Energy Industry September 2008 Updates

New FERC Tariffs to Be Filed Electronically

Last week, the Federal Energy Regulatory Commission (FERC) issued a rule that requires all new tariffs, tariff revisions, and rate-change applications to be filed electronically by public utilities, oil pipelines, natural gas pipelines, and power administrators. The filings must be made in accordance with standards jointly developed by the North American Energy Standards Board and representatives from the Association of Oil Pipe Lines. FERC will begin implementing this rule in April 2010 pursuant to a six-month staggered schedule. Thereafter, FERC will no longer accept tariff filings submitted on paper. Existing tariffs do not need to be re-filed electronically at this time, but must be when they are revised.

Creating an electronic database of tariffs will enable the public to research historical tariffs and obtain tariff provisions applicable to a particular time period rather than being limited, as is the case at the moment, to the company’s currently effective tariff available on FERC’s Web site. The electronic tariffs improve transparency, promote uniformity, and enhance the ability to search the text of tariff filings electronically.

Action on Transmission

Everyone agrees that the country needs more transmission capacity. FERC recently acted on a host of items that may help accomplish that goal. First, for New York, it approved a 275-basis point incentive return on equity (ROE) adder for a proposed merchant transmission project. The project would be a standalone for-profit transmission company supported by an entity called the “New York Regional Interconnect, Inc.” (NYRI). The FERC proceeding drew numerous opposition comments from New York participants, including current transmission owners. The proposed line would be 190-miles long, with an estimated cost of $1.8 to $2.1 billion, and a projected in-service date of 2012. NYRI claims to have only 38 percent of the property rights needed for the proposed route and expects significant risks and hurdles associated with the siting, permitting, and building of the line. The incentives granted by FERC break out as a 50-basis point incentive ROE adder for projected participation in a regional transmission organization, a 100-basis point incentive ROE adder for conducting business as a standalone transmission company (Transco), and a 125-basis point combined incentive ROE adder for using advanced technologies and for the significant risks and challenges facing the project. Consistent with NYRI’s request, FERC’s approval is conditioned on the New York State Public Service Commission finding that the project will ensure reliability or reduce congestion and providing siting approval.

In the West, FERC approved a two-year experimental pricing initiative by a group of transmission owners. The proposal would allow customers to pay one rate as opposed to pancaked rates for hourly point-to-point transmission service across a number of different systems. The actual rate would be based upon the highest ceiling rate of the affected providers. The customer would have the option of electing the current pancaked-rate structure or the experimental pricing. FERC approved the request, and the next step will be for the individual participating transmission owners to provide the tariff filings needed. Participants in the proposal include both jurisdictional and non-jurisdictional entities, and FERC granted all the requested treatment so as to protect the non-jurisdictional status of those entities. The providers hope to gain experience on revenues and transfer capability under a collective approach to providing service substantially different than a regional transmission organization (RTO) or an independent system operators (ISO).

Finally, in a series of seven orders, FERC acted on compliance filings on the transmission planning process associated with Order 890 from Southwestern Power Administration, E.ON U.S. LLC, Cleco Power LLC, Southern Company Services, Inc., South Carolina Electric and Gas (SCE&G), Duke Energy Carolinas,LLC, and Entergy Services, Inc.

Natural Gas Marketers to Report Data Annually on Their Physical Gas Transactions That Utilize a Price Index

Last week, FERC exercised its authority under the Energy Policy Act of 2005 to require natural gas marketers to report data annually on their physical sales and purchases of natural gas as a means of facilitating price transparency. The information, which applies to all volumes of gas that either originate in or are delivered to the lower 48 states, will be reported in Form No. 552. The new form will focus on transactions that utilize a price index, contribute to index price formation, or could contribute to index price formation. This also could include balancing, cash-out, operational, and in-kind transactions. FERC reasoned that, by focusing on index price transactions, market participants will have greater confidence in the transparency of the market. FERC clarified, however, that the reporting obligation for volumes subject to asset management agreements must be reported in the Form No. 552 of the individual customers of asset managers, not the asset managers themselves.

FERC exempted market participants from having to report their data if they bought or sold a de minimis amount of natural gas during the calendar year, which FERC defined as less than 2.2 million million British thermal units (mmBtus). If a company aggregates volumes from affiliates, such volumes would be aggregated for purposes of determining whether the company meets or exceeds the de minimis threshold. FERC further clarified that, although sales to end-users in interstate commerce are not exempt from the reporting obligation, traditional, bundled retail transactions by a local distribution company (LDC) at a state-approved tariff rate are exempt because those sales do not utilize a price index or contribute to index price formation.

The first report is due on May 1, 2009, and will apply to transactions occurring in calendar year 2008. Thereafter, the reports will be due by May 1 of each year for the previous calendar year. Reasoning that market participants have begun data collection for the current calendar year without the benefit of a final rule on what would be required, FERC established a one-time safe harbor for the 2009 Form No. 552 whereby data provided to index developers during 2008 will be presumed to be accurate, timely, and submitted in good faith.

FERC Proposes to Revise the Definition of the Term “Affiliate” Adopted in Order 697-A

In response to requests for rehearing of Order No. 697-A regarding market-based rate rules, FERC has proposed to revise the definition of affiliate established in that order and has sought supplemental comments on this issue. In Order No. 697-A, FERC stated that it would define affiliate similarly to how that term is used in the regulations adopted in Order No. 707.

Cross-Subsidization Restrictions on Affiliate Transactions (Affiliate Transaction Final Rule). There, the term “affiliates” incorporates explicitly the Public Utility Holding Company Act of 1935 (PUHCA 1935) definition of an affiliate for exempt wholesale generators (EWGs) based upon a five-percent-voting-interest threshold, whereas the definition of affiliate for non-EWGs is based upon a 10-percent-voting-interest threshold.

In response to requests for a single definition of affiliate applicable both to EWGs and non-EWGs, FERC now has proposed to revise the definition to delete the separate definition for EWGs and to revise the non-EWG part of the definition to provide that an affiliate of a specified company means: (a) any person who directly or indirectly owns, controls, or holds with power to vote 10 percent or more of the outstanding voting securities of the specified company; (b) any company that has 10 percent or more of its outstanding voting securities owned, controlled, or held with power to vote, directly or indirectly, by the specified company; (c) any person or class of persons who FERC determines to stand in such relation to the specified company that there is liable to be an absence of arm’s length bargaining in transactions between them as to make it necessary or appropriate in the public interest or for the protection of investors or consumers that the person be treated as an affiliate; and (d) any person who is under common control with the specified company. Comments on the proposed revision of the term affiliate are due October 20, 2008.

FERC Provides Guidance on Reporting Capacity Reassignments in EQRs

By notice issued on September 18, 2008, FERC provided guidance on how information on transmission capacity reassignments should be reported in the electric quarterly reports (EQRs). Since 2002, public utilities with market-based rate authority have been required to summarize pertinent information about their wholesale power sales during the reporting period in their EQRs.

The recent guidance was necessitated by the new requirements established in FERC’s Order No. 890 in which FERC revised its policy to permit capacity reassignments at prices in excess of the maximum rate. Under Order No. 890, a transmission provider must have a transmission capacity reassignment agreement with each assignee receiving capacity, and that agreement must be reported in the EQR filings. Because point-to-point transmission agreements cannot be reflected fully in the transaction section of the EQRs, the September 18, 2008 notice provides special reporting conventions for reporting transmission capacity reassignments. The new guidelines apply to all transmission capacity reassignments made on and after May 14, 2007, which was the effective date of Order No. 890. To comply with the guidelines, public utilities that previously had not reported capacity reassignments are required to revise and re-file their EQRs by October 31, 2008.

By separate order also issued on September 18, 2008, FERC revoked the market-based rate authority of Solaro Energy Marketing Corporation and Take Two, LLC because they failed to file their EQRs for more than a calendar quarter.

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