FERC, CFTC, and State Energy Law Developments

The US Department of the Treasury issued a letter on May 7 stating that it plans to modify the continuity safe harbor for both the production tax credit (PTC) and the energy investment tax credit (ITC). Under the current law, taxpayers seeking to claim a PTC for electricity produced from qualifying facilities or an ITC for qualifying energy property must generally begin construction on the qualifying facility or property by specified dates.

To be considered to have begun construction, the taxpayer must start physical work of a significant nature, or must satisfy the safe harbor requirements by incurring 5% or more of the total cost of the facility or property. The taxpayer must then demonstrate continuous efforts to complete construction, and must place the facility or property in service within four years to meet the requirements for a continuity safe harbor.

President Donald Trump signed an executive order on May 1 declaring that the use of bulk-power system equipment supplied by companies controlled by certain foreign nations poses an extraordinary threat to the US power grid. The order observes that the bulk-power system is a valuable target for malicious actors, and any attack on that system could pose serious risks to the economy, public health and safety, and national security.

In light of those risks, the executive order declares a national emergency with respect to the power grid and moves to ban the unrestricted import or use of bulk-power system electric equipment from foreign adversaries. Although the order calls for coordination among multiple executive branch heads, including the Director of National Intelligence and the Secretary of Homeland Security, it primarily tasks the Secretary of Energy with fulfilling the President’s directives.

FERC has provided specific, detailed guidance for the first time on the use of voting trusts to eliminate ownership affiliation.

Direct and indirect owners of 10% or greater voting interests in FERC-regulated “public utilities” are typically treated by FERC as “affiliates” and as “holding companies” of their public utilities. These owners become subject to FERC regulation with respect to some mergers, acquisitions, divestitures, and changes in control, and with respect to their and their affiliates’ FERC-conferred right to sell electricity at wholesale.

The Commodity Futures Trading Commission (CFTC) filed and settled charges on October 24 against Upstream Energy Services LLC (Upstream Energy) for acting as an unregistered futures commission merchant. The Commission’s order raises several important points for energy companies. First, while energy companies may view the Federal Energy Regulatory Commission (FERC) as their primary federal regulatory agency, certain types of transactions involving energy resources may fall under the purview of another regulatory authority, such as the CFTC. Second, a company that accepts and places futures and options order on behalf of another party must register as a futures commission merchant. Third, voluntary and full cooperation with an enforcement action can reduce greatly the nature and severity of any penalty sought.

The Federal Energy Regulatory Commission (FERC or Commission) on July 18 issued a rule, initially proposed in July 2016,[1] restructuring the way it collects certain data for market-based rate (MBR) purposes and significantly expanding the information it collects from MBR holders. Under the Final Rule, FERC will now collect MBR application and certain compliance information in a new database with multiple data tables relating to one another via entity-specific, unique identification numbering (FERC’s new “relational database”), an intricate and entirely new electronic reporting system that will become compulsory in early 2021.[2] Order 860 also adopts changes to the ownership and the gas and electricity “affiliate” information required in an MBR Seller’s compulsory disclosures.

The Final Rule will take effect on October 1, 2020, and baseline submissions will be due by February 1, 2021.[3] As of February 1, 2021, prior to filing an application for initial MBR authority, a new Seller will be required to make a submission into the relational database, which will itself create the required asset appendices and indicative screens that filers had previously prepared independently. FERC affirmed that after January 31, 2021, a Seller will no longer report its affiliated generating and related electric and gas assets in the current .XLS format (an Appendix B Excel spreadsheet).[4] Instead, the information will now be submitted in XML format and the data to be collected in the relational database, which the Final Rule claims will generate an asset appendix.[5]

For the second time, PJM Interconnection, LLC (PJM) has suspended its 2019 Base Residual Auction (BRA) as directed by the Federal Energy Regulatory Commission (FERC). FERC found that delaying the auction until the Commission establishes a replacement rate would provide greater certainty to the market than conducting the auction under the existing rules.

PJM previously suspended the 2019 BRA when FERC granted PJM’s request to waive the auction timing requirements of its tariff to allow for a delay from May to August 2019.

Read FERC’s order.

Wholesale electricity sellers that are not government owned are subject to regulation by the Federal Energy Regulatory Commission. Obtaining FERC approval to sell wholesale electricity at “market-based rates” (which is nearly any sale regulated under the Federal Power Act that is not based on cost-of-service accounting) can be an intricate exercise, requiring the applicant to submit statistical horizontal market power screens. Within the FERC-regulated organized markets, the independent system operators and regional transmission organizations (ISOs/RTOs), monitoring staff and procedures, and transparent real-time and long-term demand and pricing information have led many market participants to conclude that the required market power statistical screen studies are of little value and function merely as an administrative impediment to doing business. On July 18, FERC issued a final rule, Refinements to Horizontal Market Power Analysis for Sellers in Certain Regional Transmission Organization and Independent System Operator Markets, Order No. 861, that relieves market-based rate (MBR) entities of the statistical screen requirements in some—but not all—of the ISO/RTO markets. This should streamline both the regulatory approval process for prospective MBR entities and the ongoing compliance process for MBR entities that file notices, triennial renewal applications, and similar documents with FERC.

Order No. 861 relieves MBR entities (most of which are independent generating companies and/or power marketers, and some of which are traditional franchised utilities) of the need to prepare and submit statistical screen analyses if the MBR applicant or holder is within the Northeastern and Central ISO/RTO markets—that is, ISO New England, New York ISO, PJM Interconnection, or Midcontinent Independent System Operator. In these ISO/RTOs, FERC found that the existence of both capacity and energy markets and the vigor of market monitoring and mitigation were sufficient to permit applicants to dispense with the horizontal screen studies.

When a business entity that is regulated by the Federal Energy Regulatory Commission (FERC) is closely related to another business entity, FERC takes the position that under some circumstances it may treat the two different legal entities as if they were one single entity.  FERC ruled recently that it “may disregard the corporate form in the interest of public convenience, fairness, or equity” and “[t]his principle of allowing agencies to disregard corporate form is flexible and practical in nature.”  As a result, a new power marketer could be barred by a Regional Transmission Organization (RTO) from participating in the market unless it paid off the debts to the RTO owed by another power marketer with the same business objectives and the same contacts and administrators as the bankrupt entity. This decision could make it difficult for public utilities to avoid the debts of their bankrupt affiliates, which could be attributed to the entire enterprise regardless of the final plan of bankruptcy, including the liquidation of the bankrupt entity.

When a debtor in bankruptcy is liquidated, or successfully emerges from bankruptcy, certain unsatisfied, unsecured pre-bankruptcy debts of that bankrupt debtor are discharged. The discharge functions as a defense by the debtor against the claims of the debtor’s creditors. Similarly, when a debtor in bankruptcy is affiliated (such as by common upstream ownership) with a non-bankrupt entity, the non-bankrupt affiliate is typically not presumed to be responsible for that bankrupt debtor’s unsatisfied obligations, unless some statutory, contractual or security arrangement makes the non-bankrupt affiliate liable for those obligations or one entity is viewed to be the “alter ego” of the other under applicable state law.

Electric power generation and sale customarily fall within the scope of FERC jurisdiction under the Federal Power Act, as amended, as do generator investment and ownership. Qualifying small power production facilities (Small Power QFs) of no larger than 20 MW (net AC) are usually exempt from FERC regulation of mergers, acquisitions, divestitures, power sale rates, and related regulation under the Public Utility Holding Company Act. Small Power QFs are also normally exempt from state utility commission regulation of corporate, financial, and power sales rate matters. These Small Power QF regulatory exemptions are widely viewed as helpful and appropriate by industry stakeholders ranging from generation investors to traditional franchised utilities, and residential and commercial generation users.