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Douglas Smith of Van Ness Feldman Speaker 3a: 1

Law Seminars International | Electric Energy Regulation | 03/03/08 in Washington, DC

Electric Utility Regulation:Federal Regulatory Challenges

Doug Smith

1050 Thomas Jefferson Street, NWSeventh FloorWashington, DC 20007 (202) 298‐1800

Millenium Tower719 Second Avenue, Suite 1150

Seattle, Washington 98104(206) 623‐9372

gVan Ness Feldman, P.C.Electric Energy: Markets, Regulation and Investment

March 3, 2008Washington, D.C.

Overview

• Fundamentals of Federal electricity regulation• Current challenges

o For FERCo For utilitieso For other electricity market participants

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Why is there Federal utility regulation?

− In 1927, Supreme Court ruled in Attleboro that interstate sales of power are beyond the constitutional reach of the states to regulatepower are beyond the constitutional reach of the states to regulate, under a dormant Commerce Clause analysis

− In 1935, to address the “Attleboro gap” and the abuses of utility holding companies, Congress enacted:− Public Utility Holding Company Act (PUHCA), regulating the

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structure and activities of public utility holding companies− Parts II and III to the renamed Federal Power Act, regulating

wholesale sales of electric energy and transmission of electric energy in interstate commerce

Part II of the Federal Power Act

− Key FPA functions are: E t bli hi d i t i i t th t “j t d− Establishing and maintaining rates that are “just and reasonable,”

− Policing against undue discrimination, and − Ensuring merger and acquisition activity is in the public

interest

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− Established the Federal Power Commission (now the Federal Energy Regulatory Commission) as independent regulatory body



FPA Jurisdiction

− Includes: i i f l i i i i− Transmission of electricity in interstate commerce

− Wholesale sales of electricity in interstate commerce

− Excludes: − Distribution− Generation− Retail sales

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− Sales or transmission not in interstate commerce

− Also excludes, for most purposes:− Government-owned utilities− RUS-financed and small cooperatives

“In Interstate Commerce”

− Doesn’t matter if sale or transmission occurs within a i l t t it i i i t t t if it i thsingle state; it is in interstate commerce if it is on the

interstate grid. FPC v. Florida Power & Light, 404 U.S. 453 (1967); FPC v. Southern California Edison Co., 376 U.S. 205 (1964).

I id ll b H ii Al k d

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− Interstate grid covers all but Hawaii, Alaska and ERCOT.



Rate Requirements Under FPA § 205

− Section 205 governs utility applications for approval of new rates and utility initiated changes to filed ratesand utility-initiated changes to filed rates.

− Section 205 requires that rates, terms, and conditions of jurisdictional service, as well as any rule, regulation, practice or contract affecting such rates, terms, and conditions of service, be:

− Just and reasonable. FPA § 205(a).

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− Not unduly discriminatory or preferential. FPA 205(b).− On file at FERC. FPA 205(c) and (d).

Rate Changes Under FPA § 206

− Section 206 governs efforts by FERC or third parties to change existing utility rates.

− Under FPA § 206(a), FERC may, on its own motion or upon complaint, investigate whether any rate, term, or condition is unjust, unreasonable, or unduly discriminatory.

− If FERC finds that any rate, term, or condition is unjust, unreasonable, or unduly discriminatory, then FERC must determine and establish a just,

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y y, j ,reasonable, and non-discriminatory rate, term, or condition.

− Section 206 authorizes refunds



Rate Standards− Unjust and unreasonable rates and charges are unlawful. FPA § 205(a).

− No single formula determines when rates are unjust and unreasonable. g jFederal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944). Rather, rates must fall in a “zone of reasonableness.”− Not exploitive of consumers− Maintains financial integrity of utility

− Prudence review evaluates whether costs were prudently incurred, and thus can be included in cost-of-service rate calculations.

− Market-based rates are lawful where FERC finds that a seller cannot i k t

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exercise market power.− Undue discrimination is prohibited. FPA § 205(b).

− Discrimination is unlawful when similarly situated customers are treated differently.

− Focus is often on whether utility is preferring affiliates over non-affiliates

Filed-Rate and Mobile-Sierra Doctrines

− Filed Rate Doctrine – A utility may collect only the rates, and may only enforce the terms and conditions of service, reflected in its filed rate schedule. Arkansas Louisiana Gas Co v Hall 453 U S 571 (1981)Gas Co. v. Hall, 453 U.S. 571 (1981).

− Preemptive effect of FERC filed rate limits state authority to second-guess just and reasonable finding

− Corollary - Rule against retroactive ratemaking prevents the Commission itself from imposing a rate increase or decrease for power already sold.

− Mobile-Sierra Doctrine – “Public interest” standard used in lieu of “just and reasonable” standard to evaluate unilateral requests for changes to contract between

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reasonable standard to evaluate unilateral requests for changes to contract between utility and purchaser, unless contract provides otherwise. See United Gas Pipeline Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956); FPC v. Sierra Pacific Power Co., 350 U.S. 348 (1956).

− Recent Ninth Circuit precedent limits applicability of Mobile-Sierra in electricity markets that are not “well-functioning”



Public Utility Mergers

− FERC’s approval is required for public utility mergers, consolidations, and dispositions of jurisdictional facilities. FPA §consolidations, and dispositions of jurisdictional facilities. FPA §203.

− Corporate transactions evaluated under a public interest test. Market power assessment dominates merger evaluation.

− EPAct/05 added review for affiliate cross-subsidies.

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− FERC jurisdiction over mergers under § 203 are not exclusive; reviews under Federal antitrust laws and state utility statutes also apply.

Power Market Oversight

− Market-Based Power Rates− Expansion of MBR through the 1990s − Reined in after California crisis

− Market Behavior Rules− EPAct/05 - Market manipulation provisions− Recent reforms of market power test

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− Mergers and Acquisitions− Market power test is key to public interest evaluation



Open Access Transmission− Mandatory wheeling orders under FPA §§ 211–212 may be granted on a case-

by-case basis against “electric utilities”− Authority granted in Energy Policy Act of 1992

− FERC’s Order No. 888, issued in 1996− Requires transmission-owning public utilities to offer transmission services

under an Open Access Transmission Tariff (OATT)− OATT recently modified in Order No. 890− Order No. 888 and successors were issued under FPA § 206, not FPA §§

211 and 212

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− FERC Order No. 2000 encouraged, but did not require, the formation of regional transmission organizations (RTOs)− Designed to provide for independent, region-wide operation and planning of

transmission grid

Electricity Title of EPAct/05

− Mandatory reliability standards B k iti th it f t i i f iliti− Backup siting authority for transmission facilities

− Rate incentives for transmission investment− Authority to extend open access transmission requirements

(“FERC Lite”)− Expansion of FERC merger authority− PUHCA repeal

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PUHCA repeal− PURPA reform− Prohibition on market manipulation − Expansion of FERC civil penalty authority



Current Issues• Transmission market power – Order No. 890, interconnection rules• Generation market power – Order No. 697, change in status, 203 reviewp , g ,• Affiliate preference – standards of conduct, code of conduct• Success of competitive markets – continued criticism of organized

markets by consumer constituencies• Transmission investment – incentive rates, back‐up siting authority• Generation investment – capacity markets• Advanced/green technology – demand response as marketable capacity,

transmission for renewables, smart grid

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• Reliability standards – making technical standards mandatory• Enforcement role/culture of FERC ‐ $1 million/day penalty authority• Aftermath of California – litigation continues

Thank You

• Questions? Doug SmithDoug [email protected](202) 298‐1902

• Tracking Developmentso Van Ness Feldman publishes alerts on significant developments in concerning electricity and related energy/environment issues

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energy/environment issues o Alerts available on www.vnf.como Sign up to receive alerts by e‐mail at http://www.vnf.com/news‐signup.html

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