Electricity Issues
FERC Orders Refunds for June and July Sales Into California
The Federal Energy Regulatory Commission recently ordered refunds for all June and July, 2001, California and WSCC wholesale sales above the mitigated price. The two orders reject the submitted cost justifications for a variety of reasons. On June 19, 2001 FERC set out the justification criteria, disallowing credit-risk premiums and emissions costs.
On October 5, FERC rejected cost justifications submitted by Dynegy, Reliant, Mirant, and Williams for July, 2001 wholesale sales into California and ordered refunds of sale amounts above the mitigated price. (FERC Docket No. EL00-95-012). This order is nearly identical to the one issued on September 7, 2001 rejecting the submitted justifications and ordering refunds for June, 2001 wholesale sales into California above the mitigated price. (FERC Docket No. EL00-95-012). All California and WSCC sellers who have wholesale power transactions above the mitigated price are affected by these orders even though only three or four large companies are named outright in the orders. FERC named the companies that had submitted justifications, rejected the justifications and ordered them to refund the difference between the sale price and the mitigated price. Although they are not named, all other WSCC and California sellers must remit these refunds as well. The order indicates that to avoid having to refund sales above the mitigated price in June or July of 2001 is for FERC to approve a cost justification submitted before the deadline. If cost justifications, even timely ones, are not approved then the sellers are only entitled to the mitigated price.
FERC to Act on Generator Interconnection Issues
FERC announced at its October 12, 2001 open meeting that it plans to take steps to ease the interconnection process and ensure that new generators have access to the transmission grid. In a two-step rulemaking process, the Commission plans to develop and adopt national standard procedures for the interconnection of generation, to minimize the negative impact the interconnection process may have on the development of new generation. In the first phase of the rulemaking, FERC will issue a notice of proposed rule ("NOPR") addressing contract and product issues. According to the FERC Interconnection Study Team, this short turn-around NOPR will propose a modified version of the Electric Reliability Council of Texas' ("ERCOT") standard generation interconnection agreement and procedures. This NOPR will propose a minimum set of interconnection standards and define standard interconnection products. The proposal will also include a "strawman" interconnection agreement that interested parties can use as a starting point in developing a final standard and set of procedures. FERC says that a final rule could be in place within 120 days of the issuance of the NOPR. This final rule would be applicable nationwide, although the FERC might entertain proposals by RTOs/ISOs to modify the standards to reflect regional practices that benefit the market.
In the second step, FERC will issue a second NOPR addressing the assignment of responsibilities and costs of interconnections and related system up-grades. This proposal will consider how cost responsibility rules affect the incentives of generators and transmission operators to provide access to the transmission grid. Preliminary indications are that FERC will assign more costs to the transmission-owning facilities.
This anticipated rulemaking comes on the heels of recent FERC action clarifying the nature of interconnection service. In Tennessee Power Co., 90 F.E.R.C. & 61,238 (2000), the FERC determined that interconnection is an element of transmission service which must be offered under the terms and principles of Order No. 888, the 1996 rule mandating open, non-discriminatory access to public utility controlled transmission. Following this decision, FERC encouraged (but stopped short of requiring) transmission providers to include a set of standard interconnection procedures and criteria, including a standard interconnection agreement, in their open access transmission tariff. While many providers responded to FERC's encouragement, the Interconnection Study Team found that uncertainty and a lack of uniformity need to be addressed further.
Independent Transmission Company Application Filed with FERC
A new proposal for an independent transmission company ("ITC"), TRANSLink Transmission Company, LLC, was filed with the Federal Energy Regulatory Commission ("FERC") on September 28, 2001 (FERC Docket Nos. EC01-156, ER01-3154). If approved, the new company would own or exercise functional responsibility over the transmission systems of several public utilities in the Midwest and Southwest. The utilities include Alliant subsidiaries IES Utilities and Interstate Power Company, MidAmerican Energy Company, and Xcel affiliates Northern States Power Company - Minnesota, Northern States Power Company - Wisconsin, Public Service Company of Colorado, and Southwestern Public Service Company (Texas). The Nebraska Public Power District, Omaha Public Power District and Corn Belt Power Cooperative are also participants.
The filing entities state that the new ITC will be "the vehicle" by which the included utilities will participate in an RTO, beginning with the Midwest ISO's RTO. They describe the proposal as building "upon the Commission's conceptual approval of the creation of ITCs in a 'binary' relationship to an RTO." The new ITC bills itself as a bridge between the eastern and western interconnections, and a means by which new RTOs in the West can interconnect seamlessly with the Midwest ISO-RTO. The filing also describes what it calls its "unique" open access transmission tariff that will work in connection with the Mid-Continent Area Power Pool ("MAPP"), Mid-America Interconnected Network ("MAIN"), and the Midwest ISO. The proposal expands the Midwest ISOs proposed RTO by bringing in the transmission assets of Nebraska Public Power District and Omaha Public Power District.
WSCC and Other Transmission Groups Combine Functions in a New Western Electric Coordinating Council ("WECC")
A September 27, 2001 Federal Energy Regulatory Commission ("FERC") order grants the Western Systems Coordinating Council ("WSCC"), the Western Regional Transmission Association ("WRTA"), and the Southwest Regional Transmission Association ("SWRTA") the authority to transfer certain common functions to a new Western Electric Coordinating Council ("WECC"), but stops short of granting the organizations a blanket approval to merge. (FERC Docket No. EL00-74, ER01-2058).
On May 3, 2001, WSCC, WRTA and SWRTA filed a petition for a declaratory order from the Commission stating that either (1) no FERC action would be required for the entities to voluntarily merge into a single successor organization, WECC, or (2) authorizing the transfer to WECC of functions currently performed by all the organizations. The order authorized the transfer of functions to WECC and directed changes to a governance proposal for the new WECC and further filings to complete the approved transfer of functions.
WRTA and SWRTA are Regional Transmission Groups ("RTGs") established to promote efficient use of existing transmission, resolve transmission access disputes, and coordinate expansion planning. WSCC is a voluntary regional reliability council providing a forum for addressing electric system reliability in the Western Interconnection. The groups executed a merger agreement in late April to absorb WRTA and SWRTA into the WSCC, who would adopt new bylaws and change its name to WECC. The purpose of the merger is to consolidate the groups' functions, eliminate duplication of efforts and create a single organization to improve coordination in the Western Interconnection.
The Commission allowed the transfer of common functions to the WECC but refused to issue a blanket declaratory statement that it had no jurisdiction over the transaction. FERC refused to completely deny jurisdiction because despite the voluntary participation, the WSCC administers certain FERC required functions. FERC declared that since the merger changes the entity responsible for carrying out those functions and relates to transmission service provided by public utilities the parties should file the WECC by-laws for approval under the Federal Power Act. The order also approved the WECC governance structure, but it required the removal of provisions that might allow non-affiliated, non-stakeholder directors to hold financial interests in a member of the WECC or in a bulk power user in the Western Interconnection.
FERC Holds Workshops on RTO's
The Federal Energy Regulatory Commission ("FERC") held workshops last month on the core issues surrounding the development of electric markets in systems controlled by Regional Transmission Organizations ("RTOs"). The workshops, held from October 15 to October 19, 2001 at the FERC headquarters in Washington D.C., covered several topics. Among the issues discussed were what RTO markets will be mandatory, what optional markets an RTO may establish, transmission management, rights, planning and expansion, cost recovery, standardization of tariffs and markets, market monitoring, and market power.
According to FERC, these workshops are likely to lead to a rulemaking on market design and structure that will include a pro-forma tariff applicable to all public utilities and RTOs. While the formal rulemaking process will include an opportunity for public comment, FERC is accepting written comments within 15 days of the completion of the workshops.
Utilities File Southwest Region RTO Proposal
On October 15, 2001, Arizona Public Service Company, El Paso Electric Company, Public Service Company of New Mexico, and Tucson Electric Power Company jointly filed with the Federal Energy Regulatory Commission ("FERC") an Order 2000 compliance filing and Joint Petition for Declaratory Order to form WestConnect, LLC, a Southwest region Regional Transmission Organization ("RTO") (FERC Docket Nos. EL02-9, RT02-1). Although they are not subject to FERC's jurisdiction, the Salt River Project, Western Area Power Administration and Southwest Transmission Cooperative also participated in this filing. The participants intend WestConnect to be the framework for the west-wide RTO envisioned by the FERC.
WestConnect evolved from the prior Desert STAR RTO proposal and incorporated the operating protocols developed during that negotiation process. This proposal gives WestConnect the power to construct and own new transmission facilities both before and after acquiring complete ownership of the participant's transmission assets. The plan's transmission rate terms include a "license plate rate" system for the first seven years of its tariff.
Encouraged by FERC's recent approval of for-profit RTO proposals, the applicants adopted a for-profit governance structure rather than the non-profit structure that its predecessor, Desert STAR, was based on. The for-profit structure would allow participants either to transfer operational control of their transmission assets to an RTO while holding a passive ownership interest or to transfer asset ownership to the RTO in return for cash or equity. The WestConnect applicants claim this structure is necessary because none of the WestConnect applicants can divest their transmission assets at this time due to the current status of electric restructuring in the Southwest.
NMPRC
New Mexico PRC Investigates Impact of RTO Participation
On September 18, 2001, the New Mexico Public Regulation Commission docketed an official investigation into the effects of deregulation and RTO participation on the Commission's jurisdiction and related issues. (Order Docketing Investigation in Utility Case No. 3653). As a result, the PRC will investigate: 1) the need for a RTO; 2) the impact on Commission jurisdiction of RTO participation; and 3) the RTO impact on the operation and reliability of the transmission system. The PRC, Southwestern Public Service Company (SPS), Texas-New Mexico Power Company ("TNP"), Public Service Company of New Mexico ("PNM"), and El Paso Electric Company ("EPE") to file a pleading and a report, both with supporting testimony. The report must cover all aspects of their planned RTO participation and must include: 1) the utility's position regarding RTO membership; 2) the impact of this membership on Commission jurisdiction generally and over utility transmission facilities and rates; 3) an assessment of the current transmission system's adequacy, any identifiable need to upgrade and any plans to do so; 4) each utility's opinion of how RTOs will affect transmission reliability, operation, and the ability to construct new transmission lines in NM and between NM and surrounding states. All filings are due to the PRC by October 26, 2001.
The PRC also requested more information about the for-profit, Transco, and the not-for-profit, ISO, RTO organizational models, and SPS, TNP, PNM and EPE were ordered to provide information on their intent to form a Transco. The requested information includes: the possible effects on the PRC's jurisdiction; the Transco's purpose; its proposed membership; proposed geographical coverage; and alternatives to a Transco. This information is also due by October 26, 2001. Lastly, the order requires all electric utilities serving New Mexico to obtain PRC approval for any action that could affect the Commission's jurisdiction such as transferring control or operation of its New Mexico transmission assets.
The PRC order also addresses concerns arising from events that expand FERC jurisdiction and events that could affect the price and reliability of transmission in New Mexico. The PRC noted that there are several indications that FERC's oversight is expanding at the expense of local control. The PRC stated that deregulation will convert many retail transactions between utilities and standard-offer consumers into wholesale transactions between the distribution utility and wholesale generators or transmission providers. Since FERC has jurisdiction over wholesale sales, this retail - wholesale conversion will expand its oversight. In addition to retail sales, the PRC is concerned that local transmission could also move into FERC jurisdiction. If FERC succeeds in implementing nationwide RTO participation, local transmission that is currently regulated by the states will become indistinguishable from FERC-regulated interstate transmission. Once the local/interstate transmission distinction disappears, FERC rules and rates will apply to all transmission. Since RTO participation is proceeding on a different timeline than deregulation in New Mexico, the PRC fears it could lose jurisdiction over utility transmission assets before electric restructuring is implemented. This earlier loss of jurisdiction will occur if IOUs transfer operational control over their transmission assets to an RTO before New Mexico implements deregulation.
Finally, the PRC states that although FERC's authority to require RTO participation is questionable, it has made it clear that it wants a west-wide RTO covering all eleven states in the Western Interconnection, including California. There is no information on the consequences of including California in a west-wide RTO; however, the PRC worries that California's recent electricity troubles could potentially jeopardize reliability for the other ten states in a west-wide RTO.
Inquiry into Electric Energy Principles Initiated by NM PRC
In late September, the NM PRC began an inquiry into policy principles for electric energy. (Utility Case No. 3668). Draft principles are open for comment until the end of October. The principles address many concerns brought to light by California's deregulation crisis and generally fall into a few basic categories like supply and demand, reliability, cooperation, and regulation.
The Commission's proposed principles are designed to avoid a supply crisis and enhance the reliability of affordable service. Adequate generation or long-term power contracts to protect consumers from short-term market fluctuations, encouraging new generation and transmission, economic incentives and conservation measures form the Commission's proposed foundation for averting a supply crisis. The conservation effort would include redesigned retail rates and new metering technology to allow consumers to manipulate their usage in response to market signals. The principles also emphasize increasing access to federal, tribal, and state lands by increasing governmental cooperation.
Several reliability-related principles are included. The principles call for a thorough analysis of New Mexico's transmission system's capacity and constraints, which is consistent with the investigation into RTO issues the NM PRC recently initiated. They also call for diverse generation sources as a way to hedge against market and fuel price fluctuations. The principles also push for adequate distribution facilities to ensure reliable delivery. The enhanced infrastructure would be accompanied by new rules establishing power quality standards as well as by penalties or customer compensation provisions. Finally, the principles would require native generators to provide emergency power on a least cost basis.
Restrictions on PNM's Holding Company Remain in Place, Appeal Pending in Supreme Court
In Utility Case No. 3137, the New Mexico Public Regulation Commission ("NM PRC") recently denied PNM's request to rehear and remove six of the conditions it had placed on the holding company PNM is forming. The PRC conditions include safeguarding its jurisdiction over PNM, monitoring business activities, and merchant plant financing.
The NM PRC used the public interest language in SB 266, the authorizing statute, to justify the restrictions on PNM.
PNM wanted the following six conditions removed:
- The condition prohibiting PNM from paying dividends in excess of annual net earnings without prior commission approval.
- The condition prohibiting PNM from having subsidiaries.
- The condition requiring PNM to submit strategic and other business plans of affiliates engaged in unregulated activities to the PRC.
- The condition that PNM's merchant plant activities under SB 266 are not exempt from the class II transaction provisions of Rule 450.
- The condition requiring PNM to waive federal preemption of costs.
- The condition that the PRC will assume all ratemaking authority of the SEC if the Public Utility Holding Company Act is repealed.
By requiring PNM to waive federal preemption of costs, the NM PRC effectively retains jurisdiction over PNM's rates. The PRC's assumption of SEC ratemaking authority, in the event that Congress repeals PUHCA, not only safeguards PRC jurisdiction but also expands it. PNM feels that the dividend, disclosure and subsidiary conditions will make it unattractive to investors and make it harder for the company to compete with more flexible merchant generators. Similarly, without a Rule 450 exemption, it could be more difficult for PNM to out maneuver its competitors in the hunt for profitable business opportunities.
PNM has filed an appeal in the New Mexico Supreme Court.
NM PRC Closes PNM's Merchant Plant Filing Case But Continues Review of NM Utilities' Merchant Plant Activities
The New Mexico Public Regulation Commission ("NM PRC") has continued to consider the plans filed by in-state utilities for transition to a competitive environment. The Commission issued several orders requiring New Mexico utilities to file pleadings concerning their plans for merchant plants.
Originally, the Commission issued a March 27, 2001 order to Public Service Company of New Mexico ("PNM") in its transition plan case (Utility Case No. 3137) to submit a pleading addressing its plans to construct merchant plants under a recently passed law allowing utilities in the state to construct merchant generation free from regulation. PNM submitted its "Merchant Plant Filing" on July 25, 2001, under a new docket number (Utility Case No. 3657). Several intervenors opposed the filing because it was filed under a new docket number and because the filing included objections to an earlier PRC holding company order containing several restrictions that PNM believes would hamper its ability to engage in merchant plant activities. Those objecting to PNM's filing believed that it did not satisfy the requirements set out in the PRC's March 27, 2001 Order, and should have been supported with prefiled testimony.
On October 2, 2001, the NM PRC ordered PNM's filing back into Case No. 3137, and closed Case No. 3657 saying its March 27 Order did not "require or authorize PNM to make its Merchant Plant Filing in a new docket." The October order also required PNM to file testimony on issues identified by staff and intervenors related to merchant plant activities including a description of PNM's plans to meet its obligation to provide service.
The NM PRC also issued orders on October second requiring Southwestern Public Service Company and Texas-New Mexico Power Company to submit similar filings regarding their planned merchant plant activities. El Paso Electric Company, the state's other jurisdictional public utility, had been previously asked to submit such a filing.
Gas Issues
FERC
FERC Finds El Paso Energy Did Not Exercise Natural Gas Market Power
On October 9, 2001 FERC dismissed the market power complaint against El Paso Pipeline and its affiliate, El Paso Merchant. (FERC Docket No. RP00-241-000). The California PUC had complained that El Paso illegally used its market power to raise the price of natural gas coming into California last year. The order cited demand pressures like the lack of hydro-power from the Northwest, the concomitant cold snap on the East coast, the Carlsbad pipeline explosion and California's electricity supply shortage as factors that contributed to the natural gas price spike in 2000. Due to these outside circumstances and to the fact that El Paso was operating at or close to maximum capacity throughout the shortage, FERC found that the record contained no clear indication that El Paso had exercised its market power.
Although it dismissed the market power allegations, FERC did find that El Paso Pipeline and El Paso Merchant used their affiliate relationship to El Paso Merchant's advantage during the bidding process for the capacity at issue. While the bidding was still open El Paso Merchant had negotiated a long-term discount from El Paso Pipeline for part of the capacity. Although pipeline companies are required to immediately publish this kind of discount, at El Paso Merchant's request, El Paso Pipeline postponed publishing until after El Paso Merchant had won the bid. FERC found that this late disclosure violated parts F and G of FERC's Standard of Conduct for affiliate transactions.
NMPRC Holds Hearings on Pipeline Safety
The New Mexico Public Regulation Commission is considering adopting new regulations addressing pipeline safety in New Mexico. On May 10, 2001, the PRC issued a Notice of Inquiry ("NOI"), and public hearings were recently convened in Farmington, Carlsbad and Hobbs to take evidence and receive comments.
During the 2001 session, the New Mexico Legislature amended the state Pipeline Safety Act to force the Commission to establish minimum safety standards for the transportation of gas, oil and hazardous liquids, and the design, construction, operation and maintenance of pipelines. Previously, the law gave the Commission the power to issue standards, but did not require that it do so. The amendment also adds language stating that any rules adopted under the Pipeline Safety Act must "substantially" conform to federal pipeline safety rules.
The NOI lists several specific points the Commission is interested in collecting information about, including: pipeline company programs designed to protect the public and the environment and educate the public on pipeline hazards, pipeline company efforts in maintenance and inspection to ensure existing pipeline system integrity, technology for inspecting underground facilities, future anticipated technology for the inspection of pipelines, and maps and records of pipeline companies.
The Commission has given no indication as to when it will complete its investigation and whether it might issue proposed new pipeline safety rules.
Utilities, Energy and Telecommunications Law
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