Legal Framework for Electricity And Gas Regulation: A Quick 45-Minute Tour Energy Markets and Regulation March 15, 2007 Washington, D.C. Douglas W. Smith 1050 Thomas Jefferson Street, NW Seventh Floor Washington, DC 20007 (202) 298-1902 DWS@vnf.com Van Ness Feldman, P.C. www.vnf.com Millennium Tower 719 Second Avenue, Suite 1150 Seattle, Washington 98104 (206) 623-9372
The Rise of State Regulation Early 1900 s, states began to take steps to regulate electric service. Franchise: Individual electric companies were granted the right to be the exclusive provider of electric service in a designated territory Regulatory Compact: In exchange for monopoly franchise, utility submitted to regulation by the state: Regulated rates established by the state Service obligation State Regulatory Commissions: Established to oversee local utilities 2
Gaps in State Regulation Lead to Federal Legislation In 1927, Supreme Court ruled that interstate sales of power are beyond the constitutional reach of the states to regulate, under a Dormant Commerce Clause analysis. Public Utilities Commission of Rhode Island, et al. v. Attleboro Steam & Electric Company, 273 U.S. 83 (1927). In 1935, to address the Attleboro gap and the abuses of utility holding companies, Congress enacted the Public Utility Act: Title I - the Public Utility Holding Company Act (PUHCA), regulating the structure and activities of public utility holding companies. Title II - added Parts II and III to the newly-renamed Federal Power Act, regulating wholesale sales of electric energy and transmission of electric energy in interstate commerce. 3
Part II of the Federal Power Act Key FPA functions are: Establishing and maintaining rates that are just and reasonable, Policing against undue discrimination, and Ensuring merger and acquisition activity is in the public interest Established the Federal Power Commission (now the Federal Energy Regulatory Commission) as independent regulatory body 4
Overview of FPA Jurisdiction Includes: Transmission of electricity in interstate commerce Wholesale sales of electricity in interstate commerce Excludes: Distribution Generation Retail sales Sales or transmission not in interstate commerce Also excludes, for some purposes: Government-owned utilities RUS-financed and small cooperatives 5
In Interstate Commerce Doesn t matter if sale or transmission is in a single state, if it is on the interstate grid. FPC v. Florida Power & Light, 404 U.S. 453 (1967); FPC v. Southern California Edison Co., 376 U.S. 205 (1964). Excludes only Hawaii, Alaska and ERCOT. 6
Dividing Line Between FERC and State Jurisdiction Key limitation on State regulation is now preemption by the Federal Power Act, not dormant Commerce Clause limitation. Arkansas Electric Co-op. v. Arkansas Public Service Commission, 461 U.S. 375 (1983). FERC s jurisdiction over transmission and sales at wholesale in interstate commerce is plenary, preemptive, and non-discretionary. E.g., FPC v. Southern California Edison, 376 U.S. 205 (1964); Mississippi Power & Light Company v. Mississippi ex rel. Moore, 487 U.S. 354 (1988) (prudent wholesale power costs must be passed through in retail rates). 7
Rate Requirements Under FPA 205 FERC has authority over rates, terms, and conditions of jurisdictional service, as well as any rule, regulation, practice or contract affecting such rates, terms, and conditions of service. Section 205 requires that rates, terms, and conditions of jurisdictional service, as well as any rule, regulation, practice or contract affecting such rates, terms, and conditions of service, be: Just and reasonable. FPA 205(a). Not unduly discriminatory or preferential. FPA 205(b). On file at FERC. FPA 205(c) and (d). 8
Rate Changes Under FPA 206 Under FPA 206(a), FERC may, on its own motion or upon complaint, investigate whether any rate, term, or condition is unjust, unreasonable, or unduly discriminatory. If FERC finds that any rate, term, or condition is unjust, unreasonable, or unduly discriminatory, then FERC must determine and establish a just, reasonable, and non-discriminatory rate, term, or condition. 9
Rates Standards Unjust and unreasonable rates and charges are unlawful. FPA 205(a). No single formula determines when rates are unjust and unreasonable. Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944). Rather, rates must fall in a zone of reasonableness. Not exploitive of consumers Maintains financial integrity of utility Prudence review evaluates whether costs were prudently incurred, and thus can be included in cost-of-service rate calculations. Market-based rates are lawful where FERC finds that a seller cannot exercise market power. Undue discrimination is prohibited. FPA 205(b). Discrimination is unlawful when similarly situated customers are treated differently. Focus is often on whether utility is preferring affiliates over non-affiliates 10
Filed-Rate and Mobile-Sierra Doctrines Filed Rate Doctrine A utility may collect only the rates, and may only enforce the terms and conditions of service, reflected in its filed rate schedule. Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571 (1981). Preemptive effect of FERC filed rate limits state authority to second-guess just and reasonable finding Corollary - Rule against retroactive ratemaking prevents the Commission itself from imposing a rate increase or decrease for power already sold. Mobile-Sierra Doctrine Public interest standard used in lieu of just and reasonable standard to evaluate proposals for unilateral changes to contract between utility and purchaser, unless contract provides otherwise. See United Gas Pipeline Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956); FPC v. Sierra Pacific Power Co., 350 U.S. 348 (1956). Recent Ninth Circuit cases limit applicability of Mobile-Sierra in electricity markets that are not well-functioning 11
Public Utility Mergers FERC s approval is required for public utility mergers, consolidations, and dispositions of jurisdictional facilities. FPA 203. Transactions evaluated under a public interest test. Market power assessment dominates merger evaluation. FERC jurisdiction over mergers under 203 are not exclusive; reviews under Federal antitrust laws and state utility statutes also apply. 12
Open Access Transmission Mandatory wheeling orders under FPA 211 212 may be granted on a case-bycase basis against electric utilities Authority granted in Energy Policy Act of 1992 FERC s Order No. 888, issued in 1996 Requires transmission-owning public utilities to offer transmission services under an Open Access Transmission Tariff (OATT) OATT recently modified in Order No. 890 Order No. 888 was issued under FPA 206, not FPA 211 and 212 FERC Order No. 2000 encouraged the formation of regional transmission organizations (RTOs) Designed to provide for independent, region-wide operation and planning of transmission grid 13
Power Market Oversight Market-Based Power Rates Expansion of MBR through the 1990s Reined-in after California crisis Market Behavior Rules EPAct/05 - Market Manipulation Provisions Ongoing reforms of market power test Mergers and Acquisitions Market power test is key to public interest evaluation 14
Electricity Title of EPAct/05 Reliability Backup siting authority for transmission facilities Incentives for transmission investment Extension of open access transmission requirements ( FERC Lite ) Native load protection Expansion of FERC merger authority PUHCA repeal PURPA reform Prohibitions on market manipulation and false statements Expansion of FERC civil penalty authority 15
Natural Gas Act Many parallels to FPA in statutory framework Longer history of deregulated wholesale sales market and open access transportation Sales price deregulation implemented because regulatory failures were causing supply problems 16
Comparison of Key Features Federal Power Act Initially Enacted: 1935 Regulatory Functions: Regulate rates for wholesale sales and transmission (FPA 205,206) Regulate mergers and acquisitions (FPA 203) ---- Jurisdiction: No generation, distribution or retail sales Only activity in interstate commerce Excludes governmental entities Natural Gas Act Initially Enacted: 1938 Regulatory Functions: Regulate rates for wholesale and transportation (NGA 4,5) ---- Require certificates of public convenience and necessity for facilities and services (NGA 7) Jurisdiction: No production, gathering, or local distribution Only activity in interstate commerce Excludes governmental entities 17
FERC Jurisdiction Under NGA FERC regulates: The transportation of natural gas in interstate commerce; Sales of natural gas for resale (wholesale sales) in interstate commerce; and Natural gas companies engaged in these activities 18
Key Regulatory Concepts Transportation rates, terms and conditions must be just and reasonable and not unduly discriminatory. Cost-of-Service Ratemaking: Pipelines charge cost-based rates that recover from customers the costs the pipeline incurs to provide service. No Undue Preference: Pipelines are prohibited from granting any customer an undue preference in providing service, either with respect to rates charged or the terms and conditions of service. 19
NGA Section 4 Parallel to FPA 205. A pipeline seeking to change rates, terms or conditions of service must obtain approval from FERC under NGA section 4. The pipeline bears burden of proving that its rate proposal is just and reasonable and not unduly discriminatory or preferential. 20
NGA Section 5 Analogous to FPA 206. FERC or third party may seek to modify existing pipeline rates or tariff under NGA 5. FERC or complainant bears burden of showing that existing rate or tariff is no longer just and reasonable. 21
Pipeline Construction: Section 7 FERC authorizes the construction and operation of interstate natural gas pipelines and gas storage facilities under 7. FERC issues certificates of public convenience and necessity which contain environmental and operating conditions. No analog in FPA 22
Open Access Policies Unbundled Service: In the 1980s and 1990s, FERC required pipelines to unbundle gas sales from transportation services, so that customers could buy gas supply and transportation services separately Pipelines required to provide customers open access to their transportation systems 23
Current Issues Adequate natural gas supplies Building adequate infrastructure to get supplies from production areas to markets Alaska pipeline LNG terminals Pipeline infrastructure Natural gas storage capacity High natural gas prices Policing market manipulation Pipeline safety and infrastructure security 24
Resources 25 EPAct/05: CCH, Energy Policy Act of 2005; Law and Explanation (2005) CCH, Energy Tax Incentives Act of 2005 and Safe, Accountable, Flexible Efficient Transportation Equity Act of 2005: Law, Explanation and Analysis (2005) Redline/Strikeout version of FPAhttp://www.vnf.com/content/articles/fparedline.doc Redline/Strikeout version of NGAhttp://www.vnf.com/content/articles/ngaredline.doc FERC Activity: FERC website - http://www.ferc.gov VNF website - Alerts on key FERC actions: http:/www/vnf.com/articles.htm Energy Law Overview: Tomain and Cudahy, Energy Law in a Nut Shell (2004).