Arnie Podgorsky - Legal Update

WSPP: Update on Legal, Regulatory,
and Legislative Matters
Spring Operating Committee Meeting
Whistler, British Columbia
March 5-7, 2014
Arnold Podgorsky
Patrick Morand
Wright & Talisman, PC
Washington, DC
These training materials are not legal advice
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Contents
These materials address
– Regulatory Context
– Brief Updates, Ongoing Matters
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Capacity Markets
Order No. 1000
FERC Enforcement
BPA and FERC (environmental redispatch)
Third-Party Ancillary Services Sales
Gas-Electric Coordination
Grid Security
EQR Status Update
FERC Chairman Nomination
FERC/CFTC MOUs
Federal Reserve ANPR
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Regulatory Context
• Agency Action: Regulations; Quasi-Judicial Orders
– Regulations (Rules), issued by FERC, CFTC, EPA and
numerous other agencies are to implement statutes, to achieve
statutory objectives
• Regulations must be consistent with statutes or can be overturned by courts
on review
– Orders, result from agency quasi-judicial proceedings, resulting
from paper proceedings or full-blown trial-type proceedings
• All final orders are subject to judicial review; they can be overturned when
not in accordance with law or supported by substantial evidence
– Judicial review: courts give substantial deference to an agency’s
interpretation of its statute and evidence, recognizing the
agency’s expertise
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Regulatory Context (con’d)
• The Federal Power Act (“FPA”) requires that all rates,
terms and conditions of wholesale sales of electric power
and transmission be just and reasonable
– FERC, through rulemaking proceedings and quasi-judicial
decisional orders, interprets the FPA and related legislation
– FERC’s expansive interpretation of “just and reasonable” covers
the obvious – cost of service and reasonable return on equity for
cost-based rates – but also much more
• Exercise of undue market power
• Unduly discriminatory practices
• Open transmission access and a host of related rules to create and sustain
generation competition
• Competitive markets with market-based rates
• Prohibition of exercise of undue market power, to assure that competitive
rates are just and reasonable
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Brief Updates, Ongoing
Matters:
 Capacity Markets
 Order No. 1000
 FERC Enforcement
 BPA and FERC (environmental redispatch)
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Brief Updates
• Capacity Markets – Ongoing, but no decisions
– As reported at the October OC Meeting, on September 25, 2013
FERC held a technical conference to address capacity market
rules and structures in PJM, NYISO and ISO-NE
– FERC invited post-technical conference comments
– Commissioners indicate that they will not pursue a one-size-fitsall approach to capacity markets
– Relevant to the bilateral West? Organized markets are signals
of FERC’s concerns, they bear watching
• Order No. 1000 – Ongoing, but no recent decisions
– The FERC is reviewing the current round of Order No. 1000
compliance filings and has not issued new orders recently
– Challenges to the Order are before the US Court of Appeals (DC
Circuit); oral argument scheduled for March 20, 2014
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Brief Updates (con’d)
• FERC Enforcement
– In 2013, FERC’s anti-manipulation efforts resulted, e.g., in a
settlement with JP Morgan for $410 million, and orders
assessing civil penalties against Barclays for $435 million and
BP for $28 million
– FERC Commissioners expect to increase efforts in 2014; certain
FERC Commissioners have proposed a trader licensing
requirement for participation in FERC-regulated markets; would
clarify what entities are subject to enforcement
– Recent enforcement actions at FERC include:
• On January 6, 2014, notice of alleged violations against Louis Dreyfus
Energy Services, L.P. for allegedly manipulating the FTR market in MISO
from November 2009 to February 2010
• In an unusual move to combat an Enforcement investigation, Powhatan
Energy Fund launched a website on which it posted non-public documents
and affidavits by industry experts to refute FERC claims that Powhatan
manipulated PJM markets from February 2010 to August 2010
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Brief Updates (con’d)
• BPA and FERC (environmental redispatch)
– In June 2011, certain Pacific NW wind generators filed a
complaint alleging that BPA, through its Environmental
Redispatch Policy, curtailed wind generators in an unduly
discriminatory manner
– FERC found that BPA’s Environmental Redispatch Policy
resulted in noncomparable treatment and, pursuant to FPA §
211A, directed BPA to provide comparable service
– BPA submitted a compliance filing revising transmission tariff to
include an Oversupply Management Protocol which addressed,
among other things, compensation for generators curtailed in
periods of oversupply (like the earlier runoff)
– In December 2012, FERC accepted BPA’s Oversupply
Management Protocol, subject to further compliance
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Brief Updates (con’d)
• BPA and FERC (environmental redispatch) (con’d)
– FERC denied rehearing requests of BPA and several others;
BPA, National Rural Electric Cooperative Association, American
Public Power Association, and others sought judicial review in
the US Court of Appeals (9th Cir.) (Case No. 13-70499)
– In December 2013, BPA withdrew from seeking judicial review
indicating that, while it has concerns over FERC’s exercise of
authority under FPA § 211A, it would work with the Oversupply
Management Protocol in place
• Other petitioners have continued the judicial proceeding, arguing that FERC
did not properly invoke its FPA § 211A authority, including that the
Oversupply Management Protocol addresses generation, not transmission
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Third Party Ancillary Services
Sales
 Order No. 784-A (on rehearing)
Third-Party Provision of Ancillary Services;
Accounting and Financial Reporting for New Electric
Storage Technologies, Order No. 784-A, 146 FERC
¶ 61,114 ( Feb. 20, 2014)
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Ancillary Services
• Order 784-A (February 20, 2014) is the order on
rehearing of Order No. 784
• In Order 784 FERC addressed the growing need to allow
market-based pricing for ancillary services, by revising
its Avista rules to allow third-party sellers holding marketbased-rate authority for energy and capacity sales to sell
– energy imbalance, generator imbalance service, and operating
reserve services at market-based rates; but not regulation and
frequency control;
– to a public utility transmission provider within the same balancing
authority area, or to a public utility transmission provider in a
different balancing authority area;
– provided those balancing authority areas have implemented
intra-hour scheduling for transmission service
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Ancillary Services (con’d)
• On rehearing, FERC clarified that for energy imbalance
and generator imbalance services, intra-hour
transmission scheduling of any tempo is sufficient (e.g.,
15-minute, 30-minute, etc.)
• This clarification as to transmission scheduling tempo
does not apply to operating reserves-spinning and
operating reserves-supplemental, because each must be
available on an immediate or short time basis
– Sellers of operating reserves must make a showing that the
available transmission scheduling practices support the ability of
the source to respond within the needed time frame
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Ancillary Services (con’d)
• What about reactive supply and voltage control (OATT
Schedule 2) and regulation and frequency response
(OATT Schedule 3)?
– In Order No. 784 FERC found that the technical and geographic
requirements for these services precluded application of existing
market power screens to sales of these services
– FERC opened a new Docket, No. AD14-7-000, to gather more
information regarding the technical, economic and market issues
concerning provision of these services
– Staff will hold a workshop on April 22, 2014 to address these
issues; participation requires online registration on FERC’s
website by March 14, 2014
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Ancillary Services (con’d)
• What does this mean for WSPP?
– WSPP is deciding whether and how to revise Service
Schedule D (and possibly E) to respond
– Among other changes, note that D provided for sale
of all NERC reserves, using NERC glossary
definitions, while Order No. 784 addresses ancillary
services
• D products and nomenclature should be consistent with 784
to help assure regulatory certainty
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Ancillary Services (con’d)
• In Order 784-A the FERC also clarified that:
– the FERC’s Avista restrictions do not apply to sales to non-public
utilities; thus, the FERC did not intend to alter its Avista policy
when it stated in Order No. 784 that sales of imbalance services
to entities other than public utility transmission providers remain
authorized under the Avista policy
– the FPA § 205 filing requirement for sales of ancillary services
made pursuant to a competitive solicitation applies only to sales
not otherwise authorized in Order No. 784 (i.e., it would be
redundant to require sellers to make an FPA § 205 filing for
sales already authorized under market-based rate tariffs)
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Ancillary Services (con’d)
• Order No. 784 also required public utility transmission
providers:
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to add to Schedule 3 of their OATTs a statement that they will
take into account the speed and accuracy of regulation
resources in determining reserve requirements for regulation
and frequency response service (including whether self-supply
customers have made alternative comparable arrangements);
and
to post on OASIS historical one-minute and ten-minute area
control error (“ACE”) data for the most recent calendar year so
that transmission customers can make an apples-to-apples
comparison of regulation resources
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Ancillary Services (con’d)
• The FERC clarified that, absent verifiable operational
reasons for doing so, transmission providers may not
limit the quantity or percentage of total reserve
obligations that a transmission customer may self-supply
• The FERC also clarified, however, that transmission
providers may require self-supplying transmission
customers to supply a greater quantity of reserves than
what would otherwise be required if the self-supply
arrangement relies on slower, less accurate resources
– Last, the FERC clarified that the ACE data must be posted on
OASIS within 30 days of the order (i.e., March 22, 2014)
17
Gas-Electric Coordination
 Issuance of Order No. 787:
Communications of Operational Information Between
Natural Gas Pipelines and Electric Transmission
Operators, Order No. 787, 145 FERC ¶ 61,134
(Nov. 15, 2013)
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Gas-Electric Coordination
• On November 15, 2013, the FERC issued Order No. 787
adopting the NOPR in which it addressed the increasing
interdependence between the natural gas and electric
industries due to the increased reliance on natural gas
as a fuel for electric generation
• Order No. 787 modifies FERC regulations to authorize
interstate natural gas pipelines and public utilities to
share non-public, operational information with each other
for the purpose of promoting reliable service or
operational planning on either the pipeline’s or public
utility’s system.
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Gas-Electric Coordination (con’d)
• Limits: Order 787 limits the blanket authorization for
exchange of information to interstate natural gas
pipelines and public utilities that own, operate, or control
facilities used for the transmission of electric energy in
interstate commerce subject to the FERC’s jurisdiction
– The FERC did not extend the blanket authorization to LDCs,
intrastate pipelines, or gatherers
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Gas-Electric Coordination (con’d)
• Order No. 787 also adopts a No-Conduit Rule which
prohibits all public utilities and interstate natural gas
pipelines, as well as their employees, contractors,
consultants, or agents, from disclosing, or using anyone
as a conduit for the disclosure of, non-public, operational
information to a third party or to its marketing function
employees
– The FERC explained that the No-Conduit Rule is necessary to
ensure that the shared non-public, operational information
remains confidential and is shared among transmission
operators in a manner that is consistent with the prohibition on
undue discrimination
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Gas-Electric Coordination (con’d)
• The Order does not address scheduling differences
between gas and electric markets
– While Order No. 787 focuses on increased communication
between the gas and electric industries, an earlier Staff Report
identified other (and potentially more complicated) related
issues, namely the scheduling differences between the two
industries
– For example, in an RTO/ISO day-ahead market, a gas-fired
generator, to obtain the best gas prices, may have to nominate
pipeline transportation service before the RTO/ISO confirms it
bid in the day-ahead market, resulting in price and/or supply risk
for the generator
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Grid Security
 Senate Letters on Physical Security of U.S.
Electric Grid and the FERC’s Response
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Grid Security
• In a letter dated February 7, 2014, Senators Wyden,
Reid, Feinstein, and Franken asked FERC and NERC to
utilize their respective authorities to determine whether
additional minimum standards regarding physical security
at essential facilities are needed to ensure reliable
operation of the bulk power system
– the Senators cited to the April 2013 attack on the Metcalf
substation in Silicon Valley as a wake-up call to the risk of
physical attacks on the grid; and
– expressed concern that a voluntary approach to grid security may
not suffice
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Grid Security (con’d)
• The Senators pointed to Section 1211 of EPAct 2005
granting FERC and NERC authority to implement
mandatory standards
• In a responding letter of February 11, 2014 FERC Acting
Chair Cheryl LaFleur explained that FERC works with
NERC, DOE, FBI, Homeland Security and others to
reach out to utilities, states, and law enforcement
agencies to explain the facts of the attack on Metcalf and
the need to increase the physical protection of key
facilities
– But threw the ball back to the Senators…
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Grid Security (con’d)
• LaFleur explained that, while it is appropriate to consider
such standards on physical security, FERC must
maintain the confidentiality of sensitive security
information avoiding disclosure under the Freedom of
Information Act
– LaFleur asked that Congress enhance the confidentiality of
sensitive security information concerning physical or cyber
threats to, or vulnerabilities of, the bulk power system through a
properly-defined exemption from the Freedom of Information Act
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EQR Matters
 Order Setting Deadlines to File EQRs
 Filing Requirements for El. Utility S.A., Order
Extending and Setting Deadlines to File Electric
Quarterly Reports, 146 ¶ 61,144 (Feb. 28, 2014)
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EQR Status Update
• On February 28, 2014, the FERC issued an order
extending and establishing new deadlines for filing the
third quarter 2013 Electric Quarterly Reports (“EQRs”),
fourth quarter 2013 EQRs, and first quarter 2014 EQRs
• Accordingly, third quarter 2013 EQRs must be filed by
April 30, 2014; fourth quarter 2013 EQRs must be filed by
May 31, 2014; and first quarter 2014 EQRs must be filed
by June 30, 2014
• Starting with the second quarter 2014 EQRs, the normal
filing schedule will resume
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EQR Status Update (con’d)
• In addition, the order reminds EQR filers that:
– Order No. 768 (issued in September 2012) requires market
participants that are otherwise excluded from the FERC’s
jurisdiction under FPA § 205 (i.e., non-public utilities) and have
more than a de minimis market presence to file EQRs beginning
with the third quarter 2013
– Order No. 770 (issued in November 2012) revised the FERC’s
regulations to change the process for filing EQRs by adopting a
web-based approach that allows public or non-public utilities to
file their EQRs directly through the FERC’s website, either
through a web interface or by submitting an Extensible Mark-Up
Language-formatted file, beginning with the third quarter 2013
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FERC Chairman Nomination
 Nomination of FERC’s Enforcement Director,
Norman C. Bay
 Acting Chairman Cheryl LaFleur
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FERC Chairman Nomination
• On January 30, 2014, President Obama announced his
intention to nominate FERC’s Director of Enforcement,
Norman C. Bay, to be the FERC’s next Chairman
– Bay has been the FERC’s Director of Enforcement since July
2009
– Previously the U.S. attorney for New Mexico and a professor at
the University of New Mexico School of Law
– As Director of Enforcement, Bay has overseen the FERC’s highprofile market manipulation cases against Barclays Plc,
Deutsche Bank AG, and JPMorgan Chase, among others
• This is the second nomination for a replacement for
former FERC Chairman Jon Wellinghoff after President
Obama’s initial choice, Ron Binz, withdrew his name in
October 2013
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FERC Chairman Nomination (con’d)
• A representative of Senator Murkowski, the top
Republican on the Senate Energy and Natural
Resources Committee, noted that with the Bay
nomination President Obama had leapfrogged over
sitting FERC Commissioners a second time
• On November 25, 2013, President Obama named FERC
Commissioner Cheryl La Fleur Acting FERC Chairman
– LaFleur was reportedly interested in being Chairman, but
reportedly has said she would accept re-nomination regardless
• Does it matter who is chairman? Yes, the chairman sets
the agenda
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FERC and CFTC MOUs
 Memorandum of Understanding on
Overlapping Jurisdiction (Jan. 2, 2014)
 Memorandum of Understanding on
Information Sharing (Jan. 2, 2014)
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FERC and CFTC MOUs
• On January 2, 2014, the FERC and CFTC entered into
two memoranda of understanding (“MOU”) on
overlapping jurisdiction and on information sharing, as
Section 720 of the Dodd-Frank Act requires
• The jurisdiction MOU sets forth procedures for each
agency to notify the other agency of activities that may
involve overlapping jurisdiction and procedures to
resolve such overlaps, including dispute resolution
procedures
– The MOU on jurisdiction clarifies that it does not alter or expand
either agency’s statutory authority, nor does it require the CFTC
to issue an exemption pursuant to Dodd-Frank or the CEA or the
FERC to waive requirements of the FPA, NGA or NGPA
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FERC and CFTC MOUs (con’d)
• The information sharing MOU states procedures by
which the agencies are to share information of mutual
interest related to their respective market surveillance
and investigative responsibilities, while maintaining
confidentiality and data protection
– In a letter of February 7, 2014, Senators Feinstein, Warren,
Cantwell, Boxer, Merkley, Markey, Wyden and Levin asked
CTFC Acting Chairman Wetjen to resolve alleged technical
difficulties currently preventing the CFTC from implementing the
information sharing MOU
– This seems resolved. On March 5, 2014, the two agencies
announced the initial transmission of market data under the
MOU “for use in analyzing market activities and protecting
market integrity.” Also announced the creation of a staff
interagency Surveillance and Data Analytics Working Group
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Federal Reserve Advanced
Notice of Proposed Rulemaking
(ANPR)
 on banks and trading of physical
commodities

Complementary Activities, Merchant Banking Activities, and
Other Activities of Financial Holding Companies Related to
Physical Commodities, Docket No. R-1479, 79 Fed. Reg.
3329 (Jan. 21, 2014)
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Federal Reserve ANPR
• In January 2014, the Board of Governors of the Federal
Reserve issued the ANPR inviting comments on:
– the risks and benefits of allowing financial holding companies
(“FHCs”) to conduct certain physical commodity activities
authorized by the Bank Holding Company Act, and
– whether risks to the safety and soundness of a FHC and its
affiliated insured depository institutions, and to the financial
system as a whole, warrant Fed action to impose limitations on
the scope and manner of those trading activities
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Federal Reserve ANPR (con'd)
• The Fed explained in the ANPR that:
1. in the past several years, FHCs have expanded their activities
involving physical commodity trading and some securities firms
that engaged in substantial physical commodity activities were
acquired by or became FHCs; and
2. events involving physical commodity activities such as the oil
spill at BP’s Deepwater Horizon drilling platform, the rupture of
PG&E’s natural gas pipeline in San Bruno, California, and the
earthquake and tsunami that caused a severe nuclear incident
at the Fukushima Daiichi power plants in Japan (i.e., tail risk
events) suggest that the risks of conducting these activities are
changing and the steps that FHCs may take to limit these risks
may not be sufficient
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Federal Reserve ANPR (con'd)
• Specifically, the Fed has approved requests by FHCs to
engage in three types of activities that are
“complementary” to their financial activities:
1. physical commodity trading in the spot market, and taking and
making delivery of physical commodities to settle commodity
derivatives;
2. energy tolling arrangements; and
3. providing transactions and advisory services to power plant
owners (i.e., energy management services)
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Federal Reserve ANPR (con'd)
• The Fed seeks comments addressing the potential
actions the Fed may take to limit risks with regard to
these and other similar activities
• Comments are due April 16, 2014
Thank you for your time and attention
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