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Washington Energy Report - (1) DC Circuit Upholds FERC Decision on Midwest ISO Cost Allocation Methodology (2) A Hope for CAIR? (3) FERC Unanimously Approves Transmission Incentives for PEPCO's Grid Expansion (4) FERC Releases 2008 Enforcement Report (5) Waxman Challenges Dingell for Chairmanship of House Engergy Committee

Washington Energy Report
11.07.08

DC Circuit Upholds FERC Decision on Midwest ISO Cost Allocation Methodology

On October 31, 2008, the United States Court of Appeals for the District of Columbia Circuit (“DC Circuit”) upheld the Federal Energy Regulatory Commission’s (“FERC” or “the Commission”) 2006 decision to allow the Midwest Independent Transmission System Operator, Inc. (“Midwest ISO”) to implement a cost allocation policy on a going forward basis. The cost allocation policy is a system for paying for upgrades to the Midwest ISO grid.

The DC Circuit reviews FERC’s decisions based on the “arbitrary and capricious” standard of the Administrative Procedure Act. In applying this standard, the DC Circuit stated they give the Commission particular deference in the area of ratemaking. The DC Circuit found that the challengers—the Public Service Commission of Wisconsin (“PSCW”) and the American Transmission Company (“ATC”) had failed to meet their burden of showing that FERC was acting arbitrarily and capriciously in approving the Midwest ISO policy.

In March 2004, the Midwest ISO created the Regional Expansion Criteria and Benefits (“RECB”) Task Force. This group was charged with developing a method for recovering the cost of projects in the Midwest ISO Transmission Expansion Plan (“MTEP”). The June 2005 MTEP was published, and it included a list of projects that were “planned” or “proposed.” Planned projects were “the preferred solution[s] to an identified issue” and proposed projects were tentative solutions.

On September 16, 2005 the RECB Task Force adopted a policy to allocate costs for new generation projects, which FERC conditionally approved on February 3, 2006. The Transmission Expansion Planning Protocol allowed cost allocation to all customers at the system-wide rate for twenty percent of the costs of the highest priority projects, called Baseline Reliability Projects, with transmission capacity higher than 345 kV. The other eighty percent was allocated through sub-regional designated pricing zones. The plan also included a list of “Grandfathered Projects” that were to be excluded from the regional cost recovery without explanation.

Having a project included on the Grandfathered Projects list meant that the project’s sponsors would not be able to socialize the costs of its projects the way non-Grandfathered Projects could. PSCW and ATC filed requests for rehearing with FERC on this issue, which were denied on November 29, 2006. The Commission argued that ATC would benefit from cost sharing in the future. However, oth organizations filed petitions for review, claiming that $690,000,000 worth of Wisconsin projects were arbitrarily excluded from receiving sub-regional cost recovery. The DC Circuit was not persuaded.

The court rejected the claim that the Commission improperly relied on the RECB and that the RECB was comprised of vertically integrated utilities outside of Wisconsin. The petitioners claimed the RECB had the effect of pushing costs on Wisconsin, the minority group, while serving the majority economically by allocating their expansion costs. The court stated that the project start dates may have affected Wisconsin projects disproportionately because they had a large number of projects “planned” before the start date of the policy, but this was not enough to make the policy unduly discriminatory. The court reiterated that FERC had already concluded that the Midwest ISO policy was just and reasonable, and a “compromise” between stakeholders whose interest the RECB Task Force had to balance. ATC and PSCW also argued that the “planned” versus ”proposed” distinction for projects was arbitrary, but the DC Circuit found that this decision too was within the discretion of the Commission.

The court found that transmission providers were not unduly prejudiced by the Midwest ISO adopting a cost recovery methodology. The court further found FERC did not violate its own cost recovery policy that required the cost allocation plan to be based on “payment for transmission upgrades by the parties that cause and benefit from them.”

The opinion is available online at http://pacer.cadc.uscourts.gov/docs/common/opinions/200810/06-1408-1146852.pdf.

A Hope for CAIR?

This week, the parties who successfully challenged the Clean Air Interstate Rule (“CAIR”) responded to two additional questions raised by the Court: (1) whether any party seeks vacatur of the rule and (2) whether the Court should stay the effectiveness of its decision pending EPA re-promulgation of the rule. Notably, North Carolina and 22 other states opposed the vacatur and asked the court to stay the effectiveness of its decision. However, industry representatives split on the issue – some demanded that the vacatur become effective, while others asked for a remand instead of a vacatur, which would allow EPA to implement CAIR next year, despite the successful challenges against it.

As reported previously, the U.S. Court of Appeals for the D.C. Circuit vacated CAIR earlier this year in response to challenges raised by the state of North Carolina and others regarding the assumptions on which the program was based. The program was designed by EPA to ensure that the emissions from power plants in one state do not interfere with efforts to attain the national ambient air quality standards in another state. Despite the significant air quality benefits promised by the program, the Court agreed with the challengers that each state’s emissions must be addressed individually, and that EPA’s attempt to use a regional trading program to reduce those emissions was not authorized by the Clean Air Act. Although Congress briefly debated a legislative fix for CAIR, those efforts were quickly forgotten as attentions turned to the ailing economy and the recent election.

EPA, the Utility Air Regulatory Group and the National Mining Association filed separate petitions for rehearing and rehearing en banc of the Court’s decision. On October 21, 2008, the Court requested responses to those petitions, asking whether the parties sought a vacatur and whether it should stay the effectiveness of its decision. Because such responses are only permitted under a court order, the Court’s request could mean that it is leaning towards granting the petitions for rehearing. However, since it only takes one judge on the Court to trigger additional briefing, the Court’s request does not necessarily suggest the Court as a whole is sympathetic to the petitioning parties. For example, the Court asked for similar briefing in the Clean Air Mercury Rule (“CAMR”) case, but shortly thereafter denied the petitions for rehearing.

Even if the Court agrees to remand instead of vacate the rule, or agrees to stay the effectiveness of its decision, it is unlikely that the Court will reconsider its opinion that CAIR itself is fatally flawed, given that the Court did not request briefing on that issue. If the Court remands the rule or stays the vacatur, EPA could implement CAIR on schedule at the beginning of next year, while simultaneously working to repair the flaws cited by the Court. However, if the Court issues a mandate making the vacatur effective, EPA will have to re-promulgate the rule entirely, the timing of which remains uncertain.

FERC Unanimously Approves Transmission Incentives for PEPCO’s Grid Expansion

On October 31, FERC unanimously approved rate incentives for Pepco Holdings Inc.’s (“Pepco”) proposed 500 kV, 230 mile Mid-Atlantic Power Pathway (“MAPP”) project. The line is to run from Northern Virginia, through Maryland and Delaware, into southern New Jersey. The line is scheduled to be in service by 2013.

Order No. 679 implemented section 1241 of the Energy Policy Act of 2005, which directed FERC to establish incentive-based rates to encourage the construction of new transmission. To receive incentives, an applicant must demonstrate among other things that the facilities either ensure reliability or reduce the cost of delivered power by reducing transmission congestion. On August 18, 2008, Pepco filed revised tariff sheets to the PJM Interconnection LLC (“PJM”) Open Access Transmission Tariff (“OATT”) requesting transmission incentives for the MAPP project. Pepco argued that the project met the criteria established in Order No. 679 for receiving incentive rate treatment.

The MAPP Project was identified in the PJM RTEP as a baseline project and has been approved by the PJM Board of Managers. It is expected to resolve 33 overloads on several interfaces in the region and relieve congestion in the Baltimore-Washington area. The project also will provide access to more than 1,300 MW of renewable wind generation in the western part of PJM. In addition, it will be operated as a “smart grid” providing operating efficiencies, and minimizing sags, spikes and other disturbances.

The Commission authorized a 1.5 percent return on equity (“ROE”) adder to Pepco’s existing 11.3 percent ROE. FERC also granted full recovery of construction work-in-progress and prudently incurred abandonment costs. The rates were effective as of November 1.

Significantly, the Commission’s approval was unanimous. Dissents by Commissioners Jon Wellinghoff and Suedeen Kelly on transmission incentive cases have become the rule rather than the exception (see September 12, 2008 edition of the WER). Commissioner Jon Wellinghoff issued a separate statement to highlight important characteristics of the MAPP project that he believes warranted the significant ROE adder in this case. Specifically, he pointed to the connection of wind generation and the use of advanced technologies. Wellinghoff has previously dissented in transmission incentive cases because he felt that the majority overlooked Order No. 679’s requirement that there be a “nexus” between the incentives sought and the investment made. In previous cases, he argued that the Commission inappropriately granted incentive ROE adders for routine projects. In contrast, he said that he agreed that the MAPP project satisfies the nexus requirement.

Commissioner Kelly concurred with a “separate statement to be issued at a later date.” The order is available at: http://www.ferc.gov/EventCalendar/Files/20081031174052-ER08-1423-000.pdf

FERC Releases 2008 Enforcement Report

On Thursday, the FERC released its 2008 Report on Enforcement (“Report”), which provides a statistical analysis of its enforcement activities for the previous year, and an overview of activities from the Division of Investigations, the Division of Audits, the Division of Energy Market Oversight, and the Division of Financial Regulations.

Citing positive feedback for an enforcement report released in November 2007, FERC decided in May to issue such Reports annually. FERC hopes these reports will provide information about investigative work that is non-public, such as self-reported violations.

Overall, the Report demonstrated FERC’s increased focus on compliance. For instance, the number of self-reports more than doubled in one year from 31 in 2007 to 68 in 2008. The natural gas pipeline industry contributed the most self-reports and none of the 2008 reports have yet resulted in civil penalties. However, only 40 percent of these reports were closed with no action compared to 75 percent in the prior year.

Meanwhile, new investigations proliferated from 35 to 48 over the past year. FERC noted a large increase in the number of market manipulation investigations and allegations that entities selling power at market-based rates failed to provide accurate and complete information to FERC and its regional market operators.

Finally, the Division of Audits reported that they completed 60 audits in 2008, 39 of which were classified as financial audits. The audits resulted in 156 recommendations for remedial action. The final audit reports themselves include expanded scope and methodology sections in order to increase transparency in the audit process.

The Report also contains some of the on going measures and changes each of the divisions have implemented in the last year to advance enforcement goals at FERC. Several of these changes can be attributed to the Revised Policy Statement on Enforcement FERC released this year in May (see May 16, 2008 edition of the WER).

“The focus of the FERC enforcement program is, and must always be, compliance,” said FERC Chairman Joseph T. Kelliher. He went on to add that FERC “underscore[s] that point in this report by providing information about our enforcement program to FERC-regulated entities that could assist them in complying with the rules.”

A copy of the Report is available on the Commission’s web site at http://ferc.gov/legal/staff-reports/2008-enforc.pdf.

Waxman Challenges Dingell for Chairmanship of House Engergy Committee

On Wednesday, Representative Henry Waxman (D-CA) indicated that he will challenge John Dingell (D-MI) for the chairmanship of the House Energy and Commerce Committee. Late Wednesday evening, Waxman began calling other Democrats in the House to shore up support.

In the past, Dingell and Waxman have had many disagreements over energy policy. Waxman has pushed for stronger pollution controls than Dingell has been willing to support. Although last year Dingell supported higher fuel efficiency standards for vehicles, he has repeatedly resisted taking more aggressive action to cut greenhouse gases, fearing it would cost him the support of automakers in his home state.

Waxman released a statement saying that he was seeking to lead the Energy and Commerce Committee because he considered that panel critical to the success of some of the nation’s most important priorities—and that he was the best person to lead it.

“Enacting comprehensive energy, climate, and health care reform will not be easy. But my record shows that I have the skill and ability to build consensus and deliver legislation that improves the lives of all Americans,” Waxman said in his Wednesday press release.

Under Dingell, the Energy and Commerce Committee has taken a slow, deliberative approach to developing greenhouse legislation, with an effort to build consensus. However, President-Elect Barack Obama and Speaker Nancy Pelosi have publicly advocated stronger legislation to curb greenhouse gas emissions, leading to speculation that Waxman may have their support for his challenge.

The question now is whether Waxman can secure the support of a majority of other House Democrats. In early October, he sent a letter to Pelosi listing a set of core principles for a climate change bill that was signed by 152 members, which is about two-thirds of the Democratic caucus. The letter includes a call for reducing U.S. greenhouse gas emissions by 15-20 percent below current levels by 2020 and by 80 percent by 2050.

Dingell did not sign the letter, but several days later he released draft legislation with Representative Rick Boucher, chairman of the House Subcommittee on Energy and Air Quality, that would establish a national cap-and trade program (see October 31, 2008 edition of the WER). His plan would require emissions reductions of 6 percent below 2005 levels by 2020, and gradually tighten the cap to require a 44 percent cut by 2030 and an 80 percent cut by 2050.

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