Overview of Federal Energy Legal

Overview of Federal Energy Legal Practice Office of the General Counsel Federal Energy and External Issues Group June 11, 2009

What is FERC? In 1977, the Federal Power Commission, in operation since 1920, was retired and was succeeded by the Federal Energy Regulatory Commission (FERC) an agency with a name more reflective of the increasingly expansive authority of the organization. FERC is part of the Department of Energy. It has the powers inherited from the FPC, as well as new duties given to it under the National Energy Act of 1978. FERC is composed of five members appointed by the President, by and with the advice and consent of the Senate. One of the members is designated by the President as Chairman. Members hold office for a term of 5 years and may be removed by the President only for inefficiency, neglect of duty, or malfeasance in office. Not more than three members of the Commission can be members of the same political party. Any Commissioner appointed to fill a vacancy occurring prior to the expiration of the term for which his predecessor was appointed shall be appointed only for the remainder of such term. A Commissioner may continue to serve after the expiration of his term until his successor is appointed and has been confirmed and taken the oath of Office, except that such Commissioner may not serve beyond the end of the session of the Congress in which such term expires. Members of the Commission may not engage gg in any other business, vocation, or employment while serving on the Commission. In carrying out its functions, the Commission has the powers authorized by the law under which such function is exercised to hold hearings, sign and issue subpenas, administer oaths, examine witnesses, and receive evidence at any place in the United States it may designate. The Commission may, by one or more of its members or by such agents as it may designate, conduct any hearing or other inquiry necessary or appropriate to its functions, except as provided in the provisions of section 556 of title 5 relating to hearing examiners. Section 7171(g). The Commission regulates the industries of electric, hydropower, gas, liquefied natural gas, and oil. This overview will focus primarily on the electric industry. 2

ICC Authority to Regulate Utilities There are regulatory lt commissions i in all 50 states, tt as well as the District i t of Columbia, Puerto Rico, and the Virgin Islands. The state commissions derive their authority from state law, so they differ from one another in their jurisdiction and authority to regulate. Authority to regulate utilities rests with the legislatures, and state commissions have only the power that the legislatures deem necessary to grant them. Generally state commissions i are granted authority to take all steps necessary to ensure that rates are just and reasonable. The j & r standard is broad and permits wide discretion. The Illinois Commerce Commission (ICC) regulates public utilities in Illinois. For electric service the largest are: Commonwealth Edison Company (ComEd), serving the Chicago area, and the Ameren Companies in Illinois AmerenCILCO, AmerenCIPS, and AmerenIP, serving central and southern Illinois. 3

ICC Role before FERC The regulated utilities in Illinois are electric utilities that engage in interstate commerce by buying power in the wholesale market to distribute to end use customers In general, intrastate utility activities are subject to state regulation, and utility activities that cross state lines (interstate) are subject to federal regulation. Because the Illinois utilities are also subject to FERC regulation, the ICC has an interest in ensuring that the Illinois utilities are treated fairly by the federal regulator, and that FERC does not impose any unduly burdensome constraints on them that could have negative impacts on consumers/ratepayers or businesses here in Illinois. i 4

FEDERAL POWER ACT Federal Power Act (FPA) Part tii Regulation of Electric Utility Companies Engaged din Interstate t t Commerce Section 201 of the FPA establishes federal regulation of transmission and sale of electric energy. The statute states: It is hearby declared that the business of transmitting and selling electric energy for ultimate distribution to the public is affected with a public interest, and that Federal regulation of matters relating to generation to the extent provided in this Part [16 USCS 824 et seq.] and the Part next following [16 USCS 825 et seq.] q] and of that part of such business which consists of the transmission of electric energy in interstate commerce and the sale of such energy at wholesale in interstate commerce is necessary in the public interest, such Federal regulation, however, to extend only to those matters which are not subject to regulation by the States. 16 USCS 824(a) (emphasis added). 5

FPA Section 205 just and reasonable rates Pursuant to FPA Section 205(c), all public utilities are required to file with FERC all rates and charges for any transmission or sale subject to the jurisdiction of the Commission, and the classifications, practices, and regulations affecting such rates and charges, together with all contracts which hin any manner affect or relate to such rates, charges, classifications, and services. These rates and charges are required to be just and reasonable and any such rate or charge that is not just and reasonable is unlawful. Traditionally, FERC has determined rates based on costs. However, FERC may also satisfy the just and reasonable standard through reliance on the market. 6

Filed Rate Doctrine Section 205(c) is the statutory basis for the Filed Rate Doctrine. Under this doctrine, a utility can claim no rate as a legal right other than the filed rate, whether fixed or merely accepted by the Commission. (NEPCO Mun. Rate Comm. v FERC, 668 F.2d 1327, 1343 (DC Cir. 1981), cert denied, 457 U.S. 1117 (1982), quoting Montana Dakota Utilities co. v. Northwestern Public Service Co.,, 341 U.S. 246, 251 (1951)). A filed rate includes the base demand and energy charges, as well as formulas such asthefueladjustment adjustment clauses andformula rates. 7

State may not trap federally mandated dcosts An electric utility company's right to a reasonable wholesale rate is the right to the rate that the FERC files or fixes, and, except for review of the FERC's orders, a court can assume no right to a different rate on the ground that, in its opinion, it is the only or more reasonable rate; this principle binds both state and federal courts, being mandated in the former respect by the United States Constitution s Supremacy Clause (Art VI, cl 2). Mississippi Power & Light v. Mississippi Ex Rel Moore, Attorney General of Mississippi, et al., 487 U.S. 354 (1988). The Supreme Court held that, a state utility commission setting retail prices must allow, as reasonable operating expenses, costs incurred as a result of paying a FERC determined wholesale price...once FERC sets such a rate, a state may not conclude in setting retail rates that the FERCapproved wholesale rates are unreasonable... Mississippi Power & Light v. Mississippi Ex Rel Moore, Attorney General of Mississippi, et al., 487 U.S. 354 (1988); Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953 (1986) (barring the State of NC from setting retail rates that did not take into account FERC s allocation of power between two related utility companies) The filed rate doctrine insures that sellers of wholesale electric power subject to the jurisdiction of the FERC can recover the costs incurred by their payment py of just and reasonable rates set by the FERC; accordingly, when the FERC sets a rate between a seller of power and a wholesaler as buyer, a state may not "trap" federally mandated costs by exercising its jurisdiction over retail sales to prevent the wholesaler as seller from recovering the costs of paying the rate approved by the FERC. Mississippi Power & Light v. Mississippi Ex Rel Moore, Attorney General of Mississippi, et al., 487 U.S. 354 (1988). 8

FPA Section 206 complaint cases and investigations FPA Section 206 allows other parties and FERC to initiate proceedings. Pursuant to a complaint or on its own motion, FERC can modify rates or terms and conditions of existing rate schedules that it finds to be unjust and unreasonable. Originally, Section 206 allowed FERC to modify rates upon its own motion or upon motion or complaint on a prospective only basis. But FERC s hearing process could be lengthy, taking a number of years during which rates could be in place that were not just and reasonable. The Regulatory Fairness Act, in 1988, enabled FERC to change rates and order refunds under Section 206 before a final order issued. For complaint cases, FERC can establish a refund effective date not earlier than the date 60 days after the filing of such a complaint nor later than 5 months after the expiration of such 60 day period. For FERC investigation cases, the refund effective date may not be earlier than the 60 days after the publication by the Commission of notice of its intention to initiate such proceeding nor later than 5 months after the expiration of such 60 day period. 9

Section 203 Mergers and sales of jurisdictional lfacilities FPA Section 203 gives FERC jurisdiction over the sale or merger of jurisdictional facilities with a particular value. In merger cases, FERC focuses on consistency with the public interest and on 6 specific terms: (1) effect of the proposed action on the Applicants operating costs and rate levels; (2) the contemplated accounting treatment, (3) the reasonableness of the purchase price, (4) whether the acquiring utility has coerced the to be acquired utility into acceptance of the merger, (5) the effect the proposed merger may have on the existing competitive situation, and (6) whether the consolidation will impair effective regulation lti either by FERC or the appropriate it state tt regulatory lt authority. Emphasis is on competitive/market power issues and alleged savings from the merger. In 1996, FERC issued a policy statement establishing criteria that it will assess when considering merger applications, including the need to be consistent with the public interest, and to account for changing market structures. FERC will also consider the effect on competitive bulk power markets and ratepayers. py 10

Section 204 Issuance of Securities or Assumption of Liabilities by a public utility FERC s authority here is narrow. Section 204(f) eliminates FERC jurisdiction where a State regulates the utility s security issues 11

Section 202 Interconnections Under FPA Section 202(b), FERC may order an interconnection after opportunity for hearing. This is a physical connection of the utility s transmission facilities with other facilities under certain limited circumstances. FERC may not require enlargement of generating facilities because of the interconnection, and it may not compel the utility to sell or exchange energy when to do so would impair its ability to render adequate service to its customers. Section 202(d) allows emergency interconnections until FERC determines whether permanent interconnection is appropriate. 12

Generator Interconnection for Large Generators (over 20 MW) Generator Interconnection Generator Interconnection for Large Generators (over 20 MW): Order on Rehearing Order No. 2003 C, issued June 16, 2005 Order on Rehearing and Directing Compliance Order 2003 B, issued December 20, 2004 Clarifying Orders Small Co ops are relieved from complying with Order 2003, issued April 19, 2004 Notice of Clarifying i Compliance Procedures, issued djanuary 8, 2004 Order on Rehearing Order No. 2003 A, issued March 5, 2004 Final Rule Order No. 2003, issued July 23, 2003 News Release, issued July 23, 2003 Live Links to the full orders can be found on the FERC web site at: www.ferc.gov 13

Section 211 and 212 wheeling The Public Utility Regulatory Policies Act of 1978 amended the Federal Power Act to incorporate new Sections 211 and 212, giving FERC limited authority to order the wheeling of electricity. The Energy Policy Act of 1992 greatly expanded FERC s authority to order wheeling. Section 211 allows any electric utility, federal power marketing agency or any other person generating electric energy for sale for resale to apply to FERC for an order requiring a utility to provide transmission services (including the enlargment of transmission capacity necessary to provide such service) Section 212 limited Section 211 transmission transactions to only wholesale transmission services retail wheeling was not mandated. Retail wheeling "is the movement of electricity, owned by a power supplier and sold to a retail consumer, over transmission and distribution lines owned by neither one." A fee is charged by the owners of the lines for letting others use them. This transaction is called retail wheeling and a wheeling charge is levied for both transmission and distribution line "rental." While FERC may not mandate retail wheeling, states may permit it. Thus some states like Illinois have retail access to competitive power suppliers, and others maintain a vertically integrated utility structure. 14

RTOs and RSCs Regional Cooperation 15

Regional Transmission Organizations In 1999, FERC Order No. 2000, which set forth the criteria for an entity to be approved as a regional transmission organization. ComEd is now a member of the PJM Interconnection, LLC (PJM), a regional transmission organization (RTO) covering 13 states, primarily on the east coast, plus the District of Columbia. AmerenCILCO, AmerenCIPS, and AmerenIP are members of the Midwest Independent Transmission System Operator, Inc. (Midwest ISO or MISO), a separate RTO covering a Midwestern regional footprint of 13 states, plus Manitoba, Canada. 16

Competitive Wholesale Electric Markets FERC established RTOs pursuant to: 1. its authority under FPA section 205 to ensure that rates, terms and conditions of transmission and sales for resale in interstate commerce by public utilities are just, reasonable and not unduly discriminatory or preferencial, and 2. its authority under section 202(a) of the FPA to promote and encourage regional districts for the voluntary interconnection and coordination of transmission facilities by public utilities and non public utilities for the purpose of assuring an abundant supply of electric energy in the U.S. 17

Order No. 2000 RTO Characteristics and functions Pursuant to Order No. 2000, FERC established minimum characteristics and functions that an RTO must satisfy. 4 Minimum Characteristics: 1. Independence 2. Scope and Regional Configuration 3. Operational authority 4. Short term Reliability 8 Minimum Functions: 1. Tariff Administration and Design 2. Congestion Management 3. Parallel Path Flow 4. Ancillary Services 5. OASIS and Total Transmission Capability (TTC) and Available Transmission Capability (ATC) 6. Market Monitoring 7. Planning and Expansion 8. Interregional Coordination 18

Regional State Committees The ICC is also a member of two Regional State Committees (RSCs): the Organization of PJM States (OPSI) and the Organization of MISO States (OMS) The RSCs, OPSI and OMS, advise their respective regional transmission organizations on a number of FERC issues transmission planning and cost allocation, market monitoring and mitigation, resource planning Those RSCs consist of the member states in the regions of the respective RTOs. As a member of OPSI and OMS, the ICC actively participates in those regional entities and in cooperation with those member states to address any FERC issues that may impact the respective regions ICC staff is actively involved in a number of working groups with members from other states across the respective RTO footprints to cooperate and coordinate efforts on a number of issues before FERC and in the respective RTO Stakeholder processes These coordinated efforts increase the voting block in RTO committees, and improve influence on matters before FERC 19

State Actions ICC Participation at FERC 20

Rule 214 Interventions Under Rule 214 of FERC regulations, 18 C.F.R. 385.214, states may intervene as a party in FERC proceedings as a matter of right except in the case of investigation matters, in which participation is more strictly limited. Intervention allows the ICC to monitor a proceeding, receive service of all pleadings filed in the docket, retain rights on appeal 21

Rule 211 Protests, Rule 212 Motions, Rule 213 Answers Protests Under Rule 211 of the FERC rules of practice and procedure, parties may protest to object to any application, complaint, petition, order to show cause, notice of tariff or rate examination, or tariff or rate filing. Filing a protest alone does not make the filer a party to the proceeding; the protestor must intervene under rule 214 to become a party to the proceeding and protect its rights on appeal. Motions Under Rule 212, a motion may be filed at any time in a proceeding Motions must be in writing, except that the presiding officer (administrative law judge) may permit an oral motion to be made on the record during a hearing or conference Motions must contain a clear statement of the facts and law supporting the motion, and the specific relief or ruling requested Answers Under Rule 213, any respondent to a complaint or order to show cause must make an answer, unless FERC orders otherwise. An answer may not be made to a protest, an answer, a motion for oral argument or a request for rehearing, unless otherwise ordered by the decisional authority (prevents endless litigation). 22

Comments Pursuant to the FERC Rules of Practice and Procedure, states may also file comments in rulemaking proceedings, and public utility compliance filings. FERC issues Notices of Proposed drulemaking on numerous issues, requesting comments from stakeholders, including state commissions. For example, it has recently requested comments on wholesale competition, as well as Smart Grid Policy. In some dockets reply comments are permitted. 23

Hearings Under Rule 502, FERC may initiate hearings to take and hear evidence on issues pending before the Commission FERC may consolidate, sever and phase proceedings or issues in a proceeding. The ICC may participate in hearings including submitting evidence, providing and cross examining witnesses, briefing issues. 24

Requests for Rehearing Pursuant to Rule 713, of the FERC rules of practice and procedure, parties, including states, may file requests for rehearing on any final decision or other final order in a proceeding. A party must file the request for rehearing within 30 days after the issuance of the final decision or order. The request for rehearing must state concisely the alleged error in the final decision or order. 25

Settlement Under Rule 601, FERC may convene a conference at any time for any purpose related to the conduct or disposition of a proceeding, including consideration of offers of settlement or the use of alternative dispute resolution procedures. Participants i t must be given due notice of the time and place of the conference. Any person appearing at the conference must be authorized to act on behalf of that person s s principal with respect to matterstoto be addressed at the conference. Failure to attend the conference constitutes a waiver of all objections to any order or rulingarisingout of, of any agreement reached at the conference. 26

Appeals/Petitions for Review Any party, including state commissions, may petition for review of any FERC order to the United States Court of Appeals, in the District of Columbia Circuit, or to any Circuit with ties to the proceeding (wherein the licensee or public utility to which the order relates is located or has its principal place of business). Appeals from FERC orders under the FPA are governed by 16 U.S.C. 825(l), as well as 28 U.S.C. 2112 and Federal Rules of Appellate Procedure ( FRAP ) 15. Section 2112 governs the process when two or more appeals are taken from a FERC decision. It was enacted to eliminate the race to the courthouse that previously typified appeals from FERC orders. Although an aggrieved party has 60 days to appeal under 825(l), venue can, and often is, established during the first 10 days under 2112. Thus, since multiple appeals are possible a party should file any appeal within 10 days of issuance of the challenged order to have a chance of establishing venue in their circuit of choice. For example, the ICC petitioned the U.S. Court of Appeals for review of a FERC decision on cost allocation for PJM Interconnection s new transmission facilities over 500 kv. The ICC filed in the 7 th Circuit located in Illinois. Other parties filed in the D.C. Circuit; the court consolidated the petitions in the 7 th Circuit and set the proceeding for briefing. 27

Establishing Venue Establishing venue plays out in three basic ways. 1. If FERC receives petitions for review in two or more Circuits within 10 days of the challenged order, FERC informs the Judicial Panel on Multidistrict Litigation of multicircuit petitions. The Clerk of the Judicial Panel on Multidistrict Litigation then randomly selects a circuit court of appeal from a drum containing an entry for each circuit where a petition for review was filed. Multiple l petitions i in a single circuit i get only a single entry in the drum. The Panel then consolidates the appeals in the designated circuit as the one in which the record is to be filed. FERC then files the record actually a certified index to the record. 2. If FERC receives only 1 petition within the 10 day period, then FERC files the record in that appellate court, regardless of whether any subsequent appeals are filed within the 60 day period. 3. If FERC receives no petition within the 10 day period, but receives one or more petitions during the time for appeal, then FERC files the record in the court where the first petition was filed. 28

QUESTIONS? Feel free to contact us at: Nora Naughton, Managing Counsel Christine Ericson, Deputy Solicitor General (312) 814 3706 29