Energy Industry Updates for April 2009

FERC and DOE Propose Policies to Promote the Development of Smart Grid Technologies

Seeking to guide the development of a modern electric grid and to encourage utilities to invest in smart grid technology, the Federal Energy Regulatory Commission (FERC) issued a proposed Policy Statement and Action Plan on March 19, 2009 to provide guidance to the electricity industry on standards for the following:

• Cyber security
• Communications among regional market operators, utilities, service providers, and consumers
• Assurances that the bulk power system operators have “wide-area situational awareness” with equipment that allows them to monitor and operate their systems
• Coordination of the operation of the bulk power system with new and emerging technologies for renewable resources, demand resources, electricity storage, and electric transportation systems

FERC’s goal is to prioritize the development of interoperability standards and to provide guidance for the development of reliability and security standards — both physical and online security. Smart grid investments that demonstrate system security, compliance with reliability standards, the ability to be upgraded, and other specific criteria will be eligible for timely rate recovery and other rate treatments. Comments on the Proposed Policy Statement are due May 11, 2009.

In a related development, the U.S. Department of Energy (DOE) is accepting comments from utilities and other applicants on a proposed Funding Opportunity Announcement (FOA) for the Smart Grid Investment Grant Program, as authorized by the Energy Independence and Security Act of 2007 (EISA), and as modified by the American Recovery and Reinvestment Act of 2009 (ARRA). See www.grants.gov, Funding Opportunity No. DE-FOA-0000036; Notice of Intent to Issue a FOA for Smart Grid Investment Program. In a draft FOA issued this month, DOE solicited applications for grants for the Smart Grid Investment Grant Program — a program that covers up to 50 percent of investments on projects that promote the development and deployment of component smart grid technologies. As described in DOE’s Notice of Intent, the investments will help implement the necessary digital upgrades to the electricity grid, enabling it to work more efficiently and integrate renewable, energy-efficient technologies and demand-management practices.

The draft FOA includes four program areas of interest for which applicants may seek to use grant proceeds:

• Regional demonstrations: advanced digital technologies for use in the planning and operations of the electric power system and the electricity markets
• Synchrophasor demonstrations: installation and networking of multiple high-resolution, time-synchronized grid monitoring devices to monitor, collect, and analyze data for insight in planning the electric power system
• Utility-scale energy storage demonstrations: advanced battery systems, ultra-capacitors, flywheels, and compressed air energy systems along with the application areas of wind and photovoltaic (PV) integration, upgrade deferral of transmission and distribution assets, congestion relief, and system regulation

Comments to the FOA are due May 6, 2009. After considering the comments, DOE will issue the FOA currently planned for June 17, 2009.

On April 20, 2009, Richard Blumenthal, Attorney General for State of Connecticut (Connecticut AG), filed a formal complaint at FERC against ISO-New England, Inc. and certain unidentified market participant importers of installed capacity. The complaint requests an investigation, hearing, and disgorgement with regard to payment of certain ISO-New England Market Northern New York AC Interface importers Subsequently, on April 23, 2009, the Connecticut Department of Public Utility Control and the Connecticut Office of Consumer Counsel (collectively, Connecticut Representatives) filed a similar complaint against ISO-New England, Inc. and the unidentified importers. On the same date, the Connecticut Representatives and the Connecticut AG filed a joint motion to consolidate the two proceedings.

The complaints request FERC to investigate an alleged fraudulent and manipulative scheme that was perpetrated for more than two years by installed capacity resources that were paid at least $85.8 million for reliability services that they purportedly did not intend to provide. The complaints allege that, on 108 separate occasions during the period from January 2005 to January 2009, every market participant that submitted a supply offer in excess of $660/MWh over the Northern New York AC Interface failed to perform when dispatched. The Connecticut Representatives and the Connecticut AG request FERC to require the capacity resources to disgorge all the proceeds of the alleged illicit scheme and impose other appropriate civil penalties.

On April 13, 2009, FERC approved a 12.38-percent return on equity along with a series of rate incentives for a massive “green power superhighway” that would run from the Dakotas to Chicago. Green Power Express LP, a subsidiary of ITC Holdings Corporation, has proposed to construct a 3,000-mile high-voltage transmission line that would carry renewable energy from wind-rich states in the upper Midwest to major load centers. The 765 kV transmission line will have a planned capacity of 12,000 megawatts.

FERC based its approval of these incentives on the fact that the new transmission line would reduce the cost of delivered power by reducing transmission congestion and would increase grid reliability because the impacts of localized weather on wind generation would be spread more extensively. FERC noted that the Midwest ISO estimates that it will need approximately 25,000 MW of renewable generation over the next 10 – 15 years to comply with renewable portfolio standards in the region and that this line would facilitate the development and interconnection of wind farms to meet those goals. Green Power estimates that the project will cost $10 – 12 billion, and it will require approvals and siting authorizations from North Dakota, South Dakota, Minnesota, Iowa, Wisconsin, Illinois, and Indiana.

FERC’s willingness to provide the rate incentives for this project is noteworthy in that the project did not go through any state, regional, or ISO planning process. FERC rejected the arguments of opponents who said it should go through such processes first before FERC addresses the rate issues. How the project will be involved with the regional transmission planning processes in the future is a matter of interest to industry watchers.

FERC’s interest in promoting the development of new transmission infrastructure is, not surprisingly, encountering objections from state and local interests. As we previously reported in our March 12, 2009 Legal News (available at http://www.foley.com/publications/pub_detail.aspx?pubid=5812), the United States Court of Appeals for the Fourth Circuit rejected FERC’s 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 provide FERC with backstop authority over the siting of transmission lines in national transmission corridors designated by DOE. Piedmont Environmental Council v. FERC, 558 F.3d 304 (4th Cir. 2009). Under Section 216(b), federal jurisdiction over siting in national corridors would arise where, among other things, a state withheld approval of a transmission application for more than one year. The Fourth Circuit, in Piedmont, considered whether Section 216(b) provided FERC with backstop jurisdiction when a state affirmatively denied a permit application within one year of when it was submitted rather than simply withheld judgment during the one-year period. In a 2-1 decision, the Fourth Circuit held that FERC acquires jurisdiction only if a state fails to act within the one-year period, but does not acquire jurisdiction if the state actually denies the application within the year.

Recognizing the negative impact that this ruling could have on its fledgling authority to site transmission projects blocked at the state level, FERC has asked the court to reconsider its ruling, arguing that the court violated the tradition deference accorded to regulatory agencies to interpret ambiguous provisions of their enabling statute. Like many observers, FERC appears to recognize the crippling impact that the Fourth Circuit’s decision could have on Congress’ attempt in EPAct 2005 to break the logjam that often arises over transmission projects at the state level by allowing FERC to consider the project if certain conditions are met. Already, parties in a proceeding initiated by Southern California Edison Co. (Edison) under Section 216(b) are citing Piedmont as authority for why FERC must dismiss the application. In particular, Edison has sought to invoke FERC’s siting authority in connection with its Devers-Palo Verde No. 2 project to build new transmission between Phoenix and Los Angeles, an area of longstanding transmission shortages. Citing Piedmont, the Arizona Corporation Commission recently requested FERC to dismiss Edison’s application, arguing that it had timely denied approval for the project within the statutory one-year period, thereby denying FERC authority to site transmission within the Southwest corridor. Unless FERC is successful in obtaining reconsideration of the Fourth Circuit’s opinion or asks the U.S. Supreme Court to hear this matter, it appears that a legislative fix to the ambiguous language in EPAct 2005 will be required if FERC is to play a meaningful role over transmission siting.

As we also previously reported in our June 2008 Legal News (available at http://www.foley.com/publications/pub_detail.aspx?pubid=5127), on June 26, 2008, the U.S. Supreme Court clarified how the Mobile-Sierra “public interest” test operates within the context of the statutory just and reasonable standard when evaluating rates charged under bilateral contracts. Morgan Stanley Capital Group Inc., v. Snohomish County, Washington, Nos. 06-1457. The Supreme Court rejected the United States Court of Appeals for the Ninth Circuit’s holding that an energy contract could be subject to the public interest standard only if the contract had been reviewed and found by FERC in advance to be reasonable. The Supreme Court also stated that it would be irrelevant if the contract in question was formed during a period of market dysfunction, as were the Western markets in 2002 when the contracts at issue were signed. Although the Supreme Court stated that FERC could modify long-term contracts if their rates imposed an excessive burden on ratepayers “down-the-line” or one of the parties to the contract manipulated the market to such an extent that it altered the playing field during contract negotiations, its decision was, overall, positive for energy markets since it upheld and strengthened the sanctity of contracts as a bedrock principle of energy regulation.

At the same time that the Supreme Court was acting in Morgan Stanley, the United States Court of Appeals for the District of Columbia Circuit was considering the applicability of the Mobile-Sierra doctrine to entities not party to the contract. That case involved a settlement that addressed long-simmering problems in the New England capacity market. The vast majority, but not all, of the parties supported the settlement, which included a condition that subjected all future challenges to certain payments under the settlement to the Mobile-Sierra public interest standard of review, even those brought by parties that opposed the settlement. FERC modified the settlement’s attempt to impose the Mobile-Sierra standard on non-parties to the settlement. The D.C. Circuit upheld FERC’s decision, reasoning that the Mobile-Sierra doctrine was an exception to the just and reasonable standard of review, one that could be imposed only on parties that agreed to this limitation. Maine Pub. Utils. Comm’n v. FERC, 454 F.3d 278 (D.C. Cir. 2006). The D.C Circuit concluded that to impose the Mobile-Sierra standard of review on parties that opposed the settlement would be to deprive them of their statutory right to just and reasonable rates.

On April 27, 2009, the Supreme Court granted certiorari and agreed to hear argument in this case. NRG Power Marketing, LLC v. Maine Public Utils. Comm’n, No 08-674. We can only surmise as to what caught the Supreme Court’s attention. Since this case was heard by the D.C. Circuit before Morgan Stanley was issued, it is possible that the Supreme Court may wish to expand upon its earlier decision in Morgan Stanley in the context of nonparties to the contract. Indeed, FERC urged the Supreme Court to remand the case to the D.C. Circuit so that it could reconsider its decision in light of Morgan Stanley. Or, the Supreme Court may wish to address the applicability of the Mobile-Sierra doctrine in the context of multiparty administrative settlements (the situation here), as opposed to bilateral contracts.

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
[email protected]

Thomas McCann Mullooly
Milwaukee, Wisconsin
414.297.5566
[email protected]

Marguerite Z. Hammes
Milwaukee, Wisconsin
414.297.5679
[email protected]

Svetlana V. Lyubchenko
Washington, D.C.
202.672.5492
[email protected]

Trevor D. Stiles
Milwaukee, Wisconsin
414.319.7346
[email protected]