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FERC to Discuss Interaction Between Competitive Wholesale Energy Markets and State Energy Policies

Mar 09 2017

The Federal Energy Regulatory Commission (“FERC”) has scheduled a technical conference on May 1 and 2 to discuss and obtain input on the interaction between competitive wholesale markets and state energy policies. In recent years, several states that are part of organized wholesale energy markets have adopted legislation or policies to support or promote certain generation resources or resource types. As a result of these state policy initiatives, FERC has been forced to grapple with questions about state versus federal jurisdiction and the effect of the state policies on competition and prices in the organized wholesale energy markets. The technical conference offers an open forum to discuss potential solutions and find ways to reconcile states’ interests with interests in preserving the benefits of regional competitive wholesale markets. Read More

Cyber-physical Attacks on Critical Infrastructure: What’s Keeping Your Insurer Awake at Night?

Mar 06 2017

By James E. Scheuermann

Cyber-physical attacks on critical infrastructure that have the potential to damage those physical assets and to cause widespread losses to third parties are keeping your insurer awake at night. A cyber-physical attack on critical infrastructure occurs when a hacker gains access to a computer system that operates equipment in a manufacturing plant, oil pipeline, a refinery, an electric generating plant, or the like and is able to control the operations of that equipment to damage those assets or other property. A major cyber-physical attack on critical infrastructure is a risk not only for the owners and operators of those assets, but also for their suppliers, customers, businesses and persons in the vicinity of the attacked asset, and any person or entity that may be adversely affected by it (e.g., hospital patients and shareholders).

Because damages caused by a cyber-physical attack can be widespread, massive, and highly correlated, affecting multiple sectors of the economy and many lines of insurance, the insurance industry is giving this risk heightened attention. The U.K. insurance marketplace Lloyd’s, London and the University of Cambridge, for example, conducted a major study of the losses resulting from a hypothetical cyber-physical attack on 50 electrical generators in the Northeast U.S. Other insurance market participants have also published reports addressing cyber-physical risks to critical infrastructure. The insurance industry’s focus on cyber-physical risks perhaps should be action-guiding for corporate policyholders as well.

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

CAISO Urges Flexibility and Coordination to Advance Distributed Energy Resource Aggregations at FERC

Feb 20 2017

By Buck B. Endemann, William M. Keyser, and Molly Suda

Introduction

As previously covered by this blog, on November 17, 2016, the Federal Energy Regulatory Commission (“FERC”) issued a Notice of Proposed Rulemaking (“NOPR”) to remove barriers so that electric storage resources and distributed energy resource aggregations can better participate in the capacity, energy, and ancillary services markets operated by Regional Transmission organizations (“RTOs”) and independent system operators (“ISOs”). This post will focus on the response to those proposals submitted by the California Independent System Operator (“CAISO”), particularly as they relate to distributed energy resource aggregations.

FERC defines distributed energy resource aggregators as entities that aggregate one or more distributed energy resources, such as electric storage resources, distributed generation, thermal storage, and electric vehicles (collectively, “DERs”), and offer those resources into wholesale markets. The NOPR called for comments on what types of market rules should be established to provide DERs with more certainty and to remove barriers to entry.

The California Independent System Operator (“CAISO”) is one of the largest ISOs in the nation, responsible for managing about 80 percent of California’s electricity flow. Having recently received FERC approval of its own DER aggregation participation model, CAISO has a head start on incorporating DER aggregations into its energy and ancillary services markets.[1] In fact, in a statement issued concurrently with the NOPR, Acting FERC Chairman Cheryl LaFleur specifically identified CAISO’s DER aggregation rules as a model to study and evaluate any lessons learned from CAISO’s implementation of those rules.

CAISO submitted its comments on FERC’s proposal on February 13, 2017. With its recent experience in developing a DER program, CAISO’s comments offer insights that may guide FERC as it works toward a final rule.[2] Overall, CAISO’s comments strongly support incorporating DER aggregations into the nation’s energy and ancillary services markets, so long as each RTO/ISO is given the flexibility to develop participation models that reflect regional and regulatory preferences in generation, transmission, and distribution assets. CAISO also predicts that the roles and responsibilities of transmission and distribution operators will experience significant change in the coming years, and that FERC, electric grid operators, and market participants can best encourage innovation and resiliency by avoiding any overly-prescriptive models that stifle DER participation.[3]

FERC Issues Order to Delegate Further Authority to Staff in Absence of Quorum

Feb 06 2017

By Sandra Safro, William Keyser, and Molly Suda

On February 3, 2017, FERC issued an Order Delegating Further Authority to Staff in Absence of Quorum, which provides for further delegations to enable FERC to continue to carry out various obligations under the Natural Gas Act (NGA), Federal Power Act (FPA), and Interstate Commerce Act (ICA). In pertinent part, the delegation order states the following:

Delegations Generally.
- The delegations of authority are effective during the Delegation Period, which starts on February 4, 2017, and continues until 14 days after the date on which a quorum is reestablished.
- Delegations are made to the relevant office director, who may further delegate to his or her designee.
Pre-Existing Delegations. All pre-existing delegations of authority by the Commission to its staff remain effective, including the Secretary’s authority to toll the time for action on rehearing requests (also referred to as tolling orders)and the authority of the Director of Office of Energy Market Regulation (OEMR) authority to accept uncontested tariff or rate schedules that would result in rate increases.
Continuation of Activities Related to Safety. Limited Commission operations can continue, including inspecting and responding to incidents at LNG facilities and jurisdictional hydropower projects, and other activities involving the safety of human life or protection of property.
Further Delegations Regarding Rate Proceedings.
- With respect to contested rate and other filings under Section 4 of the NGA, Section 205 of the FPA, and Section 6(3) of the ICA, the Director of OEMR shall have authority to:
  - Accept and suspend filings and make them effective, subject to refund and further Commission order; or
  - Accept and suspend filings and make them effective, subject to refund, and to set them for hearing or settlement judge procedures.
- With respect to initial rates or rate decreases under Section 205 of the FPA where suspension and refund protection is not available, Commission Staff may institute a proceeding to protect customer interests pursuant to Section 206 of the FPA.
- The Director of OEMR may accept uncontested settlements.
Further Delegation Regarding Uncontested Requests for Waivers. The Director of OEMR may take appropriate action on uncontested filings seeking waivers of the terms and conditions of tariffs, rate schedules, and service agreements (including requests for waiver of capacity release and capacity market rules) made under Section 4 of the NGA, Section 205 of the FPA, and Section 6(3) of the ICA.
Further Delegation Regarding Extensions of Time. Commission Staff may extend the time for action on matters where extension is permitted by statute, including extensions of a 180-day period for applications for prior approval under Section 203 of the FPA.

FERC’s order is intended to prevent filings made to the Commission from going into effect by operation of law after a certain period of time as defined by statute. However, it also creates uncertainty, because any contested rate filings approved by Staff and allowed to go into effect will be subject to refund and further review by a Commission having up to three new members once a quorum is reached. It also may result in more filings being set for hearing and settlement judge proceedings, including potentially all initial rate filings that are contested.

FERC Issues Policy Statement on Cost Recovery for Electric Storage Resources, But the Devil Will Be in the “Implementation Details”

Jan 24 2017

By Molly K. Suda, William H. Holmes, and Buck B. Endemann

Last week, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) issued a Policy Statement to provide guidance for electric storage resource owners and operators that may seek to receive cost-based rate recovery for certain services, as well as market-based revenues for other services.[1] The Policy Statement explains that an electric storage resource may provide transmission or grid support services at a cost-based rate, while also participating in the wholesale energy markets administered by a regional transmission organization (“RTO”) or independent system operator (“ISO”) and earning market-based revenues. As described below, the Policy Statement eliminates some uncertainty created by prior FERC precedent, which limited electric storage resources’ ability simultaneously to provide transmission or grid support services at cost-based rates and also participate in the wholesale markets.

However, the path forward for electric storage resources to “stack” payment streams and recover costs through both cost-based and market-based rates will not be without obstacles. The Policy Statement acknowledges that “implementation details” will need to be addressed. Additionally, FERC Commissioner Cheryl LaFleur dissented, disagreeing with the Policy Statement’s broad statements that electric storage resources’ ability to recovery costs through both cost-based and market-based rates will not adversely impact other market competitors. Commissioner LaFleur also disagreed with the decision to address the issue of electric storage resources’ ability to recover costs through both cost-based and market-based rates in a proceeding separate from the pending Notice of Proposed Rulemaking on electric storage’s participation in RTO/ISO markets (“Electric Storage NOPR”).[2] Thus, while the Policy Statement removes some uncertainty, electric storage resources will likely still have to grapple with cost recovery, competition, and other issues on a case-by-case basis.

This alert provides background on the Commission’s prior precedent related to electric storage resources and cost-based recovery, as well as the Commission’s recent efforts in several open proceedings to address potential barriers to the further development of electric storage resources. Provided below is a summary of the Commission’s Policy Statement, as well as an overview of open questions and unresolved issues that are intertwined with issues presented in the Commission’s Electric Storage NOPR and other recent orders.

Military Urges Renewed Commitment to Renewable Energy

Jan 17 2017

By Scott Aliferis and Elana Reman

On January 12, 2017, Noblis, in partnership with the Pew Charitable Trusts, released a report on energy assurance on U.S. military bases. Cost-effective and reliable energy is crucial to the success of U.S. military missions, and the Department of Defense’s (DoD) fixed military installations account for 1 percent of the total electrical energy consumed by the United States, costing almost $4 billion. The military has long relied on the commercial grid, with standalone generators during peak use, but these sources are vulnerable to disruption due to aging infrastructure, severe weather, and both physical attacks and cyberattacks. Instead, the report proposes shifting to a strategy of large-scale microgrids. It conducts a cost comparison, addresses implementation issues, and analyzes the efficiency and security of microgrids, concluding that they would be superior to the military’s current system for supplying energy.

The Pew Charitable Trusts recently held a panel discussion, which supplements the report’s findings, focused on the intersection of national security, energy, and climate change. Three military secretaries examined past successes, and Dr. Jeff Marqusee, the Chief Scientist of Noblis and author of the report, discussed how the military could enhance its energy security going forward. The panelists argued that investment in renewable energy should continue to be a priority for the U.S. military because its goal is increasing mission assurance. The testimony was followed by a roundtable discussion and Q&A session.

Treasury Guidance Clarifies and (Again) Expands Field of Renewable Energy Projects That May Qualify for the PTC or ITC

Dec 22 2016

By Elizabeth C. Crouse, Charles H. Purcell, Won-Han Cheng, and Alex Weber

Notice 2017-04, issued on December 15, 2016, clarifies and expands the beginning of construction and continuity safe harbors applicable to certain alternative energy projects, including wind installations. Like Notice 2016-31, released on May 5, 2016, Notice 2017-04 concerns only projects that qualify for the Production Tax Credit (“PTC”) under Code Section 45 and, by extension, many projects that qualify for the Investment Tax Credit (“ITC”) through Code Section 48(a)(5). You may read more about the provisions and consequences of Notice 2016-31 in our previous e-alert.

To read the full alert, click here.

FERC Issues Notice of Inquiry on Income Tax Allowance Policy Statement and ROE Methodology

Dec 21 2016

By William M. Keyser, Sandra E. Safro, Michael L. O’Neill, and Benjamin L. Tejblum

On December 15, 2016, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry (NOI) seeking comment on how to address any double recovery resulting from income tax allowance policy set forth in its Income Tax Allowance Policy Statement and current policies regarding the derivation of return on equity (ROE). FERC’s existing Income Tax Allowance Policy Statement has been in place since 2005 and permits an income tax allowance for partnerships, or similar pass-through entities, to the extent that partners or members have actual or potential income tax obligations on the partnership entity’s income.

The NOI stems from the July 1, 2016 decision of the U.S. Court of Appeals for the District of Columbia Circuit (DC Circuit) in United Airlines Inc. v. Federal Energy Regulatory Commission, 827 F.3d 122 (D.C. Cir. 2016) (UAL v. FERC). In that decision, the DC Circuit held that FERC had not adequately demonstrated that the application of its Income Tax Allowance Policy Statement in combination with its use of a discounted cash flow (DCF) methodology to determine ROE does not result in double recovery of taxes for a pipeline organized as a partnership. The DC Circuit remanded the issue to FERC to develop a mechanism “for which the Commission can demonstrate that there is no double recovery” of partnership income tax costs. Among the potential options that the DC Circuit outlined was eliminating all income tax allowances and setting rates based on pre-tax returns. The NOI explicitly notes “the potentially significant and widespread effect of [the decision in UAL v. FERC] upon the oil pipelines, natural gas pipelines, and electric utilities subject to the Commission’s regulation.” NOI at P 2.

FERC Proposes Reforms to Large Generator Interconnection Procedures and Agreements

Dec 19 2016

By William M. Keyser and Elizabeth P. Trinkle

On December 15, 2016, the Federal Energy Regulatory Commission (“FERC”) issued a Notice of Proposed Rulemaking (“NOPR”) to revise Parts 35 and 37 of its regulations, as well as the pro forma Large Generator Interconnection Procedures (“LGIP”) and pro forma Large Generator Interconnection Agreement (“LGIA”). The proposed reforms are designed to improve certainty, promote more informed interconnection, and enhance interconnection processes.

The pro forma LGIP and LGIA establish the terms and conditions by which public utilities subject to the Federal Power Act must provide interconnection service to Large Generating Facilities. FERC defines “Large Generating Facilities” as facilities with generating capacity greater than 20 MW. While FERC has previously undertaken steps to reduce undue discrimination in the generator interconnection process, interconnection customers have continued to express concerns regarding inefficiencies and discriminatory practices. Moreover, FERC proposes that recent changes to the resource mix, the emergence of new technologies, changes to state and federal policies, and challenges with the interconnection study process warrant reforms. Based, in part, on input received from stakeholders following a 2015 technical conference on these issues, the NOPR identifies reforms to benefit both interconnection customers through timely and cost-effective interconnection and transmission providers by mitigating the potential for re-studies associated with late-stage interconnection request withdrawals.

Specifically, FERC proposes reforms that focus on improving aspects of the pro forma LGIP and LGIA, the pro forma Open Access Transmission Tariff, and the Commission’s regulations. These reforms fall into three broad categories: (1) reforms intended to improve certainty in the interconnection process; (2) reforms intended to improve transparency by providing more information to interconnection customers; and (3) reforms intended to enhance interconnection processes. FERC requests comment from interested stakeholders on specific issues related to development and implementation of each of the proposals within these three broad areas of reform. An overview of FERC’s proposals and request for comment on each area of reform are summarized below.

Comments on the NOPR will be due 60 days from publication in the Federal Register. A copy of the NOPR is available here.

FERC Proposes New Rules to Make Room for Storage in Wholesale Electricity Markets

Nov 21 2016

By Molly Suda and Elizabeth Trinkle

On November 17, 2016, the Federal Energy Regulatory Commission (“FERC”) issued a Notice of Proposed Rulemaking (“NOPR”) to amend Section 35.28 of its regulations. The proposed amendment would remove barriers to the participation by electric storage resources and distributed energy resource aggregations in the capacity, energy, and ancillary service markets operated by regional transmission organizations (“RTOs”) and independent system operators (“ISOs”). FERC defines “electric storages resources” as resources capable of receiving electric energy from the from the grid and storing it for later injection back to the grid regardless of where the resource is located on the electrical system. Electric storage resources include all types of electric storage technologies, such as batteries, flywheel, compressed air and hydro-pump. “Distributed energy resource aggregators” are defined as entities that aggregate one or more distributed energy resources (including electric storage resources, distributed generation, thermal storage and electric vehicles) for participation in the RTO/ISO wholesale markets.

Specifically, FERC proposes in the NOPR that each RTO and ISO revise its tariff to (1) establish market rules that accommodate the participation of electric storage resources in the organized wholesale electric markets and (2) define distributed energy resource aggregators as a type of market participant that can transact in the organized wholesale electric markets.

The NOPR includes a number of high-level proposals, and FERC requests comment from interested stakeholders on specific issues related to development and implementation of these proposals. An overview of the NOPR and FERC’s key areas of interest for comment are summarized below.

Comments on the NOPR will be due 60 days from publication in the Federal Register. A copy of the NOPR is available here.

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