Energy Industry Updates for March 2009

12 March 2009 Publication

Legal News: Energy Industry

U.S. Court of Appeals Deals Serious Blow to Federal Backstop Authority to Approve Interstate Transmission Lines Under the Energy Policy Act of 2005

Enhanced federal authority over transmission siting suffered a blow last month in a battle that pitted state commissions against a federal agency, and the Funk & Wagnalls dictionary versus Webster. A three-judge panel of the United States Court of Appeals for the Fourth Circuit voted last month to reverse the Federal Energy Regulatory Commission’s (FERC) interpretation of Section 216(b) of the Federal Power Act, 16 U.S.C. §824p(b), which was enacted in the Energy Policy Act of 2005 (EPAct 2005) to create federal backstop authority for siting transmission lines in national transmission corridors designated by the U.S. Department of Energy. Piedmont Environmental Council v. FERC, No. 07-1651 (4th Cir. Feb. 18, 2009). Unless this decision is overturned by a higher court or Congress provides a legislative solution, the Fourth Circuit’s decision could potentially undermine the role that many envisioned FERC would play in solving local barriers to necessary transmission siting.

Under the new law, Section 216(b) was added to the Federal Power Act to provide federal jurisdiction in national corridors over the siting of transmission when (i) a state does not have authority to permit the proposed lines, (ii) the applicant does not qualify to apply for a permit because it does not serve end-use customers in the state, (iii) a state has withheld approval of an application for more than one year, and (iv) a state conditions the approval of new transmission in such a manner as to essentially kill the project. The Piedmont case considered the third of these factors and examined whether an outright denial by a state of a permit application within one year of when it was submitted constitutes withholding approval for purposes of Section 216(b), or whether Congress intended for federal backstop jurisdiction to apply only when the state fails to act on the application at all for a year. The FERC commissioners were divided on this issue, but the majority decided that a denial in less than one year constitutes withholding approval, thereby invoking federal jurisdiction. Regulations for Filing Applications for Permits to Site Interstate Electric Transmission Facilities, 71 Fed. Reg. 69,440 (Dec. 1, 2006).

The Fourth Circuit reversed FERC’s interpretation in Piedmont. Citing Webster’s Third New International Dictionary, the majority analyzed the literal meaning of the word “withheld,” and ruled that the phrase “withheld approval for more than 1 year” means that an “action has been held back continuously” for one year, and that a denial before the end of the one-year period stops that clock from reaching the required one-year period precondition to a filing at FERC. The court found Congress’ intent to be clear and unambiguous. Using the Chevron step one method of statutory analysis, the majority thus concluded that it need look no further for Congress’ intent than the face of the statute and did not defer to FERC’s expertise in interpreting the new statutory provision.

Judge William B. Traxler’s dissenting opinion notes that the common meaning of the word “withheld” means that, if one year after an application is filed, the state has not granted the application for whatever reason, it has “withheld approval.” Citing the Funk & Wagnalls Standard Dictionary, which defines “withhold” in part as “to keep back; decline to grant,” Judge Traxler observed that the purpose of Section 216 is to ensure that local barriers do not impede the national interest in building more transmission lines. The dissenting opinion also noted that another subsection of Section 216 gives FERC jurisdiction when a state purports to grant an application, but with project-killing conditions, and questions whether Congress would have created federal jurisdiction in the case of onerous conditions, but not if the state denied the application outright. Finally, Judge Traxler examined the legislative history of Section 216, which he found suggests that members of Congress thought they were preempting a state’s ability to defeat transmission projects that are of national interest.

If the majority opinion stands, the states will have the ability to control the core question of federal jurisdiction — whether FERC can step in where a state puts local interests above national ones in its siting decisions — simply by saying no to a project any time within one year of the date the permit application was filed, and that denial would be beyond FERC’s reach to review. Under Piedmont, therefore, the newly minted federal backstop authority promulgated in EPAct 2005 will be sharply limited, at least in the southern states within the Fourth Circuit. It is too early to know whether FERC will seek rehearing or reconsideration en banc of the panel’s decision before the entire Fourth Circuit, whether it will seek certiorari with the U.S. Supreme Court, whether the Supreme Court would take the case and, if it did, whether it would reverse the Fourth Circuit.

Recognizing the odds are against convincing an appellate court to reverse itself on rehearing, or in getting the Supreme Court to agree to hear and then to vacate a decision of a circuit court, Congress has given indications that it will step in and clarify FERC’s backstop authority. For instance, Senate Majority Leader Harry Reid (D-Nev.) very recently introduced a proposal that would allow the president to designate renewable energy zones that can produce one gigawatt of power but lack transmission capacity to deliver the power to market. Under Mr. Reid’s bill, FERC would get backstop planning authority if certain deadlines in connection with the transmission in these zones necessary to deliver the renewable energy to market are not met or if a state does not participate in the plan. More recently, on March 10, 2009, Senate Energy & Natural Resources Committee Chairman Jeff Bingaman (D-N.M.) released a draft of a bill to give FERC siting authority over “high priority transmission projections” that are 345 kv and above and which are part of interconnection-wide planning processes. Under the proposal, FERC would designate one entity to draft interconnection-wide transmission plans in the East and West (excluding Electric Reliability Council of Texas, Alaska, and Hawaii unless they decide to participate). Once that entity is picked, it would have a year to submit a plan; if it misses that deadline, FERC would start planning on its own. Planning would have to take into account support for the development of new renewable generation, opportunities for emissions cuts from regional power production, cost savings from congestion cuts and other efficiencies, fuel diversity, reliability, and national policies. States or subregions also could submit subregional plans for FERC to consider. 

New FERC Policy Provides Increased Flexibility for Merchant Developers to Build Transmission to Bring Wind Energy in the Upper Rocky Mountain Region to Southwest Markets

Demonstrating that it is in-sync with the Obama administration’s commitment to renewable energy, FERC last month refined its negotiated rate policy for merchant transmission projects that propose to transmit such energy to market. Specifically, on February 19, 2009, FERC approved the applications filed by Chinook Power Transmission, LLC (Chinook) and Zephyr Power Transmission, LLC (Zephyr) to charge negotiated rates for transmission rights on two proposed merchant transmission projects that will bring renewable energy from wind-rich areas in Wyoming and Montana to markets in Las Vegas, Nevada and throughout the Southwest. Chinook Power Transmission, LLC, et al., 126 FERC ¶ 61,134 (2009). The significant development here is that both applicants, who have no captive customers and have agreed to accept all market risk for the project, requested permission to pre-assign as much as 50 percent of their capacity in a pre-construction period open access to “anchor customers” in order to obtain necessary financing. The project was supported by all commenting interveners, including The American Wind Energy Association.

In approving these applications, FERC took the opportunity to refine its policy governing the use of negotiated rates under merchant transmission projects. FERC jettisoned the 10-part test that it had previously used to judge such projects, in favor of a new four-part test that focuses on the following “areas of concern”: (1) the justness and reasonableness of rates under the project, (2) the potential for undue discrimination, (3) the potential for undue preference, including affiliate preference, and (4) regional reliability and operational efficiency requirements. FERC stated that the new test reflects the same concerns that it previously examined under the 10-part test, but did so in a “less rigid” manner. FERC referred to its commitment to “foster[ ] the development of merchant transmission projects through the adoption of a more flexible approach toward negotiated rate applications” that “simultaneously acknowledges the financing realities faced by merchant transmission developers.”

As applied to these projects, FERC’s analysis under all but the second factor applied existing policies. FERC found that both Chinook and Zephyr proposed just and reasonable rates because they both assumed all market risk in the event their projects failed, and because they both are new entrants into the Rocky Mountain region and are not increasing their presence into the area. FERC also noted that both companies agreed to operate under FERC’s open-access tariff under Order No. 890, provide firm tradable secondary transmission rights, and establish an open access same-time information system (OASIS) to allow for trading the secondary transmission rights. FERC added that no undue preference (the third factor) was presented here because none of the electric generation affiliates of Chinook and Zephyr are located in any state where the projects will be located.

It was on the second factor — the undue discrimination factor — that FERC ploughed new ground. Traditionally, FERC has satisfied itself that a new project will not unduly discriminate against potential participants if the sponsoring entity allocates its capacity through an open season in which all interested parties are able to bid equally on the proposed capacity. Here, by contrast, both Chinook and Zephyr proposed to assign as much as 50 percent of their capacity through a preconstruction process to “anchor customers,” whose agreement to finance the start-up costs made the project viable. In accepting the anchor-customer concept, FERC acknowledged that merchant transmission developers face difficulties in financing large transmission projects, and that the financial commitments made by anchor customers (here, wind developers) prior to an open season provide “crucial early support” and certainty to merchant transmission developers, which enables them to gain the critical mass necessary to develop these projects. FERC simultaneously acknowledged that its previous “100 percent open season allocation requirement” had become unduly rigid and ignored the real-life financing and cost-recovery concerns of the merchant transmission entities that undertake the construction of such projects. Finding that it would be able to police discrimination in the pre-construction and open-access processes through a post-open season reporting requirement and complaint process, FERC approved the projects here as just and reasonable. 

Market Participants Request FERC to Direct National Planning for Integrating Renewable Resources at Technical Conference

Market participants from all sectors of the industry addressed the challenges of integrating renewable resources into the grid at a March 2, 2009 FERC technical conference. Representatives from regional transmission organizations (RTOs), independent system operators (ISOs), transmission owners, generators, and industry groups participated in three panels, which dealt with the following topics: (i) transmission and system planning, (ii) operational challenges and solutions to integrating renewables while maintaining reliability of the grid, and (iii) operational and dispatch provisions of tariff and market rules affecting renewables.

The majority of the first panel (transmission and system planning) agreed that FERC should establish national policy regarding transmission planning. Notably, none of the panelists felt that the states should be responsible for transmission and system planning policymaking. The second panel offered solutions to operational challenges to integrating renewable resources into the grid, including the (i) consolidation of balancing authority areas that are currently balkanized on the grid, (ii) implementation of faster scheduling and dispatch of renewable resources, and (iii) incorporation of new technologies such as wind forecasting technology to provide accurate information on the availability of renewable resources. The third panel discussed changes to tariffs and market rules needed to better integrate renewables with the grid, including new rules that allow wind resources to qualify for non-spinning reserve or supplemental operating reserves to compensate for large wind events, changing reliability standards to allow low minimum load, fast-ramping capability to better accommodate wind integration, and changes in market rules to provide renewable resources with access to energy markets in neighboring balancing authority areas that share generation response capabilities.

FERC recognized that the thousands of megawatts of renewable generation awaiting interconnection to the grid pose serious challenges to the nation’s transmission system. By convening this conference, FERC demonstrated its interest in addressing these problems. 

FERC Refuses to Rescue Financial Investor That Lost Congestion Bet After the NYISO Authorized a Change of Interconnection Points for Generating Units Without Informing Its Market

In orders involving an obscure financial trader, FERC has emphasized its intention to focus on maintaining reliability on the electricity grid rather than on promoting new and potentially exotic secondary markets in the wholesale electricity industry. This issue was presented by a complaint filed by 330 Fund I, L.P. (330 Fund), a financial investor engaged in hedging congestion markets, against the New York Independent System Operator Corporation (NYISO). In its complaint, 330 Fund alleged that the NYISO violated its open access transmission tariff (OATT) and the provisions of FERC’s Standard Interconnection Agreements & Procedures for Large Generators by failing to release publicly information about a change in the point of interconnection for several gas turbine units owned by the New York Power Authority (Power Authority). On February 20, 2009, FERC denied rehearing of its earlier order denying 330 Fund’s complaint. 330 Fund, I, L.P., 121 FERC ¶ 61,001 (2007), reh’g, 126 FERC ¶ 61,151 (2009).

This story began in March 2006, when the Power Authority proposed a new point of interconnection for its generators. NYISO approved the request, finding the proposed change in interconnection points not to be “material.” If the change had been deemed material, the Power Authority would have needed to file a new interconnection request. This would have been subject to queue processing and posting requirements that could have alerted 330 Fund to the change. The criteria used by the NYISO to determine whether there was a material modification to operating characteristics essentially involve electrical characteristics such as stability, voltage, and short-circuit impacts, which it found were not implicated here by the change in the points of interconnection. While the new point of interconnection was being constructed, 330 Fund participated in three transmission congestion contracts (TCC) auctions — financial instruments that convey a right to collect or an obligation to pay the difference in price for energy associated with transmission; a TCC does not establish physical transmission rights. 330 Fund alleged that it suffered financial losses due to the construction outages, which increased congestion over 330 Fund’s predictions and from the subsequent change in the point of interconnection, which alleviated the anticipated congestion in the load pocket prior to the summer peak.

In denying the complaint, FERC agreed with the NYISO that the issue of whether a proposed change in interconnection for existing facilities is a “material” modification is determined by examining whether, to maintain reliability, a change would require additional facility upgrades. FERC rejected 330 Fund’s argument that the determination of whether a material change exists also should consider impacts that a change in interconnection points could have on the market. Citing Section 37.6(a)(2) of FERC’s regulations, 330 Fund pointed out that the NYISO was required to release information necessary to enable its customers to make “prudent business decisions.” 330 Fund argued that the operation of the transmission congestion contract market thus demands that market participants have up-to-date and accurate information as to the status of the transmission system. It alleged that it could have avoided its losses by adjusting its TCC auction positions had it known of the outages caused by the change in interconnection points.

Eschewing the opportunity presented by this case to facilitate the ability of financial traders to participate and profit in wholesale electricity markets, FERC instead focused narrowly in this case on reliability considerations. FERC stated that 330 Fund’s complaints that would also have required the NYISO to take into account market outcomes were more appropriately addressed in a rulemaking proceeding. 

U.S. Export Control Laws Highlight the Need for Vigilance by Exporters of Alternative Energy Technologies

Exporting technology can be a risky business. For example, on February 23, 2009, a Chinese national was found guilty of attempting to export certain technology to the People’s Republic of China without seeking appropriate U.S. government authorization. Because he was convicted of conspiracy and violating export laws that require licenses for exporting the technology involved (thermal imaging cameras), he faces a statutory maximum sentence of 40 years in prison. This should serve as a cautionary tale for developers of alternative energy technology to tread carefully when engaged in the export of energy technology.

Alternative energy lends itself to a wide variety of distinct and varied technologies, ranging from components of wind turbines, solar energy panels, hybrid cars, and green batteries to biofuels and genetically engineered crops and organisms. The U.S. patent system is a unifying thread that brings these technologies together, as patent protection allows researchers to generate revenue, market share, and dominance in these diverse areas. This presents a strategic concern for companies engaged in developing new technologies. The act of securing patent protection for what could be a highly sensitive technology — as well as the act of shipping the finished products themselves — also may invoke the U.S. export controls. Thermal-imaging cameras, for instance, are legitimately used by green engineers to identify gaps in wall insulation and to ensure maximum energy conservation. Innocently sending thermal-imaging cameras to a client abroad, however, without an accompanying U.S. export license, could trigger criminal prosecution that could lead to substantial fines and prison.

Caution may be required even when providing data to the preparer of the patent application. To address concerns about export control and the use of services abroad that prepare patent applications, United States Patent and Trademark Office (USPTO) officials recently reminded the domestic U.S. patent community that a “foreign filing license” does not authorize a U.S. applicant to outsource the preparation of his or her U.S. patent application because the foreign filing license is not a license to export technical data to a foreign draftsperson to prepare the USPTO-destined patent application. Obtaining appropriate clearances to use an outsourcing patent service may therefore mean complying with the currently applicable U.S. export laws, including the Export Administration Regulations (EAR) that are administered by the U.S. Bureau of Industry and Security (Bureau).

Analyzing the EAR and determining whether alternative energy technology may legally be sent abroad for patent drafting assistance can be rife with complexities. The export regulations can be difficult for experts to follow, let alone sole inventors or start-ups in the alternative energy community who rely on outsourcing companies to help draft and establish their U.S. patent portfolios. Recognizing that, the Bureau has offered a potential technology exporter the opportunity to request an Advisory Opinion to help determine whether its technical data requires an export license. Even if an EAR-compliant export license is not found to be required, however, other export and national security regulations might still apply such as the International Traffic in Arms Regulations administered by the Directorate of Defense Trade Controls, or various regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control, among others. Without appropriate expertise, therefore, an inventor or company can inadvertently misclassify technical information and material subject to export controls or misinterpret a particular regulation. Even worse, exporting patent application materials abroad without attempting to comply with the EAR can result in serious civil and criminal penalties such as the $700,000 administrative penalty against a U.S. company that had exported diaphragm pumps from the United States to Iran, Israel, China, Syria, and the United Arab Emirates without export licenses.

It is therefore critical that participants in the U.S. alternative energy sector seek advice on export control issues before transmitting unpublished, proprietary patent application materials abroad, or to foreign workers residing in the United States. This is especially significant given the USPTO’s reminder — in essence a warning — that a foreign filing license neither shields a U.S. patent applicant from liability, nor relieves them of their obligations under the U.S. government’s export control regulations.

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.

Vid S. Mohan-Ram
Chicago, Illinois

Thomas McCann Mullooly
Milwaukee, Wisconsin

Michael D. Rechtin
Chicago, Illinois

E. Glenn Rippie
Chicago, Illinois

Ann L. Warren
Washington, D.C.

Christopher W. Zibart
Chicago, Illinois

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