On January 26, 2012, FERC released its first audit reports for Form No. 552 compliance.  Form No. 552 is a reporting mechanism for natural gas market participants (see June 18, 2010 edition of the WER) that requires the reporting of physical natural gas transactions that either (a) use an index price, (b) contribute to an index price, or (c) could contribute to an index price.  The first audits issued were for Form No. 552 reports that Merrill Lunch Commodities, Inc. (“Merrill Lynch”), Shell Energy North America (US), L.P. (“Shell”), Total Gas & Power North America, Inc. (“Total Gas”), and Petrohawk Energy Corporation (“Petrohawk”) submitted, each for the period January 1, 2009 through December 31, 2010. 

The recently issued audit reports highlight the types of information FERC audit staff is reviewing, as well as the types of Form No. 552 errors and corrective actions that have been identified so far.

In its audit reports of Form No. 552, FERC’s Division of Audits within the Office of Enforcement (“OE”) identified the methodology its auditors used in reviewing companies’ Form No. 552 filings.  Among the items that OE auditors reviewed included:

• Reporting of Affiliates: Audit staff reviewed corporate organizational charts and held discussions with employees to identify all affiliates that purchased or sold physical natural gas subject to the reporting requirements of Form No. 552.
• Reporting to Price Index Publishers: Audit staff requested supporting documentation and held discussions with employees to determine whether transaction information was reported to Price Index Publishers.
• Total Transaction Volumes: Audit staff reviewed total reportable physical natural gas purchases and sales volumes to verify the accuracy and completeness of the Form No. 552. 
• Classification of Transaction Volumes: Audit staff evaluated the physical natural gas purchases and sales volumes reported in the form to verify the accuracy of each transaction category. 
• Reportable and Nonreportable Transactions: Audit staff analyzed physical natural gas transactions to ensure all of them were reported in the Form No. 552.

As a result of the audit process, OE auditors identified errors submitted on some Form No. 552 reports, and recommended compliance activities going forward.  While Merrill Lynch and Shell’s Form No. 552 submissions had no errors that required corrections, for others, the audit reports recommended corrections and changes going forward.  For the most part, the recommended actions would correct only accounting errors and internal procedures rather than providing insight on terms used on Form No. 552.  The recommended changes included:

• Updating a company’s procedures used in preparing Form No. 552 to ensure it accurately reports physical natural gas transactions volumes.
• Updating a company’s procedures to ensure that all affiliates with reportable volumes of physical natural gas are identified on the Form No. 552.
• Adopting reporting procedures to exclude sales volumes associated with unprocessed gas, natural gas liquids, and oil.
• Training employees on the Form No. 552 instructions to ensure they can distinguish reportable from non-reportable transactions.
• Revising any previously filed Form No. 552 to reflect corrected volumes for each category, total purchases sales, and recommendations issued.

OE directed Petrohawk and Total Gas to revise and re-file with the Commission the corrected From No. 552 within 30 days after the issuance of the audit report.  In addition, OE directed these companies to submit (1) plans for implementing the recommendations identified in the final audit report, and (2) copies of any written policies and procedures developed in response to the recommendations.

Copies of the audit reports can be found here.

On January 23, 2012, FERC issued the first pilot project license to Verdant Power, LLC (“Verdant”) for its Roosevelt Island Tidal Energy Project No. 12611 (“RITE”).  The RITE project will be a 1,050 kW tidal project located on New York’s East River, and the project will use natural tidal currents to generate power from turbines mounted on the riverbed.  In approving the pilot license, FERC required a number of environmental measures to preserve the fish, wildlife, cultural, and aesthetic properties of the area surrounding the RITE project.

The term “hydrokinetics” describes zero-emission renewable power from the movement of water.  Hydrokinetic projects are often referred to as “tidal” or “wave” projects, and unlike traditional hydropower projects, hydrokinetic projects do not require the building of infrastructure to create an impoundment of water (such as dams that collect and cascade water) to create energy.  Low-head hydropower projects can be confused with several hydrokinetic projects because several low-head hydropower projects are smaller projects that utilize “run-of-the-river” technology, but actually, low-head hydropower usually refers to sites with a head (i.e., elevation difference) of less than five meters (about 16 feet) for the falling water.

In an effort to encourage hydrokinetic development, the Commission developed the pilot license process in 2008 to test new technologies and to evaluate appropriate sites for these new technologies.  FERC also hopes to assess the environmental impact of implementing new hydrokinetic projects.  In order to be eligible to receive a pilot license the project must be: (1) small, (2) short term, (3) located in environmentally non-sensitive areas based on the Commission’s review of the record, (4) removable and able to be shut down on short notice, (5) removed, with the site restored, before the end of the license term (unless a new license is granted), and (6) initiated by a draft application with the appropriate environmental analysis.  To date, FERC has issued 100 preliminary permits to study the feasibility of developing a pilot hydrokinetic project, and currently there are nine entities in the pre-filing process for license applications.  Only three entities have actually submitted full license applications. 

The RITE project will be operated remotely, and although there will be no manned control center, dispatch technicians will be available to check interconnections.  A supervisory computer will collect data on the status of each turbine and allow for real-time and post-processed performance monitoring.  During periods of “no-load” when energy is not being generated, an automatic brake will be applied to the turbines and prevent the rotors from rotating.
 
A full copy of the Commission decision is available here.

On January 9, 2012, the federal district court for the District of Columbia found that the Environmental Protection Agency (“EPA”) was arbitrary and capricious in staying the boiler Maximum Achievable Control Technology (“MACT”) rule.  EPA originally bound itself in a consent decree to promulgate the rule under an aggressive schedule and asked the court for a fourteen month extension following criticism of its boiler MACT Notice of Proposed Rulemaking.  The court gave EPA a one month delay, and EPA issued the rule; however, EPA stayed the rule almost immediately after the rule was promulgated.

The Sierra Club initiated three separate lawsuits to overturn the stay.  The district court decided that EPA does have the authority to issue the stay under the Administrative Procedure Act (“APA”) for more than 3 months if the rule is being reconsidered.  The court also stated that EPA was correct in that the agency did not have to undertake notice and comment procedures to issue the stay.  The district court then determined EPA’s action in issuing the stay was arbitrary and capricious, and the court ruled that EPA could only issue a stay greater than three months if the APA rule needed to be halted pending judicial review, as opposed to agency reconsideration.  In this case, EPA’s justification for the stay was not for judicial review.  Hence, the court issued an order vacating the stay, which means the rule is in effect again.

EPA is still conducting proceedings to reconsider the MACT rule.  EPA may ask the court to stay its decision while the decision is appealed.  In addition, the parties in the pending boiler MACT litigation, which is stayed pending the reconsideration, may ask the court for a stay.  EPA could reissue the stay with a new rationale tied to the appeals, which will likely face more challenges in court. 

 A copy of the court’s order is available here.

On December 7, 2011, the Federal Energy Regulatory Commission (“FERC or the “Commission”) issued an order directing the Bonneville Power Administration (“Bonneville”) to file revisions to its Open Access Transmission Tariff (“OATT”) to provide for transmission service on terms and conditions that are comparable to those under which Bonneville provides service to itself and that are not unduly discriminatory or preferential.

As a federal power marketing agency within the United States Department of Energy, Bonneville is not a public utility within the Commission’s traditional jurisdiction. While Bonneville has voluntarily provided transmission services pursuant to a reciprocity OATT in the past, its current OATT does not meet all of the Commission’s current OATT requirements.  This past May, Bonneville adopted the Environmental Redispatch and Negative Pricing Policies under which it has unilaterally curtailed generators and utilized their firm transmission rights without compensation to deliver federal hydropower during certain high water situations.  Bonneville stated this policy was a necessary component of its compliance with certain of its organic and environmental statutory requirements.  In June, a coalition of wind energy facility owners filed with the Commission a complaint and petition under a new provision of the Federal Power Act (“FPA”) that was added by the Energy Policy Act of 2005 (FPA Section 211A).  The wind owners requested that FERC order Bonneville to discontinue its Environmental Redispatch Policy and revise its OATT to provide transmission services on terms and conditions comparable to those under which Bonneville provides service to itself and that are not unduly discriminatory or preferential.

The Commission granted the petition, ordering Bonneville to file a revised OATT within 90 days and finding Bonneville may not extend its current or implement new Environmental Redispatch Policies that result in non-comparable transmission service.  While the Commission explained that it does not take the exercise of its authority under Section 211A lightly, it found that its authority is broad and not limited by Bonneville’s enabling and applicable environmental statutes.  Given the utmost importance of open access and the availability of adequate transmission to the electric industry, the Commission found it necessary to exercise its Section 211A authority.

The Commission found that Bonneville’s Environmental Redispatch Policy “significantly diminishes open access to transmission, and results in Bonneville providing transmission service to others on terms and conditions that are not comparable to those it provides itself.”  In particular, the Commission held that the policy results in unfair and noncomparable treatment of non-Federal generating resources connected to Bonneville’s system – resources the Commission found to be similarly-situated to Federal hydroelectric and thermal resources for purposes of transmission curtailments because all such resources take firm transmission service.  Specifically, the Commission explained that “[b]y directing non-Federal generators under their respective interconnection agreements ‘to reduce generation in accordance with Transmission Provider’s . . . Environmental Redispatch Business Practices,’ Bonneville affects the non-Federal generator’s ability to inject energy at the point of receipt and interrupts non-Federal customer’s firm point-to-point transmission service, without causing similar interruptions to firm transmission service held by Federal resources.”

Further, while the Commission recognized that Bonneville must reconcile several, sometimes competing, obligations set forth in its organic and environmental statutes, FERC directed Bonneville to also reconcile with those obligations Bonneville’s FPA statutory requirement that it provide comparable transmission service that is not unduly discriminatory or preferential.  Consistent with that over-arching finding, the Commission found that Bonneville may no longer rely on the terms of its Large Generator Interconnection Agreement (“LGIA”) as support for Environmental Redispatch.  Specifically, the Commission found that service interruptions under section 9.7.2 of the LGIA must be performed according to Good Utility Practice, which includes compliance with statutory obligations – such as the requirement set forth in the Commission’s order to provide comparable transmission service that is not unduly discriminatory or preferential, consistent with the provisions of Section 211A.  Bonneville must also perform all of its obligations under Section 4.3 of its LGIA and cannot rely on force majeure as support for environmental redispatch unless it can demonstrate that such redispatch does not interfere with Bonneville’s obligation to provide comparable transmission service that is not unduly discriminatory.

Finally, the Commission made no determinations as to whether actions taken by Bonneville in the past, whether pursuant to its Environmental Redispatch Policy or otherwise, were prohibited under Bonneville’s statutory authorities.  The Commission found that to the extent Bonneville’s past actions are subject to judicial review by the Ninth Circuit Court of Appeals, such review does not limit the Commission’s prospective exercise of authority in this proceeding under Section 211A.

A copy of the Commission’s order is available here.

On Friday, December 2, 2011, the Environmental Protection Agency (”EPA”) released its third attempt at a Maximum Achievable Control Technology (“MACT”) standard for industrial boilers and process heaters under the Clean Air Act.  EPA’s latest proposal is a reconsideration of the final rule that was adopted in February and published March 21, 2011, which EPA promised to revise the same day it was released.  As with the prior iterations of the rule, the newly-proposed Industrial Boiler MACT includes strict limits on the emission of hazardous air pollutants from boilers, and the revisions EPA has proposed will likely represent a mix of good and bad news for industry.

EPA’s first Industrial Boiler MACT, adopted in 2005, was vacated by the U.S. Circuit Court of Appeals for the D.C. Circuit in 2007, which led to the re-proposal of the rule on June 4, 2010.  Amid an outcry from industry claiming the limits set forth in the 2010 proposal were simply unachievable, EPA promised to relax the rule somewhat before releasing it in final form.  Because a court-ordered consent decree established a specific deadline for releasing the final rule, EPA asked the court for more time to make the necessary revisions, but the court denied EPA’s request, forcing the agency to sign the final rule in February.  Although the agency claimed its final rule was sufficient and defensible as officially published in March, the agency immediately began proceedings to reconsider the rule and issued an administrative stay in May to delay its effectiveness.

The proposed “reconsideration rule” released at the end of last week contains a new suite of hazardous air pollutant emission limits that is entirely different from all prior versions of the rule.  Still exempt from those numeric emission limits are natural gas units, units with a heat input capacity of less than 10 mmBtu/hr, and “limited use” units that operate less than 876 hours per year, but all other boilers now face a new set of emissions limitations, some that became more stringent, others that became less stringent. 

Perhaps the most notable change is the elimination of a numeric emission limit for dioxins/furans.  In the preamble to the reconsideration rule proposal, EPA recognized that 55 percent of the dioxin/furan data it has obtained is below detection limits and conceded that almost all of the data is below the limit at which measurements are expected to be reliably accurate.  To avoid requiring source owners to demonstrate compliance with an emission limit at a level that cannot be accurately measured with existing technology, EPA chose instead to impose work practice standards to minimize dioxin/furan emissions, which consist of a periodic tune-up to ensure good combustion is achieved and maintained.

The proposed reconsideration rule continues to impose strict numeric emission limits for the four other pollutants covered by the last MACT rule, namely mercury (Hg), hydrogen chloride (HCl), particulate matter (PM), and carbon monoxide (CO).  PM and CO are not hazardous air pollutants, but function as surrogates for metallic and organic pollutants, respectively.  To establish MACT limits for these four pollutants, EPA divided them into two categories.  Characterizing Hg and HCl as “fuel-based” pollutants, since the emissions of those pollutants are driven primarily by the pollutant content of the fuel, EPA has proposed one Hg limit and one HCl limit each for solid fuels and liquid fuels, without distinguishing between boiler technologies.  In contrast, EPA characterized PM and CO as “combustion-based” pollutants because the emissions of those pollutants are more significantly affected by the design of the unit.  To account for the different emission characteristics of different combustion technologies, EPA has proposed separate emission limits for fourteen different types of boilers likely to be covered by the rule, including three different types of coal units, two different types of liquid fuel units, and seven different types of biomass units, resulting in a greater number of subcategories than any prior industrial boiler MACT rule or proposal.  Since the Clean Air Act requires more stringent emission limits for new units, EPA has also proposed a completely different set of emission limits for new units for all pollutants and subcategories.

The revised emission limits EPA has proposed do not exhibit any clear trend or pattern.  The new limits are based on a different set of data than previous boiler MACT rules – EPA received additional data after the March 2011 final rule and also conducted an additional quality assurance review to eliminate poor quality data.  EPA also revised its calculation methodology somewhat to take into account concerns related to measurement accuracy and detection levels as well.  The result is a completely different set of limits, many of which are as stringent as ever.  For example, most of the Hg and CO emission limits proposed in EPA’s reconsideration rule are actually more stringent than the March 2011 version of the rule.  The PM limits, on the other hand, are less stringent for most categories except some biomass stokers. 

EPA has also included some additional flexibility to the rule by allowing a variety of alternative emissions limits and compliance demonstration methods.  For instance, the reconsideration rule proposes an alternative “total selected metals” limit that can be used in place of the PM limit, a different CO limit for units with a CO continuous monitor, and an “output-based” alternative limits as well.  In addition, a facility with more than one boiler can choose to average the emissions of the boilers together, so long as the source as a whole remains at less than 90 percent of the standard.  EPA also abandoned its plans to require all boilers to employ continuous monitors for PM, but has proposed an option to allow sources to utility continuous monitors for Hg if they prefer.

The reconsideration rule also revises the compliance deadlines – existing units will have three years from the publication of the final reconsideration rule to comply.  EPA explained in its preamble that the deadline extension was justified in part by the fact that utility units will soon become subject to similar MACT requirements, which could compete for limited pollution control vendor resources.  However, EPA has decided not to change the “proposal date” of June 4, 2010, which is the critical date for determining whether an industrial boiler is considered “new” or “existing.”  Because EPA is continuing to promise a final reconsideration rule in April 2012, the compliance deadline for most existing sources will be June 2015, unless they can qualify for a one-year extension.    

Along with its proposed industrial boiler MACT reconsideration rule, EPA has also proposed various revisions and clarifications for the three other related rules, including the “area source” industrial boiler MACT (which applies to boilers at smaller facilities), MACT rules for incinerators that burn solid waste, and a rule to re-define the term “solid waste” to help distinguish between boilers and incinerators that burn secondary industrial materials.  EPA will take comment on all four proposed rules for 60 days from the publication of the rule in the federal register, expected within the month.