Energy Industry Updates for September 2009

30 September 2009 Publication

Legal News: Energy Industry

Will Carbon Cap-and-Trade Survive This Session?

The omnibus energy/cap-and-trade legislation is one of the major initiatives currently undergoing a substantial political reassessment. While health care remains the top legislative priority and little of any consequence will be taken up on Capitol Hill until health care plays itself out, important work on energy is being done behind the scenes. This week, it was reported that Sens. Barbara Boxer (D-Calif.) and John Kerry (D-Mass.) were about to introduce a carbon cap-and-trade bill subject to a $28-per-ton cap.

Cap-and-trade provisions were included in the House energy bill back in June 2009. But it is not at all clear that cap-and-trade will make it into a final Senate bill.  Discussions among the Democratic leadership in the Senate suggest a possible strategy in which other energy provisions in the bill, including the renewable energy standard (RES) provisions, would be considered separately from cap-and-trade. Under this scenario, cap-and-trade would be set aside for the balance of 2009 and would be taken up in 2010. Introduction of the Boxer-Kerry cap-and-trade provisions will provide a political reality check for cap-and-trade. But some in the Democratic Caucus are rethinking the wisdom of forcing such controversial provisions onto the Senate floor, given the continuing recession and the approach of the 2010 mid-term elections.

This scenario of splitting the energy legislation is backed by conservative Democratic senators, including the newly appointed Chairman of the Senate Agriculture Committee, Blanche Lincoln (D-Ark.). Sen. Lincoln has expressed her opposition to cap-and-trade, and will not be as likely to compromise as would her predecessor, progressive Sen. Tom Harkin (D-Iowa). 


The Second Circuit Holds That Lawsuits Seeking to Impose Common Law Penalties on Utilities With Large CO2 Emissions Present Valid State Common Law Issues

Earlier this month, the U.S. Court of Appeals for the Second Circuit reversed a district court ruling and allowed a previously dismissed lawsuit brought by two groups of plaintiffs, including eight states and New York City, to go forward. State of Connecticut v. American Electric Power Company, Inc., No. 05-5104-CV. The suit, which was brought against American Electric Power Co. and five other leading utility companies (including Southern Company, TVA, Excel Energy, and Cinergy) that own and operate power plants in 20 states, was brought under a common law theory of nuisance that seeks to compel the utilities to cap and reduce their carbon dioxide emissions in view of what they characterized as the “clear scientific consensus” on global warming.

The utilities and supporting amici argued that the district court was correct in dismissing the case because, among other things, the case, in their view, presented non-justiciable political questions that raised separation-of-powers concerns. They stressed that the suit implicates sensitive issues of national and international policy that were more appropriately resolved by the political branches than by a federal court. The Second Circuit rejected these arguments, holding that the complaint successfully raised a state cause of action.

Both sides of the global warming debate will be watching this case closely, since the possibility that plaintiffs could obtain potentially large damages in court could force carbon reductions that politicians may be unwilling to do. Interestingly, former Second Circuit Judge Sonia Sotomayor was on the Second Circuit panel that heard oral argument in 2006. If the case is ever taken up by the Supreme Court, now-Justice Sotomayor will have to assess whether she should recuse herself.


FERC Considering Rate Incentives for Green Energy Express Transmission Line

Green Energy Express LLC (Green Energy Express) recently submitted a Petition for a Declaratory Order with FERC for approval of rate incentives for its Green Energy Express Transmission Line. The line would transport up to 2,000 MW of renewable energy from Riverside County, California to load centers in Southern California. Specifically, Green Energy Express requested:

  • Deferred cost recovery of development costs incurred to date and pre-commercial costs going forward if not included in rate base
  • Recovery of construction work in progress through the inclusion of such expenses in rate base
  • An incentive-based return on equity adder of 200 basis points
  • Approval of a capital structure that assumes 50-percent equity and 50-percent debt investment in the project

In analyzing previous requests for incentive rates, FERC has stated that it would examine the scope of the project, (i.e., monetary investment and the involvement of multiple jurisdictions), the impact of the project on reliability or congestion costs, and any unique challenges in siting or financing facing the project. Green Energy Express explains that the monetary investment already made by the principals of project has been significant, that the effect of the project would both decrease congestion costs and increase reliability on the grid controlled by the California Independent System Operator Corporation, and that its project faces unique challenges in obtaining further financing because, as a stand-alone company not affiliated with a utility, it has no rate-payer revenues to apply towards the development or initial construction costs. Green Energy Express states that FERC’s approval of its requested rate incentives is required to obtain new capital investment to continue developing the project and therefore requested expedited action on its petition within 90 days.

FERC previously granted similar incentive packages for other transmission projects, including for example the Tallgrass Transmission and Prairie Wind projects in Oklahoma and Kansas. Unlike those projects, which are owned by and affiliated with traditional investor-owned utilities, the Green Energy Express project faces greater financial hurdles because it is not affiliated with a traditional utility and has no ratepayer revenues to use to defer its costs. FERC has not yet ruled on the requested rate incentives in these cases,but has been pursuing a policy of promoting investment in electric transmission infrastructure, including investments for the further development of renewable energy resources.


Ontario Boldly Leads Offshore Wind Development in the Great Lakes

September 24, 2009 marked the first Feed-in Tariff (FIT) program in North America for offshore wind projects. The FIT program, established by the Government of Ontario under its Green Energy Act passed in May of this year, is designed to support the development of renewable energy projects in Ontario, and offers developers fixed pricing under long-term contracts. Offshore wind projects benefit from a contract price of CAD 0.19/kWh (subject to a CPI-based escalation clause) under a 20-year power purchase agreement. Pricing is intended to cover total project costs and provide a reasonable rate of return to project investors.

The FIT program also provides qualified projects with the right to connect to the electricity grid, a one-stop streamlined approval process, and a six-month service guarantee per project. Ontario Power Authority is responsible for administering the FIT and will begin accepting applications as early as October 1, 2009. Further details of the program can be found at www.powerauthority.on.ca/FIT.

The Ontario Ministry of Natural Resources estimates that up to 35,000 MW of potential offshore wind development exists in the provincial waters of the Great Lakes, and developers are actively moving forward to capture those resources. The leader is Toronto-based Trillium Power Wind Corporation, which is developing the 710 MW Trillium Power Wind I project near the U.S. border in the east end of Lake Ontario. Trillium recently announced three other undisclosed project development sites in Canadian waters of the Great Lakes, including the 1,600 MW Great Lakes Array, the 650 MW Superior Array, and the 740 MW Trillium Power Wind II.

Toronto Hydro also is pursuing offshore wind resources, with a 100 MW project under development in Lake Ontario near the east end of Toronto. Canadian developer Southpoint Wind is pursuing a smaller 30 MW proposed project in Lake Erie near Leamington. Meanwhile, Canadian Hyrdo Developers, Inc. just announced an agreement to acquire the rights to a 4,400 MW “offshore wind prospect” in Great Lakes waters bordering Ontario, which if completed, would be the largest offshore operation in the world.


Individual Inventors Lead the Flow in Hydropower Patents

Individual inventors accounted for the vast majority of all hydropower (hydro, wave, and tidal power) patents granted in the U.S. in 2008 (28 of 38 total U.S. patents granted — almost 74 percent), a recent Foley & Lardner LLP study reveals. All other corporations or entities accounted for less than three percent of the patents. These patents may represent an area of interest for firms looking to enhance or enter the hydropower field by acquiring or licensing the rights to new hydropower technologies.

Nearly 40 percent of all hydropower patent protection granted during 2008 (based on the number of claims in the patents) was for sub-surface current-driven hydropower generating devices that typically featured flow ducts or other flow accelerating structures. The next most active areas for hydropower patent protection involved the development of wave-driven hydropower generation (26 percent) (hydropower generation using water diversion schemes accounted for approximately 12 percent), while tidal-driven hydropower generation accounted for almost 10 percent of the patents. One area of interest for monitoring further developments is waste-water driven hydropower generation, which accounted for more than eight percent of the total.

U.S. hydropower patents in 2008 were granted to entities from 11 countries. The United States accounted for nearly 63 percent of the patents (24 of 38), with Great Britain obtaining approximately eight percent, and Taiwan and Italy each obtaining about five percent. The remaining seven countries each accounted for less than three percent of all the U.S. hydropower patents granted in the hydropower field.

The 24 hydropower patents granted to United States entities were distributed among 12 states, with Texas obtaining the most (four total) and New York, Virginia, and California each accounting for three patents each.


Regional Power Companies as Strategic InvestorsPlugging Into Capital

A recent example of a cleantech company securing financing from a regional power company may provide a model for other cleantech companies. When seeking financing, emerging cleantech companies need not limit themselves to angels, venture capital, and private equity firms. The list of prospective investors also can include regional power generation companies. Some utility companies have investment funds that make strategic investments in companies with compelling technologies in their value chain such as companies with a focus on renewable energy, energy technology, or information technology.

One cleantech company that recently tapped this resource is GLO AB, a Swedish-based nanowire semiconductor LED developer. It closed a Series B round in September with investors that included Hafslund Venture and Adger Energi Venture, the investment arms of two major power generation companies in the Nordic region.

From a portfolio company’s perspective, a strategic investor can provide significant value beyond dollars invested, including access to a wealth of industry expertise and connections. A strategic investor also may become a valuable customer. Having a name brand strategic investor adds an element of cachet and market credibility to a company’s public profile as well. From the utility company’s point of view, an investment may provide an avenue to develop a strong relationship with a potential supplier of innovative goods or services. In addition, the investment may provide valuable insight into the business of an eventual acquisition target. Beyond a return on invested dollars, a utility company will have its own business initiatives in mind when making and monitoring its investment.

Strategic investments, however, present their own set of challenges. Having an overlapping relationship in which an investor also is a customer and possibly a competitor or purchaser, presents dynamics that need to be balanced carefully. However, if structured right, a strategic investment can be a great way to accelerate an emerging company’s growth.


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.
202.295.4091
rcarroll@foley.com

Thomas McCann Mullooly
Milwaukee, Wisconsin
414.297.5566
tmullooly@foley.com

Joseph L. Colaneri
Washington, D.C.
202.672.5471
jcolaneri@foley.com

Mary Ann Christopher
Milwaukee, Wisconsin
414.297.5604
mchristopher@foley.com

John M. Lazarus
Milwaukee, Wisconsin
414.297.5591
jlazarus@foley.com

Edouard C. LeFevre
Boston, Massachusetts
617.342.4071
elefevre@foley.com

Ann L. Warren
Washington, D.C.
202.945.6105
alwarren@foley.com

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