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Power & Pipes

FERC, CFTC, and State Energy Law Developments

On February 18, 2021, FERC approved the recertification of Brunner Island, LLC’s status as an exempt wholesale generator (EWG) subject to conditions that limit the economic activity of Brunner unrelated to wholesale power activities.

EWG status can provide generation project companies and their owners with significant regulatory exemptions, but to maintain that status EWGs must be exclusively engaged in wholesale power sales. The February 18 order provides further clarification on the limits of permissible incidental activities undertaken by EWGs. At bottom, a power generation company would not qualify as an EWG if it retains profits derived from transactions with unaffiliated third parties where the goods or services at issue are not created by the EWG’s wholesale power sale activities.

Exempt Wholesale Generator Background

The Public Utility Holding Company Act of 2005 (PUHCA 2005) defines an exempt wholesale generator as “any person determined by [FERC] to be engaged directly, or indirectly through one or more affiliates . . . , and exclusively in the business of owning or operating, or both owning and operating, all or part of one or more eligible facilities and selling electric energy at wholesale.”

Commission precedent has interpreted the exclusivity requirement loosely, permitting a long list of activities on the basis that such activities do not constitute separate business lines, but are rather incidental to the business of wholesale generation and sales. Incidental activities have included sales of excess fuel supplies, wholesale power marketing, sale of generation byproducts, reassignment of excess transmission capacity, and ownership and operation of a landfill for disposal of the EWG’s byproducts.

EWG status exempts the company itself from PUHCA 2005 compliance and also exempts a holding company that holds only EWGs or other specified qualifying generating facilities, and any associated service company, from various FERC regulations under PUHCA 2005. The exemptions include exemptions from FERC’s access to holding company books and records, certain recordkeeping requirements, and holding company notice filing requirements.

Brunner Island, LLC’s EWG Recertification

Brunner has been certified as an EWG since 2000. Its coal generation facility creates fly ash as a byproduct of coal combustion. Fly ash can be reprocessed and sold for other industrial applications.

Having recently acquired the rights of an affiliated non-EWG to provide fly ash for reprocessing, Brunner submitted a self-recertification of its EWG status that reported its plans to obtain fly ash from unaffiliated third parties to be processed along with its own fly ash at an unaffiliated processing facility. Brunner had planned to retain the profits derived from providing fly ash to the unaffiliated processing facility, including profits obtained from providing third-party fly ash.

Boundaries of Incidental EWG Activities

The Commission noted first that Brunner’s sourcing of its own fly ash to a processing facility and retaining of any profits does not upset the EWG exclusivity requirement. FERC has previously opined that the sale of an EWG’s own combustion byproducts, including fly ash, was reasonably incidental to owing or operating an EWG. Brunner’s proposal, however, presented FERC with its first opportunity to address an arrangement where an EWG would share in the profits from the sale of reprocessed byproducts obtained from unaffiliated third parties.

Brunner had argued that providing fly ash obtained from third parties to the processing facility and sharing in the proceeds from the sale of the processed fly ash is consistent with Commission precedent regarding permissible incidental activities of an EWG. Brunner noted that the processing facility had excess capacity. FERC disagreed with Brunner’s position, holding that retaining profits from the sale of processed fly ash of unaffiliated third parties would constitute a separate line of business from wholesale power sales. Accordingly, such an activity would violate the exclusivity requirement for EWG status.

Though Commission precedent permits an EWG to engage in activities to avoid economic waste, FERC rejected Brunner’s argument on this point. The Commission noted that in past decisions, the economic waste at issue applied to the EWG, whereas with Brunner, the avoidance applied not to its processing facility, but to an unaffiliated processing facility. At bottom, it was not Brunner’s economic waste, but that of the unaffiliated third party, and thus Brunner’s facts did not fall within Commission precedent of acceptable activities.

Brunner, however, suggested that if FERC disagreed, it might donate any profits to charity. FERC accepted this alternative, implicitly suggesting that by donating profits, Brunner’s services to third parties would not constitute a separate line of business. The Commission effectively left Brunner with two options to retain its EWG status: not delivering third-party fly ash to the processing facility or donating all profits from its delivery of third-party fly ash to charity.

Conclusion

FERC’s decision regarding Brunner provides additional clarity on the bounds between incidental activities and separate lines of business. At bottom, when an EWG transacts with unaffiliated third parties to provide services or sales for profit that are not created by the EWG, those transactions will likely not be found to be incidental, and would thus violate the exclusivity requirement for EWG status.