During the crisis, electricity in the California market was sold in two centralized auction electricity markets, the California Independent System Operation Corporation (“ISO”) and the California Power Exchange (“PX”).  In order to participate in either market, participants were required to sign contracts that bound them to the terms of the tariffs that governed the operations of the markets.  In August of 2000, San Diego Gas & Electric filed a Complaint with the Federal Energy Regulatory Commission (the “Commission” or “FERC”) against all sellers of electricity in both the ISO and PX markets, arguing that the markets were not competitive and requesting that the Commission take action to ensure that the market rates satisfy the just and reasonable standard.  Subsequently, the Commission opened an investigation into the California rates and established a refund period of October 2000 through June 20, 2001 (“Refund Period”).  The Commission found that the markets were flawed and that these flaws caused unjust and unreasonable rates.  The Commission then corrected the prices charged in the PX and ISO Markets during the Refund Period, including an interest component to compensate market participants who had originally overpaid for their power purchases. The Commission further found that its power to enforce sellers’ payment of refunds under the Federal Power Act extended to government agencies such as BPA and WAPA. 

The Ninth Circuit subsequently affirmed FERC’s ability to correct the prices charged in the markets during the Refund Period.  The PX and the ISO then recalculated prices for these transactions based on FERC’s adjusted methodology and published settlement statements.  However, the Ninth Circuit held that FERC did not have the statutory authority over the governmental agencies necessary to enforce the obligation to pay a refund and instead suggested that the “equivalent refund relief” could be obtained by bringing contract claims against the federal agencies based on the contracts that parties executed to participate in the markets, which had bound them to tariffs that governed the markets. 

In the May 2nd ruling, the Federal Court of Claims found that both BPA and WAPA, in order to access the markets, were required to sign contracts that incorporated the ISO and PX tariffs.  In executing these agreements, BPA and WAPA contractually accepted the market tariffs as modified on occasion by the Commission.  As such, the Commission’s rate methodology change for the Refund Period affected the terms of the sales made by the government agencies as a matter of contract.  Further, the court rejected the governmental agencies’ argument that the California Parties lacked privity, finding that the ISO and the PX both essentially acted as clearinghouses for transactions between parties, all of whom executed the agreements to access the markets which dictated the terms of access, and therefore privity exists between the California Parties and the government agencies.  The court also noted that the federal agencies sought to take advantage of the dysfunction of the market during the energy crisis, citing to several unflattering internal agency communications, including one BPA Operations Memo from June 22, 2000, where the agency explained that, “[s]elling at such times is an ancient but still true marketing strategy derived from the Neanderthal hunting philosophy translated from cave paintings: ‘wait until they fall in the tar pit and then whomp ‘em.”

Having found BPA and WAPA to currently be in breach of contract, the next phase of this proceeding will be a determination of damages.  The California Parties have made claims against BPA totaling $40.9 million plus interest and against WAPA totaling $29.5 million plus interest.  No additional dates have yet been set in the docket.

H.R. 4273, as proposed, would amend section 202(c) of the Federal Power Act (“FPA”) to clarify that when an electric generator is operating under a section 202(c) emergency order, it will not be considered a violation of any Federal, State, or local environmental law or regulation.  H.R. 4273 also specifies that such action will not subject the party (generator) to any civil or criminal liability or a citizen suit under such environmental law or regulation.  Subcommittee Chairman Ed Whitfield (R-KY) supported H.R. 4273, stating that it is “essential that we amend the Federal Power Act so that generators aren’t forced to choose between compliance with an emergency order and compliance with EPA regulations.”  Energy and Commerce Committee Chairman Fred Upton (R-MI) also supported H.R. 4273, calling it a “critical piece of legislation” which “protects our nation’s electricity producers from being penalized or sued….”

The following witnesses testified on H.R. 4273 and related issues:

• Patricia Hoffman, Assistant Secretary for the Office of Electricity Delivery and Energy Reliability, Department of Energy (“DOE”)
• Gina McCarthy, Assistant Administrator for the Office of Air and Radiation, Environmental Protection Agency (“EPA”)
• Commissioner Philip D. Moeller, FERC
• Chairman Betty Ann Kane, D.C. Public Service Commission (“DC PSC”)
• Debra Raggio, Vice President, Government and Regulatory Affairs, and Assistant General Counsel, GenOn Energy, Inc.
• Stephen Brick, on behalf of Environmental Integrity Project   

Assistant Administrator McCarthy testified that the Executive Branch already has “sufficient tools” to address issues that arise and that 202(c) orders are “rare.”  She further argued that H.R. 4273 could remove incentives for owners to act quickly in order to comply with environmental requirements and thus create more conflict between electric reliability and compliance with environmental laws.  Finally, McCarthy argued that H.R. 4273 could unnecessarily endanger public health. 

Assistant Secretary Hoffman also expressed concerns that amendments to FPA section 202(c) could create a disincentive for generators to take advantage of the options EPA has put into place for compliance concerning reliability issues.  Hoffman also stressed that 202(c) authority is a “last resort.” 

In addition to the DOE and EPA officials, Stephen Brick from the Environmental Integrity Project testified that H.R. 4273 is “unnecessary” and grants “an environmental hall pass” which will cut environmental regulators out of the process when DOE issues an emergency order.  Brick argued that the changes in H.R. 4273 are the “wrong response” to the actual situation and move away from environmental protection.

Debra Raggio from GenOn and DC PSC Chairman Kane testified in support of H.R. 4273.  Raggio and Kane each described the experience of Mirant Corporation in 2005 when the company acted pursuant to a DOE order to keep a power plant running for reliability purposes, then faced fines from the Virginia Department of Environmental Quality for exceeding emissions standards.  Raggio further described the experience of Mirant in 2001 during the California energy crisis, when a San Francisco area plant was dispatched by the California Independent System Operator to maintain reliability.  Mirant then faced a citizen lawsuit.  Raggio and Kane used the Mirant example to argue why H.R. 4273 is necessary to prevent the “unfair” choice of electric generators between violating environmental permits and non-compliance with an emergency order from the DOE.   Raggio further testified that H.R. 4273 offers a “clear way” to ensure that tools are available to maintain reliability of the grid even with conflicting environmental requirements.

FERC Commissioner Philip Moeller testified that he and his three colleagues on the Commission support the concept of H.R. 4273.  Commissioner Moeller also testified that a bill like H.R. 4273 is “essential to address potential reliability challenges.”  He emphasized that FERC hopes that the bill would never be invoked, but “erring on the side of reliability is the responsible approach.”

H.R. 4273 was introduced in the House on March 28, 2012 by Representatives Pete Olson (R-TX), Michael Doyle (D-PA), Lee Terry (R-NE), Gene Green (D-TX), Adam Kinzinger (R-IL), and Charles Gonzalez (D-TX).

Copies of testimony from each witness are available here.

A copy of H.R. 4273 is available here.

Specifically, the Applicants’ agreement requires:

• The Applicants to guarantee $650 million in system savings for Carolina retail customers through fuel blending, purchases and jointly operating the Carolinas generation fleets.  The guarantee may extend 18 months beyond the original five-year timeframe if coal consumption at certain plants is less than originally forecast.
• That the Applicants will not seek recovery from North Carolina retail customers for the seven planned transmission projects listed in the mitigation proposal for five years.  Applicants may seek recovery after the five years, but must show the transmission projects are needed for adequate and reliable service.
• That during the two to three year interim mitigation period, while the transmission is being built, Applicants will reduce retail rates by $70 million.
• That the Applicants will not seek recovery from North Carolina retail customers for revenue shortfalls or fuel-related costs associated with the interim mitigation power sales agreements.
• The Applicants to not seek recovery from North Carolina retail customers for their allocable shares of the merger severance costs.

The settlement agreement must now be approved by the NCUC.  However, the NCUC will likely wait to issue a decision on the settlement agreement until after FERC has ruled on the mitigation proposal.  Applicants have requested that FERC issue a decision on that proposal by June 8.

Svinicki is nuclear engineer and a former Senate staffer.  Svinicki has also worked at the Department of Energy (“DOE”) in the Office of Nuclear Energy, Science and Technology, and of Civilian Radioactive Waste Management.  Prior to working at DOE, Svinicki worked at the Wisconsin Public Service Commission as an energy engineer.

EPA is currently involved in a lawsuit, brought on by the American Lung Association (“ALA”), over the missed deadline.  In the lawsuit, the ALA has requested that EPA take final action by October 15, 2012.  EPA, in its filing, stated that it has completed a substantial portion of the work in reviewing the standards, but would not be able to take final action by the ALA’s requested October deadline.  EPA stated that its proposed August deadline “reflects the most expeditious schedule that EPA reasonably can meet under the circumstances.”

The case is American Lung Association v. EPA.  The case number is 1:12-cv-00243.