Introduction to the WTO

1
Federal State Regulatory Issues
Elizabeth W. WhittleNixon Peabody LLP401 9th
Street, N.W.Washington, D.C. 20004(202)
585-8338ewhittle_at_nixonpeabody.com


July 25, 2007
2
Federal and State Regulatory Issues

• As a wholesale supplier of power, a wind
  developer will be subject to regulation under the
  Federal Power Act (FPA). The Federal Energy
  Regulatory Commission (FERC) administers the FPA.
  FERC has jurisdiction over both the transmission
  and the sale of this power.
• Siting and related matters are subject to the
  jurisdiction of the states.

3
Transmission Regulatory Scheme

• Transmission service is governed by utility
  tariffs. In many regions, transmission service
  is provided by an Independent System
  operator/regional transmission organization
  (RTO/ISO).
• RTO/ISOs do not own the transmission assets, but
  have operational control over them.
• Open-access, non-discriminatory transmission
  service is provided pursuant to a Tariff on file
  and approved by FERC.

4
Transmission Regulatory Scheme

• Tariffs govern
• Interconnection
• Transmission
• Ancillary service
• Rates
• Dispute resolution

5
Interconnection

• The interconnection process has been
  standardized. Each Transmission Owner or RTO/ISO
  has tariff provisions governing the process from
  the filing of an interconnection request to the
  execution of the Interconnection Agreement.
• While the process is standardized, there are
  limited regional differences that are permitted
  by FERC. Milstones must be met to remain in the
  interconnection queue.
• The process includes a number of steps, many of
  which must be followed by deposits. Developer
  must pay for the costs of all studies.
• Interconnection Request - 10,000
• System Reliability Study - 50,000
• Facility Study - 100,000
• Interconnection Agreement - 250,000 if cant
  show evidence of site control

6
Sale of Power at Market-Based Rates

• FERC authorization is required to sell power at
  market-based rates even if power is sold only
  into the RTO/ISO market.
• In order to obtain authority to engage in sales
  for resale at market-based rates the Developer
  must show that
• It lacks market power over generation
• It lacks market power over transmission
• Cannot erect other barriers to entry and
• Neither it nor its affiliates engage in
  reciprocal deals or otherwise abuse an affiliate
  relationship.

7
Sale of Power at Market-Based Rates (Contd)

• On June 21, 2007 FERC issued Order No. 697 (119
  FERC 61,295), which revises some of FERCs
  market-based rates rules.
• The Final Rule is 643 pages long!
• FERC examines vertical and horizontal market
  power.

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Sale of Power at Market-Based Rates (Contd)

• Horizontal Market Power If an entity passes the
  market screens established by the FERC, the
  entity is presumed to lack market power.
• If an entity fails the market screens, the entity
  is presumed to possess market power and must
  rebut the presumption by performing the delivered
  price test.
• The geographic market is usually either the
  sellers balancing authority area or the
  RTO/ISO footprint.

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Sale of Power at Market-Based Rates (Contd)

• Vertical Market Power FERC assumes that no
  market power exists if there is an open access
  transmission tariff on file.
• FERC can revoke market-based rates and impose
  cost-based rates on the entity and, in some
  cases, the entitys affiliates.

10
Ongoing Obligations Market-Based Rates

• Once a seller obtains market based rate
  authority, there are reporting obligations.
• Each quarter, the seller must report to FERC
  electronically details of its activities,
  including Mwh sold, aggregate prices, etc. Even
  if there is no activity, the report must be
  filed.

11
Market Power Updates

• Category 1 Sellers (those marketers which own or
  control 500MW or less and not affiliated with a
  public utility with a franchised service
  territory) do not have to file market power
  updates periodically.
• Category 2 Sellers (those who are not Category 1)
  must file updates to show that they continue to
  qualify. FERC establishes a filing schedule for
  the periodic updates.
• All sellers must file changes in circumstances
  with the FERC.

12
Qualifying Facility/Exempt Wholesale Generator

• Wind projects are qualifying small power
  production facilities.
• The Public Utility Regulatory Policies Act of
  1978 (PURPA) required among other things the
  utility, if requested, to purchase all of the
  output (net) of QFs at the utilitys avoided
  cost.
• Also, under PURPA, the FERC was given the
  authority to exempt QFs from provisions of the
  FPA, including rate regulation under Section 205.
• On August 8, 2005, Congress enacted the Energy
  Policy Act of 2005 (EPAct) which among other
  things gave FERC the authority to allow the
  utility to escape from the mandatory purchase
  obligation if QF has non-discriminatory access to
  three markets defined in the legislation.

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Qualifying Facility/Exempt Wholesale Generator
(Contd)

• FERC implemented EPAct and issued Order No 688,
  (71 FR64342 (2006), Order on rehg, 119 FERC
  61,305 (2007), which established guidelines for
  utilities to escape from the mandatory purchase
  obligation. FERC created three rebuttable
  presumptions.
• For projects with a capacity over 20MW, in Day
  2 RTO/ISO markets, there is a rebuttable
  presumption that those markets are workably
  competitive. The 4 Day 2 markets are Midwest
  ISO, New York ISO, PJM and ISO-New England.

14
Qualifying Facility/Exempt Wholesale Generator
(Contd)

• For projects with a capacity over 20MW, QFs
  located in markets where service is provided
  under an open access transmission tariff are
  presumed to have non-discriminatory access to
  markets in that transmission providers
  territory.
• QFs with a net capacity 20MW or less are presumed
  to not have non-discriminatory access to any
  markets.

15
Qualifying Facility/Exempt Wholesale Generator
(Contd)

• As a result of these presumptions, many QFs with
  a net capacity of greater than 20MW will no
  longer have local utility as an involuntary
  purchaser of power. That doesnt mean that the
  utility wont voluntarily purchase the power at
  an agreed upon or auction-based price.
• If a project does not avail itself of the
  benefits of QF status, developers obtain Exempt
  Wholesale Generator (EWG) Status. EWGs are
  exempt from certain regulations under the Public
  Utility Holding Company Act of 2005.

16
Qualifying Facility/Exempt Wholesale Generator
(Contd)

• In EPAct, the Congress repealed the Public
  Utility Holding Company Act of 1935, eliminating
  the onerous SEC-related reporting requirements
  that fell on public utility holding companies.
• While the exemption from regulations as an EWG
  may not seem as valuable, it is important to
  maintain EWG status in order to claim certain
  exemptions from filing, e.g., to dispose of a
  facility under FPA Section 203. (See FERC Order
  No. 669).
• Once EWG status is obtained, material changes in
  circumstances -- changes in upstream ownership,
  etc. must be reported to FERC.

17
State-Related Issues

• Many wind development requirements are under
  State jurisdiction. Unlike natural gas pipelines
  where FERC has siting jurisdiction, siting
  matters are left to the State.
• Each State has it own siting schemes. Most
  require an approval/certificate from the Public
  Utility Commission (PUC) that the project is in
  the public convenience and necessity.
• Often this review entails an environmental
  assessment or related environmental document and
  the involvement of state environmental agencies.
• Many environmental studies are often required - -
  noise, bats, birds, impacts on landowners, etc.
• Counties and towns also have authority under
  local zoning laws.

18
State-Related Issues (Contd)

• States may be the administrator of renewable
  energy credit/RPS standards.
• Many states also regulate the utility as a public
  utility, although each may have lightened
  regulation or a way to obtain exemptions from
  state commission jurisdiction.
• In New York, for example, developers file an
  application for lightened regulation.