FERC’s Final PURPA Rule May Significantly Alter the Landscape for Qualifying Facilities

Brett A. Snyder, Frederick M. Lowther, and Jane Thomas

On July 16, 2020, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued Order No. 872 (“Order”), a final rule that significantly revised its rules implementing the Public Utility Regulatory Policies Act of 1978 (“PURPA”). Congress enacted PURPA to reduce the country’s reliance on oil and natural gas by promoting “Qualifying Facilities” (“QFs”) that rely on alternative energy sources or more efficient generation. Since their promulgation, FERC’s regulations implementing PURPA have been largely unaltered. FERC opined that the energy industry has substantially evolved since PURPA was promulgated and that the final rule is necessary to address the changing landscape and more closely align with underlying congressional intent.

Among other things, PURPA requires electric utilities to offer to purchase electric energy from QFs, which are categorized as either small power producers or cogenerators. The rate that a QF may receive for energy must be a rate “not to exceed the incremental cost to the electric utility of alternative electric energy,” which is “the cost to the electric utility of the electric energy which, but for the purchase from such cogenerator or small power producer, such utility would generate or purchase from another source.” In other words, “the purchasing utility cannot be required to pay more for power purchased from a QF than it would otherwise pay to generate the power itself or to purchase power from a third party.” This is referred to as the utility’s “avoided cost.”

Rates for energy are generally categorized as either fixed or “as-available.” Fixed rates are generally fixed at the time of the contract or other legally enforceable obligation (“LEO”) between the QF and the utility and do not vary over the term of the contract or LEO. For example, many renewable energy projects, which generally produce only to sell into the market and rely on a fixed revenue stream for financing, often rely on fixed energy rates. Conversely, other types of generators, such as cogeneration facilities, might only sell into the market when they have excess energy and will take the prevailing price at the time of sale. This rate is referred to as an “as-available” energy rate and is variable. Rates for capacity are generally fixed at the time of contract or LEO. QF rates for energy and capacity are set by state commissions.

Order No. 872 follows a technical conference, notice of proposed rulemaking (“NOPR”), and multiple rounds of industry comments. The Order adopts most of the NOPR proposals and substantially alters the rules for QFs.

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D.C. Circuit Upholds FERC’s Rules Encouraging Electric Storage Participation in Wholesale Markets

Brett A. Snyder, Lamiya N. Rahman, and Jane Thomas

On July 10, 2020, the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) denied challenges1 to the Federal Energy Regulatory Commission’s (“FERC” or “Commission”) final rule on electric storage participation in Regional Transmission Organization (“RTO”) and Independent System Operator (“ISO”) markets (“Order No. 841”).2

Order No. 841 aimed to facilitate the participation of electric storage resources (“ESRs”) in RTO/ISO markets, with the goals of removing barriers to participation by ESRs, increasing competition within RTO/ISO markets, and ensuring just and reasonable rates. Specifically, FERC ordered RTOs/ISOs to establish participation models that recognize the physical and operational characteristics of and facilitate participation by ESRs.3

An ESR for these purposes is defined as “a resource capable of receiving electric energy from the grid and storing it for later injection of electric energy back to the grid,”4 and encompasses storage resources located on the interstate transmission system, on a distribution system, or behind the meter.5 Order No. 841 declined to allow states to decide whether ESRs located behind a retail meter or on a distribution system in their state could participate in RTO/ISO markets.6 On rehearing, the FERC reiterated that it would not provide state opt-out rights, arguing among other things that “establishing the criteria for participation in the RTO/ISO markets of [ESRs], including those resources located on the distribution system or behind the meter, is essential to the Commission’s ability to fulfill its statutory responsibility to ensure that wholesale rates are just and reasonable.”7 FERC further concluded that it was not required under the Federal Power Act (“FPA”) or relevant precedent to provide an opt-out from ESR participation.8

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Energy Infrastructure Today: Permitting & FERC Case Law Updates

Margaret Anne Hill, Brett A. Snyder, Lamiya N. RahmanFrank L. Tamulonis III, and Stephen C. Zumbrun

Stakeholders in the U.S. infrastructure industry should note that ongoing litigation and new court decisions issued in the first half of 2020 are reshaping the development of energy projects.

Energy developers should carefully review the impact of new rulings that have interpreted environmental analyses required for Clean Water Act (“CWA”) permitting as greenhouse gas emissions (“GHG”) on the complex regulation of infrastructure projects. At the same time, several other recent proceedings have raised questions about practices and procedures of the Federal Energy Regulatory Commission (“FERC” or “Commission”) regarding natural gas infrastructure.

In our recent webinar, Today’s Energy Industry: The Impact of Case Law on Energy Infrastructure Projects, we highlighted what you should know about recent legal developments related to energy infrastructure:

Permitting Update

  • Status of Nationwide Permit 12. In Northern Plans Resource Council v. U.S. Army Corps of Engineers, the Montana District Court vacated the U.S. Army Corps of Engineers’ Nationwide (“Corps”) Permit 12 disrupting permitting and enforcement under the CWA. The court later clarified that the ruling applies to new projects and not existing pipeline projects and the Ninth Circuit recently denied a request to stay the implementation of the order pending appeal.
  • Navigable Waters Protection Rule. Significant litigation is expected to challenge a new restrictive rule of what constitutes “waters of the United States” under the CWA. Infrastructure projects will also be impacted by the Supreme Court’s recent decision in County of Maui v. Hawaii Wildlife Fund.
  • National Environmental Policy Act GHG Review. The District of Montana ruled in Wildearth Guardians et al. v. U.S. Bureau of Land Management, that the Bureau of Land Management must consider cumulative GHG impacts of oil and gas lease sales. Litigation is expected to challenge whether the Corps has adequately considered GHG for Section 404 permits.
  • Climate Change Litigation. Many state and local governments continue to file common law lawsuits against oil and gas companies seeking damages for climate change mitigation measures. The 9th and 4th Circuits have rejected arguments that federal law applies to these disputes and similar cases are pending in the 1st, 2nd, and 10th Circuits. Also, in v. Exxon, the District of Massachusetts ruled that a suit alleging Exxon violated state fraud statutes should be litigated in state court.

FERC Update

  • Precedent Agreements as Evidence of Market Need. In a 2019 case, City of Oberlin v. FERC, the D.C. Circuit held that FERC failed to adequately explain why it is lawful to consider a proposed pipeline’s precedent agreements with foreign shippers serving foreign customers as evidence of market need for the pipeline. FERC recently addressed City of Oberlin and explained why precedent agreements between a proposed pipeline and LNG terminal were lawfully credited as evidence of market need for the pipeline.
  • FERC’s Tolling Order Practice. In Allegheny Defense Project v. FERC, the D.C. Circuit granted en banc rehearing over whether FERC violated the Natural Gas Act (“NGA”) and landowners’ due process by issuing tolling orders to extend the time to consider rehearing requests of FERC’s pipeline approval, while allowing a pipeline to begin construction and exercise eminent domain. On June 9, FERC issued a final rule to preclude natural gas projects under sections 3 and 7 of the NGA from proceeding with construction until FERC issues a decision on the merits of any request for rehearing.
  • Pipeline Right-of-Ways (“ROWs”) through the Appalachian Trail. In February, the U.S. Supreme Court heard oral argument over a 4th Circuit ruling that the U.S. Forest Service lacks authority to grant a pipeline ROW across the Appalachian Trail. On June 15, the Supreme Court ruled 7-2 that the Forest Service had authority to issue the pipeline ROW through the Appalachian Trail.
  • FERC Authority over Pipeline Transportation Service Agreements (“TSAs”) in Bankruptcy. Several pipelines recently have filed petitions for declaratory orders, requesting FERC to declare it has concurrent jurisdiction with bankruptcy courts over natural gas pipeline TSAs and that FERC approval is required to in order to modify or reject such contracts in bankruptcy. We are continuing to follow this area for developments.

We invite you to read, watch, and share the below resources from our recent webinar for further details. Contact any of us if you have questions about the impact of recent cases, decisions, and regulations on your energy project(s).

Please click here for the presentation materials and here to listen to the recording.

FERC Establishes Revised ROE Methodologies for Public Utilities and Pipelines

Mark R. HaskellBrett A. Snyder, and Lamiya N. Rahman

On May 21, 2020, the Federal Energy Regulatory Commission (“FERC”) issued two orders addressing methodologies for analyzing the base return on equity (“ROE”) components of rates of FERC-regulated entities. In Opinion No. 569-A, FERC revised the methodology used under section 206 of the Federal Power Act (“FPA”) to evaluate the base ROEs of public utilities.1 In a separate Policy Statement, FERC clarified that the methodology established in Opinion No. 569-A applies, with certain exceptions, to natural gas and oil pipelines.2

Opinion 569-A

To change a public utility’s rates, including ROE, in a complaint proceeding under section 206 of the FPA, FERC must (i) make a finding that an existing rate is unjust and unreasonable; and (ii) determine a just and reasonable rate.3

FERC’s recent order arose from two complaint proceedings challenging the base ROE of Midcontinent Independent System Operator, Inc. (“MISO”) transmission owners.4 In November 2019, FERC issued Opinion No. 569, establishing a revised methodology to determine whether the existing base ROE was unjust and unreasonable under the first prong of FPA section 206, and if so, to establish a new just and reasonable replacement ROE under the second prong.5

Among other things, Opinion No. 569 relied on the discounted cash flow model (“DCF”)6 and capital-asset pricing model (“CAPM”)7 in the first prong of its FPA section 206 analysis, and declined to use two other models—i.e., the Expected Earnings8 and Risk Premium9 models. FERC adopted the use of ranges of presumptively just and reasonable ROEs that would be based on the risk profile of a utility or group of utilities. FERC gave equal weight to the DCF and CAPM models to establish composite zones of reasonableness. Absent evidence to the contrary, an ROE within the zone of reasonableness would be presumptively just and reasonable while an ROE outside this range would be presumptively unjust and unreasonable. FERC also relied on the DCF and CAPM models (and declined to use the Expected Earnings and Risk Premium models) in the second prong of its section 206 analysis in order to establish a new just and reasonable ROE.10

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FERC Provides Additional Regulatory Relief and Guidance in Response to Coronavirus Pandemic

Mark R. Haskell, Brett A. Snyder, and Lamiya N. Rahman

On April 2, 2020, the Federal Energy Regulatory Commission (“FERC” or “Commission”) announced several measures intended to provide relief to regulated entities responding to the COVID-19 pandemic. A summary of FERC’s previous COVID-19-related relief and guidance can be found here.

In a Policy Statement, the Commission indicated it will prioritize and expeditiously act on requests for relief filed by regulated entities in connection with ensuring business continuity of their energy infrastructure. In a series of notices and orders, the Commission also extended or clarified the relief available to regulated entities that are unable to meet certain deadlines or regulatory requirements as a result of their COVID-19 response. This relief includes:

    • Extension to June 1, 2020 for the following deadlines:
      1. Form Nos. 60 (Annual Report of Centralized Service Companies) and 61 (Narrative Description of Service Company Functions);
      2. Form No. 552 (Annual Report of Natural Gas Transactions); and
      3. Electric Quarterly Report Form 920.
    • Extensions to May 1, 2020 for the following deadlines for categories of filings that would otherwise be due on or before May 1, 2020:
      1. interventions, protests, or comments to a complaint;
      2. briefs on and opposing exceptions to an initial decision;
      3. answers to complaints and orders to show cause; and
      4. initial and reply briefs in paper hearings.
    • Waiver of FERC regulations governing the form of filings submitted to the Commission (e.g., provision of sworn declarations) through May 1, 2020.
    • Shortening of the answer period to three business days for motions for extensions of time due to COVID-19 emergency conditions. The Commission indicated it will also consider requests to shorten the comment period for motions seeking waiver of requirements in Commission orders, regulations, tariffs, rate schedules, and service agreements to as short as five days.
    • Temporary blanket waivers from document notarization and in-person meeting requirements established under open access transmission tariffs, or other tariffs, rate schedules, service agreements, or contracts subject to the Commission’s jurisdiction. These waivers are effective through September 1, 2020.
    • Extension of time for filing regional transmission organization (“RTO”)/independent system operator (“ISO”) Uplift Reports and Operator Initiated Commitment Reports required pursuant to Order No. 844 that were originally due between April and September 2020. These reports are now due to be posted on the RTOs/ISOs websites by October 20, 2020.

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FERC Issues Guidance and Regulatory Relief in Connection with Coronavirus Response

Mark R. Haskell, Brett A. Snyder, Lamiya N. Rahman, and Jane Thomas

On March 19, 2020, the Federal Energy Regulatory Commission (“FERC” or “Commission”) announced several regulatory responses to the coronavirus pandemic and FERC Chairman Neil Chatterjee held a press conference to discuss the agency’s initiatives. The Chairman emphasized the capabilities of the Commission and its staff to work in a timely manner throughout the pandemic response, while striving to provide necessary flexibility to regulated entities.

The Chairman named Caroline Wozniak, a Senior Policy Advisor in the Office of Energy Market Regulation, as the point of contact for all energy industry inquiries related to the impacts of COVID-19. Members of the regulated community may e-mail PandemicLiaison@FERC.gov with questions for Commission staff.

Chairman Chatterjee clarified that the Commission will provide regulated entities with flexibility when needed, but emphasized the Commission is fully functioning and will try not to delay decisions. Chairman Chatterjee also stated his goal is to issue certain rehearing orders involving pipeline certificate projects challenged by affected landowners within 30 days, consistent with guidance from the Chairman issued on January 31, 2020.

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FERC Issues Penalty Assessment in Vitol CAISO Market Manipulation Proceeding

Mark R. Haskell, George D. Billinson, and Lamiya N. Rahman

The Federal Energy Regulatory Commission issued an Order Assessing Civil Penalties, imposing approximately $1.5 million in civil penalties on Vitol Inc. and one million dollars in penalties on a Vitol trader. In a departure from prior cases, the Commission assessed penalties well below Enforcement Staff’s recommended six-million-dollar penalty for the company, in light of the individual trader’s significant involvement in the alleged scheme. The next step for Respondents wishing to challenge the Order will be de novo review in federal district court.

On October 25, 2019, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued an Order Assessing Civil Penalties (“Order”), imposing civil penalties of $1,515,738 against Vitol Inc. (“Vitol”) and one million dollars against Federico Corteggiano, a Vitol trader, in connection with an alleged market manipulation scheme in the California Independent System Operator Corporation’s (“CAISO”) markets.[i] Additionally, the Commission ordered Vitol to disgorge unjust profits, plus interest, of $1,227,143.

As we have previously discussed, the Commission began this proceeding by issuing an Order to Show Cause and Notice of Proposed Penalty to Respondents on July 10, 2019. In that order, the Commission directed Vitol and Corteggiano to show cause why they should not be assessed civil penalties of six million dollars and $800,000, respectively, and why Vitol should not be required to disgorge unjust profits of $1,227,143, plus interest. Respondents elected to have the Commission assess an immediate penalty if it finds a violation and then proceed with de novo review before a federal district court.

In the instant Order, the Commission found that Vitol and Corteggiano (collectively, “Respondents”) violated the anti-manipulation prohibitions in the Federal Power Act (“FPA”) and FERC’s Anti-Manipulation Rule[ii] through a cross-market scheme in which Respondents sold power at a loss in the CAISO wholesale electric market to avoid greater losses in Vitol’s positions in a separate financial product—congestion revenue rights (“CRRs”).[iii]

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[i] Vitol Inc., Order Assessing Civil Penalties, 169 FERC ¶ 61,070 (2019).

[ii] FPA § 222 (2012); 18 C.F.R. § 1c.2 (2019).

[iii] Specifically, the Commission found Respondents intentionally engaged in fraudulent physical energy imports during the period October 28-November 1, 2013, at the Cascade intertie to relieve congestion at Cragview, which in turn lowered the Cragview locational marginal price (“LMP”) and economically benefitted Vitol’s CRRs sourced at that location. Order at P 34.

FERC Further Clarifies Its Orders Reforming Generator Interconnection Procedures and Agreements

Mark R. Haskell, George D. Billinson, and Lamiya N. Rahman

On August 16, 2019, the Federal Energy Regulatory Commission (“FERC” or “the Commission”) issued an order granting in part and denying in part requests for further clarification of its reform of Large Generator Interconnection Agreements (“LGIA”) and Procedures (“LGIP”).[1] Order No. 845-B affirms FERC’s prior findings that the expansion of an interconnection customer’s option to build does not impede transmission owners’ ability to recover a return of and on network upgrades. The order also reiterates FERC’s determination not to revise the pro forma LGIA’s indemnity provisions.

Order No. 845—FERC’s Final Rule revising the pro forma LGIP and LGIA—made various reforms to “improve certainty for interconnection customers, promote more informed interconnection decisions, and enhance the interconnection process.”[2] Among these changes, the Commission expanded interconnection customers’ ability to exercise the option to build transmission providers’ interconnection facilities and standalone network upgrades beyond instances where the transmission provider is unable to meet the interconnection customer’s preferred construction timeline.

A subsequent decision, Order No. 845-A, among other things, rejected arguments that the option build revisions contradicted the United States Court of Appeals for the District of Columbia Circuit’s (“D.C. Circuit”) decision in Ameren Services Co. v. FERC. According to the Commission, “Ameren stands for the principle that the Commission cannot prohibit a transmission owner from earning a return of, and on, the cost of its network upgrades.”[3] In that case, the D.C. Circuit vacated FERC’s orders requiring the Midcontinent Independent System Operator, Inc. (“MISO”) to remove an option under its tariff allowing transmission owners to unilaterally elect to initially fund network upgrades and to thereafter recover the interconnection customer’s portion of the cost burden through periodic network upgrade charges that included a return on the capital investment (i.e., the “transmission owner initial funding option”). Although the Commission initially found the transmission owner initial funding option unjust and unreasonable, the D. C. Circuit remanded the orders directing the Commission to “explain how investors could be expected to underwrite the prospect of potentially large non-profit appendages with no compensatory incremental return.”[4] The Commission reinstated the transmission-owner initial funding option on remand.

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FERC Issues Show Cause Order Proposing $6.8M in Civil Penalties to Vitol Inc. and Individual Trader and $1.2M Disgorgement for Alleged CAISO Market Manipulation

Mark R. Haskell, George D. Billinson, and Lamiya N. Rahman

Recently, FERC issued an Order to Show Cause why Vitol Inc. and its co-director of financial transmission rights trading should not be found to have engaged in market manipulation by selling physical power in CAISO at a loss to eliminate expected losses on Vitol’s Congestion Revenue Rights. Within 30 days of the date of the Order, Respondents must show cause why they should not be found to have committed market manipulation, pay civil penalties, and disgorgement, as well as make an election under FPA § 31(d)(1) whether to proceed before an Administrative Law Judge or opt to have FERC assess a penalty and then proceed with de novo review by a federal district court.

On July 10, 2019, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued an Order to Show Cause and Notice of Proposed Penalty[1] to Vitol Inc. (“Vitol”) and Vitol’s co-head of financial transmission rights (“FTR”) trading, Federico Corteggiano (“Corteggiano”), (together, “Respondents”), directing the Respondents to show cause why they should not be found to have violated the anti-manipulation provisions of the Federal Power Act (“FPA”)[2] and the Commission’s regulations.[3]

The Order arises from allegations by FERC’s Office of Enforcement (“Enforcement”) that Respondents engaged in a “cross-product market manipulation scheme” by selling physical power at a loss in the California Independent System Operator (“CAISO”) day-ahead market to avoid even greater losses on their positions in a separate financial product—congestion revenue rights (“CRRs”). Enforcement’s factual allegations and legal analysis, resulting from an investigation into Respondents’ trading, are detailed in the Enforcement Staff Report and Recommendation included with the Order.[4] The investigation was prompted by a report from a CAISO market participant regarding Vitol’s activity.

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Council on Environmental Quality Seeks Public Comment on Draft NEPA Greenhouse Gas Emission Guidance

Brett A. Snyder and Lamiya N. Rahman

The Council on Environmental Quality has published Draft Guidance to federal agencies to evaluate the effects of greenhouse gas emissions under the National Environmental Policy Act. The Draft Guidance is largely consistent with the approach taken by the Federal Energy Regulatory Commission in recent natural gas infrastructure orders. Comments are due on July 26, 2019.

Introduction

On June 26, 2019, the Council on Environmental Quality (“CEQ”) published new draft guidance to clarify the scope of review federal agencies should undertake when considering the effects of greenhouse gas (“GHG”) emissions under the National Environmental Policy Act (“NEPA”) and related regulations.The Draft Guidance is intended to replace CEQ’s prior GHG-related guidance, which was adopted in 2016 and later rescinded pursuant to an Executive Order in 2017.2 The Draft Guidance is largely consistent with the approach taken by the Federal Energy Regulatory Commission (“FERC”) in recent natural gas infrastructure orders.

CEQ’s Draft Guidance

NEPA is a procedural statute that requires federal agencies to analyze the environmental impacts of any major federal action significantly affecting the quality of the human environment.3 Although NEPA does not mandate any particular substantive outcomes, it requires an agency to consider the direct and reasonably foreseeable indirect effects of a proposed action.4

The Draft Guidance states that “[a] projection of a proposed action’s direct and reasonably foreseeable indirect GHG emissions may be used as a proxy for assessing potential climate effects.”5 While direct effects are caused by an action and occur at the same time or place, indirect effects are caused by the action and are later in time or farther removed in distance but are still reasonably foreseeable. Thus, the proposed guidance suggests that quantification of emissions is sufficient to meet an agency’s obligation to assess effects of emissions.

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