Background
Many manufacturing and commercial facilities around the country have acquired their own on-site electric generators to use for electric power supply on a regular basis, or as a backup to use when the local utility is experiencing power outages or transmission interruptions. The ability of these facilities to enhance the value of these electric generation assets is assisted by two recent Orders issued by the Federal Energy Regulatory Commission ("FERC"). Phelps Dodge Energy Services, LLC, 88 FERC 6 61,052 (1999); Green Power Partners I, LLC, et al., 88 FERC 6 61,005 (1999). The Orders allow facilities to sell excess power at wholesale from these generators without being subject to regulation under the Public Utility Holding Company Act of 1935 ("PUHCA"). In the Orders, Phelps Dodge Corporation ("Phelps Dodge"), through a newly created power marketing venture, Phelps Dodge Energy Services, LLC ("PDES"), is allowed to sell excess power from its back-up generators without being subject to PUHCA, and to make wholesale sales without obtaining prior FERC approval of the rates for each transaction.
Regulatory Framework
Facilities considering selling excess power must first be concerned with regulation under PUHCA. PUHCA imposes stringent and comprehensive regulations requiring prior approval for virtually every type of transaction, including loans, issuance of securities and affiliate transactions. Industrials interested in owning and selling power from electric power generation facilities typically seek status as an Exempt Wholesale Generator ("EWG"), a structure established when Congress, in the Energy Policy Act of 1992 ("EPAct"), amended both PUHCA and the Federal Power Act ("FPA") in order to promote more competition in the electric power supply market. EWG status is granted by FERC upon application by the affected entity. FERC must determine that a person or corporation is engaged directly, or indirectly through one or more affiliates, exclusively in the business of owning or operating, or both owning and operating, all or part of one or more eligible facilities and selling electric energy at wholesale. An eligible facility is a facility that is either used for the generation of electric energy exclusively for sale at wholesale or used for the generation of electric energy and leased to one or more public utility companies. An EWG is a "public utility" for FPA purposes, but is not an "electric utility company" for PUHCA purposes. Owners of EWGs are therefore not subject to additional regulation under PUHCA, but the EWG's sales are subject to FERC jurisdiction.
The FERC Orders and Their Implications
Companies typically form separate power marketing groups that would be responsible for selling power from their generation facilities in order to confine any regulatory responsibilities to the entities performing the jurisdictional services. However, for tax or other reasons, a manufacturing or commercial facility may want to retain ownership of the electric generator. The order granting EWG status (the "EWG Order") for the novel arrangement proposed by Phelps Dodge was significant in two respects. Phelps Dodge Energy Services, LLC, 88 FERC 6 61,052 (1999). First, Phelps Dodge retained ownership of the generators at the parent level, and FERC made clear that the lease arrangement, where the lessee made sales from the facilities and had full operational control over them when they were not dedicated to use at the Phelps Dodge mines, satisfied the "operate" prong for EWG requirements. In the lease, Phelps Dodge has the right to recall the facilities for its own use at times when its regular power suppliers curtailed service to the mines for any reason, that the lessee subsidiary operates at other times. FERC also made clear for the first time that a power marketing entity created by an industrial could provide marketing services to prospective customers, that would include obtaining transmission and other delivery rights to enable the purchaser to obtain power sold by PDES, whether generated by PDES or other entities. PDES can also sell power from the generators of other entities.
The second FERC order (the "Market Rate Order") granted PDES' request for market rate authority, enabling it to maximize flexibility in making its sales. Green Power Partners I, LLC, et al., 88 FERC 6 61,005 (1999). Market rates are rates established by purchasers and sellers, as opposed to cost-based rates which require a seller to demonstrate that the rate is based on the cost of providing service to the customer.
Pursuant to the Market Rate Order, PDES would be both an EWG and a power marketer, and would be subject to "streamlined" FERC regulation (i.e., flexible market rate authority and exemptions from the stringent record keeping and accounting and reporting requirements applicable to public utilities). By creating a separate entity to engage in these jurisdictional activities, industrials can insulate and ensure separation of accounting and record keeping from parent operations and the parent can maintain its exemptions from regulation under PUHCA or the FPA.
Using the precedents, industrials can form power marketing subsidiaries or units that would be responsible for operating and selling power from back-up generators, as well as from generators owned by third parties. They can lease the generation resources without being required to acquire title to the electric generators and still obtain EWG status, as long as they have full operational control for the portions of the facilities subject to the lease. In addition, while the power marketing subsidiaries would be regulated as "public utilities" under the FPA, they would be subjected to streamlined regulation, as opposed to the full blown cost based rate regulation reporting requirements and record keeping requirements applicable to traditional FERC-jurisdictional public utilities.
Electric Cooperative Prosecuted For Bird Electrocutions
Recent case law increases the risk to electric utilities under the Migratory Bird Treaty Act and the Bald and Golden Eagle Protection Act. Under the court's interpretation, utilities are obligated to make its electric wires and poles safe roosts for federally protected eagles and hawks. See United States v. Moon Lake Elec. Ass'n, 45 F. Supp. 2d 1070 (D. Colo. 1999). This case marks the first time that a court has found that the Migratory Bird Treaty Act and the Bald and Golden Eagle Protection Act could form the basis for criminal prosecution of a utility whose equipment electrocutes birds.
Background
Eagles, hawks, owls and other large raptors frequently use power poles for roosting and to spot prey. The birds can be electrocuted if their wingtips complete an electric circuit by touching unprotected electrical contracts during landing or takeoff. Smaller species are also at risk though they are less likely to complete a current given the separation of wires and the smaller wingspan. Electrocutions can be prevented by installing insulating material and devices to keep the birds from perching near exposed conductors.
The Case of Moon Lake Electric Association
In Moon Lake, Moon Lake Electric Association ("Moon Lake"), a Utah-based rural electric cooperative was sentenced on Thursday, August 12, 1999, in connection with the electrocution of 17 raptors that landed and died on the company's equipment over a three-year period. Moon Lake provides power to residential and commercial customers in Utah and Colorado. The government charged that from 1995 through 1997, 17 hawks and eagles were electrocuted after landing on Moon Lake's equipment. In 1998, Moon Lake was charged with a total of 13 misdemeanor violations of the Migratory Bird Treaty Act and the Bald and Golden Eagle Protection Act.
Moon Lake moved to dismiss the charges, arguing that the laws it was charged with violating were intended to prevent illegal hunting, not the passive conduct of a company whose equipment may occasionally kill a protected bird. However, after the court denied Moon Lake's request and found that the laws could be used to prosecute the cooperative, Moon Lake plead guilty in April 1999 to three charges filed under each of the two statutes. Under a plea bargain, Moon Lake will serve three years probation, pay $100,000 in penalties and retrofit its utility lines and poles to prevent further bird electrocutions.
During the three-year probation period, Moon Lake must implement a protection plan aimed at mitigating the danger to raptors and other migratory birds posed by its electric poles, lines and equipment in Colorado and Utah. The U.S. Fish and Wildlife Service, the Colorado Division of Wildlife and the Utah Division of Wildlife Resources, the agencies that originally investigated the violations, will assist Moon Lake in implementing its plan.
Implications
This case sends a strong message to the electric utility industry to use existing technology to protect the nation's birds from being electrocuted on power lines. In keeping with this message, the U.S. Fish and Wildlife Service has stated that it will work with utilities wherever possible but will continue to refer cases for prosecution when it becomes necessary. Thus, utilities should check their equipment for potential areas that may pose hazards for birds and consider contacting the U.S. Fish and Wildlife Service and/or their respective state wildlife agency to ensure all protective steps have been taken.