print version

OVERVIEW OF FEDERAL ENERGY LEGISLATION
Craig Gannett
Davis Wright Tremaine

"The Mighty Columbia: What's Next"
Seattle, Washington
October 23, 2003

I. Status of the Legislation: Bills have passed both the Senate and the House, and are in conference committee. Many titles of the bill have been at least tentatively agreed to, and have been placed on the website of the Senate Energy and Natural Resources Committee. However, there are several issues that have not been resolved, including the electricity and tax titles. In many respects, the electricity title is the most important to the Northwest, so there is a big piece missing from the puzzle.

The prospects for enactment are very good. On Monday, October 20, conference Chairmen Pete V. Domenici and Billy Tauzin (the leader of the House conferees) issued a joint statement saying that the tax writers need more time, and that they will convene the conference early next week. Their statement says that they are "absolutely confident of putting a comprehensive energy bill on the President's desk this year." As of this morning, it appears that the conference will meet on Tuesday to sign the conference report, and that final passage in the House and Senate could take place as soon as Wednesday.

There is no doubt that most Republicans will vote for whatever comes out of conference, and that the President will sign it. The key is the Senate Democrats, who have been almost entirely left out of the process of resolving the differences between the bills in conference. Many Democrats are waiting to see what comes out of conference, although the provisions supporting the use of ethanol in gasoline are likely to attract enough support from Midwest Democrats to provide the 60 votes that are necessary to protect the bill from a filibuster.

It is worth noting that the last major federal energy legislation was the 1992 Energy Policy Act, which, among other things, cracked the door to non-discriminatory access to the transmission system. Bills to follow-up on the Energy Policy Act were introduced as early as 1995, so the bill that is about to become law is the culmination of eight years of debate. I don't expect to see another energy bill of this size in less than another 8-10 years.

II. Overview of the Bill: Let's start with the most controversial provisions. The drilling of the Alaska National Wildlife Area (ANWR) for oil and gas is still on the table, although it seems likely to be set aside because of adamant Democratic opposition. On the demand side of the oil independence coin, there are provisions in the bill encouraging the use of hybrid vehicles, and alternative fuel vehicles, such as fuel cell driven buses, but there was no significant progress in increasing average fuel economy, commonly know as the CAFE standards.

Other provisions that are likely to be in the final bill address: (1) an authorization to appropriate up to $1.6 billion over the next eight years to promote "efficiency, environmental performance, and cost competitiveness" in the use of coal; (2) a number of energy efficiency provisions, including one requiring that the use of energy in federal buildings be reduced by 20 percent by 2013, (3) an authorization to appropriate $10.2 billion over the next three years for the Low-Income Home Energy Assistance program (LIHEAP); (4) an extension of the Price-Anderson indemnification provisions for the nuclear industry for another 20 years; (5) a number of incentives for oil and gas production; and (6) provisions regarding the development of energy facilities on tribal lands.

III. Provisions of Particular Interest to the Northwest: Most of the provisions of greatest interest to the Northwest are in the unreleased electricity title, but there is one major exception: hydro relicensing reform. This provision is posted on the Energy Committee website, and apparently is agreed to.

The relicensing of hydroelectric projects may seem like an arcane topic, and it is, but it also very important to the energy future of the Northwest. In the next 15 years, Northwest utilities must relicense hydroelectric projects that generate over 10,000 MW. That's enough power to supply the needs of at least 10 cities the size of Seattle.

Primarily, the language would do two things to improve the hydro relicensing process. First, it would allow licensees to propose an alternative to the mandatory conditions that are proposed by the Secretary of the Interior or the Secretary of Agriculture to protect federal lands within their jurisdiction. The agency is required to accept the proposed alternative if it meets the same environmental standard as the proposed mandatory condition and either costs less or allows for the production of more electricity.

This is an outcome-based approach that achieves the same level of protection for federal lands while, at the same time, minimizing costs and allowing hydroelectric projects to maximize the output of electricity. The same principle is applied in the legislation when the Secretary of Commerce or the Secretary of the Interior prescibes the construction or operation of a fishway at an hydroelectric dam. The licensee is free to propose an alternative to the fishway as long as it is no less protective of the fish than the fishway initially prescribed by the Secretary.

Second, the licensee would have a right to a trial-type proceeding before an administrative law judge regarding disputed issues of material fact. This will help remedy one problem facing licensees today, namely that they have little or no opportunity to obtain an objective review of factual assertions made by federal agencies during the relicensing process, particularly where those factual assertions are later used by those agencies to justify unnecessarily onerous mandatory conditions.

As to the electricity title, no conference language has been released, but we have at least some idea of what that title will look like. The tricky part is that there are three relevant bills, the one passed by the House, the one passed by the Senate, and the bill that was pending on the Senate floor when the Senate gave up and passed last year's bill. Reading the three bills together gives us the following picture:

1. SMD/RTO Moratorium. The most talked about deal in the course of this legislation is the one among Senator Domenici (R-NM), Vice President Cheney, and Senator Shelby (R-AL). At the insistence of Senator Shelby, Domenici and Cheney agreed to prohibit FERC from moving forward on Standard Market Design (SMD) or mandating any Regional Transmission Organizations (RTO) until 2007. This legislation has created very strange bedfellows, being strongly supported by Senators Shelby and Trent Lott, and by our own Senators Murray and Cantwell.

The Domenici/Shelby/Cheney deal is being criticized by those in the Midwest and Northeast who believe that mandatory RTO authority is necessary to provide reliability in their regions. Those regions generally support RTOs, and they need the mandatory power of FERC to keep a relatively few opponents from scuttling their plans. Therefore, it is possible that the RTO portion of this provision will be at least partially rolled-back.

2. Reliability. All three bills have essentially the same reliability language, so this will be in the final conference report. The basic idea is that they will be regional reliability organizations throughout the country, setting reliability standards for the transmission system, and backed up by the enforcement authority of FERC.

3. "FERC-lite" Regulation of the Transmission Facilities of Publicly-Owned Utilities. All three bills extend FERC jurisdiction over the transmission lines owned by publicly-owned utilities, so a provision on this subject is virtually certain to be included in the final conference report.

It is called "FERC-lite" because the provisions require publicly-owned utilities, including BPA, and coops to provide transmission service at rates that are comparable to (but not necessarily identical to) those it charges itself, and on terms and conditions (not related to rates) that are comparable to the terms and conditions under which it provides transmission service to itself. It is likely that there will be an exemption for publicly-owned utilities that sell less than 4 million MWh of electricity per year.

None of the bills subject public power to FERC jurisdiction with respect to power sales. Also, the comparability standard is less strict than the rule that applies to investor-owned utilities. But, as a practical matter, FERC is likely to be pretty aggressive in applying the comparability standard, and therefore publicly-owned utilities will have a difficult time justifying differences.

Ten years ago, this might have been the most important provision in the bill, because FERC had total regulatory control over the transmission lines of investor-owned utilities, but almost no control over the transmission lines of publicly-owned utilities, including BPA. But, due to FERC Rule 888, that gap has largely been closed as publicly-owned utilities, including BPA, have filed transmission tariffs that are very similar to those used by investor-owned utilities. As a result, this "FERC-lite" provision does not break much new ground. Instead, it basically clarifies FERC's authority to do what it has already done to create consistent, uniform rules for the use of the nation's transmission system.

4. PUHCA Repeal. Repeal of PUHCA is very likely, and, if so, is likely to cause significant industry consolidation. For example, Warren Buffett owns one utility now, and has made it clear that he would like to own more after PUHCA is repealed. The question then becomes whether state public utility commissions will allow the transfer to local utilities to any large national company.

Also, it is worth noting the PUHCA repeal language substitutes other reporting requirements for PUHCA. Basically, it would authorize FERC and state commissions to require holding companies to provide them with books, accounts, memoranda, and other records that the commissions determine are reasonably necessary to discharge their jurisdictional responsibilities.

5. Market-Based Rates. The House has no provision, but both of the Senate bills address this issue. The bill that was pending on the Senate floor says that, within 6 months, FERC shall issue a policy statement establishing the conditions for market-based rate authority. This would create a very heated debate among those that would take a liberal approach to the granting of market-based rates, and those that would like to return to the traditional cost-of-service form of ratemaking.

6. Enforcement Penalties. All three bills increase civil and criminal penalties for violation of the Federal Power Act (FPA). Thus, an increase in penalties is certain; only the dollar amounts and the scope are in doubt.

7. Market Transparency Rules. All three bills address this issue, so it is highly likely that something will come out of conference. For example, the bill that was pending on the Senate floor provides that FERC must issue rules establishing an electronic information system to facilitate price transparency and participation in markets subject to FERC's jurisdiction. Specifically, the system is to provide information regarding the availability and market price of wholesale electricity and transmission. Exemptions would be available for information that, if disclosed, would be detrimental to the operation of an effective market or jeopardize system security.

8. Round Tripping is Prohibited. Both the House bill and Domenici have virtually the same language, so a prohibition of "round-tripping" electricity transactions this is almost certain to be in the final bill.

9. Market Manipulation. Only the bill the was pending on the Senate floor addresses the issue of market manipulation. It provides that it is a violation of the FPA to knowingly and willfully report any information relating to the price of power or transmission capacity that the person knew to be false at the time of the reporting, to any governmental entity with the intent to manipulate the data being compiled.

10. Federal Transmission Facility Siting. This provision is only in the House bill, so it's fate is uncertain. But the Administration supports it, and the blackout has helped. The basis idea is that the Department of Energy would identify "interstate congestion areas." FERC would then be able to issue permits for the construction or modification of interstate transmission lines in the congestion areas if the relevant state or states either lack authority to do so, or fail to act within one year. FERC has had authority to site interstate gas pipelines since 1948, and this would give FERC similar authority on the electric transmission side.

In the Northwest, it appears that developers of coal-fired generation in Montana would use this authority to site transmission lines from Montana to appropriate points on the regional grid.

11. PURPA Repeal. All three bills would repeal the must-purchase requirement of PURPA on a prospective basis. However, the repeal only applies where there are certain characteristics of a competitive wholesale market. Specifically, the bill that was pending on the Senate floor provides that FERC must find that the qualifying generation facility has access to an independently-administered, auction-based day ahead and real-time wholesale market. Because we do not yet have such a market in the Northwest, the repeal would not apply.

Under the House provision, the repeal is somewhat more likely to apply because it says that FERC must find that the qualifying facility has access to a competitive market that provides opportunities that are comparable to the above-described characteristics. It is unclear whether FERC would find that the Northwest market meets this comparability test.

12. Renewable Portfolio Standard. This provision is only in last year's Senate bill, so it is doubtful that it will appear in the final conference report. The required percentage of renewables begins at 1 percent in 2005, and climbs to 10 percent in 2019. The total power sold, against which the percentage is calculated, excludes energy generated by a hydro facility, an eligible renewable energy resource, or municipal solid waste.

IV. What's Next? Perhaps the most important result of the enactment of this legislation is that we will have much less to fight about. We will no longer be fighting FERC because the bill will stop FERC in it's tracks on SMD mandatory RTOs until 2007. We will not be fighting about the extent of FERC jurisdiction over publicly-owned utilities, because that will be decided. We will not be fighting about whether PUHCA has outlived its usefulness, because that too will be settled.

Does that mean that we will have nothing to do? Absolutely not. In fact, it means that we will have a golden opportunity to get our own regional energy house in order. In particular, on transmission issues, we will have a window of over three years to figure out what improvements we want in the Northwest transmission system. Our transmission system may be better than the systems of some other regions, but it is far from perfect.

We need to improve that transmission system in a way that preserves the benefits of the Columbia River hydroelectric system, but without compromising the benefits of competitive regional markets. If a FERC-style RTO doesn't work here, it is our obligation to decide what will work. Put another way, if we allow January 2007 to arrive without a clear transmission model for the Northwest, we will deserve whatever FERC tries to jam down our throats.

Most importantly, we need to invest in our transmission system, which is stressed to its limits. We need to cost-effectively use the increased federal borrowing authority that BPA received last year, along with other innovative ways to open up bottlenecks in the system.

Finally, we must decide the role that we want BPA to play in our future, particularly regarding serving the region's load growth. In 1996, the Northwest Regional Review recommended that BPA not be responsible for load growth. In 2002, an historic coalition of virtually every publicly-owned and investor-owned utility in the region said the same thing.

But now, in the face of BPA rate increases, that coalition has lost much of its cohesiveness. If we are to define BPA's role with enough lead time to allow Northwest utilities to take up the burden of providing for load growth, that coalition needs to come back together behind a plan. Otherwise, no one in the region will truly be responsible for load growth, and we will be no more prepared for the next energy crisis than we were for the last one.

Any questions about this presentation should be directed to:

Craig Gannett , Seattle, (206) 628-7654, craiggannett@dwt.com

This Energy presentation is a publication of the Energy Department of Davis Wright Tremaine LLP. Our purpose in publishing this presentatin is to inform our clients and friends of recent developments in energy law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

Copyright © 2003, Davis Wright Tremaine LLP.

return to Advisory Bulletins main page