Bench Report: Top 10 Groundbreaking Legal Decisions in 2009

Fortnightly Magazine - November 2009

1. NRG Power Marketing v. Maine PUC: High Court Reconsiders ‘Just and Reasonable’ Standard

When the U.S. Supreme Court granted certiorari to hear NRG’s appeal, it raised uncertainty about the industry’s longstanding “just and reasonable” standard for assessing wholesale power rates, based on the Mobile-Sierra doctrine (referring to a pair of Supreme Court decisions from 1956). The Mobile-Sierra doctrine holds that FERC must presume that rates established in freely negotiated wholesale energy contracts are just and reasonable. Just last year, the Supreme Court clarified Mobile-Sierra, deciding in Morgan Stanley v. PUD No. 1 that the only way to overcome the Mobile-Sierra presumption is if FERC concludes a contract “seriously harms the public interest.” In the NRG case now before the Court, petitioners argue that a D.C. Circuit decision conflicts with Morgan Stanley. In a case involving a FERC settlement establishing ISO New England’s capacity market, the D.C. Circuit ruled that the Mobile-Sierra doctrine doesn’t apply to transactions between parties who weren’t part of the FERC settlement. NRG alleges that any participant in the ISO New England market is, in effect, entering a contract that’s subject to the FERC settlement agreement and any such transactions should be covered by Mobile-Sierra. If the High Court agrees with NRG and vacates the D.C. Circuit’s decision, it might mean that Morgan Stanley’s public-interest standard applies not only to parties to the FERC settlement, but to anyone who participates in a competitive wholesale market. But if the Court affirms the decision, it would clarify that FERC’s settlement agreement doesn’t make a de facto just-and-reasonable rate out of any trade conducted in an organized market. NRG Power Marketing, LLC v. Maine PUC (No. 08-674),USSC granted cert., April 27, 2009.

2. Massachusetts v. EPA: EPA Endangerment Finding: Implementing

When the U.S. Supreme Court ruled in April 2007 that EPA has authority to regulate greenhouse gases (GHG) under the Clean Air Act (CAA), it marked a major turning point in the climate policy debate. Then, when voters elected President Obama in November 2009, the new administration was expected quickly to reverse the previous EPA’s position on GHG emissions. In April 2009, EPA Administrator Lisa Jackson did exactly that, signing a proposed finding that increasing concentrations of atmospheric GHGs “endanger the public health and welfare of current and future generations,” with observable effects that trigger regulation under CAA. Further, the administrator proposed defining new motor vehicle GHG emissions as pollutants endangering public health and welfare. The finding set the stage for federal regulation of GHGs from both stationary and mobile sources, and indeed this fall the White House formally asked Jackson to draft such regulations. EPA Docket ID No. EPA-HQ-OAR-2009-0171.

3. ComEd v. FERC: Paying the Postage for Grid Expansion

In August, a federal appeals court in Chicago struck a blow against those advocating a national program to remake the nation’s electric grid—akin to Eisenhower’s 1950s Interstate Highway Project—by insisting that local ratepayers in one state can’t be forced to pay for new lines built in a far-off region.

By a 2-1 vote, the court endorsed the traditional utility “cost-causer” practice of “beneficiary pays” and struck down a FERC order that had OK’d PJM’s policy of “postage-stamp” funding that had required all RTO members to share costs equally for new transmission lines 500-kV or greater. Writing for the majority, Judge Posner said that Commonwealth Edison, an Illinois utility, should not have to help pay for “Project Mountaineer,” a set of new 500- and 765-kV lines designed to facilitate power imports into the eastern Mid-Atlantic—at least not without a better explanation from FERC. Illinois Comm. Comm’n. v. FERC, Aug. 6, 2009, 576 F.3d 470 (7th Cir.).

4. Connecticut v. AEP: Weighing the Certainty of Climate Change

In September, a federal appeals court in New York City (2nd Circuit) gave the go-ahead to a common law lawsuit filed by eight states, the City of New York, and several private land trusts, against a group of large U.S. utilities operating fossil-fired power plants (including the five largest U.S. CO2 emitters, according to claims), by which the plaintiffs had sought to force the utilities to cap and then reduce their carbon CO2 emissions, on the theory that such greenhouse-gas emissions (GHG) represent a public nuisance that has, and will cause, harm to human health and natural resources.

Citing evidence of California water shortages from reduced winter snowpack, plus flooding from earlier and heavier springtime melts, the appeals court found a sufficient allegation of certainty of “injury in fact” to support standing to sue, adding in its 139-page opinion, “there is no probability involved.”

The ruling reversed a 2005 district court order that had dismissed the lawsuit as essentially a political matter better decided by Congress or the president. The appeals court found no example of legislation or federal regulation on GHGs that had usurped the field. Of course, with proposals moving forward in both Congress and EPA, such regulation might arrive soon. Connecticut et al. v. American Elec. Pwr. Co., Inc., et al., Nos. 05-5104-cv, 05-5119-cv, Sept. 21, 2009 (2d Cir.).

5. North Carolina v. TVA: Lawful Emissions Deemed Public Nuisance

As a stand-alone decision, Judge Lacy Thornburg’s ruling opened the door to a possible flood of civil lawsuits challenging power plant operators on environmental grounds. It lays the groundwork for states, cities and other governments to use public-nuisance litigation to force emitters in neighboring jurisdictions to install emissions controls beyond what’s required by statute. But also it could serve to strengthen such cases as Connecticut v. AEP, which demand reductions in GHG emissions to remedy the alleged public nuisance of climate change. In this case, North Carolina alleged TVA coal-fired plants in Tennessee and Alabama emit air toxins that create a public nuisance for North Carolinians. Federal Judge Thornburg, sitting in North Carolina’s western district, agreed and ordered TVA to install and operate scrubbers at four power plants, even though the plants were in compliance with EPA regulations under the Clean Air Act. North Carolina v. Tennessee Valley Authority (Civ. 1:06CV20, 2009 WL 77998 (W.D. N.C., Jan. 13, 2009).

 

6. Piedmont Environmental Council v. FERC: Not Quite a Leak-proof Backstop

In February, a federal appeals court ruled that FERC’s right under the 2005 EPAct law to step in as a “backstop” and grant a federal permit for a new transmission line when the applicable state permitting agency has failed for 12 months to act on a permit application does not apply if the state agency has taken action within 12 months to expressly deny the permit application.

FERC had argued that a “denial” should be equated with a failure to act because otherwise, Congress would never have included another clause in the EPAct law that had granted backstop authority to FERC when the state agency nominally OKs a permit but also imposes impossible conditions that effectively kill the project anyway. Piedmont Environmental Council v. FERC, Feb. 18, 2009, 558 F.3d 304 (4th Cir.).

 

7. NStar/Northeast: FERC Bends Rules to Boost Renewables

In May, the FERC showed itself willing to violate its own open-access policy—if only to ensure that enough transmission gets built to boost imports of renewable energy from Canada into the United States.

The case involved NStar and Northeast Utilities, which had joined with Hydro-Quebec to propose a new 1,200-MW, high-voltage DC line from Quebec to New England. With a clever multi-contract deal structure that traded grid rights for construction funding, NStar and NU won rate-base treatment for their U.S. line segment, but HQ also won the right to export renewable hydropower at market rates, without having to bid the exports into New England’s regional wholesale market, in competition against private power producers. NE Utils. Srv. Co., NStar Elec. Co., Docket No. EL09-20, May 22, 2009, 127 FERC ¶61,179.

8. Chinook/Zephyr: An ‘Anchor’ for Merchant Transmission

In February, the FERC relaxed its rules for financing “merchant” electric transmission lines when it allowed power line developers to set aside a 50-percent share of future line capacity for the exclusive use of an unnamed wind farm project developer who would serve as an “anchor tenant” and help with upfront funding of line construction—thus allocating only half the line’s capacity through an “open-season” solicitation process.

FERC agreed that market realities warranted a new approach to reduce risk and boost the credit-standing of merchant lines, and to break the stalemate when downstream utilities and upstream wind farm developers each hesitate to commit funds without assurances from the other.

The case involved Chinook and Zephyr Transmission LLC, two second-tier subsidiaries of the Canadian pipeline giant TransCanada, and twin proposed high-voltage (500 kV), 3,000-MW DC power lines, running from Montana and Wyoming to just south of Las Vegas. See, Chinook Pwr. Trans. LLC, Zephyr Pwr. Trans. LLC, Docket Nos. ER09-432, ER09-433, Feb. 19, 2009, 126 FERC ¶61,134.

 

9. John Deere v. SW Public Service: Texas Throws a Curve at Small Wind Developers

The Texas PUC held in May that because wind energy is intermittent, and thus non-firm, state rules implementing the 1978 federal PURPA law do not allow wind-powered QFs (qualifying facilities) to bind retail electric utilities to a legally enforceable purchased-power obligation, as would ordinarily occur 90 days after the QF tenders a sales offer to the utility.

Involving Southwestern Public Service (SPS) and wind farms owned by John Deere Renewables, the ruling means that wind-driven QFs in Texas cannot secure in advance a sales rate based on avoided costs calculated as of the day the obligation matures—a step that Deere argues is needed to gain project financing—but instead must settle only for a sales rate calculated on delivery of energy. PURPA’s purchase-and-sale obligation still applies in SPS territory, per a 2008 FERC ruling that QFs there lack non-discriminatory access to transmission.

Calling the PUC order “potentially devastating” for other wind- and solar-powered QFs, Deere filed a complaint at FERC on September 24, seeking to enjoin the Texas rule. Complaint of JD Wind v. SW Pub. Serv. Co., Tex., PUC Docket No. 34442, May 1, 2009.

 

10. Connecticut DPUC v. FERC: Resource Adequacy

In June, a federal appeals court in Washington, D.C., denied claims by Connecticut state utility regulators that FERC action approving the installed capacity requirement under ISO New England’s Forward Capacity Market was an illegal federal intrusion on state regulation of generation and resource adequacy.

The court likened FERC’s order as more a rate-setting action, in the nature of a peak-demand forecast, since the ICAP target affects the market-clearing capacity price, as set via the FCM’s bidding auction.

It also cited 30-year-old legal precedent from the 1970s that FERC had jurisdiction over deficiency charges imposed by NEPOOL on member utilities that fell short of required capacity. As the court put it, “this particular camel has long since entered—indeed, ransacked—the tent.” Conn. DPUC v. FERC, June 23, 2009, 569 F.3d 477 (D.C.Cir.).