Milbank Energy Update
September 23, 2002
TURN Appeal
The United States Court of Appeals for the Ninth Circuit (the "Court") issued both an Opinion and an Order today in Southern California Edison Company v. Lynch, et al., No. 01-56879 affirming in part and certifying in part the judgment of the District Court relating to its entry of a Stipulated Judgment between Southern California Edison Company ("SCE") and the California Public Utilities Commission ("CPUC"). The Utility Reform Network ("TURN"), an intervenor in the case, had appealed the entry of the Stipulated Judgment. The Court ruled that none of TURN's substantive arguments based on federal statutory or constitutional law compel reversal of the District Court's approval of the Stipulated Judgment. However, the Court found that there is a serious question of whether the agreement between the CPUC and SCE violated state law, both in substance and in the procedure by which the CPUC agreed to it. Accordingly, by separate order, the court certified the following state law issues to the California Supreme Court for resolution:
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Does the stipulated judgment approved by the district court violate § 368 of Assembly Bill 1890 (Act of September 23, 1996, 1996 Cal. Legis. Serv. 854, codified in Cal. Pub. Util. Code §§ 330-398.5) ("Section 368")?
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Do the procedures employed in entering the stipulated judgment violate the Bagley-Keene Open Meeting Act, Cal. Gov’t Code §§ 11120- 11132.5 ("Bagley-Keene")?
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Does the stipulated judgment violate § 454 of the Public Utilities Code ("Section 454") by altering utility rates without a public hearing and the issuance of findings?
The Court stated that the Stipulated Judgment "appears to" violate Section 368 in two respects. First, the settlement expressly maintains the rate-freeze beyond March 31, 2002 and authorizes SCE to recover its past procurement costs past this date in violation of Section 368. The Court found that Section 368 limits the utilities to March 31, 2002 and disallows SCE from applying collections past this date to prior procurement costs. Second, the Court found that the settlement "appears to" violate Section 368's rate-freeze guarantee that protects consumers from price increases during the transition period. In this regard, the Court found that the Stipulated Judgment allows SCE to "pocket" for itself the above-rate-freeze-level rates that the CPUC adopted in 2001 solely in order to pay the state for wholesale power the California Department of Water Resources was procuring for the utilities. As a result, under the Stipulated Judgment, the Court found that SCE will collect a "surcharge" rate that is above the rates in effect on June 10, 1996, in violation of Section 368.
Procedurally, the Court found that the Stipulated Judgment "seems" to violate the Bagley-Keene Act because the parties approved it in a "secret" meeting. In this regard, the Court determine that the Government Code merely allows the agency to meet in closed session "to confer with, or receive advice from, its legal counsel regarding pending litigation"--not to take action, and certainly not to issue regulatory orders. The Court also found that the CPUC "appears" to have violated Section 454 with its decision to extinguish ratepayer refund rights and to lock-in higher rates without a public hearing and without findings.
The court stayed further proceedings in this case pending a response from the California Supreme Court. If the California Supreme Court declines the certification, the Court indicated that it will resolve the issues in accordance with its perception of California law.
FERC Order Re El Paso Natural Gas Company
The Federal Energy Regulatory Commission's (FERC) Chief Administrative Law Judge issued an initial decision today which concludes that: (1) El Paso Natural Gas Company "withheld extremely large amounts" of natural gas pipeline capacity that could have been used to flow natural gas to California delivery points (the Judge found that the pipeline failed to make available at least 345 MMcf/day) during the period November 1, 2000 - March 31, 2001, in violation of its certificate of public convenience and necessity granted by FERC, a settlement agreement previously approved by FERC, and FERC's regulations; (2) El Paso Natural Gas Company had the ability to exercise market power and did in fact exercise market power by withholding substantial volumes of pipeline capacity, which tightened the supply of natural gas to California and broadened the basis differential for gas deliveries to California; and (3) FERC should institute penalty procedures pertaining to the unlawful exercise of market power and with respect to the Judge's findings in a previous initial decision regarding violations of FERC's standards of conduct for interstate pipelines.)
The Judge's initial decision is attached. Parties to the El Paso proceeding will now have an opportunity to file briefs requesting that FERC affirm, reverse or modify the initial decision. FERC will then issue its ruling. We will continue to monitor developments in this proceeding and keep you informed.
FERC Order Re Upward Adjustment In ROE For RTO Participation
FERC also issued an order today regarding the appropriate return on equity for transmission owners that participate in the Midwest Independent Transmission System Operator, the only operational Regional Transmission Organization (RTO) approved by FERC. A FERC Administrative Law Judge had recommended that the ROE be set at 12.38%. FERC's order modified the Judge's recommended ROE upward by 50 basis points to 12.88% because of "the level of operational independence that the Midwest ISO provides." The order also states that FERC "will consider providing additional upward adjustments for greater levels of independence," but does not indicate how much of an upward adjustment might be made or otherwise elaborate on this statement. Finally, the order states that FERC will be clarifying its incentive rate policy in the near future to explain the behavior and performance that it seeks to incent.
The order, along with statements that have been made by the FERC Commissioners, reflects the fact that FERC is continuing to move forward with its efforts to promote voluntary RTO participation and greater independence with respect to operation and ownership of the transmission grid (e.g., sales of transmission assets to entities that are unaffiliated with energy market participants), and that financial incentives will be an important tool to be used by FERC in this regard. A copy of FERC's order is attached.
Regards,
Ed Feo (efeo@milbank.com)
Doug Dunn (mdunn@milbank.com)
Steve Kramer (skramer@milbank.com)
Kevin McSpadden (kmcspadden@milbank.com)
Carla Urquhart (curquhart@milbank.com)
James Schwarz (jschwarz@milbank.com)
Jim Liles (jliles@milbank.com)