FERC, CFTC, and State Energy Law Developments

The US Court of Appeals for the District of Columbia affirmed the Federal Energy Regulatory Commission’s (FERC’s) decision to reject a transmission cost allocation proposal submitted by the Midcontinent Independent System Operator (MISO). The court found that FERC adequately explained its decision to reject the proposal on the grounds that it undervalued interregional transmission projects.

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The US Department of Justice (DOJ) and the Federal Energy Regulatory Commission (FERC) filed a joint brief on May 29 in the US Court of Appeals for the Seventh Circuit, stating that Illinois’ zero emission credit (ZEC) program for eligible nuclear plants in Illinois is not preempted by the Federal Power Act (FPA). Because the panel in a substantially similar case pending in the Second Circuit has indicated that it would review the government’s filing in the Seventh Circuit case, the views of FERC and DOJ could be critical as this issue plays out in the federal court system.

The Illinois legislature passed a law in 2016 requiring utilities to purchase ZECs at administratively set prices from nuclear plants in the state. Generators that compete with the ZEC-receiving nuclear plants challenged the law, arguing that the ZEC program is preempted by the FPA. The district court upheld the program, and the generators appealed the decision to the Seventh Circuit. FERC did not take a position in the trial court but has now done so after the Seventh Circuit invited the US government to file a brief.

The Federal Energy Regulatory Commission is seeking stakeholder comments through a Notice of Inquiry as it contemplates updating its policy statement on how FERC-jurisdictional facilities are reviewed and authorized, a move that could revamp the FERC’s 19-year-old policy statement on its certification of new natural gas transportation facilities.

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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.

On July 7, the US Court of Appeals for the District of Columbia Circuit issued its opinion in NRG Power v. FERC, vacating in part and remanding a May 2013 order by the Federal Energy Regulatory Commission (FERC) that had accepted PJM Interconnection, L.L.C.’s (PJM’s) revisions to the Minimum Offer Price Rule (MOPR) in the PJM electricity capacity market subject to PJM’s acceptance of certain modifications.

The court held that in directing the modifications to the PJM proposal, FERC created “a new rate scheme that was significantly different from [both PJM’s proposed and existing rate designs],” thereby exceeding FERC’s authority under Section 205 of the Federal Power Act (FPA). The court also held that PJM’s consent to FERC’s modifications did not cure FERC’s regulatory overreach because utility customers did not receive an opportunity for notice and comment on the modified rate.

Following this most recent decision, FERC will need to exercise caution in proposing modifications to a utility’s filing under Section 205.

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Earlier this month, the US Supreme Court issued a ruling that imposed a five-year statute of limitations period in which disgorgement could be ordered by an administrative agency penalizing regulatory violations. Although the Court’s decision in Kokesh v. SEC arose in the context of an enforcement action initiated by the Securities and Exchange Commission (SEC), the Court’s decision may well be applied to disgorgement orders issued by either the Federal Energy Regulatory Commission (FERC) or the Commodity Futures Trading Commission (CFTC). However, additional litigation may be required to ensure that the disgorgement boundaries set forth by the Court in Kokesh are equally applied to FERC and CFTC enforcement actions seeking disgorgement from an energy market participant.

On April 14, the US Court of Appeals for the DC Circuit issued its opinion in Emera Maine v. FERC, vacating and remanding FERC’s Opinion No. 531 in which FERC established a just and reasonable rate of return on equity (ROE) for transmission-owning utilities in the Northeast (NETOs) and adopted a new methodology for determining the ROE for FERC-jurisdictional electric utilities.

The DC Circuit found two grounds for sending the case back to FERC. First, because the proceeding began through a complaint filed under section 206 of the Federal Power Act (FPA), the court found that FERC failed to find that the existing ROE for the NETOs was unjust and unreasonable before proceeding to set a new just and reasonable ROE. Second, the court found that FERC had not adequately justified its determination of the new just and reasonable ROE.

The court’s decision creates significant uncertainty in FERC ROE policy.

On November 17, the Federal Energy Regulatory Commission (FERC) Office of Enforcement (OE) issued its 2016 Report on Enforcement. The report provides a review of OE’s activities during fiscal year 2016, revealing likely areas of focus for FERC enforcement in the coming year.

The report indicates OE’s continued focus on the same areas of market and operational risk that have traditionally captured its attention, although the targets of those investigations are contesting OE’s claims in the court system. The report also indicates that the vast majority of alleged violations that come to OE’s attention are addressed informally through corrective actions voluntarily implemented by the subject of the investigation, without the need for a formal settlement.

Read more about the FERC’s 2016 Report on Enforcement in our recent LawFlash. The report as well as accompanying FERC staff white papers that provide insight into OE’s views on emerging trends also will be discussed in further detail during an upcoming webinar hosted by Morgan Lewis

For the first time, a federal district judge has held that a review of a Federal Energy Regulatory Commission’s (FERC’s) order assessing civil penalties will be treated as an ordinary civil action that requires a full trial rather than a proceeding in which a federal judge only reviews an administrative record compiled by agency investigators. This is also the first federal court decision on how the de novo review standard set forth in Section 31(d)(3) of the Federal Power Act (FPA) should be applied when FERC enforcement targets elect federal court review of the facts and law at issue in an electricity market manipulation proceeding.

The court’s ruling provides important guidance to market participants in the electricity industry that can avail them of the de novo review option set forth in the FPA when targeted by FERC enforcement staff. Further, this ruling provides precedent that defendants should consider when developing their strategy for defending against FERC allegations brought under the FPA.

Read the full LawFlash: Federal Court Grants Full Civil Trial to FERC Enforcement Target

On July 1, the US Court of Appeals for the District of Columbia Circuit issued an opinion invalidating an oil pipeline partnership’s tax allowance that the Federal Energy Regulatory Commission (FERC) had approved as consistent with established FERC policy.

In United Airlines v. FERC, the DC Circuit determined that FERC “failed to demonstrate that there is no double-recovery of taxes for partnership, as opposed to corporate, pipelines.” The court, in turn, ruled that FERC’s policy as applied in the case was arbitrary and capricious in violation of the Administrative Procedure Act. The court vacated that portion of the FERC decision and remanded for further proceedings.

The DC Circuit’s decision and its underlying analysis threaten to upset long-established FERC-permitted rate recovery of tax expense by pass-through entities and may create far-reaching rate implications for affected interstate pipelines and for electric transmission providers that have opted to be treated as partnerships for tax purposes.