Regulatory Commission (FERC) approved — with some modifications — a proposal submitted by the Midwest Independent Transmission System Operator, Inc. (MISO) to fundamentally overhaul its generator interconnection queue process. The size and complexity of the issue can be shown in basic numbers: approximately 3,000 MW of wind generation currently exists in the MISO footprint; pending interconnection requests would add 83,000 MW of generation, including 65,000 MW of wind capacity; at current speed, all pending interconnection requests would not be resolved until the year 2050. MISO’s new plan moves from a “first-come, first-served” process to what MISO has termed a “first-ready, first-served” approach to queue management. In a departure from the current queue process mandated by Order No. 2003 and the current Large Generator Interconnection Procedures, the new process will consist of four phases: Pre-Queue, Application Review, System Planning and Analysis, and Definitive Planning.

Numerous parties intervened both in favor of and against the proposal. Most of the participants acknowledged that the biggest underlying issue is a lack of transmission capacity (or willingness and ability to pay for substantial new facilities), particularly in areas of the MISO footprint that contain little load but large potential for the development of wind generation.

The controversies resolved by FERC in its order include assertions that the process would blur the fundamental distinction between a request for interconnection service and a request for transmission service by treating “energy resources” differently than “network resources.” FERC agreed with protesters and rejected MISO’s proposed tariff changes on this point. Some parties also resisted aspects of MISO’s proposal that would limit the ability of pending projects to suspend while maintaining a position in the queue, but FERC approved the MISO approval in this regard. Others suggested that the multiplicity of projects entering the queue could best be resolved through greater transparency with the transmission system and constraint information, which would allow developers to determine independently whether or not to go forward with an interconnection request. FERC did not address this directly but did reject a request that MISO be required to include, as part of the tariff, its Business Practice Manuals affecting the interconnection process. Parties both supported and took issue with the proposed increases in the amount and number of deposits required at various stages in the process. FERC approved the new deposit requirements. Some also argued that proposed milestones required to maintain a position in the queue could be discriminatory as to projects not affiliated with a utility. FERC was not persuaded and generally approved the new milestones subject to a MISO-reporting requirement and new tariff language needed to accommodate a variety of organizational structures. Current projects in the queue were given 60 days to meet specified milestones and deposits, but FERC will allow MISO to seek waivers in specific cases. If a project has an executed Facilities Study Agreement, it will only be subject to new rules regarding suspension.

FERC Says No to Arizona Commission on Transmission Project Delay

Under the Energy Policy Act of 2005 (EPAct 2005), Congress gave FERC the power, for the first time, to site transmission projects in “National Transmission Corridors” established by the U.S. Department of Energy (DOE) if no progress is made at the state level on a siting proposal within such a corridor after one year. A recent decision reveals that FERC is taking seriously this new authority vis-à-vis state commissions.

Specifically, FERC has denied a motion for stay filed by the Arizona Corporation Commission (ACC) to intervene in the FERC proceeding that is processing Southern California Edison’s (Edison) “pre-filing” under the new law to construct much needed transmission capacity between Phoenix, Arizona and Southern California. That project, known as the Devers-Palo Verde No. 2 project, has been on the drawing board for years but has been delayed by the ACC, which many believe wishes to minimize the export of the plentiful nuclear generation at Palo Verde into California. The California portion of the project has been approved by the California Public Utilities Commission (CPUC). A large swath of land between Phoenix and Los Angeles is one of the two corridors designated by DOE under EPAct 2005. (The other corridor is in the mid-Atlantic region.) This is the first project filed with FERC under the new law.

The ACC sought to delay the FERC proceeding, ostensibly to allow it time to negotiate a resolution of the controversy with Edison and the CPUC. Because the proceeding is only a “pre-filing” proceeding (the formal application has yet to be filed), however, no parties, including the ACC, have been allowed to intervene, although they have been permitted to file comments on the proposal. FERC thus dismissed the ACC’s motion for a stay, finding that the ACC, as a non-party, has no standing to seek a stay. FERC added that it “would be contrary to the public interest to halt a prefiling process that could ultimately lead to the construction of necessary interstate electric transmission facilities that meet the criteria set forth by Congress” in EPAct 2005.

In denying the ACC’s motion, it is apparent that FERC wants to keep the pressure on the ACC to reach an accommodation with Edison and the CPUC that would ultimately lead to increased transmission capacity in the Southwest. It also is apparent that, unless EPAct 2005 is found to be unlawful in one of the civil lawsuits that have been filed challenging it, FERC is prepared to act if the ACC does not reach an accommodation with California.

Groups Call on FERC to Investigate Circuitous Scheduling Transactions in NYISO

The New York Independent System Operator, Inc. (NYISO) recently proposed to amend its tariff to prevent market participants from scheduling transactions over circuitous paths around Lake Erie. According to the NYISO, the problematic transactions were scheduled so that the power would supposedly exit the NYISO, be wheeled through the Independent Electricity System Operator of Ontario (IESO) and MISO, and sink in PJM Interconnection. However, approximately 80 percent of the power is estimated to have flowed over the common border between the NYISO and PJM. The NYISO estimates that the circuitous scheduling has caused hundreds of millions of dollars in increased congestion charges this year alone, all borne by NYISO consumers.

Because the proposed tariff amendments were submitted unilaterally under the “exigent circumstances” provisions of the NYISO’s tariff, they are subject to automatic expiration no later than 120 days after it was filed unless the NYISO management committee ratifies the filing during the 120-day period. FERC therefore accepted the proposed tariff amendments to be effective from July 22, 2008 through November 18, 2008, and directed the NYSIO to submit a status report of the discussions with the management committee by September 12, 2008. FERC went out of its way to reserve the right to undertake further consideration of the tariff revisions under Section 206 of the Federal Power Act, which suggests that it may be prepared to find that the proposed amendments are required by the public interest as a matter of law if the management committee fails to approve them.

Consumer protection groups also called on FERC to launch a full public investigation into the alleged practices. Specifically, the Public Utility Law Project requested that FERC inquire into whether market participants that engage in transactions identified by the NYISO should be made to disgorge their profits generated by unreasonable rates charged in violation of the NYISO’s tariff. The New York State Consumer Protection Board urged FERC to approve the NYISO’s proposed remedy and direct the NYISO to hold a stakeholder process to find a permanent solution for the circuitous scheduling problem. The public law and consumer protection groups urge FERC to establish a refund effective date in the interim to provide for refunds of any further unreasonable charges caused by the continuation of the activities, that FERC require the publication of the rates and contracts of the market participants who make circuitous transactions, and that it revoke market-based rate authority of those who do. 

Launch of California’s Redesigned Energy Markets Delayed Once Again

In its monthly status report filed with FERC in August, the California Independent System Operator Corporation (California ISO) announced another delay in the launch of the much-anticipated redesign of its energy markets under the Market Redesign and Technology Upgrade (MRTU) program. The California ISO confirmed that the most recent targeted launch date of October 1, 2008 would not be met and would be delayed for an indeterminable amount of time. The California ISO revealed that system tests of computer software for the Day-Ahead Market and Real-Time Market “have deteriorated” and that “challenges persist” in achieving final functionality of the technology. The California ISO has since disclosed that “pricing excursions” have developed under MRTU during which entire hours of energy trading were registering on the software system but were failing to trigger any payments for the purchase and sale of this energy.

Frustrated market participants have identified several factors for why MRTU continues to be delayed. First, they have noted that the artificial deadlines to date for starting MRTU have actually led to inefficiencies in MRTU’s development and have been counterproductive to getting the new product up and running. They further point out that the California ISO had begun creating technology to interface with its energy markets before finalizing energy and legal policies governing the markets, which necessitated a redesign of technology when policies changed thereafter. As things now stand, the launch date for MRTU will not take place until at least February 1, 2009, as an overwhelming number of California market participants have requested a delay into next year to avoid conflicts with winter holidays. Even this date is believed by many to be optimistic.

Exchange Developments: CME Group Acquisition of NYMEX

On August 22, 2008, the CME Group Inc. completed its $8.4 billion acquisition of NYMEX Holdings, Inc., the parent company of the New York Mercantile Exchange (NYMEX). NYMEX is the largest futures exchange in the United States for trading futures and options on futures on energy commodities, including natural gas, heating oil, crude oil, and gasoline.

The CME Group and NYMEX Holdings announced the proposed transaction in March 2008. In June, the Antitrust Division of the U.S. Department of Justice granted clearance for the acquisition to go forward. The final hurdle, approval by at least 75 percent of the Class A Members of NYMEX, occurred on August 18, 2008. As a result of the acquisition, NYMEX is now a wholly owned subsidiary of the CME Group, along with two other futures exchanges, the Chicago Mercantile Exchange and the Chicago Board of Trade. On a combined basis, the three exchanges account for more than 95 percent of the trading volume on U.S. futures exchanges.

The CME Group has announced plans to begin integrating NYMEX business operations into its other exchange operations. As part of the plans, CME Group expects to combine clearing systems in the third quarter of 2009. The CME Group has committed to keep the current NYMEX trading floor open through 2012 — NYMEX contracts already trade electronically on the CME Group’s GLOBEX platform — and to retain preferential transaction fee rates that NYMEX members enjoy over non-members.

Legal News is part of our ongoing commitment to providing legal insight to our energy 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
Washington, D.C.

Thomas McCann Mullooly
Milwaukee, Wisconsin

Kathryn M. Trkla
Chicago, Illinois

Ann L. Warren
Washington, D.C.

Svetlana V. Lyubchenko
Washington, D.C.

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