FERC, CFTC, and State Energy Law Developments

The White House announced late last week that President Donald Trump has directed Energy Secretary Rick Perry to “prepare immediate steps to stop the loss” of “fuel-secure power facilities,” noting that near-term retirements of these facilities could lead to “a rapid depletion of a critical part of our nation’s energy mix, and impact the resilience of our power grid.” Although the federal government has not yet disclosed what those steps might be or which generators are at issue, press reports from CNN and Bloomberg, among others, have emerged suggesting that the US Department of Energy (DOE) is considering a directive that would require Independent System Operators and Regional Transmission Operators (ISOs/RTOs) to purchase energy from designated “fuel-secure” plants for a period of up to, and possibly more than, 24 months to avoid any near-term decommissioning.

On the heels of the news reports describing cyberattacks on the energy sector that have continued to accumulate over the last few years, the US Department of Homeland Security (DHS) and the Federal Bureau of Investigation (FBI) issued a technical alert on March 15 describing ongoing attacks on critical infrastructure by hackers associated with the Russian government. The alert described the cyberattacks as part of a “multi-stage intrusion campaign by Russian government cyber actors” that targeted the energy sector networks, as well as computer systems used by entities in the nuclear, water, aviation, and critical manufacturing sectors. The alert is the latest in a string of reported cyberattacks on industrial control systems (ICS) in recent years, and can only serve to ratchet up the regulatory pressure on these industries to demonstrate their resilience in the face of these well-organized attacks.

The North American Electric Reliability Corporation (NERC) filed a Notice of Penalty summarizing an agreement by an unidentified electric utility to pay a $2.7 million penalty in connection with self-reported violations of the Critical Infrastructure Protection reliability standards related to sensitive data exposure by a vendor. Although the utility did not directly cause the improper data handling—and indeed the violation resulted from vendor noncompliance with utility policies—the Western Electricity Coordinating Council nevertheless concluded that the utility failed to adequately implement its information protection program by not preventing or immediately detecting the vendor’s actions and submitted the settlement to NERC. 

For more detail, read our LawFlash.

In response to concerns that the ability of the electric system to provide frequency response following a system disturbance is falling across the United States, the Federal Energy Regulatory Commission (FERC) changed its generation interconnection requirements on February 15. Frequency response is, generally speaking, the ability of the system to quickly return to 60 Hz frequency following a system event such as the sudden loss of a generator. If frequency is not immediately corrected, over- or under-frequency events can occur, which would lead to more and more facilities tripping out of service. The ability of the bulk electric system to provide frequency response is therefore critical in order to avoid cascading outages.

Under the revisions to the pro forma Large Generator Interconnection Agreement (LGIA) and the Small Generator Interconnection Agreement (SGIA), nonsynchronous generators (typically renewable generation) will for the first time be required to have equipment that enables the generator to provide frequency response. Previously, only synchronous generators were required to have that capability because of concerns that nonsynchronous generators were not technically capable of providing that service. FERC found that with recent technological developments there is no longer a reason to treat synchronous and nonsynchronous generation differently on this issue.

The new requirements will apply only to new interconnection agreements, including those driven by changes at an existing generator that necessitate a new interconnection agreement.

The Federal Energy Regulatory Commission (FERC) issued an order on January 18 approving four Emergency Operations (EOP) reliability standards: EOP-004-4 (Event Reporting), EOP-005-3 (System Restoration from Blackstart Resources), EOP-006-3 (System Restoration Coordination), and EOP-008-2 (Loss of Control Center Functionality). The newly-approved standards are intended to enhance the requirements for system restoration and related personnel training.

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.

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.

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.”

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 >>