On January 24, 2012, President Obama proposed several new initiatives to develop American-made energy in his State of the Union address.  The initiatives included:

• Opening more than 75% of America’s potential offshore oil and gas resources;
• Requiring companies that drill for gas on public lands to disclose the chemicals used;
• Promoting clean-energy tax credits;
• Allowing the development of clean energy on public lands;
• Announcing the U.S. Navy will purchase enough clean energy capacity to power a quarter million homes (1 GW); and
• Proposing that Congress pass a bill to promote energy efficiency in manufacturing facilities.

President Obama also directed the Department of the Interior (“DOI”) to develop 3,500 MW of renewable projects on public lands this year.  DOI has stated that this increase in 2012-approved projects would mean that it would meet the Energy Policy Act of 2005’s mandate to site 10 GW of non-hydroelectric renewable energy projects by December 31, 2015.  DOI also recently announced plans for a natural gas lease sale in the Gulf of Mexico.  The sale is expected to take place on June 20, 2012 and will include approximately 7,250 unleased blocks that span nearly 38 million acres.  Federal estimates speculate the region contains 31 billion barrels of oil and 134 trillion cubic feet of natural gas.

Obama’s address renewed his request for Congress to pass a “clean energy standard” that would require electric utilities to obtain 80 percent of their power from natural gas, nuclear and renewable sources by 2035 and a permanent extension of a federal production tax credit for wind power.  The current wind energy tax credit is set to expire on December 31, 2012.  The American Renewable Energy Production Tax Credit Extension Act has been introduced and proposes to grant a four year extension to the wind energy tax credit.  Obama made reference to the Solyndra bankruptcy stating “some technologies don’t pan out; some companies fail.”  (See September 23, 2011 edition of the WER).

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.