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Washington Energy Report (1) FERC Defends New England Transmission Incentives for RTEP Projects (2) GAO: FERC Could Take Additional Steps to Analyze RTO Benefits and Performance (3) GAO Reports Inexperience and Lack of Scheme Limits Carbon Capture and Storage Developments (4) FERC Revises Electric, Hydro Reporting Forms (5) The Surface Transportation Board Approves the Merger of CP Railway and the DM&E Railroad (6) Railroad Legislation Wrap

Washington Energy Report
10.03.08

FERC Defends New England Transmission Incentives for RTEP Projects

On September 25, 2008, the Federal Energy Regulatory Commission (“FERC” or “Commission”) rejected a complaint by the New England Conference of Public Utilities Commissioners, Inc. (“NECPUC”) requesting rehearing of an order (“Opinion No. 489”) granting a blanket 1% incentive return on equity (“ROE”) to all projects in New England’s Regional Transmission Expansion Plan (“RTEP”). Commissioners Jon Wellinghoff and Suedeen Kelly wrote separately to reiterate their original opposition to Opinion No. 489.

The Commission has the authority to grant ROE incentives. Although recently, the Commission has done so under the authority of Federal Power Act (“FPA”) section 219, implemented in Order No. 679 on July 20, 2006, the Commission also claims that the authority to grant transmission infrastructure incentives preceded this authority. The ROE adders in this case were issued under the Commission’s “authority under section 205 for the purpose of encouraging new investment to meet demonstrated needs” because the request for the adders was filed with the Commission in November 2003, well before section 219 was added to the FPA in 2005.

FERC applied a two-pronged test in approving the rate adders that asks whether the proposed incentive is within a “zone of reasonableness” and whether there is “some link, or nexus between the incentive being requested and the investment being made.” In Opinion No. 489, the Commission held that a project’s inclusion in the region’s RTEP provided that nexus.

The NECPUC argued that circumstances had changed since the order was issued. The costs of the projects in the RTEP have increased far beyond the estimates in place when the incentive was granted. In some cases, the costs have risen to over 100% of the cost estimates. The NECPUC argued that it is unjust and unreasonable, and creates perverse incentives to allow an incentive cost adder on the amount of the estimate overrun. The Commission replied that the incentives were not granted on the basis of any cost benefit analysis and that the actual costs of the project were irrelevant to the determination to grant incentive rates. The incentive rates were granted on the basis of the project’s inclusion in the RTEP, and that much has not changed.

The Commission also determined that the complaint should be dismissed on procedural grounds and that arguments about the appropriateness of the incentive adder to increases to project estimates should have been brought before the overruns occurred, namely, in the proceeding that was resolved by Opinion No. 489.

Commissioner Kelly stated that she did not “believe that Opinion No. 489 was consistent with the Commission’s general policy on incentive rates.” Still, she concurred with the order, presumably because she agreed that the matter had been decided in Opinion No. 489. Commissioner Wellinghoff concurred in part and dissented in part, noting that “[i]n and of itself, the projects’ RTEP status did not warrant an incentive ROE adder under the Commission’s FPA section 205 authority applied in Opinion No. 489.” Wellinghoff repeated his contention that “ROE adders should focus on encouraging investment decisions beyond the upgrades required by a utility’s service obligations or good utility practice.” Still, he concurs that the ROE adders only apply to prudently incurred costs, and suggests that if NECPUC believes the adders on particular projects have been imprudently incurred, the procedural remedy would be to inform the Commission on a case-by-case basis.

The order is available on FERC’s website under Docket No. EL08-69.

GAO: FERC Could Take Additional Steps to Analyze RTO Benefits and Performance

On September 22, 2008, the Government Accountability Office (“GAO”), the investigative arm of Congress, issued a report to the U.S. Senate Committee on Homeland Security and Governmental Affairs regarding regional transmission organizations (“RTOs”). The report indicates that FERC needs to do more than just assert that RTOs are lowering costs to consumers.

FERC regulates six RTOs including California ISO, ISO New England, Midwest ISO, New York ISO, PJM Interconnection, and Southwest Power Pool, but does not regulate the Electric Reliability Council of Texas. GAO was asked to review (1) RTO expenses and key investments in property, plant, and equipment from 2002 to 2006; (2) how RTOs and FERC review RTO expenses and decisions that may affect electricity prices; and (3) the extent to which there is consensus about RTO benefits.

The study generally found that states with RTOs established before 1999 have had higher prices and seen faster rate increases in recent years compared to other states. However, the report qualifies this finding by noting that the pre-1999 RTO states have seen price increases as a result of higher prices for natural gas, a primary source of fuel for electricity in these areas. Overall, the report finds that “FERC officials, industry participants, and experts lack consensus on whether RTOs have brought benefits to their regions.” Many believe RTOs improved the management of the transmission grid and improved generator access to it. There is not a consensus, however, about whether RTO markets provide benefits to consumers or their influence on consumer electricity prices.

The report finds that FERC “has not conducted an empirical analysis of RTO performance or developed a comprehensive set of publicly available, standardized measures to evaluate such performance.” To improve FERC oversight of RTOs, the GAO recommends that FERC develop a consistent approach for reviewing RTO budgets and routinely review and assess the accuracy, completeness, and reasonableness of the financial information reported by RTOs in FERC Form No. 1 filings. The report notes that FERC has a non-public document that provides some standardized measures of RTO market performance, and these measures are addressed in FERC’s annual “State of the Markets Report.” However, FERC stated that these measures were not intended to be used “to assess RTO benefits or evaluate the performance of individual RTOs.”

The GAO also recommended that FERC collaborate with RTOs, stakeholders, and experts to develop standardized measures to track RTO performance and report the results to Congress and the public. The GAO provided FERC with a draft report to review, and FERC generally agreed with the report and recommendations.

A copy of the GAO report, “Electricity Restructuring: FERC Could Take Additional Steps to Analyze Regional Transmission Organizations’ Benefits and Performance” is available on the GAO’s web site at http://www.gao.gov/products/GAO-08-987.

GAO Reports Inexperience and Lack of Scheme Limits Carbon Capture and Storage Developments

On Tuesday, the GAO released a report on the progress of carbon capture and storage (“CCS”) technology by studying its current technological, legal, and regulatory obstacles, and various federal agencies’ efforts to create a nationwide strategy for controlling carbon dioxide (“CO2”) emissions. The report concluded that inexperience and the absence of a comprehensive plan for CO2 emissions have limited the use and progress of CCS.

CCS is a process of separating CO2 from other gases produced as a result of fuel combustion or industrial processes. The captured CO2 can then be injected and stored long-term underground. Several studies have concluded that CCS is a necessary part of any plan to reduce future CO2 emissions. As a result, the progress and deployment of CCS technology has become a key issue to several groups.

House Select Committee on Energy Independence and Global Warming Chairman Edward Markey (D-Mass.) requested the GAO report. Concerned about the development of CCS in the United States, the GAO analyzed two issues: (1) the critical economic, legal, regulatory, and technological barriers that currently prevent commercial-scale use of CCS and, (2) the federal agencies’ efforts to create a nationwide strategy to control CO2 emissions while focusing on efforts by the Department of Energy (“DOE”) and the Environmental Protection Agency (“EPA”) in particular.

The report found that without a nationwide strategy, the electric utility industry has little incentive to develop and expand CCS practices. The absence of such a strategy has also discouraged agencies from resolving related issues, such as transporting and storing CO2. Meanwhile, inexperience with CCS has led to other barriers, mainly involving legal and regulatory issues. As of right now, the technology is underdeveloped and the cost is too high for the electric industry to increase its use of CCS technology.

The report notes that some agencies have begun to address these problems. However, instead of opting for a comprehensive approach, agencies have chosen to tackle one problem at a time. For instance, the GAO states that the DOE has devoted most of its resources to advance technology at new coal-fire power plants instead of all plants, new and existing. Similarly, the report stated that while the EPA has started looking into affected areas in the Clean Water Act, it still must address issues in the Clean Air Act and the Comprehensive Environmental Response, Compensation, and Liability Act. Finally, a number of other agencies, including the Department of the Interior and the Department of Transportation, could further delay a nation-wide plan for CCS.

The report concluded by providing the following recommendations:

• The Secretary of Energy should continue to emphasize reducing greenhouse gas emissions at current power plants by instructing that the Office of Fossil Fuel Energy maintain their current funding levels.

• The Administrator of the EPA should address all key environmental issues, not just those in the Clean Water Act in order to create a comprehensive scheme.

• The Executive Office of the President needs to put together a special task force to analyze and address these barriers to large-scale use of CCS technologies.

The report, as well as its recommendations and highlights, can be found at: http://www.gao.gov/docsearch/locate?searched=1&o=0&order_by=rel&search_type=publications&keyword=GAO-08-1080&Submit=Search.

FERC Revises Electric, Hydro Reporting Forms

On September 19, 2008, FERC issued Order No. 715 (“Final Rule”), amending reporting requirements for public utilities and licensees to file financial forms, reports, and statements, including FERC Form No. 1, FERC Form No. 1-F, and FERC Form No. 3-Q. According to the Commission, the revisions “will improve transparency and give FERC greater detail so it can better carry out its jurisdictional responsibilities.”

FERC Form No. 1 is an annual financial report filed by major utilities that, in each of the last three years, had sales or transmission services exceeding 1 million megawatt-hours (“Mwh”); 100 Mwh of sales for resale; 500 Mwh of delivered power exchanges; or 500 Mwh of wheeling power for others. Utilities and licensees with total sales of 10,000 Mwh file Form No. 1-F. These entities also file Form 3-Q, a quarterly financial report that “allows for more timely evaluations of existing rates and improves the transparency and currency of financial information.”

FERC notes that the Final Rule “does not convert the submission of Form 1 and other data into a FPA section 205 rate case filing or a cost-and-revenue study.” Among the changes in the Final Rule, is that FERC is requiring filers with formula rates to include explanatory information in a footnote when the formula rate inputs differ from Form 1 reported amounts.

Additionally, the Final Rule eliminated the filing requirement for utilities that are not subject to FERC’s jurisdiction but otherwise meet the Form 1 and Form 3-Q filing thresholds. The Final Rule also requires filers to provide information regarding their affiliate transactions. The Final Rule established a $250,000 threshold for reporting individual affiliate transactions. According to FERC, this “reasonably balances the burden while still reporting needed information” and is consistent with a similar threshold for natural gas companies in Order No. 710. The Final Rule further requires parties to give a more detailed breakdown of the various sources of “other revenues,” with a minimum threshold for disclosure of $250,000 per source of income.

The Final Rule will take effect January 1, 2009 and is available on the Commission’s web site at http://www.ferc.gov/whats-new/comm-meet/2008/091808/E-2.pdf.

The Surface Transportation Board Approves the Merger of CP Railway and the DM&E Railroad

On September 30th the Surface Transportation Board (“STB” or “Board”) conditionally approved the proposed acquisition of control by the Canadian Pacific Railway Corporation (“CP”), and its indirect subsidiary, the Soo Line Holding Company (“Soo Holding”) of the Dakota, Minnesota & Eastern Railroad Corporation (“DM&E”) and its wholly owned railroad subsidiary, the Iowa, Chicago & Eastern Railroad Corporation (“IC&E”). The Board found that the merger would not likely result in a substantial lessening of competition, the creation of a monopoly, or restraint of trade in surface freight transportation, and that the public benefits of the transaction would outweigh any decrease in competition.

As one condition of approving the merger, the Board imposed the representations of the applicants to “keep open on commercially reasonable terms all gateways affected by the proposed transaction.” The Board rejected complaints that certain payment terms of the transaction related to the DM&E’s proposed construction of a track into the Powder River Basin (“PRB”) in Wyoming to compete with BNSF Railway and Union Pacific would discourage CP from undertaking the project after the merger. In another noteworthy finding, the Board determined that environmental review of the merger transaction itself was not necessary, but that the Board would later prepare an Environmental Impact Statement addressing the effects of possible future movement of PRB coal over the merged railroad’s lines once sufficient information about such traffic became available. The Board imposed as a condition that the merger applicants could not transport any PRB coal originating on the new DM&E line into the PRB until the STB prepared the EIS addressing and issued a final decision allowing such operations to commence.

Railroad Legislation Wrap-up

Rail Competition and Service

The 110th Congress has paid increased attention to the complaints of rail shippers about the lack of competition between the major railroads and deteriorating service. Although the passage of legislation that substantively alters the status quo in the rail industry may not be passed in this session, some inroads were made toward legislative changes designed to increase competitive options for shippers and/or give them more avenues for relief from non-competitive railroad behavior.

One area that received substantial attention was the repeal of exemptions from the full application of the federal Antitrust laws currently enjoyed by railroads. Bills that would repeal such exemptions were reported out of the House and Senate Judiciary Committees. The bills, S. 772 and H.R. 1650, would greatly expand the roles of the Department of Justice, Federal Trade Commission, and State Attorneys General over railroad business practices now subject exclusively to the jurisdiction of the Surface Transportation Board. If eventually enacted, such changes could be significant for rail shippers without competitive rail options whose rates and service terms are subject to the STB’s jurisdiction, and for “rail common carrier service” generally. They would also open up for scrutiny under the Antitrust laws the STB’s “bottleneck rules,” which permit railroads to refuse to quote joint line rates to favor longer single line movements on their tracks. In addition, DOJ and FTC would have much greater roles in the area of rail mergers, where the STB currently has exclusive authority to approve rail mergers under standards that are less stringent than the rules that DOJ and FTC apply to mergers in most other industries. The failure to pass this legislation, means that the current limited application of the antitrust laws to railroads will remain in force for railroad actions outside the jurisdiction of the STB. Such areas include anticompetitive behavior directed to rail shippers with dual rail service, whose rates and transportation are not subject to the STB’s jurisdiction.
Earlier in the session, Congress passed as part of the Energy Independence and Security Act of 2007 (PL 110-140) a section that requires a DOE and DOT joint study on the adequacy of transportation of domestically-produced renewable fuels by railroad and other transportation modes. Some of the elements of the required study, such as (a) the adequacy of existing rail infrastructure; (b) whether adequate competition exists for the transportation of renewable fuels and if not, whether inadequate competition leads to unfair prices or unacceptable service; and (c) whether federal agencies have sufficient legal authority to address inadequate competition and railroad service problems related to transporting domestically-produced renewable fuels, could have more general industry wide application.

Rail Safety

On October 1, the Senate passed the Rail Safety Enhancement Act of 2008 (S. 1889). Its companion bill, the Passenger Rail Investment and Improvement Act of 2008 (H.R. 2095), had previously been passed by the House. The bills are considered to be the most comprehensive rail safety legislation in 34 years, and the President is expected to sign the combined measure into law. Main features of the law will include creation of a high-level chief safety officer within the DOT, the addition of 200 rail safety inspectors and increased training, and instructions to the DOT to develop a long term plan for improving rail safety.
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