FERC, CFTC, and State Energy Law Developments

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.

Today, the Federal Energy Regulatory Commission (FERC) Office of Enforcement (OE) issued its 2017 Report on Enforcement. The report provides a review of OE’s activities during fiscal year 2017, which begins October 1 and ends September 30 annually, revealing likely areas of focus for FERC enforcement in the coming year.

The report indicates that even though FERC lacked a quorum for much of 2017, OE continued to focus on the same areas of market and operational risk that have traditionally captured its attention, which include (i) fraud and market manipulation; (ii) anticompetitive conduct; (iii) conduct that threatens transparency in regulated markets; and (iv) serious violations of mandatory reliability standards. OE does not anticipate that its priorities will change for fiscal year 2018. FERC also addresses its continued litigation of contested cases in federal courts. Additionally, similar to fiscal year 2016, the report 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. But this year, OE provides detailed examples of surveillance inquiries initiated by its Division of Analytics and Surveillance that are closed without referral to the US Department of Justice. Details on the topics in the 2017 Enforcement Report will be further described in a future LawFlash that will be posted as part of Morgan Lewis’s Power & Pipes energy law web postings. These issues will also be discussed in further detail during an upcoming webinar hosted by Morgan Lewis linked below.

2017 Year in Review: FERC Enforcement Webinar >>

FERC’s October 5 Order on Rehearing in Equitrans, L.P. provides a good reminder to market participants that the commitments made in a precedent agreement may subsequently be rejected by FERC when the negotiated rate transportation agreement is filed for Commission approval. Equitrans, L.P. (Equitrans) filed a non-conforming negotiated rate transportation agreement that it entered into with EQT Energy, LLC (EQT Energy) for new service on Equitrans’ Ohio Valley Connector Project. The agreement included the following three non-conforming provisions for service:

  1. A provision that gave EQT Energy the right to participate in any future open season for an expansion of the system with the benefits and designation of a Foundation Shipper (the Foundation Shipper provision);
  2. A provision that gave EQT Energy most-favored nation status, which would allow EQT Energy to match the decreased negotiated rate if Equitrans contracts for a lower negotiated rate with another shipper; and
  3. A provision that imposed stricter creditworthiness requirements for EQT Energy.

Although FERC remains hobbled by its continued lack of quorum since then-Commissioner Norman Bay’s departure earlier this year, recent ratemaking challenges remind the industry that the specter of FERC’s unresolved income tax allowance policy for pass-through entities (e.g., master limited partnership pipelines) remains an ever-present conundrum for the industry and the Commission. Two protests submitted earlier this week in response to Great Lakes Transmission, LP’s (Great Lakes’) rate case filed in March raised the issue of FERC’s unresolved income tax allowance policy. The challenges demonstrate that the income tax allowance policy for pass-through entities can, and in many cases, is likely to, be disputed by customers involved in proceedings seeking to amend the rate structures of pass-through entity pipelines.

Putting aside the climate change politics swirling around US President Donald Trump’s recent executive order on “Promoting Energy Independence and Economic Growth,” what does the order mean for the nation’s electric generation portfolio? Can the gradual decline in the role of coal-fired generation be reversed?

The executive order, released on March 28, 2017, calls for increased domestic energy production from coal, natural gas, nuclear material, and other domestic sources, explicitly balancing the need to “promote clean and safe development” of energy resources with “avoiding regulatory burdens that unnecessarily encumber energy production, constrain economic growth, and prevent job creation.” In addition to revoking various Obama-era executive orders on climate change and carbon emissions and rescinding various reports issued by federal agencies on these topics, the executive order also directs the Environmental Protection Agency (EPA) to review the Clean Power Plan in the context of the domestic production policy adopted in the executive order and to, “as soon as practicable, suspend, revise, or rescind” the rule.  

This week, FERC submitted its annual financial report to the US Congress. Although part of the regular slate of voluminous reports sent up to Capitol Hill each year, FERC’s report often includes certain nuggets of information useful to the regulated community.

Buried in the report this year was a reminder that FERC—for the first time—has adjusted the civil monetary penalties that it may administer in response to violations of its rules.

As of July 16, 2016, the following civil monetary penalties apply:

  • $1,193,970 per violation, per day for violations of any provision of Part II of the Federal Power Act (FPA) or FERC’s regulations and orders thereunder, including the electric market manipulation provisions of the FPA and mandatory reliability standards.
  • $1,193,970 per violation, per day for violations of the Natural Gas Act or FERC’s implementing regulations and orders thereunder, including the natural gas market manipulation provisions.
  • $1,193,970 per violation, per day for violations of the Natural Gas Policy Act or FERC’s implementing regulations and orders thereunder.

FERC’s various organic statutes contain a variety of other miscellaneous civil penalty provisions as well, all of which were raised.

These adjustments were formally implemented through Order No. 826 in response to the Federal Civil Penalties Inflation Adjustment Act of 2015 and were the first modifications to the significant civil penalty authority given to FERC in the Energy Policy Act of 2005. Under the law, FERC will be required to update its monetary penalty amounts every January 15.

The recent US presidential election results will bring new faces and policies to the energy world next year when the 115th Congress convenes and President-Elect Donald Trump and Vice President–Elect Mike Pence are sworn into office. Read more about the changes for the energy industry on our nuclear blog, Up & Atom.

An Interim Final Rule allows the Pipeline and Hazardous Materials Safety Administration (PHMSA) to respond immediately to unsafe conditions or practices that pose an imminent hazard to public health and safety or to the environment.

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On August 11, Midcontinent Express Pipeline LLC (MEP) filed proposed tariff revisions in Docket No. RP16-1168 that, if adopted, would reflect one of the first instances in which an interstate pipeline proposed tariff revisions for the stated purpose of addressing changing market conditions and the effect of those conditions on producer shippers. As proposed, MEP and a shipper may agree to reduce the Maximum Daily Quantity of an existing Rate Schedule FTS transportation agreement or terminate an existing Rate Schedule FTS transportation agreement in certain circumstances in exchange for a payment to MEP of all or a portion of the reservation charges for the agreement’s remaining term. MEP explains that it is proposing the provision to “provide flexibility to its shippers in implementing transfers of producing acreage to other entities and in light of significant changes in commodity markets that have affected the financial condition of some of its shippers.”