Energy Industry Updates for February 2011

28 February 2011 Publication

Legal News: Energy

CFTC Dodd-Frank Act Implementation Update for Commercial Users

Since September 2010, the Commodity Futures Trading Commission (CFTC) has issued nearly 50 notices and advance notices of proposed rulemaking to implement comprehensive amendments added to the Commodity Exchange Act (CEA) last July for regulating swaps, which were enacted with passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). As prescribed by Dodd-Frank, the various amendments are to take effect on the later of July 15, 2011 or 60 days after the CFTC adopts implementing rules, except where Dodd-Frank expressly imposes a different effective date. The unprecedented pace and ad hoc nature of the CFTC’s rulemaking activities are generating criticism from affected parties who state that it is not possible to fully analyze the implications of the myriad proposals in a meaningful, integrated way.

Adding to the challenge, market users are still awaiting proposed rules (to be issued jointly with the SEC) that elaborate upon the Dodd-Frank definition of a “swap.” That definition and, importantly for commercial users, the scope of Dodd-Frank’s commercial transaction exclusion from the term, are critical for differentiating between those transactions that will become subject to the new regulatory regime for swaps and those that will not. A number of commercial users are urging the CFTC to interpret the commercial transaction exclusion consistent with the forward contract analysis for classifying deferred delivery commercial merchandizing transactions as forward contracts that are excluded from regulation under the CEA as futures contracts, including extension of the CFTC’s 1990 Brent oil interpretation covering commercial transactions where the parties terminate the delivery obligation for reasons of commercial convenience or necessity.

The CFTC’s proposals will impact swaps activities of commercial users in many respects. Of note for the energy sector, the CFTC has proposed federal position limits for 28 core reference futures contracts and related derivatives on energy, agricultural, and metals commodities. The core reference contracts include futures on Henry Hub Natural Gas, Light Sweet Crude Oil, New York Harbor No. 2 Heating Oil, and New York Harbor Gasoline Blendstock listed on the New York Mercantile Exchange (NYMEX). The limits would apply to a market user’s aggregate positions in a core reference contract and in related futures, options, swaps, or swaptions linked to the core contract via pricing cross-reference or common underlying commodity with the same delivery location or a delivery location where the commodity has substantially the same underlying supply and demand fundamentals. The proposal would require a market user to self-report to the CFTC when it holds or controls positions that exceed a CFTC-prescribed visibility level for the particular class of contracts defined by reference to the core contract. The proposal includes a hedge exemption from position limits, along with an exemption from aggregation at the holding company level of positions of non-financial entities owned by the holding company, provided that the holding company can demonstrate that each subsidiary’s positions are independently controlled and managed. That condition would seem contrary to the central hedge desk function that many global commercial enterprises employ. Comments on the position limit rulemaking proposal may be submitted through March 28, 2011.

The CFTC also has issued proposed rules to implement the conditions for the end-user exception from mandatory clearing; proposed rules and interpretive guidance for defining the term swap dealer, which could capture certain commercial swap participants within its scope; and proposed rules governing exchanges that could result in NYMEX having to migrate many of the energy products it lists for trading in the ClearPort suite to trading on a swap execution facility.

FERC Requires OATT to Be Filed for Generator Lead Line

FERC's recent Sky River decision highlights issues for owners of generator lead lines regarding the use of such lines by unaffiliated third parties.

Sky River, LLC owns a wind project and an interest in an associated lead line to connect to the transmission grid. Other qualifying facilities also use the nine-mile, 320-kV generator lead line. Sky River negotiated a common facilities agreement to allow a third party, WindStar Energy, LLC, to use the line to transmit power from WindStar’s proposed wind project to its point of interconnection on the transmission grid.

With Sky River as owner and WindStar as licensee, the parties filed the common facilities agreement for FERC approval under Section 205 of the Federal Power Act. The parties requested waiver of Sky River’s requirement to post an open access transmission tariff (OATT), which, pursuant to Order No. 888, is required for the provision of jurisdictional transmission service. FERC has often granted waivers to entities that only own discrete and limited interconnection facilities, such as a generator lead line.

In this instance, however, FERC rejected the common facilities agreement. FERC stated that Sky River cannot provide transmission service to an unaffiliated third party outside the context of an OATT. In the circumstances involving WindStar, an unaffiliated third party, FERC determined that Sky River was required to publish an OATT and process a transmission service request pursuant to that OATT, as outlined in Order No. 888.

Sky River affects numerous generators with lead lines. It would require them to publish an OATT when an unaffiliated third party requests service on the line. The Sky River decision rejects common facilities agreements with unaffiliated third parties that involve generator lead lines because they have been determined to result in the provision of jurisdictional services outside of FERC’s open access requirements.

Rehearing requests are due March 2, 2010.

Massachusetts Solar Carve-Out Program Regulation Finalized, Alternative Compliance Payment Reduced

After operating under an emergency regulation for nearly a year, the Massachusetts Department of Energy Resources (DOER) finalized the regulations pertaining to its Solar Carve-Out Program, which took effect on January 7, 2011. The Solar Carve-Out Program is part of the larger Massachusetts Renewable Portfolio Standard (RPS) that was established in regulations issued by the DOER in 2002, whereby each regulated electricity supplier/provider serving retail customers in the state must include a minimum percentage of qualifying renewable energy sources in the electricity it sells. The Solar Carve-Out Program requires that a specific portion of the RPS must come from solar resources.

The Solar Carve-Out Program is a market-based incentive program to support residential, commercial, public, and nonprofit entities in developing 400 MW of solar photovoltaic (PV) energy facilities across the Commonwealth of Massachusetts. Rather than providing subsidies based on the costs of solar energy facilities, the Solar Carve-Out Program creates a market through which solar energy generators receive solar renewable energy certificates (SREC) that may, in turn, be sold to the regulated electricity supplier/providers, either directly or through an aggregator.

In order to participate in the Solar Carve-Out Program, a solar energy system must (i) have a capacity of 6 MWs or less, (ii) be located in the Commonwealth of Massachusetts, (iii) use some of its generation on-site and be interconnected to the utility grid, and (iv) have a commercial operation date of January 1, 2008 or later.

With respect to SREC sales, the DOER sets an alternative compliance payment (ACP), which acts as a price ceiling for SRECs because utilities can choose either to purchase SRECs or to pay the ACP. In addition, the DOER has created a fixed-price auction clearinghouse, where SRECs may be sold for a fixed price of $300, which effectively acts as a price floor for SRECs.

On January 31, 2011, the DOER announced that it has reduced the ACP for compliance year 2011 by 8.3 percent, from $600 to $550. The DOER has the authority to reduce the ACP by up to 10 percent per year, and it justified its recent ACP adjustment decision by citing declining PV module costs, lower installed costs, and the desire to encourage solar energy development at the lowest cost to electric customers in Massachusetts.

Additional Information

Foley attorneys Jeffery R. Atkin and William D. DuFour recently led a Web conference on the Massachusetts Solar Carve-Out Program. An audio recording and program materials are available at:

Authors and Editors

Ronald N. Carroll
Washington, D.C.

Thomas McCann Mullooly
Milwaukee, Wisconsin

Jeffery R. Atkin
Los Angeles, California

Andrea J. Chambers
Washington, D.C.

Kathryn M. Trkla
Chicago, Illinois

William D. DuFour III
Chicago, Illinois

Trevor D. Stiles
Milwaukee, Wisconsin


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