During this month’s Federal Energy Regulatory Commission (FERC) meeting, FERC issued two Notices of Proposed Rulemaking (NOPR) and two Notices of Inquiry (NOI) impacting the electric industry. In addition, the natural gas pipeline industry received clarification in Docket No. RM08-2-001 regarding the applicability of FERC’s Pipeline Posting Requirements Under Section 23 of the Natural Gas Act (Order No. 720-A). In the first NOPR, Control and Affiliation for Purposes of Market-Based Rate Requirements under Section 205 of the Federal Power Act and the Requirements of Section 203 of the Federal Power Act issued in Docket No. RM09-16-000, FERC is seeking comment on its proposed rule exempting certain acquisitions of public utilities by holding companies from certain market-based rate requirements or cross-subsidization restrictions. In the second NOPR, Credit Reforms in Organized Wholesale Electric Markets issued in Docket No. RM10-13-000, FERC proposes a series of credit reforms that will balance the need for market liquidity with appropriate risk management while ensuring just and reasonable rates for the nation’s electric customers.

The first NOI, Electricity Market Transparency Provisions of Section 220 of the Federal Power Act in Docket No. RM10-12-000, demonstrated that market transparency continues to be a hot issue. Through this proceeding, FERC will determine whether it ought to broaden its oversight of transactions by market participants that are excluded from FERC jurisdiction under Section 205 of the Federal Power Act (FPA), such as electric cooperatives. In addition, the natural gas pipeline industry received clarification in Docket No. RM08-2-001 regarding the applicability of Order No. 720-A.

Finally, in the second NOI, Integration of Variable Energy Resources issued in Docket No. RM10-11-000, FERC is seeking public comment on whether to reform any of its rules or procedures (e.g., reporting requirements, reliability commitments, capacity market reforms) to accommodate the expanding generation portfolio that now includes more variable (a.k.a. intermittent) energy resources such as wind, solar or non-storage hydro generating plants.

Comments on the NOPR issued in Docket No. RM10-13-000 and the NOI issued in Docket No. RM10-11-000 are due by March 29, 2010. The other NOPR and NOI have yet to be published in the Federal Register. Comments on those issuances will be due 60 days after publication in the Federal Register, and Order No. 720-A will become effective within 150 days upon publication in the Federal Register. Additional information on the following issuances is provided below: (i) NOPR on acquisitions of public utilities by holding companies; (ii) NOI on electric market transparency; and (iii) Order No. 720-A pipeline reporting requirements. For additional information on the other FERC issuances referenced above, please contact any member of Fulbright’s Energy Regulatory Practice Group.

A. Proposed New Rules for Investment in Electric Utilities

For some time, generators and investment firms have argued that FERC’s regulations that protect electricity market competition make it difficult for passive investors to own more than a 10% stake in power companies. FERC seems to be listening to the industry and has proposed amendments to its regulations that could make it easier for investors such as hedge funds to take large stakes in power companies.

The NOPR proposes regulations that would allow investors to take up to a 20% stake without being subject to certain rate requirements and cross-ownership restrictions. Specifically, the NOPR proposes the amendment of FERC’s regulations pursuant to Sections 203 and 205 of the FPA to grant blanket authorization for a holding company to acquire 10% or more (but less than 20%) of a public utility, provided that the holding company files an Affirmation in Support of Exemption from Affiliation Requirements (new Form 519-C). Through the Affirmation, the holding company certifies that such securities were not acquired and are not held for the purpose or with the effect of changing or influencing the control of the public utility. In FERC’s view, the commitments required by the Affirmation and the enforcement of those commitments will be sufficiently rigorous to ensure adequate oversight of public utilities and protection of utility customers.

In the NOPR, FERC also proposes to amend Subparts H and I of Part 35 of its regulations to define an “affiliate” of a specified company as “any person that controls, is controlled by, or is under common control with the specified company.” Under the current regulations, an investor is an “affiliate” of a public utility if it “owns, controls, or holds with power to vote” 10% or more of the public utility’s outstanding voting securities. FERC indicated that the revised definition is meant to create a rebuttable presumption of lack of control.

B. Electricity Market Transparency

In Docket No. RM10-12-000, FERC is seeking comments on whether its Electric Quarterly Report (EQR) filing requirements should be applied to market participants that are excluded from FERC jurisdiction under Section 205 of the FPA, such as publicly owned utilities, municipal utilities, public utility districts, rural cooperatives and federal entities. Currently, only FERC-regulated utilities file EQRs, which summarize contract terms and conditions in agreements for all jurisdictional power sales. This reporting requirement allows consumers and FERC to monitor power sales for indications of market power. Expanding this requirement to the referenced non-jurisdictional entities would provide market information on an additional 29% of electric utility sales.

Some of the specific issues raised by FERC include: (1) whether FERC should establish a threshold pursuant to which market participants (that are excluded from FERC’s jurisdiction under Section 205 of the FPA) with a de minimis market presence would not be subject to the EQR filing requirements; and (2) whether there are certain EQR filing requirements that should not extend to market participants that are excluded from FERC’s Section 205 jurisdiction.

C. Clarification on Pipeline Posting Requirements

In Order 720-A, FERC amended its regulation to require major non-interstate pipelines to post scheduled flow data for receipt and delivery points at which design capacity is unknown or does not exist (e.g., virtual points, pooling points) with scheduled maximum natural gas volumes equal to or greater than 15,000 MMBtu on any day within the prior three calendar days. FERC also clarified that major non-interstate pipelines are required to begin internet postings for newly-eligible receipt and delivery points within 45 days of the point’s eligibility for posting.

FERC amended Section 284.1(d) to reflect that the appropriate threshold for a new pipeline to qualify as a major non-interstate pipeline is whether the pipeline has the capability to deliver more than 50 million MMBtu of natural gas annually. FERC stated that until a non-interstate pipeline has experienced three years of operational flow, it must utilize its maximum delivery capacity to determine whether it is a major non-interstate pipeline subject to the transparency rule.

FERC adopted an exemption from posting for receipt points with actual flows of less than 5,000 MMBtu per day on each day within the prior three years, stating that the exemption shall apply to receipt points with scheduled natural gas volumes of less than 5,000 MMBtu per day on each day, within the prior three calendar years. These modifications are consistent with FERC’s determination to post scheduled volumes rather than actual flows and should be less burdensome for major non-interstate pipelines to implement than a rolling exemption based upon actual flows.

FERC also clarified that a major non-interstate pipeline with a stub line incidental to a processing plant that delivers all of its transported gas directly into a single pipeline should not be required to comply with the posting requirements. However, if a major non-interstate pipeline’s stub line delivers gas to multiple pipelines or to end-users, then the exemption does not apply. Also exempt from the posting requirements are major non-interstate pipelines that deliver more than 95% of their annual flows to end-users (i.e., LDCs) as measured by average deliveries over the preceding three calendar years.

This article was prepared by Lisa M. Tonery (ltonery@fulbright.com or 212 318 3009), Erik J.A. Swenson (eswenson@fulbright.com or 202 662 4555), Tania S. Perez (tperez@fulbright.com or 212 318 3147) and Rabeha Kamaluddin (rkamaluddin@fulbright.com or 202 662 4576) from Fulbright’s Energy Regulatory Practice Group. If you have any questions about this Fulbright Briefing or would like a copy of the FERC issuances, please do not hesitate to contact any of the above authors.