FERC REAFFIRMS FINAL RULE PROMOTING TRANSMISSION INVESTMENT THROUGH PRICING REFORM
On December 22, 2006, the Federal Energy Regulatory Commission ("FERC" or "the Commission") issued Order No. 679-A, essentially reaffirming on rehearing its July 20, 2006 Final Rule that, pursuant to the Energy Policy Act of 2005 ("EPAct 2005"), promotes transmission investment by establishing incentive-based rate treatments for electric transmission by public utilities. Various entities had argued that the Final Rule was too permissive in offering rate incentives. The Commission partly agreed, but explained that Order No. 679-A does not intend to "depart from a fundamental commitment to provide incentives to support the development of transmission infrastructure." The Commission accordingly maintained the Final Rule’s rate incentives, though it modified the way they are to be applied.
First, the Commission agreed that the Final Rule erred in unqualifiedly establishing a rebuttable presumption that some review processes, such as state siting approvals, satisfy the requirement that a project promotes reliability or reduces congestion. Instead, Order No. 679-A now provides that such a rebuttable presumption would apply only if the applicant can show that the review process included a determination that the project is necessary to ensure reliability or reduce congestion.
Second, protestors had argued that the Commission’s requirement that applicants demonstrate a nexus between the incentive being sought and the investment being made was not "sufficiently rigorous to protect customers." The Commission agreed that by allowing the nexus test to be separately applied to each incentive, rather than to the package of incentives as a whole, the Final Rule could enable an applicant to seek incentives that reduce project risks and yet request an enhanced rate of return on equity ("ROE") for greater risk. Accordingly, Order No. 679-A instead requires applicants to demonstrate that "the total package of incentives is tailored to address the demonstrable risks or challenges faced by the applicant in undertaking the project."
Third, the Commission clarified that it does not intend to routinely grant ROE rates at the top end of the zone of reasonableness. Rather, applicants will be required to justify a higher ROE under the nexus test and where in the zone of reasonableness that return should lie. Significantly, the Commission stated that it would "entertain requests for a specific ROE determination in a petition for declaratory order" because the Commission recognizes the difficulty of enticing investors without providing certainty regarding the ROE.
Order No. 679-A will be effective 30 days after publication in the Federal Register.
FERC CONDITIONALLY APPROVES PJM’S RPM SETTLEMENT INTENDED TO ENSURE ADEQUATE POWER SUPPLY
On December 21, 2006, FERC approved, with conditions, a settlement filed by PJM Interconnection, L.L.C. ("PJM") concerning PJM’s Reliability Pricing Model ("RPM") that is intended to ensure reliability and provide for just and reasonable rates within PJM. FERC stated that PJM’s current energy markets do not provide for sufficient revenue to assure reliability, but that the settlement, with minor changes, would provide reliable energy supplies within PJM at just and reasonable rates, and increase PJM’s ability to meet its reliability obligations while reducing costs.
The five main elements of PJM’s RPM are: creating 23 Locational Delivery Areas for the determination of prices on an incremental basis through 2010-2011; requiring each company providing electricity to customers throughout PJM to supply or purchase sufficient resources to meet the reliability targets for its service areas through generation, transmission, or demand response; setting prices through an auction market based on the amount of supply within each localized area using a downward sloping demand curve to ensure that prices change gradually based on the amount of supply offered and the amount required for reliability; increasing the opportunities for competition by requiring companies to contract with suppliers three years in advance to ensure that reliability goals are met and that generators have sufficient revenue; and adding design features to discourage the exercise of market power and increase competition from new entrants.
FERC conditioned its approval on PJM’s filing of changes to eliminate discrimination between signatories and non-signatories of the settlement; removing inappropriate grants of discretion to the PJM Market Monitor; and revising the tariff to enable a greater number of resources to receive expedited cost recovery treatment. PJM was also directed to conduct a forum to identify and remedy barriers to demand response entry, and to file a report on the status of the additional process for pursuing demand response and incorporating energy efficiency applications.
FERC LAYS OUT POLICY ON ASSESSING CIVIL PENALTIES
On December 21, 2006, FERC issued a Policy Statement providing guidance on the process for implementing EPAct 2005’s authorization of civil penalties up to $1 million per day for each violation of rules, regulations, and orders issued under the Federal Power Act ("FPA"), the Natural Gas Act (NGA"), and the Natural Gas Policy Act ("NGPA") of 1978. In all cases, the Commission will issue a notice of the violation and the proposed penalty, and will give the responsible entity time to respond. For violations of Part II of the FPA (on electric power and transmission rate regulation), the entity can elect to either be assessed a penalty immediately or seek a hearing before an Administrative Law Judge ("ALJ") . For violations of Part I of the FPA (on hydropower regulation), the process depends on whether it does not involve any violation of a final compliance order: absent a compliance order, the respondent can also elect to either be assessed a penalty immediately or seek a hearing before an administrative law judge; but if a compliance order is involved, the Commission will require a hearing before an ALJ. For violations of the NGA, there will be either a paper hearing or an ALJ hearing. For violations of the NGPA, there will be only a paper hearing.
Penalty assessments under the FPA and the NGPA are subject to de novo review in a U.S. District Court, but no such District Court review is provided for penalties assessed under the NGA. On the other hand, when a hearing before an ALJ is held pursuant to the FPA or the NGA, an adverse Initial Decision can be subject to exceptions to the Commission, and an adverse FERC decision can be the subject of a rehearing request. Under all the statutes, the civil penalties affirmed by either a U.S. District Court or by the Commission can be appealed to the United States Court of Appeals.
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