Category: Energy Law

Reform Opens Door to Private Investment in Mexico’s Energy Sector

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Mexican Senate presents comprehensive Energy Reform Bill to the House of Representatives with tremendous potential for domestic and foreign energy companies.

In an encouraging move toward energy reform, the Mexican Senate approved today and presented to the House of Representatives a bill—the combined effort of Partido Acción Nacional (PAN) and Partido Revolucionario Institucional (PRI)—with a constitutional reform proposal (the Energy Reform Bill) that paves the way to allow production and profit-sharing arrangements with, and the issuance of risk-sharing licenses to, private parties. The bill further advances the efforts of both parties, detailed in our August 15, 2013 LawFlash,[1] to promote energy reform in Mexico.

If the bill is enacted, these production and profit-sharing arrangements could be entered either directly by private parties or in association withPetróleos Mexicanos (Pemex), the state oil company. It is expected that risk-sharing licenses will mimic a concession-based system that would allow the booking of reserves for accounting purposes. Mexico has struggled with the adoption of a “pure” concession-based system due to a deeply engrained social and political belief that Mexico’s oil and gas reserves are and should remain the exclusive property of the Mexican state.

In addition, the Energy Reform Bill proposes the creation of the Mexican Oil Fund, with Mexico’s central bank, Banco de México, acting as the trustee. The fund would manage, invest, and distribute hydrocarbon revenues.

In the power sector, the Energy Reform Bill reaffirms the state monopoly with respect to the operation of the national grid and transmission and distribution activities. However, if enacted, the bill would break horizontal processes by permitting private parties to participate and contract with the Comisión Nacional de Electricidad (CFE), the state-owned utility company, and by allowing competitive activities with respect to power generation and commercialization.

Details on the reform are expected to be addressed in subsequent legislation that would follow congressional approval of the Energy Reform Bill; however, the bill underlines the reality of the reform and its potential for domestic and foreign private investors. The Energy Reform Bill, if approved, would give Congress a 120-day period to establish the necessary legal framework and regulate the new contracting mechanisms.

In order to pass, the bill will have to be approved by the House of Representatives and by 17 of the 32 state legislatures. It will then be submitted back to Congress for presentment of the final bill to the president, who must sanction and sign the proposed Energy Reform Bill into law, at which point it will be published in the Mexican Federal Official Gazette. Although some adjustments are expected, both PRI and PAN have indicated their intent to complete the congressional approval of the constitutional amendments on or before December 15, 2013.

[1]. View our August 15, 2013 LawFlash, “Mexican Government to Consider Overhaul of Energy Sector,” available here.

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Progress on the Western Front in the Solar Net Metering Battle?

 

The ongoing discussion between solar energy stakeholders and utilities concerning the merits of net metering and the best approach to ensure that ratepayers with installed solar power systems contribute appropriately to overall electric transmission and distribution costs spans the nation,  with state utility commissions from Georgia to California considering this issue.  However, nowhere is that discussion presently more heated and more closely watched than in Arizona and Colorado.

After a day of public comments and a full day of discussions with interveners, the Arizona Corporation Commission (A.C.C.) voted 3 – 2 on November 14, 2013 to modify APS’s Net Energy Metering (NEM) program. (A.C.C. Docket No. E-01345A-13-0248)  In brief, the A.C.C. voted to adopt a 70 cent/kW installed monthly charge for ratepayers with rooftop solar.  For the average-sized rooftop installation of 7 kW, this means a monthly charge of $4.90.  The two commissioners who voted against the decision felt that this did not go far enough in addressing the cost shift from NEM.

While the decision is likely to be perceived as a win for the rooftop solar companies, APS and other utilities can take solace in the fact that the Commission recognized that NEM does produce a cost shift and that the grid has value for all customers.  The details of the cost shift, including consideration of the value of the grid, will be the subject of A.C.C. workshops that will take place prior to the next APS rate case.

Prior to the open meeting, it appeared as though the A.C.C. would adopt a solution that would reduce the NEM subsidy based on a formula that took into consideration the lower cost of utility scale solar.  The monthly charge calculated through this formula ranged from $7.00 to $56.00 per month for a 7 kW installation, depending on the individual Commissioner’s proposal.

However, on the morning of the second day of the open meeting, the rooftop solar interveners and the Arizona Residential Utility Consumers Office (RUCO) negotiated a settlement that was the subject of most of the discussion.  This “settlement” proposed a monthly charge of 70 cents per kw installed or $4.90 for a 7 kW system.  While Commissioner Pierce and others mentioned the lower cost of utility scale solar, the final outcome had less to do with addressing the rate-shift and more to do with the amount that the DV industry said that the average customers, who they contend only save $5-10/month, could absorb and still be willing to install a system.  APS opposed the eventual outcome, as did Commissioners Pierce and Brenda Burns.

The following solution was adopted:

Monthly charge.  New rooftop PV customers beginning after December 31, 2014 will be billed a monthly charge of 70 cents per kW installed to help address the rate-shift from solar to non-solar customers.  For the average-sized system of 7 kW, that would mean a charge of $4.90/month.  The charge can be adjusted by the Commission in the future – either up or down – based on the volume of installations.  Reports of rooftop installation volumes will be provided quarterly.  There is no automatic escalation of the charge based on installation volume.  This charge will be added to the rooftop solar customer’s Lost Fixed Cost Recovery (LFCR) fund assessment currently paid by APS customers.  An offsetting reduction will be made to the monthly LFCR assessment currently paid by customers without rooftop solar.

Grandfathering.  Rooftop installations under the current NEM structure will be grandfathered.  There was a long discussion about grandfathering with a general consensus being reached that while any Commission can change any previous decision made, future Commissions were likely to honor grandfathering decisions made by previous Commissions.  Customers who sign up for systems under the new 70 cent charge will be grandfathered if the charge is increased to 80 cents or $1.00, but only until the next rate case in 2015.  Customers who then sign up under any increased charges (e.g., 80 cents or $1.00) will also be grandfathered until the next rate case.  However, all new rooftop customers (post December 2013) will be subject to any changes agreed to in the next rate case.

The NEM issue will be taken up again in the next APS rate case.

While the net metering discussion in Arizona has reached a conclusion – for now, the debate continues in Colorado.

On July 24, 2013, Public Service Company of Colorado (PSCo), Xcel Energy’s Colorado subsidiary, filed with the Colorado Public Utilities Commission (CPUC) its 2014 Renewable Energy Standard Compliance Plan detailing its updated proposal to meet Colorado’s requirement that 30% of PSCo’s retail electric sales come from eligible energy resources by 2020.  (CPUC Docket No. 13A-0836E)  Long recognized for its substantial commitment to wind energy, PSCo’s renewable energy portfolio also includes utility scale solar facilities and various programs designed to facilitate expansion of distributed solar energy installations, including the popular Solar*Rewards® program which has over 15,000 participants and represents more than 160 MW of installed solar capacity.

In its 2014 RES Compliance Plan PSCo proposed adding 42.5 MW of new distributed solar generation, including 36 MW of retail distributed solar generation through the Solar*Rewards® program and 6.5 MW of community solar gardens through the Solar*Rewards® Community program.  At the same time, the company proposed reducing the per kilowatt-hour incentives paid to customers with distributed solar installations.

The more controversial aspect of the utility’s filing related to PSCo’s call for more transparency in the NEM credit paid to customers with installed solar systems and the costs and benefits associated with distributed solar facilities.  PSCo explains that customers with installed solar arrays receive a 10.5 cent credit per kilowatt-hour of electricity they deliver to the grid, however, that electricity only provides 5 cents in benefits to PSCo systems and customers.  While PSCo acknowledges that distributed solar generation allows for some savings associated with fuel costs, energy losses, and the deferral of new generation resources, the utility argues that the NEM incentive paid to solar-owning customers does not adequately consider other costs related to generation, transmission, and distribution, costs that are presently being borne by non-solar customers.  As did APS in the NEM debate in Arizona, PSCo takes the position that the need for and nature of NEM incentives must be reevaluated as the solar industry moves toward becoming self-sustaining.  If the CPUC does not agree with PSCo’s NEM proposals, the utility indicated that it intends to acquire only enough distributed solar generation needed for minimum RES compliance – a total of 12.5 MW.

Solar businesses and trade groups, renewable energy advocates, and environmental groups have strongly opposed PSCo’s analyses and have characterized the utility’s proposal as declaring war on the solar industry.  These stakeholders argue that PSCo’s analyses fail to properly consider distributed solar’s grid, environmental, and job creation benefits.  To that end, the Vote Solar Initiative (VSI) filed a motion requesting that the CPUC sever the NEM issue from PSCo’s RES Compliance docket and conduct a separate, comprehensive NEM cost-benefit analysis.  While VSI’s motion was supported by various other stakeholders, it was opposed by PSCo and CPUC Staff, and was ultimately denied.

An evidentiary hearing on PSCo’s 2014 RES Compliance Plan, including consideration of PSCo’s proposed NEM changes, is scheduled for February 3-7, 2014.  Until then, it is likely that the NEM battle in Colorado will continue both in the CPUC docket and in the public debate concerning the costs and benefits associated with distributed solar generation, how those costs and benefits should be accounted for and allocated, and the continued need for incentives related to this distributed energy resource.

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Federal Energy Regulatory Commission (FERC) Delays Electric Quarterly Reports (EQRs) Filing Deadline

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On October 10, after many weeks of speculation, the Commission issued an order extending the filing deadline of the 2013 Q3 Electric Quarterly Reports (EQRs) filings from October 31 to “a date to be determined.”  This extension follows a series of similar delays and significant technical issues associated with the revised EQR filing requirements put in place by Order Nos. 768, 768-A, and 770.

As part of the preparation for the new filing requirements, FERC had made available to the public an EQR Sandbox Electronic Test Site (Sandbox) that was meant to be a testing platform to help users acclimate to and prepare for the new filing requirements and system.  The Sandbox was made available on July 12 and was meant to be available until September 1.  Following the testing period, the Sandbox would be taken offline to prepare it to go live well in advance of the original October 31 filing deadline.  Commission Staff encouraged filers to utilize the Sandbox “as often as possible” and to contact Staff with questions and concerns during the planned six week testing period.  From the beginning of the testing period, there were significant and wide-ranging problems encountered with the Sandbox.  After vocal feedback from industry, the Commission extended the Sandbox availability from September 1 to September 15.  It was hoped that this extension would allow ample time to address and resolve the problems and allow filers additional time to test a functioning Sandbox.  Unfortunately, the issues were not resolved, and on September 13 the Commission extended the availability of the Sandbox “until further notice.”

Since the indefinite extension of the Sandbox availability, filers have continued to experience difficulties.  As a result of these ongoing issues, the Commission has implemented a similar indefinite extension of the filing deadline.

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Watt's New? Michigan Energy News – September 2013

Varnum LLP

Still Getting Ready to Make Good Energy Decisions

After reviewing and analyzing the submissions from seven public forums and from the 114 questions posted on the web for feedback, Energy Office Director Steve Bakkal and MPSC Chairman John Quackenbush will be issuing four reports on the following schedule:

■ Renewable Energy: Draft report release for comments – 9/20/13

Due date for public comments – 10/11/13

Release final report – 11/4/13

■ Additional Areas: Draft report release for comments – 10/1/13

Due date for public comments – 10/22/13

Release final report – 11/15/13

■ Electric Choice: Draft report release for comments – 10/15/13

Due date for public comments – 11/1/13

Release final report – 11/20/13

■ Energy Efficiency: Draft report release for comments – 10/22/13

Due date for public comments – 11/6/13

Release final report – 11/26/13

All this material will be posted at: www.michigan.gov/energy

Net Metering Participation Increases

The Michigan Public Service Commission issues an annual report on electric customers participating in the statewide net metering program required under the Clean, Renewable, and Efficient Energy Act of 2008. [Under net metering, when a customer produces electric energy in excess of its needs, energy is provided back to the serving utility and the customer receives a credit.] In 2012 the size of the net metering program increased 55 percent to 9,583 kW. The number of net metering customers has gone from 53 in 2008 to 1,330 in 2012. While most of the recent increase was due to new solar installations, a 535 kW methane digester in Great Lakes Energy Cooperative’s service territory is Michigan’s first Category 3 (methane digester up to 550 kW) modified net metering project.

Methane-to-Methanol Plant Operational

Oil wells also produce natural gas. When there is no way to get the natural gas to market it is usually “flared”. Now Gas Technologies LLC of Walloon Lake has demonstrated its 25-foot, portable, singlestep, gas-to-liquids plant in a Kalkaska County oil field. This first in the industry process can monetize stranded natural gas, biogas, coal mine methane, and landfill gas. www.gastechno.com

Adopt-A-Watt Helps Library

Dearborn’s Henry Ford Centennial Library has installed 25 energy efficient street lights and an electric vehicle charging station under the national Adopt-A-Watt program. Modeled on the AdoptA-Highway program, sponsorships are sold to fund new, energy-efficient equipment, alternative fuel vehicles and other green technologies for financially challenged public agencies. The agencies then realize the cost savings into the future.

Restrictive Wind Zoning Struck Down by Michigan Court

Forest Hill Energy recently won a court order striking down alleged “police power” ordinances passed by townships attempting to regulate the construction and operation of wind turbines. The Clinton County Zoning Ordinance already had extensive wind energy provisions. Nonetheless, three townships passed ordinances that were more restrictive to wind energy development than the county zoning. The additional restrictions related to height, noise, setbacks, and shadow flicker. Forest Hill Energy brought suit seeking a declaration that the townships’ “police power” actions were really zoning ordinances in disguise. The Clinton County Circuit Court ruled that since the townships were subject to the county’s zoning, the township ordinances were invalid because they were inconsistent with the county’s zoning plan—the townships could not get a “second bite at the zoning apple.” Forest Hill Energy had already obtained a special use permit for the construction of a 39 turbine project in January of 2012, and now expects to move forward with construction in late 2013.

More Wind Farms to Commence Construction in 2013

NextEra’s 150 MW Pheasant Run Wind projects are commencing construction this fall, with the energy to be sold to DTE Electric Company. The two projects will be located in Brookfield, Fairhaven, Grant, Oliver, Sebewaing and Winsor townships, all in Huron County. The Michigan Public Service Commission approved a 20 MW power purchase agreement (PPA) for DTE Electric Company with Big Turtle Wind Farm, LLC. The twenty year PPA has estimated pricing of up to 5.3 cents per kilowatt-hour. The project will have more than 50 percent Michigan-sourced content, and brings the DTE renewable energy portfolio to 9.8 percent. Consumers Energy will begin construction on its 105 MW Cross Winds Energy Park in Akron and Columbia townships in Tuscola County before the end of the year.

Michigan Shorts

ΩΩ Bay City Electric, Light & Power has signed a 20-year contract to purchase 4.8 MW of energy from the Beebe Community Wind Farm at a price starting at 4.5¢/kWh and increasing to 7.2¢/kWh Ω Revolution Lighting Technologies has acquired Relume Technologies, a Michigan manufacturer of LED lighting products and control systems Ω The City of Ypsilanti has set a goal to have 1000 solar roofs within the city limits by 2020 Ω DTE Energy is offering its customers the opportunity to buy BioGreenGas derived from the Sauk Trail Hills Landfill in Canton Ω Lansing Board of Water & Light has announced it will purchase energy from eight wind turbines in Gratiot County under a power purchase agreement with Exelon Wind ΩΩ

Virtual Solar Engineering Center Meeting with Success

GreenLancer.com, a Detroit-based solar energy technology company, has announced its initial $500,000 in funding. The company, launched in 2011, combines state-of-the-art cloud computing with a national network of green energy engineering freelancers (“greenlancers”). Their goal is to reduce the soft costs associated with solar energy projects. Initial investors include Bizdom (Detroit), Start Garden (Grand Rapids), Blue Water Angels (Midland), Northern Michigan Angels (Traverse City), and a private investor. The company has projects in 33 states and six foreign countries.

Converting Corn Stalks into Biofuel

Using a fungus and E. coli bacteria, University of Michigan researchers have turned inedible waste plant material into isobutanol. The waste used in the initial work was corn stalks and leaves. Isobutanol has 82 percent of the energy in gasoline, whereas ethanol has only 67 percent. It also has the added advantage over ethanol of not mixing easily (or absorbing) water. So it is a viable candidate to replace ethanol as a gasoline additive. The fungi turns the plant roughage into sugars that are then converted by escherichia coli to isobutanol. Through bioengineering the researchers believe they can produce a variety of petroleum-based chemicals through this same process.

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Argentina Legal Highlights (Volume II, 2013)

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Latin American Region Enviromental Report, Second Quarter, 2013

Packaging Waste Management Bill Introduced in Chamber of Deputies

On April 11, 2013, a bill (No. 1859-D-2013; the “Bill”) was introduced in the Chamber of Deputies that would create a national, comprehensive packaging-waste management system. The Bill would apply to most packaging and packaging waste, and would regulate most entities that are involved with the packaging of products, the marketing of packaged goods, or the recycling or recovery of packaging waste. (Arts. 2, 7) A covered entity could comply with its responsibilities through one of two methods. (Art. 9) One option would allow it to pay a fee and participate in a provincially or municipally administered Packaging-Waste Management Program (Programa de Gestión de Residuos de Envases), which would set requirements for collection, transportation, temporary storage, processing, and recovery of packaging waste. (Arts. 10-23) Alternatively, a covered entity could administer its own government-approved Deposit and Return System (Sistema de Depósito, Devolución y Retorno). (Arts. 24-26) The Bill was referred to the committees on Industry, Natural Resources and Conservation of the Human Environment, and Budget and Finance.

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Battery Waste Bill Introduced in Chamber of Deputies

On April 25, 2013, a battery waste management bill (No. 1859-D-2013; the “Bill”) was introduced in the Chamber of Deputies. The Bill would cover nearly all batteries, with the exception of industrial and car batteries. (Art. 2) Most of the obligations established by the Bill would fall on battery producers: i.e., manufacturers, importers, brand owners, and resellers. These companies would be responsible for collection and management of battery waste and required to implement one of the following waste-management options: (a) establishing their own Individual Battery Waste Management System (Sistema de Gestión Individual de Residuos de Pilas y Acumuladores ); (b) participate in an Integrated Battery Waste Management System (Sistema Integrado de Gestión de Residuos de Pilas y Acumuladores); or (c) establish a deposit-and-return system. (Art. 5) Regardless of the option chosen, approval of the Secretariat of Environment and Sustainable Development (Secretaría de Ambiente y Desarrollo Sustentable) would be required. (Arts. 6-8) The Bill would also set standards for battery collection, treatment, recycling, and disposal (Arts. 9-10), impose labeling requirements (Art. 15), and require equipment manufacturers to make battery removal easy (Art. 16). Under the Bill, as under current Argentine law, used batteries would be deemed hazardous by definition, and thereby subject to Argentina’s extensive restrictions on transport, storage and handling of hazardous wastes. (Art. 3)

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Mexico Legal Highlights (Volume II, 2013)

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Latin American Region Enviromental Report, Second Quarter, 2013

Mexico Enacts Landmark Environmental Liability Law

On June 7, 2013, Mexico published its long-awaited Federal Environmental Liability Law (Ley Federal de Responsabilidad Ambiental; the “Law”), establishing the types of harms that incur liability and specifying which parties have standing to sue for environmental restoration.  The scope of occurrences that create liability under the Law is broad: “Any person or entity who by act or omission directly or indirectly occasions a harm to the environment, will be liable and will be obligated for the reparation of the harm or, when reparation is not possible, to environmental compensation.”  (Art. 10)  The Law provides important exceptions, stating that “environmental harm” is not deemed to have occurred if: (1) the activity that caused it was previously authorized through an environmental impact assessment process; or (2) the limits (i.e., of emissions, etc.) established by the relevant laws or regulations were not exceeded.  (Art. 6)  Where there is a qualifying activity and harm, the Law grants standing to the following: (1) the inhabitant of the community adjacent to the environmental harm; (2) Mexican environmental non-profit organizations; (3) the federal government through its environmental prosecution office (Procuraduría Federal de Protección al Ambiente; commonly known as “PROFEPA”); and (4) the state governments through their prosecutorial offices or institutions that exercise environmental protection functions.  (Art. 28)

The Law enumerates the factors that judges must observe in the issuance of judgments, both in determining the appropriate measure of liability (Art. 39) and in the elements that a judicial decision must contain (Art. 37).  Rather than money damages, the principal restoration due under the Law is either remediation of the harm or “compensatory” investment in other environmental improvements.  For cases of intentional causation of environmental harm, in addition to requiring restoration, courts may assess “economic sanctions” (apparently a counterpart to punitive damages) ranging from 300 to 50,000 (for individuals) or 1,000 to 600,000 (for companies) times the daily minimum wage in Mexico City.  (Art. 19)  The Law provides for two forums in addition to the existing court system: first, the Law envisions the creation of District courts specialized in environmental issues to be established within two years (Art. 30; Third Transitory Art.); second, the Law encourages the use of alternative dispute resolution in parallel with formal judicial proceedings (Arts. 47-51).   The statute of limitations for bringing actions under the Law is twelve years from the date on which the environmental harm and its effects were caused.  (Art. 29)

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Mexico Regulates Vehicle Greenhouse Gas Emissions

A new Official Mexican Standard (Norma Oficial Mexicana; “NOM”), NOM-163-SEMARNAT-ENER-SCFI-2013, limits the emissions of greenhouse gases allowed from passenger vehicles and light trucks sold in Mexico.  The emission limits are mandatory for new vehicles up to 3, 857 kilograms, and apply to the fleets of vehicles sold by a given company in model-years 2014-2016; however, companies that sell less than 500 vehicles per model-year are exempt.  (Art. 2)  The bulk of NOM-163 sets forth the parameters and methodology used to calculate corporate targets and actual averages of carbon dioxide emissions (reported in grams of carbon dioxide per kilometer) and its equivalent in terms of fuel efficiency (reported in kilometers per liter).  Companies that registered sales of between 501 and 2,500 vehicles in 2012 may opt for an alternative, potentially less stringent program that requires emissions reductions of approximately 25% from 2012 levels.  (Art. 6)  A credit system will be established in order to incentivize the use and development of high-efficiency vehicles.  (Art. 5.5.2)

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Mexico Issues Product Stewardship Requirements for Plastics

Through a May 21, 2013, decree (the “Decree”) amending the General Law for the Prevention and Integral Management of Wastes (Ley General para la Prevención y Gestión Integral de los Residuos; the “Waste Law”), Mexico has enacted product stewardship requirements for plastics at both the beginning and end of their life.  The Decree provides for the issuance of Official Mexican Standards (Normas Oficiales Mexicanas; “NOMs”) that establish environmental and technical criteria for the plastic and expanded polystyrene materials used in products and packaging and which becomes wastes.  (Art. 7(VI))  The NOMs must consider the principles of reduction, recycling and reuse.  Unlike the technical standards of most countries, most NOMs stand as binding law (i.e., without being incorporated by legal provisions), so criteria developed in Mexico can potentially have a direct impact on materials used internationally.  At the end of life, the Decree subjects plastics and expanded polystyrene to the producer take-back requirements that apply to special management wastes.  (Art. 28)  For certain circumstances, plastics and expanded polystyrene had already been included in the regulation on special management waste take-back plans, NOM-161-SEMARNAT-2011, issued in February 2013.  Their inclusion in the Waste Law may be intended to backfill a legal gap, and could also be used as authority to expand take-back requirements for these materials.

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Mexico Will Establish Voluntary Sustainability Certification for Goods and Services

On May 24, 2013, Mexico amended its General Law of Ecological Balance and Environmental Protection (Ley General del Equilibrio Ecológico y la Protección del Ambiente; “LGEEPA”) to provide for the establishment of a certification and labeling program for environmentally sustainable goods and services.  Specifically, LGEEPA now directs the Secretariat of Environment and Natural Resources (Secretaría del Medio Ambiente y Recursos Naturales; “SEMARNAT”) “to promote the identification of those products, goods, inputs and services with lesser environmental impact.”  (Art. 37 bis)  Such identification would be through a voluntary marking or certificate, and would have to be based on environmental criteria taking into account the life cycle of the product or service to be certified.  The new LGEEPA text also includes a broadly worded directive for SEMARNAT to issue regulations on the “requirements, specifications, conditions, procedures, goals, parameters and permissible limits that must be observed . . . in the use of natural resources, in the development of economic activities, in the production, use and disposition of goods, in inputs and in processes.”  (Art. 36)

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Watt’s New? Michigan Energy Law News – August 2013

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Natural Gas Power Plant Approval Case Gets Started

The first hearing at the Michigan Public Service Commission (MPSC) regarding the application of Consumers Energy to build a 700 MW natural gas-fired power plant (Case U-17429) occurred August 19. Twelve intervenors were granted party status: the Michigan Energy Innovation Business Council; Energy Michigan; Attorney General for the State of Michigan; Association of Businesses Advocating Tariff Equity (ABATE); Midland Cogeneration Venture Limited Partnership; Renaissance Power LLC; New Covert Generating Company LLC; Interstate Gas Supply, Inc.; First Energy Solutions Corp.; Michigan State Utility Workers Council; Sierra Club; National Resources Defense Fund; and Michigan of Environmental Council.  Potential issues to be raised by the interveners include the assumptions in the filed Integrated Resource Plan on:

  • alternative and renewable energy generation availability and costs;
  • the limitations of the customer choice program;
  • the closure of seven coal plants with a total capacity of 950 MW; and
  • the impact of energy optimization and conservation on future load demand.

ABATE has indicated it will be filing a Motion for Summary Judgment seeking the dismissal of the application, asserting that Consumers Energy has not properly shown a need for a new power plant. Assuming the case is not dismissed, a schedule has been set calling for cross examination of witnesses the second week of December, and a decision by the MPSC on or before the 8th of April, the statutory deadline for a decision on the Certificate of Necessity request. See www.tinyurl.com/mpsc-conDeep Water Offshore Floating Wind Turbines Showcased On August 15 Detroit-based Charles Nordstrom, P.E. of Glosten Associates Inc. (naval architects and marine engineers out of Seattle) presented the latest design and deployment plans for the Pelastar floating wind turbine system at the Michigan Alternative and Renewable Energy Center in Muskegon.

Emphasizing the opportunity to locate near load demand, Nordstrom explained the system avoids the difficulties of offshore construction and assembly by allowing the floating platform to be build dockside, with tower, nacelle and blades attached by a land-based crane. The entire assembly is then floated to its location and tethered to the lake or sea bed. The first 6 MW demonstration project, supported by Alstom Wind, NREL, BP, Rolls-Royce, Shell, Caterpillar, and others is targeted for offshore at Cornwall, England, in late 2015. Cost of energy estimates for first generation offshore wind farms is $0.170 per kWh, and below $0.13 in the second generation design for 10 MW wind turbines. The floating platform must be in at least 50m of water depth, and can be deployed at up to 500m depth.

Cellulosic Ethanol Plant Loses Partner

Mascoma Corporation has lost a major funding source in its efforts to build a 20 million gallon ethanol plant in Kinross. Valero Energy Crop has pulled its $50 million investment in the project. An IPO for Mascoma that would have raised $100 million has been placed on hold. The company has stated it will not proceed with the project until all funding is secured.  The total cost for the facility, which has $120 million in public funding pledged, is $232 million.

Anaerobic Digester Opens at MSU

Michigan State University has commissioned an anaerobic digester to create energy for its East Lansing campus. The digester will utilize about 17,000 tons of organic waste to generate 2.8 million kilowatt hours of electricity per year. The organic material used by the system includes cow manure, food waste from several campus dining halls; fruit and vegetable waste from the Meijer Distribution Center in Lansing; and fat, oils and grease from local restaurants. It will take 20 to 30 days to digest the material in the 450,000 gallon tanks. Total cost of the project was about $5 million, and is expected to pay for itself in less than 15 years. MSU is also involved in a similar project in Costa Rica. that will provide power to a local village.

MIchigan Shorts

Orisol Energy US, Inc. of Ann Arbor has been named as one of eight wind developers eligible to participate in the upcoming lease sale of 112,8000 acres of offshore Virginia for commercial wind energy leasing  Ω  DTE Energy plans to construct a 502 kw ground-mounted solar installation in Sigel Township on farm acreage as part of its 15 MW utility-owned solar initiative  NextEnergy has its MATch (Michigan Accelerating Technologies) Energy Grant program to provide matching funds for federal gudning of advanced energy research, development, and demonstration programs

University of Michigan has received a National Science Foundation four-year, $2 Million grant to determine what combinations of algae make the most efficient fuel source Lights Out at Detroit’s Municipal Utility? The Detroit Public Lighting Department (PLD) currently serves 115 customers, including: Detroit Public Schools; Joe Louis Arena; Cobo Hall; the Detroit Institute of Arts; Wayne State University; McNamara Building Federal Building; and the city’s traffic signal system (almost 1300 intersections).

The Detroit Emergency Manager recently notified DTE Energy Company that PLD will be winding down its electricity distribution and transmission services and requested that DTE provide service to PLD’s customers. The switchover will take five to seven years, as DTE will replace the PLD grid over time. How DTE will recover the costs of the transfer and upgrades has become an issue to be decided by the MPSC in Case No. U-17427. See www.tinyurl.com/mpsc-pld

The Incredible Shrinking Renewable Energy Surcharge

Consumers Energy is asking to eliminate its authorized renewable energy surcharge beginning in July 2014. The residential charge under PA 295, was initially pegged at $2.50/month, then lowered twice to its current $0.52/month charge. Meanwhile DTE Energy has asked the Michigan Public Service Commission to lower its monthly residential renewable energy surcharge from $3/month to $0.43/month. Commercial and industrial surcharge reductions are also being requested by both utilities.

Made in Michigan Microgrid Under Development

In 2006, NextEnergy in Detroit was contracted by TARDEC and the Defense Logistics Agency to develop equipment to provide US-grid quality power in remote locations using renewable and conventional power sources. Although the project was successfully tested, it was too large and too heavy to be deployed in the field, as it required a 20-foot long container for shipping. But the concept of an intelligent management for remote power systems had been proven and the Tactical Modular Mobile Microgrid was born. TM3 Systems of Royal Oak is now working to reduce the size and commercialize the concept. The building blocks for its system are four-foot cubes capable of managing up to 360 kW of generation. By metering and controlling both inputs (generators, solar panels, and battery banks), and outputs (downstream loads), this “microgrid,” is more reliable, efficient, configurable, and controllable than a typical remote power system. It can use dissimilar power sources (fossil fuel generators, solar arrays, and batteries) to reduce fuel consumption while supplying uninterrupted power to critical assets in remote location.

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Federal Energy Regulatory Commission (FERC) Initial Decision Lowers Return on Equity (ROEs) for New England Transmission Owners

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On August 6, 2013, FERC Administrative Law Judge Michael J. Cianci issued an initial decision on the complaint filed against the New England Transmission Owners (NETOs) seeking to reduce their currently effective 11.14% base return on equity (ROE) (FERC Docket Nos. EL11-66-000, et al.). Applying FERC’s traditional discounted cash flow (DCF) analysis to financial data largely for the period May 2012 – October 2012, Judge Cianci would require the NETOs to use a 10.6% base ROE to make refunds for transmission service provided between October 1, 2011 and December 31, 2012. Applying the same DCF analysis to financial data largely for the period October 2012 – March 2013, Judge Cianci would allow the NETOs a 9.7% ROE that would apply prospectively once FERC ultimately issues its order in the case (assuming FERC sustains Judge Cianci’s rulings; see PP* 544, 559-560). These rulings undoubtedly are disappointing both to the NETOs, who opposed any reduction in the 11.14% base ROE, and the complainants, who advocated substantially lower ROEs (8.3% to 8.9%) than Judge Cianci would allow.

On the positive side for the NETOs, Judge Cianci found that reducing utility ROEs below 10% for a prolonged period could be harmful to the industry (P 576). He also resolved virtually all conventional DCF methodological issues in the NETOs’ favor and his 10.6% and 9.7% ROEs were the ROEs developed in the NETOs’ conventional DCF analysis (PP 551, 552, 557). This would suggest that the 10.6% and 9.7% ROEs represent the maximum possible ROEs given the financial market data and the constraints of FERC precedent.

Judge Cianci expressly declined to rule on an issue that was hotly contested by both the NETOs and the complainants. The issue is whether post-2007 financial market conditions cause the DCF method to understate ROE costs and require modification of FERC’s conventional DCF analysis by use of alternative ROE methodologies (e.g., CAPM) to determine the NETOs’ actual common equity costs. A related issue, also hotly disputed by the parties, is whether the billions of dollars of required new transmission investment should also impact the ROE calculus.

The NETOs and the complainants are free to dispute all aspects of Judge Cianci’s decision through the FERC appeal process. The initial appellate briefs (known as briefs on exceptions) are due September 20, 2013, and briefs opposing exceptions are due October 24, 2013. The ultimate FERC ruling in this case will clarify and/or modify FERC’s ROE policy and is likely to be of extreme importance not only to the NETOs and their customers but to all utilities who charge or pay FERC jurisdictional transmission rates.

Two elements of Judge Cianci’s decision merit additional comment.

First, his decision concerned the NETOs collectively with the result that the ROE benchmark was the so-called “mid-point” of the zone of reasonableness (the mid-point is the average of the highest and lowest returns within the zone). The benchmark for an individual utility would be the “median” (the median is the point within the zone of reasonableness where half the returns are higher and half the returns are lower). Under current conditions, the median would be somewhat lower than the midpoint. Thus, other things being equal (they never are), a hypothetical Judge Cianci decision in an individual utility rate case would result in somewhat lower ROEs.

Second, due to the statutory fifteen-month limitation on retroactive refunds, the NETOs will not be required to make Docket No. EL11-66-000 refunds for the period between January 1, 2013 and the issuance date of the final FERC order. However, FERC has not yet acted on a second ROE complaint currently pending against the NETOs (Docket No. EL13-33-000). Although FERC would need to make new ROE findings in the new docket, this second complaint could close the Docket No. EL11-66-000 gap, and expose the NETOs to “back-to-back” ROE refunds for a 15-month period beginning January 1, 2013.

The initial decision is available here.

* “P” refers to the relevant numbered paragraph in the initial decision.

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Mexico: U.S. Natural Gas Savior?

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Much has been made of the exponential growth in natural gas supply within the continental United States due to the horizontal drilling and fracking techniques employed in recent years. The resulting natural gas glut has reversed the conventional wisdom that America would be a net importer of natural gas for most of the 21st century with the expectation now being that America, despite being by far the world’s largest consumer of hydrocarbons, will be a significant exporter of natural gas overseas in the coming years and decades. This development has resulted in a flurry of proposed liquefied natural gas (“LNG”) terminals that hope to export natural gas in order to take advantage of the large spreads between prices in America and those in Europe and Asia. Those price spreads exist because a worldwide market for natural gas doesn’t exist, as opposed to oil where the relatively short-lived Brent-WTI price differential has evaporated in recent months.

However, these export terminals cannot export gas to foreign countries lacking a free trade agreement with the U.S. without permits from the U.S. Department of Energy and the Federal Energy Regulatory Commission (“FERC”). The queue for approval is long with only three facilities (including most recently the Lake Charles LNG Project in Lake Charles, Louisiana) receiving approval from the Department of Energy and only one of those (the Sabine Pass project in Cameron Parish, Louisiana) receiving approval from FERC. Given the long construction lead times for these projects and political pressure from environmentalists and buyers of natural gas who want prices to remain low, it won’t be until 2016 when any significant volumes of LNG are exported from the continental United States. Rival producers such as Qatar, Australia and Indonesia are rapidly signing contracts with Japan, Korea and China to satisfy the long-term needs of those countries as America continues to delay the development of its LNG infrastructure.

Meanwhile, the historically low natural gas prices created by the production glut are forcing energy companies to find a profitable market for their natural gas in the short to medium term. They appear to have found one in America’s backyard: Mexico. Constructing pipelines to straddle the U.S.-Mexico border entail less regulatory complexities and attract less political attention than LNG exports. With the existing U.S.-Mexico natural gas pipelines almost at capacity, energy companies cannot build border pipelines fast enough, with several new pipeline projects coming online, including Kinder Morgan’s El Paso Natural Gas Co. export pipeline near El Paso, Texas, with a capacity of 0.37 billion cubic feet per day. According to the U.S. Energy Information Administration all of the in-progress pipeline projects on the U.S.-Mexico border could result in a doubling of American natural gas exports to Mexico by the end of 2014.

This new export market should continue to support U.S. shale development in the near-term and medium-term future, especially in Texas, despite low natural gas prices and continued supply growth. Longer term prospects for U.S. natural gas exports to Mexico are also bright as well. Even though Mexico has large hydrocarbon reserves itself, the 1938 nationalization of its oil industry and the subsequent decades of underinvestment have seen Mexican hydrocarbon production steadily decline in the last decade. The Mexican constitution effectively prohibits private investment in hydrocarbon production and the Mexican public firmly believes in public ownership of hydrocarbons. There is widespread agreement among many Mexican politicians that private capital, especially from U.S. energy companies with the expertise to tap offshore and shale hydrocarbons, is needed to reverse the production decline, but whether public opposition can be overcome remains in doubt. Mexican President Enrique Peña Nieto is pushing constitutional reforms to attract foreign capital, but even if those pass Mexico is years away from converting any private capital into increased production. If those reforms do not pass, Mexico will be forced to continue to look to U.S. natural gas producers to provide it with its growing energy needs.

So while a regulatory bottleneck is endangering America’s ability to be a long-term overseas exporter of natural gas, Mexico, with its growing economy and inability to tap its own reserves, seems poised to play an outsized role in a continued expansion of American natural gas production. LNG exports might be the wave of the future, but natural gas exports to Mexico are the here and now.

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Federal Energy Regulatory Commission (FERC) Requires Filing of Additional Oil Pipeline Rate Base Information

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On July 18th, the Federal Energy Regulatory Commission (“FERC”) approved a final rule that makes substantive changes to the components of FERC Form 6, which interstate oil pipelines are required to file each year.[1] The rule requires additional reporting of the figures underlying pipelines’ rates of return and is intended to make it easier for both FERC and oil pipeline shippers to evaluate whether a given transportation rate complies with the law.

The new rule pertains to page 700 of Form 6, which provides information designed to show the pipeline’s cost of service, including O&M expenses, rate base, rate of return, total cost of service, revenues, and throughput. The purpose of this reporting is to provide a preliminary screen for determining whether a pipeline’s rates are “just and reasonable” as required by the Interstate Commerce Act.

In the final rule, FERC added new fields to page 700 that are intended to allow shippers to more easily calculate an oil pipeline’s actual rate of return on equity. The new required information, which FERC anticipates is already being developed in the preparation of the rate base and rate of return information required on existing page 700, is outlined briefly and at a high level below.

Interestingly, the Commission was asked by commenters to include additional changes to Form 6 in this rulemaking, including requiring companies that file Form 6 for multiple oil pipeline systems to file separate page 700s for each segment, service, or rate schedule. The Commission declined to do so in this proceeding as it was beyond the scope, but it should be noted that the consolidated Form 6’s and page 700’s that many companies currently file are alleged to mask the cost of service and rate of return for individual pipelines and services, and the comments in this proceeding suggest that shippers may continue to press FERC to require individualized page 700 filings in the future.

The changes to page 700 will take effect for the annual Form 6 filing for calendar year 2013, which is due April 18, 2014. These changes could enable new scrutiny of pipeline rates and complaints and challenges both to existing rates and to proposed annual rate increases under FERC regulations in the near future.

Outline of Page 700 Changes:

– Rate Base: While current page 700 requires the pipeline to report its rate base for each year, the revised page 700 will require this number to be broken out into three new components: Depreciated Original Cost; Unamortized Starting Rate Base Write-Up; and Accumulated Net Deferred Earnings.  The sum of these three components will equal the rate base number that was already required.

– Rate of Return: The existing rate of return percentage reported on page 700 is a weighted cost of capital; the new page 700 will require reporting of the cost of equity, costs of debt, and capital structure supporting the rate of return.

– Return on Rate Base: Currently, page 700 requires reporting of the return on rate base, combining the real return on equity and the portion of the return allocated to paying the pipeline’s cost of debt.  The revised page 700 requires breaking the return of rate base into separate debt and equity components.

– Composite Tax Rate: The revised page 700 will require pipelines to report the adjusted sum of the pipeline’s applicable state and federal income tax rates.

The stated purpose of the page 700 changes is to better enable the calculation of the actual return on equity of the pipeline, as adjusted for taxes, inflation and depreciation.  The final rule states that this calculation “is particularly useful information when using page 700 as a preliminary screen to evaluate whether additional proceedings may be necessary to challenge rates.”[2]

[1] Revisions to Page 700 of FERC Form No. 6, 144 FERC ¶ 61,049 (2013).

[2] Id. at P 36

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