Global Power Law & Policy

Legal and Policy Developments Affecting the Global Power Industry.

 

1
RENEWABLE ENERGY: Leveraging the Opportunity Zones Tax Incentive to Improve Returns on Renewables, Storage Plus, and Standalone Storage
2
K&L Gates Blockchain Energizer – Volume 38
3
Minding the Gap: FERC Issues Proposed Rule To Address Treatment of Income Taxes Following Change in Tax Rates
4
US Offshore Wind Market Handbook Helps Investors Navigate Technical and Regulatory Issues
5
K&L Gates Links with Global Legal Blockchain Consortium
6
2018 Election Guide: A Guide to Changes in Congress – Available Now
7
K&L Gates Blockchain Energizer – Volume 37
8
FERC’s New ROE Math
9
The Blockchain Technology Revolution: Implications for the Energy Sector
10
Invigorated Federal Interest in Fusion Energy Presents Opportunities and Questions for Growing Private Fusion Energy Sector

RENEWABLE ENERGY: Leveraging the Opportunity Zones Tax Incentive to Improve Returns on Renewables, Storage Plus, and Standalone Storage

By Elizabeth C. Crouse and Mary Burke Baker                     

Federal and state tax credits for renewable energy facilities are winding down, but a new federal tax incentive enacted in tax reform may provide a boost to many new installations, repowering projects, and storage facilities. The Qualified Opportunity Zones (“QOZ”) incentive provides attractive tax benefits for investors with capital gains that, unlike other federal incentive programs such as the New Markets Tax Credit and Historic Rehabilitation Tax Credit, can be combined with the Investment Tax Credit (“ITC”) and Production Tax Credit (“PTC”) for facilities located in geographic areas that are designated as QOZ. Further, QOZ benefits will remain in place for a significant period after the ITC and PTC have become less valuable or expired. Recently released regulations provide significant clarity and highlight how valuable the QOZ incentive can be for qualified investments. See our October 23 alert for a discussion of how the regulations make the QOZ incentive even more interesting.

To view the full alert on K&L Gates HUB, click here.

K&L Gates Blockchain Energizer – Volume 38

By Buck B. Endemann, Benjamin L. Tejblum, and Daniel S. Cohen

There is a lot of buzz around blockchain technology and its potential to revolutionize a wide range of industries from finance and health care to real estate and supply chain management. Many institutions and companies are forming partnerships to explore how blockchain ledgers and smart contracts can be deployed to manage and share data, create transactional efficiencies, and reduce costs.

While virtual currencies and blockchain technology in the financial services industry have been the subject of significant debate and discussion, blockchain applications that could transform the energy industry have received comparatively less attention. Every other week, the K&L Gates’ Blockchain Energizer will highlight emerging issues or stories relating to the use of blockchain technology in the energy space. To subscribe to the Blockchain Energizer newsletter, please click here.

IN THIS ISSUE

  • KEPCO Announces Exploration of Blockchain-Based Solar Trading Platform.
  • SP Group Using Blockchain to Power REC Trading Platform in Singapore.
  • Energy Web Foundation Unveils an Electric Vehicle Charging Toolkit for EW Origin.

To view more information on theses topics in Volume 38 of the Blockchain Energizer, click here.

Minding the Gap: FERC Issues Proposed Rule To Address Treatment of Income Taxes Following Change in Tax Rates

By Abraham F. Johns, Toks A. Arowojolu, William M. Keyser, Eric E. Freedman, David P.  Hattery, and Sandra E. Safro

On November 15, 2018, the Federal Energy Regulatory Commission (“FERC”) announced two major policy developments on the treatment of Accumulated Deferred Income Taxes (“ADIT”) in light of the recent reduction of the federal income tax rate in the Tax Cuts and Jobs Act of 2017. The proposed developments are intended to benefit utility customers by providing for a fair return of the tax savings created by the new law. First, FERC issued a Policy Statement that outlines FERC’s policy on the treatment of ADIT for both accounting and ratemaking purposes for public utilities, natural gas pipelines and oil pipelines in light of the recent reduction in income taxes. Second, in a notice of proposed rulemaking (“NOPR”), FERC proposes to require all public utility transmission providers to revise their transmission rates to account for the reduction in income taxes caused by the Tax Cuts and Jobs Act of 2017.

Policy Statement: Treatment of ADIT in Light of the Tax Rate Reduction

The Policy Statement, titled “Accounting and Ratemaking Treatment of Accumulated Deferred Income Taxes and Treatment Following the Sale or Retirement of Assets,” provides guidance on two questions FERC posed in its March 15, 2018, Notice of Inquiry (“NOI”).

First, FERC provides details on the specific accounts that public utilities and natural gas pipelines should use to record amortization of excess and deficient ADIT. FERC also explains how oil pipelines should treat deferred tax balances and provides that, for ratemaking purposes, FERC will continue the practice of amortization and removal of excess or deficient ADIT by reducing the returned allowed prior to grossing up for income taxes.

Second, FERC provides guidance on how public utilities, natural gas pipelines and oil pipelines should address excess and/or deficient ADIT that is recorded on their books after December 31, 2017, as a result of the sale or retirement of assets. The Policy Statement explains that in the case of a public utility or natural gas pipeline that continues to have an income tax allowance, any excess or deficient ADIT associated with an asset must continue to be amortized in rates even after the sale or retirement of that asset. If the rate treatment of the excess or deficient ADIT is disallowed, then the amounts should be written off in the year of the disallowance. In line with the existing Uniform System of Accounting for oil pipelines, FERC notes that for accounting purposes an oil pipeline’s ADIT balance will be reduced immediately by the full amount of the excess or deficient tax reserve. For ratemaking purposes, an oil pipeline would maintain the excess or deficient ADIT in the ADIT account and would continue to amortize those amounts when determining its income tax allowance as part of the ratemaking process after the assets are sold or retired.

The Policy Statement also states that, to provide greater transparency, public utilities, natural gas pipelines and oil pipelines should provide additional information regarding ADIT in their annual financial filings.

NOPR: Closing the Gap in Transmission Formula Rates of Public Utilities

The proposed reforms are intended to ensure ratepayers receive the benefits of the Tax Cuts and Jobs Act of 2017 and that transmission rates are just and reasonable following the enactment of the Tax Cuts and Jobs Act. As explained in the NOPR, the proposed changes fall into three categories and apply differently to transmission formula rates and stated rates. First, the NOPR proposes to require public utilities with formula rates to include a mechanism in their formula rate to deduct excess ADIT from or add deficient ADIT to their rate bases. Second, the NOPR proposes to require public utilities with transmission formula rates to include a mechanism in the formula rate that decreases or increases their income tax allowances by any amortized excess or deficient ADIT. The NOPR proposes to require that public utility transmission providers with stated rates to determine the excess or deficient ADIT caused by the Tax Cuts and Jobs Act based on the ADIT amounts approved in their last rate case and return or recover this amount from ratepayers. Finally, the NOPR proposes to require all public utility transmission providers with transmission formula rates to include a new permanent worksheet into their transmission formula rate that will track information annually related to excess or deficient ADIT.

In his remarks at FERC’s monthly meeting, Chairman Chatterjee emphasized that the NOPR does not prescribe a one-size-fits-all approach to make the required adjustments. Rather, the NOPR recognizes that multiple approaches to modify rate base may be just and reasonable.

All three Commissioners strongly supported the NOPR. Commissioner LaFleur stated, “My goal is to get tax savings back into the hands of the customers as quickly as possible. That’s not yet done, but this is an important first step.”

Comments are due within 30 days of publication of the NOPR in the Federal Register. We will continue to monitor the developments of this proceeding.

US Offshore Wind Market Handbook Helps Investors Navigate Technical and Regulatory Issues

K&L Gates LLP, and Atkins, a member of the SNC-Lavalin Group recently released an Offshore Wind Market Handbook to help guide investors through technical- and regulatory issues in the emerging US offshore wind market.

“Many large companies and institutional investors who have been successful with offshore wind projects in Europe are now poised to invest in the US,” said Andrew Thompson, Director, Offshore Wind at Atkins. “However, technical and regulatory issues unique to this market can be a barrier to developers for offshore wind energy projects. Our handbook provides practical information that addresses key matters.”

Regulatory issues include a discussion of the interplay between US federal jurisdiction and the various coastal states that have enacted laws and regulations encouraging offshore wind projects. Technical issues include turbine and foundation options and solutions, performance assurance strategies and a discussion of innovations in design and equipment that are particularly suited to US coastal waters.

“Essentially, technical and regulatory legal issues are intertwined such that project success requires a closely coordinated cross-discipline team,” said David Hattery, co-leader of K&L Gates’ power practice. “Together, K&L Gates and Atkins demonstrate a pool of knowledge and a depth of experience to draw on that gives us uniquely valuable insight into the legal and technical challenges facing the US offshore wind industry.”

The K&L Gates renewable energy practice combines European project experience with US regulatory and project development expertise. Atkins is a leading provider of full range technical and operational expertise in the energy industry, including engineering design and owner’s engineer services in the global offshore wind market. Together, K&L Gates and Atkins demonstrate market leadership on key issues and can help investors build a leading position in the US offshore wind market.

To read the full press release, click here.

K&L Gates Links with Global Legal Blockchain Consortium

Global law firm K&L Gates LLP has joined the Global Legal Blockchain Consortium (GLBC), an organization of legal and technology industry stakeholders focused on increasing the security, productivity, and interoperability of blockchain technology.

To date, more than 120 large companies, law firms, software companies, and law schools have joined the GLBC to help in developing standards and policies that govern the use of blockchain technology in the business of law. Specific issues on which the consortium focuses include data integrity, authenticity, security, and privacy for contracts and documents; interoperability between corporate legal departments and law firms; productivity improvements in the operation of legal departments and law firms; and augmentation of existing legal technology systems.

Judith Rinearson, a partner in K&L Gates’ New York and London offices and one of the co-chairs of the firm’s FinTech practice leading K&L Gates’ involvement with GLBC, said: “We have been very strategic in  how we have approached the enormous opportunities presented by the blockchain. Our membership in GLBC is a great fit in our overall strategy to harness the capabilities of the blockchain in order to benefit our clients.”

Last year, K&L Gates announced plans to implement its own private blockchain to assist in the exploration, creation, and implementation of smart contracts and other technology applications for future client use, a commitment that very few, if any, other major law firms have made.

Lawyers in the firm’s FinTech practice are part of a cross-disciplinary, global team focused on helping clients navigate regulatory, policy, and business issues surrounding the FinTech space, such as consumer financial services regulation, e-commerce regulation, fund formation, cybersecurity, finance, and intellectual property matters.

K&L Gates is a fully integrated global law firm with lawyers located across five continents. The firm represents leading multinational corporations, growth and middle-market companies, capital markets participants and entrepreneurs in every major industry group as well as public sector entities, educational institutions, philanthropic organizations and individuals. For more information about K&L Gates or its locations, practices and registrations, visit klgates.com.

2018 Election Guide: A Guide to Changes in Congress – Available Now

The tumultuous 2018 midterm election, characterized by many as the most consequential in a generation, ended as predicted: the Democrats took control of the House while the Republicans increased their hold in the Senate.

Indeed, it was a tale of two Houses. As of 10:00 a.m. ET on November 7, the Democrats have picked up 28 seats in the House of Representatives, with the prospects of gaining about seven more as the remaining close races are decided, mostly in the west. In the Senate, Democratic Senators in Missouri, Indiana, and North Dakota were defeated while a Republican lost in Nevada, resulting in a net gain of two Senate seats thus far for Republicans with three races too close to call.

To help you assess yesterday’s election, K&L Gates has prepared a comprehensive guide that summarizes the results and their impact on the 116th Congress, which will convene in January. The Election Guide lists all new members elected to Congress, updates the congressional delegations for each state, and provides a starting point for analyzing the coming changes to the House and Senate committees.

Please click here to download the most up-to-date version of the 148-page Election Guide, which will be updated on an ongoing basis as more of the close races are called and committees are finalized.

For additional information regarding the effects of the recent elections, please contact Tim Peckinpaugh or any member of the Public Policy and Law practice.

To view the complete guide online, click here.

K&L Gates Blockchain Energizer – Volume 37

By Buck B. Endemann, Benjamin L. Tejblum, and Daniel S. Cohen

There is a lot of buzz around blockchain technology and its potential to revolutionize a wide range of industries from finance and health care to real estate and supply chain management. Many institutions and companies are forming partnerships to explore how blockchain ledgers and smart contracts can be deployed to manage and share data, create transactional efficiencies, and reduce costs.

While virtual currencies and blockchain technology in the financial services industry have been the subject of significant debate and discussion, blockchain applications that could transform the energy industry have received comparatively less attention. Every other week, the K&L Gates’ Blockchain Energizer will highlight emerging issues or stories relating to the use of blockchain technology in the energy space. To subscribe to the Blockchain Energizer newsletter, please click here.

IN THIS ISSUE

  • Energy Web Foundation, PJM-EIS Launch Pilot Program to Use EW Origin to Facilitate REC Trading.
  • Nevada Public Utilities Commission is Exploring Blockchain for Portfolio Energy Credit Tracking.
  • Electron Signs Cooperation Agreement with eEnergy Center to Develop Electron’s Flexibility Trading Platform.
  • JAMS Establishes a Blockchain, Smart Contracts, and Cryptocurrency Practice.
  • Power Ledger Wins the 2018 Extreme Tech Challenge.

To view more information on theses topics in Volume 37 of the Blockchain Energizer, click here.

FERC’s New ROE Math

By: Donald A. Kaplan, William M. Keyser, and Abe F. Johns

On October 16, 2018, the Federal Energy Regulatory Commission (“FERC” or “the Commission”) issued an order (“Order”) that dramatically reforms the way it determines the just and reasonable return on equity (“ROE”) in rate cases. The new methodology abandons FERC’s exclusive reliance on its discounted cash flow (“DCF”) model and will now give equal weight to the DCF, capital-asset pricing model analysis (“CAPM”), and an expected earnings analysis (“Expected Earnings”) to determine if a ROE is unjust and unreasonable. FERC will add a fourth method, a risk premium analysis (“Risk Premium”), to determine the new ROE when it finds a challenged ROE unjust and unreasonable.

While the new method only applies to transmission owners in New England, considering FERC’s enthusiasm for uniformity, the policy will likely be applied to more rate cases in the future and could impact both the electric and gas industries.

I. Background: FERC’s Previous ROE Calculus

The Order on remand, from the DC Circuit Court of Appeals in Emera Maine v. FERC, 854 F.3d 9 (D.C. Cir. 2017), comes as the latest iteration of cases based on several complaints against the collective ROE of the transmission owners in ISO New England, Inc.

The ROE represents the allowed return on utility equity included their cost-of-service rates. Under the famous Hope and Bluefield standards, FERC must set utility rates and returns on investment commensurate with other enterprises of comparable risk and sufficient to attract capital and “assure confidence in the financial integrity of the enterprise . . . .”  FERC ratemaking also “involves a balancing of the investor and the consumer interests.” FPC v. Hope Nat. Gas Co., 320 U.S. 591, 603 (1944).

In these cases, FERC was called upon to address a challenge to the New England transmission owners’ ROE under Section 206 of the Federal Power Act (“FPA”). Under Section 206, FERC first determines if the existing allowed ROE is “unjust and unreasonable.”  If that first finding is made, it then must establish a new just and reasonable ROE to replace the existing rate.

For nearly 40 years, FERC used the DCF method to assess whether a ROE is just and reasonable for a public utility. Under the DCF method, FERC evaluates the expected dividend growth and market-determined yields of a group of comparable utilities with bond ratings the same as or close to the utility or utilities subject to the ROE complaint to generate a range of ROEs with an upper and lower bound, which FERC termed the “zone of reasonableness.”  FERC then identifies a point in that range as the just and reasonable ROE. FERC had been using the midpoint (for multiple utility ROEs) or median (for a single utility) until recently. In early stages of this case, it began looking at various other considerations to adjust the ROE upward. FERC essentially used the new ROE to satisfy both findings it must make under Section 206 of the FPA.

The Court of Appeals ruled that FERC must explicitly find that a ROE is unjust and unreasonable before it can establish a new rate. It was not sufficient for FERC to find that the new ROE it establishes under the DCF method differs from the existing ROE. Rather, the court held that a broad range of ROEs could be just and reasonable under the FPA (although this range was not the same as FERC develops under the DCF method) and that FERC must find that the existing ROE is not in this range before it establishes a new one.

II. FERC’s Decision: A New Calculus

FERC declared an end to its sole use of the DCF model to determine whether a ROE is just and reasonable. Instead, it will use the DCF with two other methodologies (CAPM and Expected Earnings) to determine whether a utility’s ROE falls within the zone of reasonableness. If it finds that it does not, it will then use these three methodologies plus a fourth, Risk Premium, to establish a new rate.

a. Three Additional Methodologies

FERC chose to incorporate the CAPM, Expected Earnings, and Risk Premium methodologies because, among other reasons, “investors use those models . . . to inform their investment decisions.” The basics of each methodology are worth understanding.

The CAPM evaluates risk and cost equity through a formula that adds a “risk-free rate” with a “market-risk premium,” multiplied by a “beta” of the security. The risk-free rate is a proxy number, often based on the yield of 30-year U.S. Treasury bonds. The beta is a measure of the stock’s risk compared to the market. The market risk premium is the difference between the risk-free rate and the expected return on that stock, which is found either by forward-looking estimates, backwards-looking estimates, or a review of investment academics’ and professionals’ estimates.

The Expected Earnings methodology determines the earnings an investor can expect to receive on the book value (the equity of a company’s capital minus the long-term debt) of a particular stock. The analysis either uses backwards-looking estimates, based on historical earnings on book value, or forward-looking estimates based on analysts’ forecasts of the company. The value of expected earnings helps investors gauge the opportunity cost of investing in a specific utility.

The Risk Premium methodology focuses on the investment in stocks, as they hold greater risk than investment in bonds. The methodology examines that “premium” value that a stock investment accrues over a bond investment. The Order noted that “investors’ required risk premiums expand with low interest rates and shrink at higher interest rates.” FERC will compare the interest rates and risk premiums and assess how “investors’ required rate of return have been impacted by the interest rate environment.”

To assess the first prong of the FPA’s Section 206 standard, three of the methodologies (DCF, CAPM, and Expected Earnings) will yield a composite zone of reasonableness from which a spread of presumptively just and reasonable ROEs for utilities with comparable risk profiles will be identified. FERC will establish an overall zone of reasonableness, then subdivide that zone into four “quartiles” centered on the overall midpoint, and upper and lower midpoints of the zone.

b. Comparing ROEs Based on a Utility’s Risk and Presuming ROE Lawfulness

FERC will use the overall midpoint and upper and lower midpoints to anchor three zones of reasonableness, one each for utilities of lower risk, average risk and higher risk utilities. If the subject utility falls with its appropriate zone, FERC will presume that it is just and reasonable. If not, FERC will move on to set a new just and reasonable rate.

For comparison to average risk utilities, the central tendency of DCF, CAPM, and Expected Earnings zones of reasonableness will determine the cost of equity. Those three midpoint/median figures will be averaged along with the Risk Premium number to calculate the ROE of average risk utilities. To assess ROEs for below or above average risk utilities, the midpoint/medians of the lower and upper halves of the zone of reasonableness will be used, respectively.

FERC will continue to determine a utility’s risk profile by two means. First, it compares the utility to a proxy group of companies with similar risk profiles, i.e., utilities within one “notch” of the subject utility’s credit rating. Second, FERC eliminates utilities from the proxy group based on specific circumstances may be unique, such as involvement in a merger or unusually high or low ROEs found under the four methodologies.

Additionally, FERC will use a “composite zone of reasonableness” based on the DCF, CAPM, and Expected Earnings to create a limit to a utility’s total ROE (base ROE plus incentives). Using this composite zone, FERC will dismiss complaints against ROEs that are within that zone, which are seen as presumptively just and reasonable ROEs, unless that presumption is adequately rebutted.

III. Industry Impact: New England and Beyond

The new calculation for ROEs is considered favorable for public utilities. Under the new calculation, there will be less need to account for anomalous market conditions because four distinct methodologies are used. The calculation is expected to identify a more accurate and healthy ROE for utility investors infrastructure investment.

The Order concludes that the new calculus will work to produce more precise ROEs from inception, allowing for less litigation and fewer complaints. During the Commission Meeting on October 18, 2018, Commissioner LaFleur commented positively about the new methodology, noting that it “could help mitigate pancake complaints (i.e., complaints filed while prior cases are still unresolved)” that have created uncertainty in the industry and “add clarity . . . [to] better inform potential litigants” about existing ROEs, as well as “mitigate some of the concerns . . . on the thinness of the survey that underlies the IBES (institutional brokers’ estimate system) growth rates . . . .”

Currently, the new method only applies to the litigation over the ROE for the New England transmission owners. However, given FERC’s desire for uniformity, the future policy could eventually be applied to all rate cases for electric utilities and gas pipelines subject to FERC’s jurisdiction.

The Blockchain Technology Revolution: Implications for the Energy Sector

Please Join K&L Gates and use our Speaker Discount Code!

Join K&L Gates’ Buck B. Endemann and Benjamin L. Tejblum, along with an expert panel in New Orleans, LA for a two-day conference that will discuss the business use cases of blockchain technology within the energy industry, cutting through the hype to focus on realistic applications of blockchain that many companies are already integrating.  Diverse content experts will present actual data, case studies and pilot projects involving blockchain to showcase what this technology can actually do for energy companies, while evaluating the longer-term implications for business and blockchain’s relationship to the evolving electric grid and other emerging technologies. This program will maintain an objective perspective of blockchain, addressing concerns about the technology, and evaluating if it is actually appropriate for every application it is being looked at for.

Click here to learn more about the event and to register.

K&L Gates is pleased to offer a registration discount to colleagues and friends of the firm. Simply enter discount code BLOCK18SPK when registering.

Invigorated Federal Interest in Fusion Energy Presents Opportunities and Questions for Growing Private Fusion Energy Sector

By Tim L. Peckinpaugh, Michael L. O’Neill, R. Paul Stimers                     

Significant investment is flowing into private companies seeking long-sought-after breakthroughs to develop practical power generation solutions based on nuclear fusion reactions. [1] Fusion reactions have become relatively commonplace in the laboratory setting, but no one has developed a nuclear fusion reactor yet that produces more energy than the device uses to operate and maintain the reaction. Numerous private companies, in the United States and around the world, are attacking this challenge with a variety of approaches, with the goal of making the technology sustainable, practical, and commercial. These companies are receiving significant investment from backers who believe a solution is within reach.

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