APPA OVERVIEW OF EPACT 2005 Transmission Provisions, Merger Review, and More

1. APPA OVERVIEW OF EPACT 2005Transmission Provisions, Merger Review, and More Cindy Bogorad SPIEGEL & MCDIARMID 1333 New Hampshire Ave., NW Washington, DC 20036 (202) 879-4000 November 10, 2005

2. Electricity Title • Most major overhaul of Federal Power Act and PUHCA since 1935 • React to various problems—reliability, inadequate transmission, Enron scandals, regulatory gaps, QF machines

3. Recurring Themes • Transmission infrastructure • Tradeoffs for PUHCA repeal-enhanced merger review authority

4. Reliability (EPAct05 § 1211; FPA § 215) • Electric Reliability Organization to establish and enforce reliability standards with FERC oversight • Reliability standard “does not include any requirement to enlarge [bulk-power system] facilities or to construct new transmission capacity….”

5. Reliability (cont’d) • Compliance with standards should prod transmission construction • Recovery of prudently-incurred costs to comply covered in incentive rulemaking • Periodic reports on bulk-power system reliability and adequacy

6. Backstop Siting Authority (EPAct05 § 1221; FPA § 216) • DOE to designate National Interest Electric Transmission Corridors- constraints or congestion adversely affects consumers • FERC (or where regional siting compact, DOE) may issue permit with federal eminent domain where state delays/conditions/lacks authority

7. Backstop Siting Authority (cont’d) • Includes state inability to consider interstate benefits or failure to qualify requestor that does not serve end users • DOE lead agency for federal authorizations/environmental review • Expedition/reporting required

8. Third-Party Finance (EPAct05§ 1222) • WAPA/SWPA participation in National Interest Electric Transmission Corridor facilities under certain circumstances • Third party funding, capped at $100 million through 2015

9. Federal Utility RTO Participation (EPAct05 § 1232) • Permits TVA and PMAs to participate in RTOs • Through contracts with protections • Includes ensuring consistency with existing contracts, third-party financing arrangements, and statutory obligations

10. Transmission Infrastructure Rule (EPAct05 § 1241; FPA § 219) • Incentive/performance-based rates to benefit consumers by ensuring reliability/reducing delivered power cost by reducing congestion • Promote transmission investment “regardless of the ownership” • Technologies to increase capacity/efficiency • Return that attracts new investment

11. Transmission Infrastructure Rulemaking – RTO Participation • To the extent within jurisdiction, FERC to provide incentives to each transmitting utility and electric utility that joins an RTO/ISO • Ensure any costs recoverable under this subsection may be recovered through utility’s transmission rates or RTO/ISO rates

12. Transmission Infrastructure Rulemaking • Little in the way of specifics • All subject to just, reasonable and not unduly discriminatory standard • Flexibility to design rates that get needed transmission built at reasonable cost, e.g., by reducing risks and/or accessing new sources of capital

13. Participant Funding (EPAct05 § 1242) • Far less prescriptive than last bill • Permissive to FERC-may approve if just and reasonable, not unduly discriminatory and otherwise consistent with §§ 205/206 • Consistent with existing law

14. Native Load Service Obligation (EPAct05 § 1233; FPA § 217) • Facilitate planning and expansion of transmission to meet reasonable needs of LSEs • Enable LSEs to secure firm transmission rights (or equivalent financial rights) on a long-term basis for long-term power supply arrangements

15. Native Load Service Obligation (planning/long-term rights) • Applies in RTO and non-RTO markets (except ERCOT) • Required rulemaking to implement within organized markets

16. Native Load Service Obligation (existing rights) • LSE is entitled to use existing firm rights or equivalent financial rights to meet service obligation • Preserves resource-to-load rights existing as of date of enactment • Whether through ownership, GFA, or OATT service agreement • Consistent with OATT

17. Native Load Service Obligation (existing rights) • Not just TO native load • LSEs include everyone in this room; not just those serving enduse load • Include joint action agencies—obligation under long term contracts to municipal utilities that serve endusers

18. Native Load Service Obligation (existing rights) • N/A to PJM, NYISO, ISO-NE, and CAISO (except certain CA rights protected against conversion) • Not directly applicable to MISO, but FERC must take policies into account when MISO changes FTR allocation methodology • Applies to SPP and other new RTOs • Separate added protections for PNW

19. PUHCA Repeal Tradeoffs • PUHCA, by active and passive restraints, largely restricted utilities to compact vertically integrated entities • PUHCA’s repeal will open up industry to consolidation and fragmentation in ways we can’t imagine

20. Tradeoffs - Mergers (EPAct05 § 1289; amending FPA § 203) • Expanded/clarified authority to review generation acquisitions and holding company mergers • But FERC must act within 180 days, plus 180-day extension period

21. Merger Review (cont’d) • Maintains traditional “consistent with the public interest” test • Added test: not result in cross-subsidization of non-utility or pledge/encumbrance of utility assets unless consistent with the public interest

22. Qualifying Facilities (EPAct05 § 1253; amending PURPA § 210) • Eliminate restrictions on QF ownership • No obligation to purchase from new QF unless meets new requirements • No mandatory purchase obligation for new contracts if QF has non-discriminatory access to RTO/ISO with competitive wholesale market, or comparable markets • Preservation of existing QF contracts

23. Odds and Ends • Eliminate 60-day wait for Section 206 refunds • Non-RUS-financed coops with less than 4 million MWh sales removed from FERC jurisdiction • Sense of Congress that FERC should consider state objections to LICAP

24. Bottom line • Many, many rulemakings • Expanded FERC regulatory and enforcement tools • Costs won’t go down • Life won’t get less complicated