Advisories
Energy

FERC Proposes Major New Initiatives for Electric Utilities

By James K. Mitchell
01.26.10
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The Federal Energy Regulatory Commission (FERC) issued two Notices of Inquiry and two Notices of Proposed Rulemaking on Jan. 21, 2010, that collectively are intended to facilitate improved efficiency and reliability of electric service throughout the country. Comments on each of these proposals are due to be filed within 60 days after it has been published in the Federal Register. These initiatives include:

  • Removal of potential barriers to greater integration of variable energy resources such as wind and solar resources in the mix of the nation’s energy supplies.
  • Adoption of detailed credit practices to protect the integrity of organized wholesale electricity markets and thereby to protect consumers from high costs that would otherwise flow from excessive defaults and associated risks.
  • Relaxation of rules for acquisition of 10 percent or more, but no more than 20 percent, of outstanding voting securities of a public utility or public utility holding company.
  • Requirements for participants in wholesale electricity markets not otherwise subject to regulation by the FERC to file quarterly reports on capacity and energy transactions in order to provide greater market transparency.

Integration of Variable Energy Resources (Docket No. RM10-11-000)

The FERC has issued a wide-ranging Notice of Inquiry designed to help it identify potential barriers to greater integration of variable energy resources (VERs, i.e., renewable energy resources such as wind and solar generation facilities and certain hydroelectric resources that are characterized by variability in the fuel source that is beyond the control of the resource operator) into the grid in an efficient and reliable manner, and potential market and operational reforms that may be needed to eliminate those barriers.

The FERC recognizes that operating characteristics of VERs are different from those of conventional generation sources, and that existing policies and practices may present challenges to greater reliance on energy from VERs. Comments submitted in response to this inquiry may lead to market and operational reforms intended prevent VERs from facing undue discrimination as a result of their operating characteristics. Although the FERC has asked for comments broadly addressing the integration of VERs into the grid, it has identified specific issues that it would like to have addressed in comments that are submitted, including the following:

  1. Whether improved data and reporting requirements, including availability and use of accurate meteorological and other forecasting tools, may help reduce the level of reserves needed to integrate VERs.
  2. Whether to permit greater scheduling flexibility for VERs (e.g., shorter dispatch schedules and intra-hour schedule changes to facilitate integration of VERs), and provide appropriate incentives for accurate scheduling of VERs.
  3. Whether changes to forward market structures and modification of financial risks will eliminate perceived barriers to participation of VERs in day-ahead energy markets.
  4. Whether increased coordination among balancing authorities (or consolidation of balancing authorities) has the potential to enlarge the base of generation and demand available to customers, thereby making variability more manageable and helping to reduce costs; whether separate VER balancing authorities should be created.
  5. Whether use of existing generation reserves in meeting needs of VERs is cost-effective; whether new categories of reserve products should be created; whether new sources of reserve products (e.g., demand response resources and energy storage devices) might be helpful.
  6. Whether VERs are capable of providing capacity, and, if so, whether capacity market reforms are needed to ensure that they are compensated properly for the capacity that they provide.
  7. Whether existing redispatch and curtailment practices discriminate unfairly against VERs.

Credit Reform in Organized Wholesale Electric Markets (Docket No. RM10-13-000)

The FERC has proposed new rules to govern credit practices in organized wholesale electricity markets. The agency explained that "the recent turmoil in financial markets has emphasized the importance of sound credit practices that provide competitive markets with adequate access to capital without excessive risk and without excessive cost."

The FERC’s goal is to provide for adoption of sound credit practices that appropriately balance the need for market liquidity against corresponding risk and to ensure that the credit policies in place in organized markets are sufficient to reasonably protect consumers against the adverse effects of default. The proposed rules, if adopted, would require each regional transmission organization and independent system operator to incorporate specified credit standards and practices in its tariff and might thereby affect the ability of certain market participants to remain active in the market. Among the standards and practices that the FERC has proposed to be included in each of the affected tariffs are the following:

  1. A settlement cycle of no more than seven calendar days, with no more than an additional seven calendar days for final payment.
  2. A maximum amount of unsecured credit extended to any market participant of no more than $50 million.
  3. No unsecured credit in financial transmission rights markets.
  4. Clear rights to manage defaults within the market and to offset market obligations.
  5. Minimum financial criteria required for market participation, such as the capability to engage in risk management or hedging or to outsource this capability with periodic compliance verification. (The FERC did not propose specific criteria for market participation, but believes it may be appropriate to have such criteria established in each affected tariff.)
  6. Specific criteria for determining whether a market participant has experienced a "material adverse change" and should therefore be required to post additional collateral, and standardized periods under which market participants must post additional collateral in order to "cure" the changed circumstances.

Control and Affiliation for Purposes of Market-Based Rate Requirements under Section 205 of the Federal Power Act and the Requirements of Section 203 of the Federal Power Act (Docket No. RM09-16-000)

Under Section 203 of the Federal Power Act, prior FERC approval may be needed for acquisition of voting securities of a public utility or public utility holding company. The FERC has previously granted blanket authorization for certain of these transactions that are not considered to create significant market power issues. The agency is now proposing to amend its regulations in order to grant blanket authorization for acquisitions of 10 percent or more, but less than 20 percent, of outstanding voting securities of a public utility or public utility holding company, where the acquiring company files a statement certifying that such securities were not acquired and are not held for the purpose of exercising control over the company whose securities were acquired.

These proposed rules would also define an "affiliate," and would exempt certain relationships among affiliates from requirements that otherwise apply under the market-based rate program where an affirmation regarding the lack of control has been submitted. The proposed rules are intended to mitigate concerns that existing regulatory requirements threaten to discourage investment in energy infrastructure and unnecessarily create compliance issues for competitive power supply companies with market-based rates.

Electricity Market Transparency Provisions of Section 220 of the Federal Power Act (Docket No. RM10-12-000)

The FERC is seeking comments about whether to require participants in wholesale electricity markets that are excluded from the FERC's jurisdiction under Section 205 of the Federal Power Act (e.g., federal entities, municipal utilities and certain rural electric cooperatives) to file quarterly information on their wholesale power sales comparable to that contained in Electronic Quarterly Reports (EQRs) which are currently being filed by regulated entities.

Although this information would provide greater transparency in wholesale electricity markets and, according to the FERC, "would strengthen the Commission's regulatory scheme and enhance its oversight of the market-based rate program," it would also impose additional administrative costs on nonregulated entities that seek to participate in wholesale electricity markets.

The FERC is also considering adoption of refinements to its existing EQR program to include (1) reporting the trade date and the type of rate (i.e., fixed price, a formula or an index), (2) reporting resales of financial transmission rights in secondary markets; (3) standardizing the unit for reporting energy and capacity transactions; and (4) omitting the time zone from the contract section of the EQR.

We would be happy to assist you in preparing and filing comments on each of these matters. If you have questions or desire assistance with respect to any of these initiatives, please contact one of the listed related attorneys or your primary Davis Wright Tremaine relationship attorney.

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