Energy Industry Updates for August 2009

Fall Battle Looms — Behind-the-Scenes Maneuvering for Climate Change Legislation Begins to “Heat Up”

As the fall session approaches, energy and environmental advocates are hard at work behind the scenes fashioning climate change legislation that would overhaul the energy industry. A battle over global warming and energy legislation was guaranteed earlier this year when Henry Waxman (D-Calif.), for years a vocal advocate of climate change legislation, became Chairman of the House Energy and Commerce Committee. Decades of environmental priorities were moved to the top of the legislative queue and are now center stage on Congress’ agenda.

After six months of negotiations, the House passed a bill in June by a vote of 219 – 212 that, if ultimately enacted into law, will enact reforms that are intended to reduce greenhouse gases. The likelihood of the House bill being seriously considered by the Senate this fall set off a sense of urgency among all energy industry advocates, and behind-the-scenes maneuvering began in earnest. The respite provided by the focus on health care reform this summer has allowed energy interest groups to organize their campaigns for the upcoming debates. Energy groups that did not even participate in the House negotiations are now mobilizing for the upcoming Senate battles.

Here is a brief primer on what you need to know:

To Review the Bidding

• The Waxman bill aims to reduce greenhouse-gas emissions to 17 percent below 2005 levels by 2020, and 83 percent below 2005 levels by 2050
• Initially, the government would give away 85 percent of emissions credits and auction the rest
• Polluters would earn credits by underwriting carbon dioxide reduction programs

The cap and trade program is the cornerstone of the energy package. It is seen as part of a societal transformation towards a green economy through green technologies, renewable energy sources, and alternative fuels.

Under the cap and trade program, power companies and manufacturers would be required to buy “allowances,” or credits, for each ton of carbon dioxide or other greenhouse gas they emit. Polluters that cut their emissions below their mandated “cap” could “trade” their leftover allowance to another company. Initially, the federal government would give away 85 percent of the permits and auction off the rest, with proceeds used to help low- and moderate-income households pay for the resulting higher energy bills. Gradually, fewer and fewer credits would be free, raising the cost of the nation’s dirtiest sources of energy and making green alternatives more affordable.

What Is at Stake for the Stakeholders?

Electric Utilities — the House bill hands out 30 percent of the emission credits free to local electric distribution companies in an effort to hold down the cost of CO₂ compliance and to provide relief from rate increases to residential and commercial customers. The plan also seeks to distribute credits under a formula that rewards utilities that have already invested in clean energy technology while at the same time easing compliance for coal and natural gas utilities.

Coal — the House bill provides the coal industry with free credits and $1 billion each year to develop the ability to capture, transport, and permanently store carbon dioxide emissions underground. The industry also is pushing to delay the compliance date for CO₂ reduction beyond the 2014 compliance date in the House bill.

Natural Gas — Natural gas utilities get a major break through a provision that exempts local distribution companies that sell natural gas to homes and commercial businesses from having to comply with the CO₂ emission restrictions until 2016. At that time, the government would give them credits to help meet the pollution control cap.

Nuclear Energy — Nuclear power is included in the plan under a proposed Clean Energy Development Administration that would help finance new energy technology projects. The industry also wants additional funding for the U.S. Department of Energy’s (DOE) loan guarantee program for building nuclear plants, an expedited loan-guarantee process, and investment tax credits and job-training incentives to help revive nuclear power manufacturing factories.

Renewable Energy — A renewable energy standard (RES) is included in the House bill that would require generators to produce an increasing amount of their power from renewable energy sources — solar, wind, and geothermal. The House bill requires utilities to produce six percent of their electricity from renewables by 2012 and 20 percent by 2020. It is likely that the Senate will impose more modest RES goals than the House.

The Senate Takes Center Stage

As Congress adjourned for the August break, Senate Democrats were already at work drafting energy and cap and trade provisions. The Senate bill will draw heavily from the House package but there will be differences, prompting Senate Energy Committee Chairman Jeff Bingaman (D-N.M.) and ranking Republican Lisa Murkowski (R-Alaska) to suggest in recent weeks that the Senate consider splitting off the pure energy production, conservation, and regulatory provisions into one bill with the cap and trade provisions being considered as a separate, second bill. This option will likely be considered more fully in the coming weeks.

Environmental groups who see a once-in-a-generation opportunity to set standards for CO₂ emissions will push Senator Barbara Boxer (D-Calif.), Chair of the Committee on Environment and Public Works, to include even tougher CO₂ emission standards in the Senate bill. The agriculture community will seek more concessions than those obtained in the House bill, which limited the role of the EPA to examine the connection between ethanol production and greenhouse gas emissions for the next five years. The oil lobby will engage more directly in seeking to open up more federal lands to oil and gas exploration. The renewable energy community will continue to fight for the RES.

The final enactment of the cap and trade and related energy provisions is by no means assured. When the Senate begins its work in the fall, all the energy groups that stand to win or lose from the legislation — those representing the traditional energy sources and those representing the renewable sector — will be jockeying for a seat at the table. 

Stimulus Funds — New Solicitations and Guidance From the DOE Will Provide Up to $11 Billion in Federal Loan Guarantee and Credit Subsidies for Innovative Energy Projects

The DOE recently issued a new solicitation that will provide up to $8.5 billion in federal loan guarantees and $2.5 billion in credit subsidy costs for eligible projects that employ innovative energy efficiencies, renewable energy, and advanced transmission and distribution technologies. Commercial technologies are currently ineligible. The solicitation involves the Sections 1703 and 1705 Loan Guarantee Programs. The DOE will accept applications on a rolling basis, with the first set of applications due by September 14, 2009.

The DOE also proposed amendments to the “first lien” requirement of Section 1702, which had been compulsory until now. The DOE may still choose to require a superior first lien for particular projects, but would not be required to do so. The DOE’s decision was driven, in part, by the tenancy-in-common ownership structure of many nuclear generating facilities. Under the first lien requirement, these facilities were effectively disqualified from participating under Section 1702 if they were jointly owned through such a structure. The proposed amendment also vests authority with the DOE to determine appropriate collateral packages and inter-creditor arrangements. 

A new study of patent trends in seven different water technology categories differentiates technologies that are receiving patents (and thus may already be areas of strong investment and research) from technologies that were not patented and may yet have room for opportunity. Because the demand for water is higher than ever, industry expectations are that the solution will rely on new technologies. For example, through technology we can develop wastewater treatment, less expensive desalinization, and a better purification processes. Foley’s Water Technology U.S. Patent Landscape Report study reviewed 384 patents issued in 2008 in the United States. 

The Illinois Finance Authority Is Authorized to Issue Bonds for Large Scale Renewable Projects and Clean Coal Initiatives

In a second important stimulus to make Illinois a competitive energy-friendly state, Illinois Governor Pat Quinn recently signed into law Public Act 096-0103 (Act). This bill authorizes the Illinois Finance Authority (Authority) to issue bonds for renewable energy projects in the State of Illinois (State) beginning January 1, 2010, and increases the Authority’s borrowing limit to $3 billion for its energy program. This is on the heels of a bill signed on June 30, 2009 that allows wind projects to claim a sales tax exemption in the State.

Although the Authority already had in place an existing clean coal and energy program, the Act extends the Authority’s statutory authority to permit it to issue bonds for large-scale renewable energy and clean coal initiatives. The Authority is authorized to make loans of up to $450 million to single borrowers (including affiliates) that are engaged in clean coal and other renewable energy initiatives. The Authority also has programs in place to:

• Make loans to privately owned solid waste disposal companies that provide services to the general public, including corn, biomass, coal, and waste projects
• Make loans to manufacturing companies to finance the acquisition of fixed assets such as wind power processing plants
• Guarantee projects sponsored by farmers and agribusinesses that wish to diversify into new enterprises
• Coordinate with the Illinois Power Authority to develop programs to utilize a $4 billion bonding authority for eligible clean coal and renewable resource projects
   

FERC to Rule on Whether Generators in the Midwest ISO Region Must Pay 100 Percent of Network Upgrade Costs

The Midwest Independent Transmission System Operator, Inc. (Midwest ISO) recently filed with FERC, jointly along with certain Midwest ISO transmission owners, a proposal to revise its pro forma Open Access Transmission Tariff to require generators that wish to interconnect with the MISO grid to pay all of the network upgrades costs associated with the interconnection. This proposal would revise the current MISO’s open access tariff to permit them to recover 10 percent of such costs, and then only if the generation facilities have a minimum capacity of 345 kV and have achieved commercial operations at the facilities. The MISO tariff presently permits a generator to recover 50 percent of the costs of the network upgrades.

The proposal was prompted by the announcement of five transmission owners in the region (Otter Tail Power Company, Montana-Dakota Utilities Co., Indianapolis Power & Light Co., Hoosier Energy Rural Electric Cooperative, Inc., and Southern Illinois Power Cooperative) that they intended to withdraw from the Midwest ISO due to concerns that retail and wholesale customers in their pricing zones are being required to fund significant costs for network upgrades necessitated by interconnecting new wind resources that serve load outside those zones. Many independent power producers, including renewable energy generators and industry associations, protested the proposal on the grounds that it would unduly discriminate against generators, discourage development of wind resources in the region, and undermine state efforts to meet state and federal guidelines for renewable power development.

FERC’s deliberations on this matter will be a tug-of-war between competing policy objectives: its commitment to the growth of renewable energy in one of the most wind-rich regions in the country through needed upgrades to an aging transmission system, and its support for organized markets such as the Midwest ISO, whose viability depends on continued membership of the transmission owners in the region. 

FERC Unveils New Reporting Requirement for Land Acquisition by Market-Based Rate Sellers

In July, FERC began to require market-based rate sellers to report the acquisition of sites for the development of generation capacity over which they will have control. Under this order, known as Order No. 697-C, a market-based rate seller is deemed to have acquired control over a site if it has any of the following characteristics: (i) ownership, (ii) leasehold interest, (iii) right to develop, (iv) option to purchase, (v) option to acquire a leasehold site, or (vi) exclusive business relationship with an entity having the right to sell, lease, or grant the seller a right to possess or occupy the site.

Order No. 697-C established three reporting requirements. First, a market-based rate seller must file a change in status report with FERC within 30 days after the end of each quarter if it acquires and controls sites that could be used to develop generation capacity with an output of at least 100 MW. Second, a market-based rate seller will be required to file a change in status report with FERC that identifies sites for 100 MW or more of capacity acquired within the past three years but for which site control through an interconnection process has not yet been demonstrated. Third, a market-based rate seller must file a report with FERC by January 1, 2010 if it acquires a site that it has already held for three years prior to July 29, 2009, and site control for such sites have not yet been demonstrated through an interconnection process, and it has not already notified FERC of the site acquisition and holding.

By assisting FERC’s ability to detect whether market-based rate sellers are purchasing but not actually developing viable land on which other sellers could have developed new generation capacity, the new reporting requirements will help FERC monitor a market-based rate seller’s ability to erect barriers to entry for development of new generation. 

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Please contact your Foley Energy attorney if you have any questions about these topics or want additional information regarding energy matters. Authors and editors: