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Electricity Reforms Move Toward Enactment as House-Senate Conference Clears Energy Legislation

On November 17, Congress moved one step closer to enactment of comprehensive energy legislation as the Conference Committee approved the conference report on H.R. 6. The bill addresses a wide range of energy issues and includes numerous reforms to the Federal statutes on electric industry regulation. The conference report will now be considered by the House of Representatives and the Senate.

Key Provisions in the Electricity Title
The electricity title of the bill that cleared the conference includes the following key provisions:

Electricity Reliability – Provides for a system of mandatory reliability standards to be developed and enforced by an industry-comprised Electric Reliability Organization subject to FERC oversight.

Siting Authority – Authorizes FERC to issue permits for the construction or modification of transmission facilities in DOE-identified “interstate congestion areas” if a state has withheld approval or unduly conditioned approval for such projects.

Transmission Infrastructure Investment – Directs FERC to conduct a rulemaking on pricing policies to promote investments in transmission infrastructure.

Standard Market Design Deferral – Prohibits FERC from issuing any final rule on Standard Market Design (SMD), or any rule “within the scope” of the SMD proposal, prior to October 31, 2006, and any such rule cannot be effective before December 31, 2006.

RTO Development – States a sense of the Congress that all transmitting utilities should voluntarily become members of independently administered regional transmission organizations (RTOs). Authorizes Federal utilities to join RTOs. Provides rate incentives for transmission-owning utilities that join RTOs.

Native Load Protection – Requires FERC to ensure that load serving entities are allowed to use transmission facilities and transmission contract rights to meet service obligations to native load customers before transmission capacity is made available to other parties.

Participant Funding – Allows utilities to implement participant funding in transmission rates if FERC finds that utility plans satisfy statutory criteria.

“FERC Lite” – Authorizes FERC to require public power systems and cooperatives to provide open access transmission service.

PUHCA Repeal – Repeals the Public Utility Holding Company Act, effective one year from enactment of the legislation. Grants FERC and state regulators authority to access the books and records of utility affiliates for purposes of utility rate regulation.

Merger Review – Authorizes FERC review of holding company mergers. Provides new statutory factors for evaluating whether a merger is in the public interest. Requires FERC to expedite the review of merger applications and provides that applications not acted upon within the statutory time frames (360 days at most) will be deemed granted.

Market Manipulation – Prohibits wash trading, round-trip trades, and false reporting to Federal agencies of wholesale prices or available transmission capacity.

Market Transparency – Directs FERC to issue rules establishing a publicly accessible electronic system on wholesale sales and transmission data. Exempts from disclosure information that would be detrimental to the operation of an effective market or would jeopardize system security.

Civil and Criminal Penalties – Increases civil penalties for violations of the Federal Power Act (FPA) to $1,000,000 per day and extends civil penalty sanctions to any violation of Part II of the FPA or any related FERC rules or orders. Also increases criminal penalties.

Refund Authority – Authorizes FERC to provide refund remedies from the date a complaint is filed. Authorizes FERC to order refunds by large public power systems if short-term wholesale sales are made in violation of FERC rules.

Contract Review – Applies a “public interest” standard for FERC review of contracts unless contract expressly provides for a different standard.

PURPA: Qualifying Facilities – Eliminates, prospectively, the PURPA “must buy” requirement where the qualifying facility (QF) has access to fully competitive wholesale markets. Eliminates “must sell” obligation where QF has access to competitive retail suppliers. Eliminates limitations on utility ownership of QFs. Requires a FERC rulemaking on new criteria for qualifying cogenerators.

PURPA: State Proceedings – Requires State commissions and non-regulated utilities to conduct proceedings to consider the adoption of new Federal standards on net metering, fuel diversity, fossil plant efficiency and smart metering.

Consumer Protections – Authorizes the Federal Trade Commission to promulgate rules prohibiting cramming and slamming.

Next Steps for Energy Legislation
H.R. 6 is scheduled for consideration and a vote by the House of Representatives today. Amendments are not allowed to a conference report, so the House may vote to approve the report, reject the report, or recommit the report back to the conference committee. Most expect the House to approve the report. Consideration in the Senate could begin as early as tomorrow. It is expected to be more difficult and timeconsuming than the House debate, although a desire to recess for the year could expedite action on the bill. During its consideration, the Senate has the option of approving the report, rejecting it, tabling it, or requesting a new conference. In the Senate, the motion to proceed to consideration of the conference report may be filibustered.

Implementation and Implications
If the energy bill is enacted, governmental activity will shift from Congress to FERC and other agencies. FERC in particular will be required to conduct rulemakings on a number of issues, including reliability, transmission pricing, PURPA, PUHCA and market transparency. In many cases, the rules are to be completed on relatively short time frames. Key interpretations and policies on other issues, such as participant funding and native load protection, are likely to emerge from individual cases considered at FERC. The Department of Energy, the Federal Trade Commission, and State commissions also have implementation responsibilities for new electricity title provisions.

FERC has announced that it plans to hold workshops in December to consider issues relating to implementation of the legislation, beginning with a discussion on reliability issues on December 1. Further sessions on other aspects of the bill are expected to be held on December 15 and 16.

Likewise, electricity industry participants will themselves need to digest the changed statutory framework and take steps to adjust their business strategies as appropriate. Important ground rules will change for all market players – transmission owners, transmission customers, generators and power marketers, holding companies, qualifying facilities, public power and the cooperatives – and it is important for all of these players to determine exactly how these changes are going to impact their businesses.

Doug Smith & Janet Woodka