Energy regulatory developments in the United States impact numerous sectors of the energy industry and address a wide swath of issues. We reported on key federal and state energy regulatory developments in the United States during 2015 in Volume 4, Issue 2 of the ERQ in June 2016. This report highlights significant developments in 2016 which should be of interest to readers of the ERQ.

I. LIQUIFIED NATURAL GAS EXPORTS   

In 2016, the United States Court of Appeals for the District of Columbia Circuit denied four petitions for review by environmental intervenors that challenged on various grounds Federal Energy Regulatory Commission (FERC) orders authorizing the siting, construction and operation of liquefied natural gas (LNG) export facilities.  In addition, FERC rejected an application for authorization to site, construct and operate an LNG export terminal due to insufficient evidence of need.

On June 28, 2016, the court denied appeals of FERC authorizations with respect to       (1) construction and operation of the Freeport liquefaction export facilities in Texas and (2) expansion of the capacity of the Sabine Pass liquefaction export facility.¹ Appellants in both cases argued that FERC’s National Environmental Policy Act (NEPA)² analysis was deficient particularly with respect to indirect and cumulative environmental effects of granting the projects’ applications. The court said that the issue before it was whether FERC “discharged its NEPA duty to adequately consider the indirect and cumulative environmental effects of authorizing the ‘siting, construction, expansion, [and] operation’ of the Freeport Projects.”³ The environmental intervenors’ principal issue was that FERC was required in performing its NEPA analysis to consider possible indirect effects of the anticipated exports of natural gas from the projects, such as increased production of natural gas and emissions.

The court held that the United States Department of Energy (DOE) has sole legal authority to authorize the export of natural gas through the liquefaction facilities. Because FERC’s statutory authority with respect to the exported LNG is limited, the court reasoned, FERC cannot prevent such indirect effects of LNG exports. Therefore, the court determined, FERC’s authorization “cannot be considered a legally relevant ‘cause’ of the effect for NEPA purposes.”⁴ DOE’s “independent decision” whether to authorize exports from the Freeport project “breaks the NEPA causal chain” and absolves FERC of responsibility in performing its NEPA analysis to consider issues that it cannot act on.⁵ The court in Sierra Club v FERC (Freeport) noted that the appellants had petitioned the court to review DOE’s decisions to authorize exports from the Freeport facility and issues with respect to environmental effects associated with exports of natural gas from the facility should be raised in that appeal. The court also affirmed FERC’s analysis of the cumulative impacts of the project; under NEPA, FERC was required to consider only the effect of the current project along with any past, present or likely future actions in the same geographic area as the current project under review.

On July 15, 2016, the court denied environmental intervenors’ petition for review of FERC’s order authorizing the liquefaction facilities at the Dominion Cove Point plant in Maryland to be converted from import to export.⁶ Appellants contended that FERC’s failure to consider certain possible environmental impacts that the project may have resulted in FERC failing to satisfy its obligations under NEPA. The court held, “[f]or the reasons set forth in Sierra Club v FERC (Freeport)…,” that FERC “was not required under NEPA to consider indirect effects of increased natural gas exports through the Cove Point facility, including climate impacts.”⁷ The court stated that the effect of emissions arising from the transportation and consumption of natural gas in the facilities could not occur unless DOE independently authorized the project to increase the natural gas exports from the facility. In addition the court rejected appellants’ argument that FERC erred by not using the “social cost of carbon” analysis in analyzing the environmental impacts of greenhouse gas emissions from the project.⁸ The court noted FERC had specified the reasons it decided not to rely on the analysis, and the appellants had not identified to FERC an alternative methodology. Thus, appellants’ presented no reason to doubt the reasonableness of FERC’s conclusion not to adopt the methodology.

Finally, on November 4, 2016, the court denied a petition for review of FERC’s orders authorizing construction and operation of the Corpus Christi Liquefaction LNG export terminal in Texas, and issuing a certificate of public convenience and necessity under Section 7 of the Natural Gas Act (NGA) to construct and operate an interconnected interstate pipeline. Citing its opinion in Sierra Club v FERC (Freeport), the court ruled that FERC did not have to address the indirect effects of the anticipated export of natural gas under NEPA. The court also rejected appellant’s arguments regarding greenhouse gas emissions citing its ruling on “identical arguments” in EarthReports.⁹

FERC issued an order denying applications on March 11, 2016, filed by Jordan Cove Energy Project under Section 3 of the NGA for authorization to site, construct and operate an LNG export terminal at Coos Bay, Oregon and by Pacific Connector Gas Pipeline for a certificate of public convenience and necessity under Section 7 of the NGA to construct and operate an interconnected interstate natural gas pipeline. Pacific Connector had presented “little or no evidence of need” and failed to satisfy the standards for issuance of a certificate under Section 7 of the NGA.  Accordingly, FERC dismissed the Jordan Cove project’s application as it would not be able to access natural gas supplies and thus “can provide no benefit to the public to counterbalance any of the impacts which would be associated with its construction.”¹⁰

The applicants filed requests for rehearing at FERC, stating that long-term precedent agreements had been signed for 77 per cent of the pipeline’s capacity and that FERC should proceed with review of the applications with “evidence of need” having been demonstrated. FERC denied rehearing. In order to reopen the record on these applications, FERC held that there had to be “extraordinary circumstances” to overcome the need for finality in contested proceedings. Before filing for rehearing, the pipeline was afforded “ample time – over 3.5 years – to demonstrate evidence of market demand”¹¹ and failed to do so. FERC reiterated that dismissal of the applications was without prejudice to either applicant to submit a new application. FERC cautioned that evidence of market need in a new application should be submitted as part of the initial application, or in a timely manner in response to FERC staff data requests, should the companies show a market need in the future for the projects.

II. ENERGY STORAGE

A. Federal Developments

As background, FERC issued an important order regarding energy storage – Order 784 – in 2013.¹² That order directed wholesale market operators to find ways to monetize “fast response” resources–storage devices such as batteries and flywheels. On April 11, 2016, FERC issued a series of data requests and requests for comments in a new informational docket, “Electric Storage Participation in Regions with Organized Wholesale Electric Markets,” Docket No. AD16-20-000.¹³ This docket concerns the “participation of electric storage resources in the organized wholesale electric markets, that is, the regional transmission organizations or RTOs and the independent system operators or ISOs.”¹⁴ FERC will be seeking input in May 2017 on whether additional action is necessary to address potential barriers to electric storage participation in the RTO and ISO markets.

FERC opened another informational docket concerning storage in late 2016: “Utilization In the Organized Markets of Electric Storage Resources as Transmission Assets Compensated Through Transmission Rates, for Grid Support Services Compensated in Other Ways, and for Multiple Services,”  Docket No. AD16-25-000.¹⁵  FERC staff convened a technical conference on November 9, 2016.  Eight days later, FERC issued a Notice of Proposed Rulemaking to “remove barriers to the participation of electric storage resources and distributed energy resource aggregations in the organized wholesale electric markets.”¹⁶  The proposed rulemaking would also allow storage to provide services not necessarily procured through markets, such as black start, primary frequency response and reactive power.

In addition to activity at FERC, the Department of Energy’s Energy Storage Systems  Program conducted an energy storage reliability workshop in June 2016, a series of webinars on various technical issues associated with integrating storage into energy grids, and a peer review conference.

B. State Storage Proposals

1. California

We start again with background. As detailed in prior years’ Washington Reports, California has taken the lead to include energy storage in its electric utilities and energy suppliers’ resource planning. Assembly Bill 2514 required the California Public Utilities Commission (CPUC) to determine appropriate targets, if any, for each load-serving entity to procure viable and cost-effective energy storage systems. The CPUC opened Rulemaking R.10-12-007 to implement AB 2514.¹⁷ R.10-12-007 culminated in Decision D.13-10-040 in 2013 which requires California’s three large investor-owned electric utilities to procure 1,325 MW of energy storage capacity by 2020.¹⁸ The CPUC divided the 1,325 MW into biennial procurement targets by “grid domain” in 2014, 2016, 2018 and 2020.

D.13-10-040 directed a comprehensive evaluation of the Energy Storage Framework and Design Program no later than 2016 and once every three years thereafter. In compliance with D.13-10-040, the CPUC opened a new rulemaking to consider policy and implementation refinements to the Energy Storage Procurement Framework and Design Program (D.13-10-040, D.14-10-045) and related Action Plan of the California Energy Storage Roadmap.” As the proceeding’s name implies, it is a broad review of all CPUC policies (and associated IOU practices) relating to energy storage.¹⁹ The CPUC has conducted a workshop in the proceeding, and further workshops are anticipated. In a separate rulemaking, R.14-10-003, the CPUC issued a decision in December 2016 (D.16-12-036) establishing a framework for utility solicitations for Distributed Energy Resources (DER).²⁰ Small-scale storage is eligible to participate in the resulting utility solicitations.

2. Oregon

The Oregon legislature passed an energy storage bill in 2016, Oregon House Bill 2193 (HB 2193),²¹ requiring Oregon’s major investor owned utilities to obtain up to one per cent of 2014 load of energy storage in service by January 1, 2020 and directing the Oregon Public Utility Commission to adopt guidelines for proposals of projects providing at least 5 MWh of storage. On December 28, 2016, the Commission adopted the required guidelines, establishing a technology-neutral framework for development and evaluation of storage proposals but leaving many details to utilities, bidders, and Commission staff.²²

3. Massachusetts

Massachusetts adopted an energy storage law in August of 2016, deferring to the Massachusetts Department of Energy Resources (MADERS) on whether to set appropriate targets for electric companies to procure viable and cost-effective energy storage systems to be achieved by January 1, 2020. ²³ In response to this legislation, MADERS determined that storage mandates were appropriate and a stakeholder process is now underway to establish a mandate amount by July 1, 2017.

III. DISTRIBUTED GENERATION AND NET METERING 

State public utility commissions across the United States continue to grapple with how to incorporate distributed generation and net metering into rate design. Traditional utilities contend that giving consumers credit for energy produced from distributed generation (such as residential solar panels that connect with the grid) unfairly reduces utility revenues. Utilities recover a large portion of costs through per-KWh charges. Such utilities also contend that distributed generation users, and particularly net metering customers, do not pay a fair share of the fixed costs needed to provide the electricity they use. Advocates of distributed generation counter that high fixed prices (coupled with lower variable prices) encourage energy use and would allow the utilities to avoid competition from distributed generation. Different states are addressing these issues in divergent ways.

A. California’s Distributed Resources Proceedings

1. California’s Distribution Energy Resources and Distribution Resources Plan Proposals

For more than a decade, it has been California’s policy to require each of its investorowned utilities (IOUs) to consider nonutility-owned distribution energy resources (DERs) as a possible alternative to investments in its distribution system to ensure reliable electric service at the lowest possible cost.²⁴ In 2013, the California legislature enacted PU Code Section 769 requiring IOUs to submit distribution resource plan proposals (DRPs) to the CPUC.²⁵ Section 769 requires IOUs to submit DRPs that recognize the need for investment, to integrate cost-effective DERs and for activity identifying barriers to the deployment of DERs. The CPUC is authorized to modify and approve an IOU’s DRP “as appropriate to minimize overall system costs and maximize ratepayer benefit from investments in distributed resources.”²⁶

In August 2014, the CPUC opened Rulemaking 14-08-013 to establish policies, procedures, and rules to guide IOUs in developing their DRPs and to review, approve, or modify and approve the plans. The CPUC-assigned Administrative Law Judge issued a proposed decision for consideration at the Commission’s February 9, 2017 meeting. The proposed decision, if adopted, would approve utility plans to pilot DER programs that demonstrate locational benefits, that allow for high levels of DER penetration, and/or that constitute a microgrid.

In another recent development, the CPUC issued a decision in December 2016 in R.14-10-003, the “Order Instituting Rulemaking to Create a Consistent Regulatory Framework for the Guidance, Planning and Evaluation of Integrated Distributed Energy Resources” approving a pilot program for DER solicitations by CPUC-jurisdictional utilities.

2. California Net Energy Metering

Under AB 327²⁷, enacted in 2013, CPUC had until December 31, 2015, to develop a standard contract or tariff that applies to customer-generators who own rooftop solar installations or other distributed generation.  On January 28, 2016, the CPUC approved Decision 16-01-044, adopting a net energy metering (NEM) successor tariff that continues the existing NEM structure while making adjustments to align the costs of NEM successor customers more closely with those of non-NEM customers. The CPUC has stated it will not revisit NEM policy for three years.

Assembly Bill 793²⁸ directed California IOUs to provide incentives to residential and small and medium business (SMB) customers for “energy management technology” (EMT), which may include a product, service, or software that allows a customer to better understand and manage electricity or gas use in the their home or place of business.   AB 793 also required the IOUs to educate residential and SMB customers about incented EMT offerings available to them.  The IOUs filed proposals with the CPUC on August 1, 2016, and supplemental programs including marketing plans followed later that month and in September.  CPUC is expected to approve the IOU programs, with modifications to increase customer and utility use of “smart-meter” data.

B. Nevada’s Evolving Regulatory Regime for Rooftop Solar

In 2015, the Nevada legislature enacted SB 374²⁹ directing utilities to prepare a cost-of-service study for rooftop solar installations and to prepare a new tariff to go into effect once solar rooftop installations in Nevada exceeded a cumulative 235 MW of installed capacity. Nevada’s two major utilities, NV Energy and Sierra Pacific, filed cost-of-service studies, and, on December 23, 2015, the Public Utilities Commission of Nevada (PUCN) issued a controversial order approving tariff filings by the two utilities³⁰ that significantly reduced the economic benefits customers would see when they installed rooftop solar panels.³¹ Further, the PUCN declined to “grandfather” the approximately 17,000 existing solar customers who had already installed and interconnected rooftop solar systems into the pre-existing rate regime.³² Thus Nevada is the first state in the country to significantly change the economics of net metering without grandfathering existing customers.

In the wake of public criticism and court challenges, Nevada courts and the PUCN in 2016 restored some net metering benefits to some rooftop solar customers, including by restoring the status quo ante for grandfathered customers. Subsequently, the PUCN reopened net metering for new customers in the Northern portion of the state (Sierra Pacific’s service territory).³³

C. New York Public Service Commission’s (NYPSC’s) Reforming Energy Vision and Customer Choice

The NYPSC continues its comprehensive Reforming the Energy Vision (REV) proceeding intended to improve customer knowledge, market animation, system-wide efficiency, fuel and resource diversity, and system reliability and resiliency and reduce carbon emissions.³⁴ A companion proceeding will address the future of New York clean energy programs currently funded by a surcharge on the delivery portion of customers’ utility bills.³⁵

The NYPSC adopted a two-phase schedule for Case 14-M-0101. Track 1 considers issues related to the concept and feasibility of a distributed system platform provider (DSPP).  Track 2 focuses on regulatory changes and ratemaking issues. Task forces and working groups have been formed and are working on both tracks, along with a large-scale renewable track.

The NYPSC issued a series of orders over the last two years on various REV issues.³⁶   The orders serve principally to establish analytical frameworks for issues such as how to conduct cost-benefit analyses and expand the scope of the proceeding.

A recent development is the NYPSC’s proposal to reconsider its retail electricity competition framework.  On December 2, 2016, in the NYPSC issued a Notice of Evidentiary and Collaborative Tracks and Deadline for Initial Testimony and Exhibits establishing a process for evaluating this proposal.³⁷

D. Other States’ Rate Changes Regarding Distributed Generation

In Hawaii, a state with the highest penetration rate for rooftop solar in the country, customers reached the state’s limit on rooftop solar eligible to export power to the grid. Rooftop solar customers in Hawaii must now use the customer self-supply (CSS) option, which is for solar PV installations that are designed to not export any electricity to the grid. Customers are not compensated for any export of energy.  CSS customers must pay a minimum $25/month to their utility.

Another state with considerable insolation, Arizona, allowed utilities to impose fixed charges on distributed generation owners of $0.70 per KW/month.³⁸ Arizona has now ended its retail net metering program for new customers.³⁹ Customers who already have solar rooftops will be grandfathered under the prior rate structure. Arizona has not decided how (or how much) to pay rooftop solar owners for energy placed on the grid. That issue will be decided in pending rate cases.

IV. ENERGY EFFICIENCY

The federal government has long promoted energy efficiency in various ways, ranging from setting efficiency standards for consumer products such as lightbulbs⁴⁰, sponsoring research at National Laboratories into how to build more energy efficient buildings,⁴¹ and implementing the “Energy Star” labeling program overseen by the Environmental Protection Agency.

Many states have laws requiring regulated entities to undertake energy efficiency activities.  State-mandated energy efficiency activities commonly include rebates for efficient equipment and efficiency-focused changes to building codes.  For illustrative purposes, we will focus on California.⁴²

Public Utilities Code Sections 454.55 and 454.564⁴³ require the CPUC, in consultation with the California Energy Commission (CEC), to identify potentially achievable cost-effective electricity and natural gas efficiency savings and establish efficiency targets for electrical or gas corporations to achieve. Public Utilities Code Section 381 mandates that the CPUC “allocate funds spent to programs that enhance system reliability and provide in-state benefits including: (1) cost-effective EE and conservation activities . . .”⁴⁴

The CPUC devotes approximately $1 billion per year in customer funds to energy efficiency programs, spread across all CPUC-jurisdictional energy utilities. The CPUC devotes another approximately $300 million per year to low-income energy efficiency programs.  The CEC, for its part, develops building codes and appliance standards, and also funds energy efficiency research.

The CPUC is now evaluating a PG&E proposal to spend an additional $200 million per year to procure energy efficiency to partially offset the loss of capacity from PG&E’s proposed closure of the Diablo Canyon Nuclear Power Plant (Diablo Canyon).⁴⁵ Using energy efficiency to make up for generation capacity lost in the closing of a nuclear power plant is an idea pioneered by Southern California Edison Company (SCE) in connection with the closure of the San Onofre Nuclear Generating Station (SONGS) in 2013.  PG&E’s proposal differs from its SCE predecessor in two ways: energy efficiency will be procured before any other resource.  In contrast, SCE procured energy efficiency as one among many “preferred resources.”  PG&E is proposing to spend $1.2 billion just on energy efficiency procurement, which is orders of magnitude more than SCE spent on energy efficiency in connection with SONGS replacement. A decision on PG&E’s proposal is expected in late 2017 as part of a broader decision on whether/how to close Diablo Canyon.

V. FREQUENCY RESPONSE SERVICE

On November 20, 2015, FERC issued Order No. 819, a final rule that permits wholesale sellers with market based rate authority to sell Primary Frequency Response Service at market based rates.⁴⁶ “[P]rimary frequency response service” is “a resource standing by to provide autonomous, pre-programmed changes in output to rapidly arrest large changes in frequency until dispatched resources can take over.” Under North American Electric Reliability Corporation (NERC) Reliability Standards, balancing authorities are required to maintain a minimum frequency response obligation. FERC noted that balancing authorities may be interested in purchasing primary frequency response service from third parties (in addition to or in place of their own resources) if doing so would be economically beneficial.

On November 17, 2016, FERC issued a proposed rule that would require all newly interconnecting large and small generating facilities, both synchronous and non-synchronous, to install and enable primary frequency response capability as a condition of interconnection.     FERC explained that as conventional generating facilities retire or are displaced by variable energy resources such as wind or solar, the net amount of frequency responsive generation online could be reduced, challenging system operators in maintaining reliability, and balancing authorities in meeting their obligations under NERC reliability standards to have primary frequency response capabilities.

FERC proposed its new rules, under Section 206 of the FPA, “…to address the increasing impact of the evolving generation resource mix and to ensure that the relevant provisions of the pro forma LGIA and pro forma SGIA are just, reasonable, and not unduly discriminatory or preferential.” The existing pro forma Large Generator Interconnection Agreement (LGIA) contains limited primary frequency response requirements that apply only to synchronous generating facilities “and do not account for recent technological advancements that have enabled new non-synchronous generating facilities to now have primary frequency response capabilities.” The pro forma Small Generator Interconnection Agreement (SGIA) does not contain any provisions related to primary frequency response. The proposed rules would require both new large and small generating facilities to comply with comparable primary frequency response requirements.

In addition, FERC is not proposing to require that the interconnection customer receive any compensation for meeting the new frequency response requirements. FERC cited cases where it has accepted changes to individual transmission provider tariffs that required interconnection customers to install primary frequency response capability or that established specified governor settings, without requiring any accompanying compensation. A party that wanted to receive, or pay, compensation could file a proposed rate under FPA Section 205.

VI. DODD-FRANK AND CFTC DEVELOPMENTS

The Commodity Futures Trading Commission (CFTC) continued to implement the Dodd-Frank Wall Street and Consumer Protection Act reforms during 2016. Chairman Timothy Massad completed his tenure as Chairman of the CFTC on January 20, 2017, when the new Trump Administration took office. We describe some significant developments for energy companies below.

On March 16, 2016, the CFTC approved a final rule that eliminated the reporting and recordkeeping requirements in CFTC regulations for trade option counterparties that are neither swap dealers nor major swap participants (Non-SD/MSPs), including commercial end user energy companies that transact trade options in connection with their businesses. Trade options generally are physically-settled option transactions in nonfinancial commodities involving commercial counterparties. Significantly, the final rule eliminated the requirement that such counterparties annually file a Form TO in connection with their trade options, and does not require them, as had been proposed, to notify the CFTC’s Division of Market Oversight if they enter into trade options that have, or are expected to have, an aggregate notional value in excess of $1 billion in any calendar year. Trade option counterparties were also relieved from swaps recordkeeping requirements, although a legal entity identifier must be obtained and furnished to a counterparty that is a swap dealer or major swap participant.

This relief, along with an interpretation issued by the CFTC that generally relaxes the requirements for forward contracts with volumetric optionality issued in 2015 (i.e., optionality as to the amount of the commodity delivered), should alleviate CFTC-related compliance obligations for energy companies with respect to many of the commercial contracts.

In addition, on October 18, 2016, after much pushback from energy market participants, the CFTC issued final orders reiterating that it will exempt from regulation under the Commodity Exchange Act (CEA) (other than anti-fraud and anti-manipulation provisions) electric energy-related agreements, contracts, and transactions in organized wholesale electric markets that are under the jurisdiction of FERC. The CFTC decided that activity in organized electric markets is also exempt from private actions brought pursuant to CEA Section 22, and thus addressed energy industry concerns about an earlier proposal to allow private rights of action.

Specifically, one of the final orders amends the CFTC’s March 28, 2013, order exempting from most CEA and CFTC regulation certain transactions within markets administered by six regional transmission organizations (RTOs) and independent system operators (ISOs) (the RTO-ISO Order). The scope of the RTO-ISO Order included transactions for: electric energy, financial transmission rights (FTRs), forward capacity of electric generation, and ancillary services known as reserve or regulation (collectively, the covered transactions). The CFTC clarified in the final order that transactions exempt by the RTO-ISO Order are also exempt from private rights of action under CEA Section 22, including actions for alleged fraud or manipulation. In its May 15, 2016 proposed order, the CFTC had stated its intent to preserve private rights of action to deter manipulators and protect market participants.  However, it received comments from a wide variety of energy market participants and consumer advocates who argued that RTO-ISO markets are already comprehensively regulated by FERC and the Public Utility Commission of Texas (PUCT). Commenters also expressed concerns about regulatory uncertainty, decreased liquidity, and potentially massive costs due to exposure to private rights of action in the courts.

The CFTC in issuing the final order decided against preserving private actions, reasoning that FERC and PUCT regulation of RTO-ISOs is “pervasive” and includes rate monitoring, tariff approval, authorization of market rules and pricing mechanisms, and real-time oversight and surveillance of markets. Accompanying the final order, CFTC Chairman Massad issued a statement to explain that he had been persuaded private rights of action would “inadvertently introduce regulatory uncertainty and increase costs for consumers.”

The CFTC issued another final order in response to an exemption application from Southwest Power Pool, Inc. (SPP)–an RTO which in 2014 became the newest wholesale market administrator–exempting from CEA regulation most transactions in SPP’s markets. Exempt transactions include those for: energy in SPP’s day-ahead and real-time balancing markets, operating reserves, and transmission congestion rights (also known as FTRs). The CFTC found that these covered transactions are inextricably tied to SPP’s physical delivery of electric energy and are thoroughly supervised by SPP, SPP’s Market Monitor, and FERC. The SPP Final Order tracks the March 2013 RTO-ISO Order for the six other RTO-ISOs, with the addition of the exemption from private rights of action. As with the other regional wholesale markets, transactions in SPP markets remain subject to the CFTC enforcement’s anti-fraud and anti-manipulation authority.

Finally, on December 5, 2016, the CFTC unanimously re-proposed position limits on 25 core physical commodity futures contracts and their “economically equivalent” futures, options, and swaps (referenced contracts), and deferred action on three cash-settled commodities contained in the original position limits proposal of November 2013. The re-proposal would impose limits on 4 energy reference contracts:  NYMEX Henry Hub Natural Gas, Light Sweet Crude Oil, NY Harbor ULSD (Heating Oil) and RBOB Gasoline, and generally increases these limits compared to the November 2013 proposal. At the same time, the CFTC finalized its aggregation rules for position limits that will apply to the limits under the re-proposal, if adopted. It is unclear how the re-proposal will fare under a new Chairman appointed by President Trump.

VII. FRACKING

A. State  Developments

In October 2016, Pennsylvania overhauled its fracking regulations. The new rules, supported by environmental groups, allow Pennsylvania’s Department of Environmental Protection (DEP) to require additional protective measures if fracking operations are located near public resources and require the restoration of water supplies degraded or damaged by fracking.⁴⁷ The rules also imposed tighter requirements for the storage of fracking wastewater and include electronic filing provisions that will allow DEP to more easily track well development.⁴⁸ A Pennsylvania court granted a limited injunction blocking portions of these regulations in November 2016, finding that DEP exceeded its statutory authority under the state’s Clean Streams Law by attempting to extensively regulate pre-drilling evaluation and post-drilling remediation and monitoring of drill sites and water resources.⁴⁹

In November 2016, California voters approved a ballot measure which limits oil operations in Monterey County, CA and bans all fracking operations.⁵⁰ The ballot measure also prohibits drilling new wells and phases out the practice of wastewater impoundment and injections over the next five to fifteen years.⁵¹ Unlike the other five counties in California that have already banned fracking, Monterey County has a significant oil and gas industry – it is the fourth largest oil-producing county in the state.⁵² The ballot measure, Measure Z, was heavily opposed by the oil and gas industry and its opponents spent $5 million to fight the ballot proposition. Oil producers have already filed two lawsuits seeking to overturn Measure Z. In December 2016, a Monterey County judge delayed Measure Z’s implementation pending resolution of the litigation, although the stay will not apply to the fracking ban.⁵³ If Measure Z is able to survive its legal challenges, the ballot proposition may provide further momentum for county-wide fracking bans across the U.S.

As concern spreads regarding the potential for fracking-induced earthquakes in several Midwestern U.S. states, the Sierra Club filed a class action lawsuit in Oklahoma against several of the state’s largest energy companies in February 2016.⁵⁴ The lawsuit, brought under the Resource Conservation and Recovery Act⁵⁵, alleges that several energy companies have contributed to increased seismic activity in Oklahoma and southern Kansas.⁵⁶ Among other remedies, Sierra Club sought the establishment of an independent earthquake monitoring center which would determine the amount of fracking waste that would be permissible to be injected before seismic activity would occur. The case remains pending in the Western District of Oklahoma.⁵⁷

B. Federal  Developments

In May 2016, several environmental organizations brought suit against the U.S. Environmental Protection Agency (EPA) alleging that EPA had failed to regulate fracking as a hazardous waste for the past 30 years.⁵⁸ The litigation seeks to force EPA to impose stricter regulations on the disposal of fracking wastewater and notes that regulations for handling oil and gas drilling waste have not been updated since the 1980s.⁵⁹ In particular, plaintiffs want EPA to address the safety specifications for ponds and landfills in which fracking waste is deposited and ban the practice of dumping fracking wastewater on fields and roads.⁶⁰ Under a December 28, 2016 consent decree, EPA has agreed to review and potentially update its oil and gas waste disposal rules and either propose new rules by March 2019 or determine that no updates are necessary.⁶¹

In June 2016, a federal district court in Wyoming stayed a final rule the Bureau of Land Management (BLM) of the Department of Interior issued in March 2015, which would regulate fracking on federal and Native American lands including by ensuring that usable water zones have been isolated and protected from contamination, more stringent requirements for demonstrating well integrity, and ensure that hydraulic fluids are recovered and contained.⁶² The court found that BLM exceeded its statutory authority under public land use and mineral development statutes.

VIII. CRUDE BY RAIL 

Concerns regarding crude by rail (CBR) transportation safety have led to the implementation of several new administrative rules and policies over the past few years, including a US Department of Transportation (DOT) final rulemaking for safe transportation of flammable liquids by rail in May 2015 and the enactment of the Fixing America’s Surface Transportation Act in December 2015.

In 2016, certain industry groups, such as freight railroad interests,  called for standards beyond those established by the Pipeline and Hazardous Materials Safety Administration (PHMSA), a DOT sub-agency, while other industrial manufacturers petitioned PHMSA with the goal of establishing the sub-agency’s ultimate authority for imposing new hazardous tank car standards. The opponents of separate standards fear that allowing additional third parties to devise standards may damage the economic viability of CBR, pushing crude to be transported by road in a less safe fashion.

In 2016, U.S. regulators may become more focused on increasing accountability and more stringent enforcement of violations. Currently, individuals who willfully or recklessly violate federal hazardous materials regulations face both civil and criminal penalties.  Further, companies may be criminally liable for violations committed by their employees. The Federal Railroad Administration (FRA), another DOT sub-agency, is tasked with enforcement authority over CBR and the U.S. Department of Justice (DOJ) is responsible for prosecuting both criminal and civil actions for those violations that are not resolved by the FRA.

In practice, criminal liability for violations has rarely been enforced. While the FRA celebrated its “highest-ever” civil penalty collection rate in 2015, a 2016 report by the DOT’s Office of Inspector General criticized the FRA for weak civil enforcement efforts and non-existent pursuit of criminal liability for violations.⁶³ The DOT report recommended that the FRA increase its civil penalties and require all of its staff to directly report to the Office of Inspector General all suspected criminal violations. FRA has indicated that it will comply with the requirements of the report by March 15, 2017.

IX. CLIMATE ACTION PLAN

While outgoing President Obama touted the progress his administration has made on climate change and renewable energy deployment, President Trump’s administration threatens to undermine whatever momentum the prior Administration’s Climate Action Plan (CAP) generated over the past three years. From the Clean Power Plan to the finalization of EPA rules aimed at methane emission reductions, President Trump has vowed to dismantle much of Obama’s climate legacy.

A. Clean Power Plan

In June 2013, Obama set forth a three-pronged plan to cut carbon pollution, referred to as the CAP.  The Clean Power Plan (CPP) is widely regarded as a lynchpin to the CAP. Adopted pursuant to Section 111(d) of the Clean Air Act (CAA), the CPP establishes the first ever national standards to limit greenhouse gas (GHG) emissions from existing power plants. If fully implemented, the CPP will have significant implications for how energy is generated, transmitted, and consumed in the United States. However, the 2016 presidential election results increased the uncertainty as to whether the CPP will be implemented.

Several US states challenged the CPP in federal court, asserting that the EPA lacks authority under the CAA to mandate GHG emission cuts from existing power plants. After the DC Circuit Court of Appeals declined to stay the rule’s implementation, the US Supreme Court (quite surprisingly, to many legal observers) granted a stay of the CPP’s implementation while legal challenges played out. With oral arguments heard on September 27, 2016, further implementation of the CPP continues to be stayed as a 10-judge en banc panel in the DC Circuit reviews the legal challenges to the rule.

On the campaign trail, Trump vowed to rescind the CPP if elected.  Indeed, President’s Trump’s nominee for EPA Administrator – Oklahoma Attorney General Scott Pruitt – has led the legal charge against the CPP. But the path President Trump may take to undermine the rule remains uncertain.

In December 2016, a 24-state coalition led by West Virginia and Texas submitted a letter to then President-elect Trump requesting that he issue an order to undercut enforcement of the CPP on the first day of his presidency. The letter also recommends that he take action to formally withdraw the rule via a formal administrative action consistent with the Administrative Procedure Act⁶⁴ and the CAA. Finally, the letter also recommends that Congress and the President-elect take action to ensure that similar rules are never attempted by the EPA in the future.  In response, a counter-coalition of states and cities submitted a letter to Trump, urging him to preserve the rule and continue defending it in court. New York Attorney General Eric Schneiderman, former California Attorney General (now U.S. Senator) Kamala Harris, and others contend in the letter that any attempt to remand the rule or undermine its enforcement would only lead to more litigation.

In short, while some form of nationwide carbon emissions regulation remains probable in the long term, the implementation of the CPP is unlikely over the next four years.

B. Methane Emissions

As part of the Obama Administration’s CAP, the EPA finalized rules in May 2016 aiming to curb the methane emissions of new and modified oil and gas infrastructure. Methane emissions are widely considered to be a leading contributor to GHG emissions, second only to carbon dioxide. These rules represent the first effort to curb methane emissions in any industry.  North Dakota led the legal charge against the rule in July 2016 by asking the DC Circuit to strike down the rule as beyond the scope of the EPA’s authority under the CAA. Texas and West Virginia launched similar attacks against the new regulations.

As with the CPP, President-elect Trump has pledged to rescind the Obama Administration’s recently published methane regulations, which may circumvent the basis for the state-led legal challenges to the regulations. One mechanism the Trump Administration may attempt to use is the Congressional Review Act.⁶⁵

C. Mercury and Air Toxics Standards

The EPA developed the mercury and air toxics standards (MATS) to regulate hazardous air pollutant emissions from power plants under the CAA. Finalized in 2012, environmental and industry groups litigated MATS all the way to the US Supreme Court, which ultimately remanded the litigation back to the DC Circuit after finding that the EPA had not sufficiently considered the cost of the rule prior to promulgation.

In December 2016, industry and environmental groups challenged MATS yet again – albeit for different reasons.  Environmental groups argued that the EPA improperly ignored necessary particulate matter limitations. Industry groups contented that the underlying study used by the agency to support MATS rested on inaccurate emissions data. Final briefs for the case are due April 3, 2017, with a decision likely in the months following.

X. DEMAND RESPONSE

Demand response−compensation for the curtailment of electric use during periods of peak demand and high system marginal cost−is an increasingly integral feature of wholesale power markets by reducing peak system demands and forestalling the need for costly new generation capacity.  The US Supreme Court in January 2016 held that FERC has the authority under the Federal Power Act (FPA)⁶⁶ to regulate demand response bids in wholesale markets and compensate demand response providers be paid the same amount for conserving electricity as generators are paid for producing it.⁶⁷  The Court upheld FERC’s Order No. 745, which directed RTOs and ISOs to pay suppliers of cost-effective demand response resources in their day-ahead and real-time wholesale power markets the full locational marginal price (LMP) used to compensate generation suppliers to these markets.⁶⁸

The EPSA decision ended several years of uncertainty over the future viability of demand response, and has prompted significant investment in the industry likely to continue into 2017.  RTO/ISOs have recently endeavored to adapt their market rules to accommodate this growth in demand response.  For example, PJM Interconnection (PJM) recently sought and obtained FERC approval to revise its settlement process to improve the accuracy of demand response baseline and reduction calculations, provide flexible options for participation, and better align market incentives with efficient market outcomes.⁶⁹  NYISO is seeking to exempt demand response resources from its buyer-side capacity market power mitigation measures, reasoning that demand response has no ability to meaningfully suppress capacity prices in New York State.⁷⁰  A variety of stakeholders are likely to increasingly take advantage of demand response incentives, including emerging technologies such as distributed generation and energy storage which are able to provide demand response.

XI. STATE SUBSIDY OF ELECTRIC GENERATION

On August 1, 2016, the NYPSC issued a controversial order as part of New York’s goal to drastically reduce carbon emissions, requiring ratepayers of investor-owned utilities to subsidize the continued operation of several nuclear generators which would likely otherwise be decommissioned. The subsidies would take the form of so-called zero emissions credits (ZEC), entitling each plant to receive both the locational marginal price for energy and an additional revenue stream calculated using the federal government’s “social cost of carbon” methodology.⁷¹

New York’s program has been challenged in federal district court by non-nuclear generator owners who allege it will artificially suppress energy and installed capacity prices in the state’s markets.⁷² The impending legal battle over ZEC marks the first significant test of the scope of the U.S. Supreme Court’s April 2016 ruling in Hughes v Talen Energy Marketing LLC (Hughes), which invalidated the state of Maryland’s subsidy for new gas-fired generators as preempted by FERC’s jurisdiction over the field of wholesale electricity markets and rates under the Federal Power Act.⁷³ Opponents argue that New York’s subsidy similarly distorts wholesale market prices. The NYPSC and supporters argue that New York’s program merely compensates the nuclear generators for their environmental attributes in furtherance of the state’s public policy, not “tethered” to wholesale market clearing prices and therefore in compliance with the narrowly tailored Hughes decision.

On December 7, 2016, the State of Illinois also passed the Future Energy Jobs Act which included a ZEC program to subsidize baseload nuclear generation for ten years, prompting competing generators to file legal challenges at FERC and in federal court.⁷⁴

XII. FERC AND CFTC ENFORCEMENT AND COMPLIANCE

FERC’s Office of Enforcement (Enforcement) continued to focus its efforts during 2016 in four principal areas: (1) fraud and market manipulation; (2) serious violations of mandatory reliability standards; (3) anticompetitive conduct; and (4) conduct threatening the transparency of regulated markets.⁷⁵ In FY 2016, Enforcement continued to prosecute matters under FERC’s authority to impose civil penalties of up to $1 million per day for market manipulation and fraud.⁷⁶ FERC opened 17 new investigations and obtained monetary penalties and disgorgement of unjust profits totaling approximately $18 million. With the pending litigation in U.S. federal district courts and before the Commission, Enforcement is seeking to recover more than $567 million in civil penalties and disgorge more than $45 million in allegedly unjust profits.

FERC Enforcement also issued two white papers: one summarizing recent FERC and federal court case law regarding development of the Commission’s anti-manipulation doctrine and identifying factors staff investigates for indicia of fraudulent conduct; and another explaining internal best practices for jurisdictional entities to prevent and detect market manipulation and other violations.⁷⁷

The Commodities Futures Trading Commission (CFTC) also continued to aggressively exercise its enforcement authority in FY 2016, bringing 68 enforcement actions, resulting in more than $1.2 billion in monetary sanctions. A significant portion of the CFTC’s enforcement actions continue to involve the energy sector, and the CFTC has prohibited disruptive trading practices on the commodities exchanges under its jurisdiction. Notable FERC matters are briefly described below.

A. Maxim Power Corporation, et al

On September 26, 2016, the Commission approved a settlement with Maxim Power Corporation (Maxim), several of its affiliates, and one individual employee, resolving claims pending in litigation before the United States District Court for the District of Massachusetts.⁷⁸ Maxim stipulated to the alleged facts but neither admitted nor denied the violations. It agreed to pay $4 million in disgorgement to ISO New England (ISO-NE) and $4 million in civil penalties.

The settlement resolved allegations FERC issued an Order Assessing Civil Penalties against the Maxim entities on May 1, 2015, that they had violated the Commission’s Anti-Manipulation Rule,⁷⁹ through a scheme to collect approximately $3 million in inflated payments from ISO-NE for reliability runs by charging the ISO for costly oil when it actually burned much less expensive natural gas.⁸⁰ FERC also found that Maxim had violated FERC’s false statements regulation by misleading and omitting material omissions in its communications with the ISO-NE Market Monitor.⁸¹ FERC assessed civil penalties of $5 million against Maxim and $50,000 against an individual employee, with one Commissioner dissenting from the Commission’s Order.  The September 2016 settlement also resolved a separate non-public investigation into whether Maxim potentially gamed ISO-NE mitigation procedures to maximize its uplift payments when it was dispatched for reliability purposes.

B. Lincoln Paper and Tissue LLC, et al

On June 1, 2016, the Commission issued an order approving a settlement in which Lincoln Paper and Tissue LLC (Lincoln) stipulated to the facts but neither admitted nor denied allegations that it manipulated ISO New England’s demand response markets.⁸² The settlement was also approved by the United States Bankruptcy Court for the District of Maine as part of an ongoing Chapter 11 bankruptcy reorganization by Lincoln. As part of the bankruptcy proceeding, FERC agreed that the disgorgement will be paid as an unsecured claim and the civil penalty will be treated as a subordinated claim.

FERC had issued orders⁸³ on August 29, 2013, assessing civil penalties of $5 million, $7.5 million, and $1.25 million against Lincoln, Competitive Energy Services, LLC (CES), and Richard Silkman (Silkman), CES’ managing partner, respectively. The orders also sought disgorgement of unjust profits of approximately $380,000 from Lincoln and $170,000 from CES. FERC’s petition seeking orders affirming the imposition of penalties against CES and Silkman⁸⁴ continues to be litigated in the United States District Court for the District of Maine and has survived Motions to Dismiss.⁸⁵

C. BP America Inc, et al

On July 11, 2016, FERC affirmed an Initial Decision issued on August 13, 2015, by an Administrative Law Judge at FERC after an evidentiary hearing lasting approximately two weeks. The Initial Decision found that BP America Inc., BP Corporation North America Inc., BP America Production Company, and BP Energy Company (collectively, BP) illegally manipulated a certain natural gas market in Houston from September to November 2008. Enforcement Staff alleged manipulation by citing, among other things, markedly changed market activity by BP at points in Texas following Hurricane Ike, and a recorded telephone demonstrating that a junior trader realized BP’s trading was manipulative and expressed concern to his supervisor.  The Initial Decision assessed penalties totaling $28 million and disgorgement of $800,000 in unjust profits, which is equal to the amount sought in the Commission’s Order to Show Cause issued on August 5, 2013.⁸⁶

On August 10, 2016, BP sought rehearing and a stay of the Commission’s July 11, 2016 order and the Commission responded by staying civil penalty payment and granting rehearing for further consideration of the merits.⁸⁷ On September 7, 2016, BP appealed the Commission’s original order setting the matter for hearing before an administrative law judge to the US Court of Appeals for the Fifth Circuit.

D. Total Gas & Power North America, Inc, et al

On April 28, 2016, FERC issued an Order to Show Cause alleging that Total Gas & Power North America, Inc (Total), along with its affiliates and two traders, violated the Anti-Manipulation Rule by trading during bidweeks to influence the published index prices of natural gas at four locations in the southwest United States between June 2009 and June 2012.⁸⁸ FERC alleged that Total traded a dominant market share of monthly physical fixed price natural gas during bidweek to inflate or suppress the volume-weighted average price and then reported these trades for inclusion in the calculation of the published monthly index prices to which it was exposed, thereby benefitting its derivative positions whose value was tied to those indices. FERC seeks civil penalties totaling more than $216 million and disgorgement of more than $9 million.

Total also filed a lawsuit in United States District Court for the Western District of Texas seeking to prevent FERC from adjudicating the alleged violations, seeking a declaratory judgment that the Commission: (1) has no legal authority to adjudicate NGA violations; (2) any such adjudication would violate Article III and the Fifth and Seventh Amendments of the United States Constitution; (3) the process by which FERC appoints administrative law judges is unconstitutional, because those judges are not appointed by the Commission as a whole; and (4) communications among FERC staff during the investigative stage (i.e. before issuance of the Order to Show Cause) of the Total matter violated the prohibition on ex parte communications and the separation of function requirements established by the Administrative Procedure Act. The court subsequently transferred the matter to the United States District Court for the Southern District of Texas, and that court dismissed the plaintiffs’ complaint on July 15, 2016, finding the claims were non-justiciable, hypothetical and not ripe, and rejecting Total’s jurisdictional challenge.⁸⁹ Total appealed that dismissal to the US Court of Appeals for the Fifth Circuit on September 26, 2016.⁹⁰

In December 2015, the CFTC filed and settled market manipulation charges against Total for a subset of the same bidweek trading FERC is pursuing.  CFTC collected a $3.6 million civil penalty and banned Total from trading physical basis or physical fixed-price natural gas at hub locations when it also holds certain related financial natural gas positions.⁹¹

E. ETRACOM LLC, et al

On August 17, 2016, FERC filed a petition in the United States District Court for the Eastern District of California to enforce the Commission’s June 2016 order assessing civil penalties against ETRACOM LLC and its majority owner and its principal owner.⁹² FERC alleged that during May 2011 ETRACOM violated the Commission’s Anti-Manipulation Rule by submitting virtual electric supply transactions at an intertie on the border of the California Independent System Operator (CAISO) market, in order to benefit ETRACOM’s congestion revenue rights (CRR) positions.  Respondents allege that pricing at the intertie was affected by, among other things, market design and software flaws and modeling errors in CAISO’s operation of its energy and CRR markets.

The Commission has asked the court to summarily affirm assessed civil penalties totaling $2.5 million and disgorgement of approximately $315,000.  The court is evaluating the scope of de novo review of a penalty assessment under the FPA, including whether the Federal Rules of Civil Procedure apply and to give ETRACOM the rights to seek discovery from FERC and third parties.

F. National Energy and Trade, LP, et al

On September 1, 2016, the Commission approved settlement agreements resolving the investigations of National Energy & Trade, LP (NET) and one of its natural gas traders.⁹³  Enforcement staff alleged that NET violated the Anti-Manipulation Rule by engaging in directional trading in the January 2012 and April 2014 bidweeks at natural gas trading hubs in New York and Texas to benefit its related financial positions.  NET paid a civil penalty and disgorgement of approximately $1.5 million, neither admitting nor denying the allegations, and the trader paid a civil penalty of $40,000 and agreed to a one-year trading ban.

G. Up-To Congestion Investigations, Settlements, and Proceedings

FERC continues to litigate two cases stemming from allegations of “gaming” of market rules in the PJM market under the Anti-Manipulation Rule with respect to so-called Up-to Congestion (UTC) transactions. FERC defines a UTC transaction as a “product that enables a trader to profit if the congestion price spread between two nodes changes favorably between the Day Ahead Market (DAM) and the Real Time Market (RTM).”⁹⁴

1. Powhatan Energy Fund, et al

FERC has petitioned the United States District Court for the Eastern District of Virginia⁹⁵to enforce the Commission’s May 2015 order assessing civil penalties against Powhatan Energy Fund, LLC ($16.8 million), HEEP Fund Inc. ($1.92 million), CU Fund Inc. ($10.08 million), and the companies’ principal trader Houlian “Alan” Chen ($1 million) (collectively, “Powhatan Respondents”) and ordered the corporate entities to disgorge allegedly unjust profits. FERC alleges that the Powhatan Respondents engaged in manipulative UTC trading by “plac[ing] UTC trades in opposite directions on the same paths, in the same volumes, during the same hours for the purpose of creating the illusion of bona fide UTC trading and thereby to capture large amounts of marginal loss surplus allocation (MLSA) that PJM distributed at that time to UTC transactions with paid transmission,” and proposing civil penalties of the same amounts.⁹⁶ The court has not yet determined the scope of the de novo review required by the FPA.

2. City Power Marketing, LLC, et al

FERC has petitioned the United States District Court for the District of Columbia⁹⁷ to enforce the Commission’s July 2015 order assessing civil penalties totaling $15 million and disgorgement of more than $1.2 million against City Power Marketing, LLC (City Power) and its owner, K. Stephen Tsingas.⁹⁸ The Commission found that City Power and Tsingas had violated the Commission’s Anti-Manipulation Rule by engaging in fraudulent Up-To Congestion trades in the PJM market during the summer of 2010. As part of that finding, the Commission determined that City Power and Tsingas had engaged in three types of trades to improperly collect MLSA payments intended for bona fide Up-To Congestion trades: (1) “roundtrip” trades that constituted wash trades, (2) trading between export and import points that had the same prices and (3) trading between two other points which had minimal price differences, not to profit from spread changes but instead for the purpose of collecting MLSA payments. The Commission reasoned, in part, that City Power’s trades were inherently fraudulent because they were pre-arranged to cancel each other out and involved little to no economic risk.

The Commission also found that City Power had violated section 35.41(b) of the Commission’s regulations by making false and misleading statements and material omissions in its communications with Enforcement staff to conceal the existence of relevant instant messages. On August 10, 2016, the court issued an opinion dismissing City Power’s Motion to Dismiss but holding−consistent with other district courts evaluating the question−that FERC’s petition for review must be treated as an ordinary civil action governed by the Federal Rules of Civil Procedure, rejecting FERC’s argument that the proceeding was merely a summary review of agency action.⁹⁹

3. Coaltrain Energy, LP, et al

FERC has petitioned the United States District Court for the Southern District of Ohio¹⁰⁰ to enforce the Commission’s May 2016 order assessing civil penalties totaling $38 million and disgorgement of more than $4.1 million against Coaltrain Energy LP, its co-owners, and three traders.¹⁰¹  Enforcement staff alleged that Coaltrain used financially-settled UTC transactions in the summer of 2010 to manipulate and defraud PJM by over-collecting MLSA payments, and that Coaltrain misled investigators by initially failing to produce screenshots from its internal computer monitoring software.

XIII. OIL AND NATURAL GAS PIPELINES

Increased public scrutiny and controversy regarding the direct and upstream environmental impacts of crude oil and natural gas pipelines contributed to the delay or rejection of several proposed projects in late 2016.  Most notably, sustained protests by environmental activists at the proposed site of the Dakota Access oil pipeline in North Dakota culminated on December 4, 2016, when the Obama Administration directed the Army Corps of Engineers to refuse Energy Transfer Partner an easement required for the project.  However, the Trump Administration reversed this decision as part of Trump’s pledge to streamline permitting and environmental review processes for energy infrastructure, particularly with respect to approving TransCanada Corporation’s extension of the Keystone XL pipeline which would import tar sands crude oil from Alberta.

In May 2016, Constitution Pipeline appealed to the US Court of Appeals for the Second Circuit an April 2016 decision by the New York State Department of Environmental Conservation not to issue a construction permit under Section 401 of the Clean Water Act¹⁰², despite FERC having approved the gas pipeline project in 2014.¹⁰³ Industry trade associations including producers, transporters, and users of natural gas are participating in the litigation and arguing that New York impermissibly interfered with FERC’s authority under the NGA over siting and approval of new pipelines.

Other projects−primarily those designed to alleviate gas transportation constraints in New England and elsewhere in the Northeastern United States−have pushed back their estimated completion dates due to complications with FERC and/or state environmental reviews. Inadequate demand and uncertain market conditions also led to the cancellation of the Northeast Energy Direct pipeline proposed by Kinder Morgan Inc and prompted FERC to reject the certificate application of the Pacific Connector Pipeline proposed in connection with the Jordan Cove LNG export terminal in Oregon.¹⁰⁴

XIV. ELECTRIC RELIABILITY

FERC continues to actively oversee and enforce Reliability Standards compliance, in coordination with the NERC, an industry self-regulatory organization, and NERC’s regional reliability entities. Reliability enforcement is of particular interest because the Reliability Standards are also mandatory and enforceable in the provinces of Ontario, New Brunswick, Alberta, British Columbia, Manitoba, and Nova Scotia and are in the process of being adopted in Quebec.¹⁰⁵

FERC continues to focus on strengthening the security of the North American bulk power system by overseeing development of new Critical Infrastructure Protection (CIP) Reliability Standards. On July 21, 2016, FERC directed NERC to develop a new supply chain risk management CIP standard in order to address security vulnerabilities faced by the specialized vendors providing industrial control system hardware, software, and computing and networking services to power system operators.¹⁰⁶ On July 21, 2016, FERC also issued a notice of inquiry into modifying CIP standards to better protect from cyberattack the control centers that are used to monitor and control the bulk electric system by requiring those control centers to be separated to some extent from the Internet and to have the ability to prevent unauthorized applications.¹⁰⁷ In 2016, FERC did not announce any major enforcement actions related to widespread electric outages or serious violations of Reliability Standards.

*Senior of Counsel at Morrison & Foerster LLP in Washington, D.C., where he represents a range of clients on energy regulatory, enforcement, compliance, transactional, commercial, legislative, and public policy matters. He serves as Editor-in-Chief of the Energy Law Journal (published by the Energy Bar Association) and is a former General Counsel and Vice-President for Legislative and Regulatory Policy at Constellation Energy. The author would like to thank the following members of Morrison & Foerster’s energy practice for their assistance: Zori Ferkin, Julian Hammar, Todd Edmister, Paul Varnado, Ben Fox, Megan Jennings and Lala Wu. The views expressed in this report are his own, however, and do not necessarily reflect those of Morrison & Foerster or any of its clients.
1.   Sierra Club v FERC (Freeport), 827 F.3d 36 (DC Cir 2016).
2.   National Environmental Policy Act, 42 USC § 4321.
3.   Supra note 1 at 46.
4.   Supra note 1 at 47.
5.   Ibid.
6.   EarthReports, Inc v FERC, 828 F.3d 949 (DC Cir 2016).
7.   Ibid at para 1.
8.   Ibid at II.A.
9.   Sierra Club v FERC, No 15-1133 (DC Cir 4 November 2016).
10.   Order Denying Applications for Certificate and Section 3 Authorization, Jordan Cove Energy Project LP and Pacific Connector Gas Pipeline LP, 154 FERC 61190 (11 March 2016) at para 44.
11.   Order Denying Rehearing, Jordan Cove Energy Project LP and Pacific Connector Gas Pipeline LP, 157 FERC 61194 (9 December 2016) at paras 17, 19.
12.   Third-Party Provision of Ancillary Services; Accounting and Financial Reporting for New Electric Storage Technologies, Order 784, Docket Nos AD10-13-000 and RM11-24-000, 144 FERC 61056 (18 July 2013).
13.   Electric Storage Participation in Regions with Organized Wholesale Electric Markets, FERC Docket No AD16-20-000 (11 April 2016).
14.  Transcript of Commission Meeting, (FERC issued 21 April 2016), online: <https://www.ferc.gov/CalendarFiles/20160509131051-transcript.pdf>.
15.  Utilization in the Organized Markets of Electric Storage Resources as Transmission Assets Compensated Through Transmission Rates, for Grid Support Services Compensated in Other Ways, and for Multiple Services, FERC Docket No AD16-25-000 (30 September 2016).
16.   Electric Storage Participation in Markets Operated by Regional Transmission Organizations and Independent System Operators, Nos AD16-20-000 andRM16-23-000, 157 FERC 61121 (17 November 2016).
17.   US, AB 2514, An act to amend Section 9620 of, and to add Chapter 7.7 (commencing with Section 2835) to Part 2 of Division 1 of, the Public Utilities Code, relating to energy, 2009-2010, Cal, 29 September 2010.
18.   Decision Adopting Energy Storage Procurement Framework and Design Program, CPUC D.13-10-040, (17 October 2013).
19.   Order Instituting Rulemaking to consider policy and implementation refinements to the Energy Storage Procurement Framework and Design Program (D.13-10-040, D.14-10-045) and related Action Plan of the California Energy Storage Roadmap, CPUC R.15-03-011 (2 April 2015).
20.   Decision Addressing Competitive Solicitation Framework and Utility Regulatory Incentive Pilot, CPUC D.16-12-036 (22 December 2016).
21.   US, HB 2193, An act relating to energy storage; and declaring an emergency, 78^th Leg Assem, Reg Sess, Or, 2015.
22.   Order Implementing Energy Storage Program Guidelines pursuant to House Bill 2193, Order 16-504, Docket No UM 1751 (Or 2016).
23.   US, H 4568, An act to promote energy diversity, 2015-2016, Mass, 2016.
24.   Cal Pub Util Code § 353.5.
25.   Cal Pub Util Code § 769.
26.   Cal Pub Util Code § 769(c).
27.   US, AB 327, An act to amend Sections 382, 399.15, 739.1, 2827, and 2827.10 of, to amend and renumber Section 2827.1 of, to add Sections 769 and 2827.1 to, and to repeal and add Sections 739.9 and 745 of, the Public Utilities Code, relating to energy, 2013-2014, Cal, 2013.
28.   US, AB 793, An act to amend Section 2790 of, and to add Section 717 to, the Public Utilities Code, relating to public utilities, 2015-2016, Cal, 2015.
29.  US, SB 374, 78th session, 2015, online: <https://www.leg.state.nv.us/App/NELIS/REL/78th2015/Bill/1973/Overview>.
30.   Order re: NV Energy and Sierra Pacific Power Applications, PUCN Docket Nos 15-0741 and 15-0742 (23 December 2015).
31.   Ibid; Advice Letter No 453-R, PUCN Docket No 15-07041 (30 December 2015) at 2, 6 ROD 006938.
32.   Supra note 30 at 108 (23 December 2015), 7 ROD 007515.
33.   Order Granting in Part and Denying in Part General Rate Application by Sierra Pacific Power, PUCN Docket No 16-06006 (20 December 2016).
34.   Proceeding on Motion of the Commission in Regard to Reforming the Energy Vision, NYPSC Docket No 14-M-0101.
35.   Proceeding on Motion of the Commission to Consider a Clean Energy Fund, NYPSC Docket No 14-M-0094.
36.  The NYPSC has collected its REV orders, online: <http://www3.dps.ny.gov/W/PSCWeb.nsf/All/C12C0A18F55877E785257E6F005D533E?OpenDocument>.
37.   In the Matter of Eligibility Criteria for Energy Service Companies, NYPSC Docket No 15-M-0127; Proceeding on Motion of the Commission to Assess Certain Aspects of the Residential and Small Non-residential Retail Energy Markets in New York State, NYPSC Docket No 12-M-0476; Uniform Business Practices, NYPSC Docket No 98-M-1343.
38.   Arizona Public Service Company’s Application for Approval of Net Metering Cost Shift Solution, Decision No 74202 at 19-20, Ariz Corp Comm’n Docket No E-01345A-13-0248 (3 December 2013).
39.   Arizona Corporation Commission, Docket No E-00000J-14-0023 (20 December 2016).
40.   See, e.g., the Energy Independence and Security Act of 2007, Pub L No 110-140, 42 USC 17001.
41.   Lawrence Berkeley National Laboratory, What’s Energy Efficiency, online: <https://eetd.lbl.gov/ee/ee-2.html>.
42.   The American Council for an Energy Efficient Economy (ACEEE) ranks states annually on the extent to which states promote energy efficiency.  In 2016, the top two states on the “ACEEE Scorecard” were California and Massachusetts, online: ACEEE <http://aceee.org/state-policy/scorecard>.
43.   Cal Pub Util Code §§ 454.55, 454.564.
44.   Cal Pub Util Code § 381.
45.   California Public Utilities Commission, Docket No A-16-08-006.
46.   Third-Party Provision of Primary Frequency Response Service, Order No 819, Docket No RM15-2-000, 153 FERC 61220 (20 November 2015).
47.   David DeKok, “Pennsylvania Adopts New Fracking Regulations”, Insurance Journal (10 October 2016), online: <http://www.insurancejournal.com/news/east/2016/10/10/428843.htm>.
48.   Dan Packel, “New Pa. Fracking Regs Finally Take Effect”, Law360 (7 October 2016), online: <https://www.law360.com/articles/849422/new-pa-fracking-regs-to-finally-take-effect>.
49.   Marcellus Shale Coalition v Department of Environmental Protection, case number 573 MD 2016 (Pa 8 November 2016).
50.   Claudia Melendez Salinas, “Big Oil Sues Monterey County to Stop Measure Z”, Mercury News (16 December 2016), online: <http://www.mercurynews.com/2016/12/16/big-oil-sues-monterey-county-to-stop-measure-z/>.
51.   Ibid.
52.   Ibid.
53.   Ibid.
54.   Paul O’Donnell, “Days after Oklahoma Earthquake, Sierra Club Lawsuit Targets Chesapeake, Devon, Others”, Dallas Morning News (17 February 2016), online:  <http://www.dallasnews.com/business/energy/2016/02/17/days-after-oklahoma-earthquake-sierra-club-lawsuit-targets-chesapeake-devon-others>.
55.   Resource Conservation and Recovery Act, 42 USC § 6901 et seq (1976).
56.   Blake Watson, “Hydraulic Fracturing Tort Litigation Summary” (1 January 2017).
57.   Ibid.
58.   Brady Dennis, “Environmental Groups Sue EPA, Seek Stricter Rules over Fracking Waste Linked to Earthquakes”, Washington Post (4 May 2016), online: <https://www.washingtonpost.com/news/energy-environment/wp/2016/05/04/environmental-groups-sue-epa-seek-stricter-rules-over-fracking-waste-linked-to-earthquakes/?utm_term=.2e66 25b2cdae>.
59.   Ibid.
60.    Ibid.
61.   Keith Goldberg, “EPA Will Review Drilling Waste Regs to Settle Enviros’ Suit”, Law360 (4 January 2017), online: <https://www.law360.com/articles/877132/epa-will-review-drilling-waste-regs-to-settle-enviros-suit>.
62.   Order on Petitions for Review of Final Agency Action, Wyoming v Jewell et al, No 2:15-cv-043 (D Wyo 21 June 2016); 80 FR 16128 (26 March 2015).
63.   Department of Transportation, Report No ST-2016-020, “FRA’s Oversight of Hazardous Materials Shipments Lacks Comprehensive Risk Evaluation and Focus on Deterrence” (24 February 2016), online: https://www.oig.dot.gov/sites/default/files/FRA%20Oversight%20of%20Hazmat%20by%20Rail_Final%20Report%5E2-24-16.pdf.
64.   Administrative Procedure Act, Pub L No 79-404, 60 Stat 237 (1946).
65.  Emmarie Huetteman, “How Republicans Will Try to Roll Back Obama Regulations”, The New York Times (30 January 2017), online: <https://www.nytimes.com/2017/01/30/us/politics/congressional-review-act-obama-regulations.html?_r=0>.
66.   Federal Power Act, 16 USC § 791a.
67.   FERC v Electric Power Supply Ass’n, 577 US __, No 14-840, slip op (25 January 2016); For a case comment on this decision previously included in this quarterly, see Scott Hempling, “The Supreme Court Saves Demand Response: Now What?” (2016) 4:1 Energy Regulation Quarterly 35.
68.  Demand Response Compensation in Organized Wholesale Energy Markets, Order No 745, Docket No RM10-17-000, 134 FERC  61,187 (15 March 2011), order on reh’g, Order No 745-A, 137 FERC 61,215 (15 December 2011).  The Order required that demand resources actually be capable of supplying the claimed reduction in demand, that the resources pass a ‘net benefits test’ and that the applicable state regulatory commission permit the bidding of the demand in an organized wholesale market.
69.   Order Accepting Proposed Tariff Revisions, Docket No ER16-2460-000, 157 FERC  61,067 (31 October 2016).
70.   Complaint, New York State Public Service Commission et al v New York Independent System Operator, Inc, FERC Docket No EL16-92 (24 June 2016).
71.   Petition of Constellation Energy Nuclear Group LLC; R.E Ginna Nuclear Power Plant, LLC; and Nine Mile Point Nuclear Station, LLC to Initiate a Proceeding to Establish the Facility Costs for the R.E Ginna and Nine Mile Point Nuclear Power Plants, Implementation of a Large-Scale Renewable Program and a Clean Energy Standard, NYPSC Docket No 16-E-0270 (1 August 2016).
72.   Complaint, Coalition for Competitive Energy v Zibelman, Case No 1:16-cv-08164 (SDNY 19 October 2016).
73.   578 US __, 136 S. Ct. 1288 (2016). For a discussion of the decision previously included in this quarterly, see Robert Fleishman, “The Washington Report” (2016) 4:2 Energy Regulation Quarterly 54.
74.   Electric Power Supply Association et al v Star et al, No. 1:17-cv-01164 (ND Ill 2017); Calpine Corp et al v PJM Interconnection LLC, FERC Docket No EL16-49-000 (14 February 2017).
75.   Federal Energy Regulatory Commission, 2016 Report on Enforcement, FERC Docket No AD07-13-010 (17 November 2016), online: FERC <https://www.ferc.gov/legal/staff-reports/2016/11-17-16-enforcement.pdf >. The Report provides additional transparency and guidance for regulated entities and the public.
76.   See Prohibition of energy market manipulation, 16 USC § 824v(a) (2012); Prohibition on market manipulation 15 USC § 717c-1 (2012).
77.   Federal Energy Regulatory Commission, Anti-Market Manipulation Enforcement Efforts Ten Years After EPAct 2005 (November 2016), online: <https://www.ferc.gov/legal/staff-reports/2016/marketmanipulationwhitepaper.pdf>; Federal Energy Regulatory Commission, Effective Energy Trading Compliance Practices (November 2016), online: <https://www.ferc.gov/legal/staff-reports/2016/tradecompliancewhitepaper.pdf>.
78.   Order Approving Stipulation and Consent Agreement, Maxim Power Corporation, 156 FERC 61223 (26 September 2016).
79.   18 CFR § 1c.1 (2015).
80.   Order Assessing Civil Penalties Maxim Power Corporation, 151 FERC 61094 (1 May 2016).
81.   18 CFR § 35.41(b) (2015).
82.   Order Approving Stipulation and Consent Agreement, Lincoln Paper and Tissue, LLC, 155 FERC 61228 (1 June 2016). “Demand response” refers to a reduction in customers’ consumption of electricity from their anticipated consumption in response to an increase in the price of electricity or to incentive payments designed to induce lower electricity consumption.
83.    Order Assessing Civil Penalty, Lincoln Paper & Tissue, LLC,144 FERC 61162 (29 August 2013); Order Assessing Civil Penalty, Competitive Energy Servs LLC, 144 FERC 61163 (29 August 2013); Order Assessing Civil Penalty, Richard Silkman, 144 FERC 61164 (29 August 2013).
84.   Petition for an Order Affirming the Federal Energy Regulatory Commission’s August 29, 2013 Order Assessing Civil Penalty Against Lincoln Paper and Tissue, LLC, FERC v Lincoln Paper & Tissue LLC, No 1:13-cv-13056-DPW (D Mass) (2 December 2013).
85.   Memorandum and Order Regarding Motions to Dismiss, FERC v Lincoln Paper & Tissue, LLC, No 1:13-cv-13056-DPW (D Mass) (11 April 2016).  The order contained rulings favorable to FERC Enforcement on the issues of statute of limitations, waiver of all defenses and arguments not raised during the Commission penalty assessment process, applicability of the Anti-Manipulation Rule to individual persons, and fair notice of which fraudulent conduct is proscribed.  The Court in 2016 did not provide clarity sought on the scope of de novo review under the FPA.
86.   Initial Decision, BP America Inc, 152 FERC 63016 (13 August 2015); Order to Show Cause and Notice of Proposed Penalty, BP America Inc, 144 FERC 61100 (5 August 2013).
87.   Order Staying the Payment Directives of the Order Assessing Penalties, BP America Inc, 156 FERC 61174 (12 September 2016); Order Granting Rehearing, BP America Inc, Docket No IN13-15-002 (8 September 2016).
88.   Order to Show Cause and Notice of Proposed Penalty, Total Gas & Power North America, Inc, 155 FERC 61105 (28 April 2016).
89.   Memorandum and Order, Total Gas & Power North America, Inc v FERC, No 4:16-cv-01250 (SD Tex 15 July 2016).
90.   Notice of Appeal, Total Gas & Power North America, Inc v FERC, No 16-20642 (5th Cir 26 September 2016).
91.   US Commodity Futures Trading Commission, Press Release, pr7289-15, “CFTC Files and Settles Charges against Total Gas & Power North America, Inc. and Therese Tran for Attempted Manipulation of Natural Gas Monthly Index Settlement Prices” (7 December 2015), online: <http://www.cftc.gov/PressRoom/PressReleases/pr7289-15>.
92.   Petition for an Order Affirming the Order Assessing the Civil Penalties, FERC v ETRACOM LLC, No 2:16-cv-01945 (ED Cal 17 August 2016).
93.   Order Approving Stipulation and Consent Agreement, National Energy & Trade, L.P, 156 FERC 61154 (1 September 2016); Order Approving Stipulation and Consent Agreement, In re David Silva, 156 FERC 61155 (1 September 2016).
94.   Order Approving Stipulation and Consent Agreement, In re PJM Up-To-Congestion Transactions, 142 FERC 61088 (1 February 2013) at para 3.
95.   Petition for an Order Affirming FERC’s Order Assessing Civil Penalties, FERC v Powhatan Energy Fund LLC, No 3:15-cv-00452 (ED Va 31 July 2015).
96.   Order to Show Cause and Notice of Proposed Penalty, Powhatan Energy Fund LLC, 149 FERC 61261 (17 December 2014).
97.   Petition for an Order Affirming the FERC’s July 2, 2015 Order Assessing Civil Penalties Against City Power Marketing, LLC and K. Stephan Tsingas, FERC v City Power Marketing LLC, No 15-cv-01428 (DDC 1 September 2015).
98.   Order Assessing Civil Penalties, City Power Marketing LLC and K. Stephen Tsingas, 152 FERC 61012 (2 July 2015).
99.   Memorandum Opinion and Order Denying City Power and Tsingas’ Motion to Dismiss, FERC v City Power Marketing LLC, No 15-cv-01428, (DDC 10 August 2016).
100.   Petition for an Order Affirming Order Assessing Civil Penalty, FERC v Coaltrain Energy et al, No 16-cv-00732 (SD Ohio 27 July 2016).
101.   Order Assessing Civil Penalties, Coaltrain Energy LP, 155 FERC 61204 (27 May 2016).
102.   Clean Water Act, 33 USC §1251 et seq (1972).
103.   Constitution Pipeline v New York State Department of Environmental Conservation, No 16-1568 (2d Cir 23 May 2016).
104.   Order Denying Applications for Certificate and Section 3 Authorization, Jordan Cove Energy Project, LP, 154 FERC 61190 (11 March 2016) at para 48: order denying reh’g, 157 FERC 61194 (9 December 2016).
105.   NERC, Key Players: Canada, online: <http://www.nerc.com/AboutNERC/keyplayers/Pages/Canada.aspx>.
106.   Revised Critical Infrastructure Protection Reliability Standards, Order No 829, Docket No RM15-14-002, 156 FERC 61050 (21 July 2016).
107.   Cyber Systems in Control Centers, Docket No RM16-18-000, 156 FERC 61051 (21 July 2016).