FERC, CFTC, and State Energy Law Developments

A Supplemental Report of the US International Trade Commission Regarding Unforeseen Developments reaffirms the commission’s original conclusions and emphasizes that the increased imports of CSPV solar cells and modules were both “unforeseen” and the “substantial cause” of “serious harm” to the domestic industry for these products. This sets the stage for the likely imposition of tariffs and other remedies by the president.

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Nineteen states have asked the Federal Energy Regulatory Commission (FERC) to modify public utilities’ FERC-regulated cost-of-service revenue requirements to reflect the recent reduction in the federal corporate income tax rate. The states claimed that “[t]he Tax Cuts and Jobs Act significantly reduces the marginal federal corporate income tax rate from 35 to 21 percent. Unless the Commission adjusts… revenue requirements to reflect this federal corporate income tax reduction, utility customers nationwide will be overpaying for their electric and gas service by hundreds of millions of dollars.”

According to the states, the level of current corporate income tax expense incorporated into public utilities’ rates could render those rates unjust and unreasonable, and if FERC does not proactively reduce those rates, a significant amount of money would need to be refunded to customers in the future.

Over a half dozen natural gas rate proceedings are expected to be initiated at the Federal Energy Regulatory Commission in 2018, many of which will raise issues that are historically addressed in pipeline general rate case proceedings, as well as novel issues such as the impact of the new tax laws on rates and the inclusion of a pipeline modernization tracker in rates.

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On December 15, 2017, the California Court of Appeal, Second Appellate District, issued its opinion in Southern California Gas Co. v. Superior Court of Los Angeles County. In reversing the lower court’s decision, the appeals court concluded that Southern California Gas Co. (SoCalGas) could not be held liable in tort for economic damages in the absence of a transactional relationship unless its actions caused personal injury or property damage. This case underlines the importance of familiarity with the state legal protections that can shield utilities from claims for damages due to the indirect harms stemming from major service or infrastructure disruptions.

The Court of Appeal held that SoCalGas owed no duty to the business plaintiffs in the class action, who “claimed no injury to person or property. Instead, they alleged the gas leak and subsequent relocation of [nearby] residents caused crushing economic loss to their businesses.” The court explained that, under California law, “[g]enerally a defendant owes no duty to prevent purely economic loss to third parties under any negligence theory.” The appeals court determined that none of the various exceptions to this general rule applied to SoCalGas’s actions because those exceptions generally held true only when there was a direct injury to persons or property. Accordingly, SoCalGas could not be held liable to the plaintiffs because no injury to persons or property occurred and no transactional relationship existed that was intended to “directly” affect the plaintiffs.

On January 8, 2018, the Federal Energy Regulatory Commission (FERC) issued an order rejecting the US Department of Energy’s (DOE’s) proposed changes to organized market rules that would have permitted certain baseload resources with at least 90 days of on-site fuel to be paid a cost-of-service rate rather than relying on compensation under market-determined prices. DOE’s September 29, 2017 proposal was focused on ensuring the “resilience” of energy service in these organized markets, and was widely viewed as benefitting primarily coal and nuclear generation.

In its order, FERC concluded that it lacked the record necessary for FERC to take the requested action to order changes to existing market rules under Section 206 of the Federal Power Act. Under that statute, FERC must first find that the existing rates are unjust and unreasonable and then replace it with a rate that is just and reasonable. According to FERC, the DOE proposal failed to satisfy either prong. First, FERC explained that none of the comments submitted by the RTOs/ISOs indicated any threat to resilience posted by past or future generator retirements. Second, FERC explained that allowing any resource that met DOE’s resiliency criteria to receive a cost-of-service rate would not be just and reasonable because that payment would not be tied to the need for the facility or the cost to the system of providing that payment.

As bitcoin and other cryptocurrency values continue to rise, the sheer number of cryptocurrency transactions rises as well. By now, almost 500,000 unique bitcoin transactions are taking place every day, with the number increasing exponentially over the last six months of the year.

So what does cryptocurrency have to do with what is often viewed as a very staid and traditional electric utility business? On the surface, the cryptocurrency and electric businesses could not seem more different. The electric utility business began in the 19th century, while bitcoin is less than a decade old and internet-dependent. But in reality, the operability of bitcoin and other cryptocurrencies relies on massive computing power distributed around the world because of the nature of the technology that makes cryptocurrencies possible. And that computing power requires massive amounts of always-on electric power.

Under a notice of proposed rulemaking to be released today, December 21, the Federal Energy Regulatory Commission (FERC) is proposing to direct the North American Electric Reliability Corporation (NERC) to revise the Critical Infrastructure Protection (CIP) reliability standards to require electric utilities to report all cyberattacks on the electric security perimeters surrounding their key electric infrastructure as well as the associated electronic access control and monitoring devices that protect those perimeters.

As evidence that cyberattacks continue to threaten electric infrastructure in the United States, a report issued on December 14 by cybersecurity firm FireEye indicates that critical infrastructure industrial control systems (ICS) could be susceptible to a new type of malware. FireEye reported that the malware—dubbed “TRITON”—triggered the emergency shutdown capability of an industrial process within a critical infrastructure ICS. This is not the first time that hackers have successfully targeted ICS. In 2013, hackers believed to be operating on behalf of a state-actor managed to take partial control of the Bowman Avenue Dam near Rye Brook, New York. More recently, reports emerged this past summer that hackers gained access to the operational grid controls of US-based energy firms. Because of the destructive potential of these types of breaches, critical electric and other utility infrastructure will remain highly prized targets for future cyberattacks.

As the pace of reported cyberattacks on ICS continues to pick up, scrutiny of electric utilities’ compliance with the Critical Infrastructure Protection (CIP) reliability standards by the Federal Energy Regulatory Commission (FERC) and the North American Electric Reliability Corporation (NERC) is likely to increase. It is highly likely that electric utilities will receive data requests or informal outreach from FERC or NERC in the near future to determine whether those utilities have similar equipment that could be exploited, and if so, what steps they have taken to mitigate the threat. Even in the absence of such requests, these events provide a good opportunity for electric utilities to test the sufficiency of their CIP compliance programs in identifying and remediating such threats.

In an admonishing response letter issued December 8, US Secretary of Energy Rick Perry granted the Federal Energy Regulatory Commission’s (FERC) request for a 30-day extension to consider final action on its Proposed Grid Reliability and Resiliency Pricing Rules. The proposed rules, if adopted, could provide economic support to coal and nuclear generation in organized markets.

FERC had emphasized in its request that extra time is needed to provide adequate opportunity for recently sworn-in Chairman Kevin J. McIntyre and Commissioner Richard Glick to consider the voluminous record in the proceeding that includes more than 1,500 comments in response to FERC’s solicitation for public comment on the proposed rules. Mr. Perry granted FERC’s request while noting in his letter that, as explained in his original directive, failure to act expeditiously within a 60-day timeframe would be unjust, unreasonable, and contrary to the public interest. Given the circumstances highlighted by FERC, he agreed to allow FERC to take final action by Wednesday, January 10, 2018. Despite granting the request, Mr. Perry strongly urged FERC to act before the deadline to ensure the “resilience and security of the electric grid.”

The DC Circuit has found that the Federal Energy Regulatory Commission (FERC) adequately and reasonably explained its decision to adopt the index formula that governs pipeline rates for the 2016 to 2021 period. Oil pipeline rates are governed by an indexed ratemaking system, and each year FERC calculates the index used to set pipeline-specific rate ceilings by using a formula that captures the cost change in the oil pipeline industry. FERC reviews this formula every five years and adopted the most recent one on December 17, 2015 after a notice and comment rulemaking.

The Association of Oil Pipelines challenged the index formula for the 2016-2021 period on the grounds that FERC did not apply the same methodology used in prior index reviews. First, FERC relied solely on the middle 50% of pipeline cost-change data and did not incorporate the middle 80%. Second, FERC used Page 700 cost-of-service data to calculate the index level instead of the Form No. 6 accounting data it had used in the past.