Regulatory Updates

Ninth Circuit Holds FERC Arbitrarily Granted a Public Utility an ROE Incentive Adder for RTO Participation

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In an Opinion[1] issued on January 8, 2018, the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”) granted a petition for review filed by the California Public Utilities Commission (“CPUC”) in two rate proceedings in which the Federal Energy Regulatory Commission (“FERC”) summarily approved for Pacific Gas and Electric Company (“PG&E”) a 50 basis point return on equity (“ROE”) incentive adder for its participation in the California Independent System Operator Corporation (“CAISO”).  DWGP client, the Transmission Agency of Northern California, intervened in the appeal in support of the CPUC. This is a significant decision that has potential implications for other public utilities throughout the United States that receive ROE adders and thereby increase their shareholders’ return for their participation in Regional Transmission Organizations (“RTOs”) or Independent System Operators (“ISOs”).

In response to the directives of Congress in the Energy Policy Act of 2005, and specifically the requirements in section 219 of the Federal Power Act directing FERC to establish by rule, certain incentive-based rates, including incentives for electric utilities that join a RTO/ISO, FERC issued Order No. 679.[2] Order No. 679 provided, in pertinent part, that FERC “will approve, when justified,” requests for ROE-based incentives for public utilities that join or continue membership in an RTO/ISO.[3] Following Order No. 679, FERC has routinely granted a 50 basis point ROE adder to utilities that join or remain members of an RTO/ISO.

In a series of orders on two rate filings submitted by PG&E, CPUC argued that pursuant to California state law, PG&E is required to participate in the CAISO as ordered by the CPUC and, therefore, the FERC orders on review grant an incentive adder to PG&E for doing something it was already required to do and that the granting of an incentive for involuntary behavior is contrary to FERC policy. FERC rejected the CPUC’s claims and summarily granted PG&E the ROE adder finding that PG&E is presumed to meet the criteria required under Order No. 679 to receive the participation incentive.

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President Approves Tax Reform Legislation

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On December 22, 2017, the President signed into law tax reform legislation known as the “Tax Cuts & Jobs Act” (available here).   Broadly, the legislation lowers corporate tax rates and restructures personal income tax brackets while also impacting energy companies, state and local entities, and owners and issuers of tax exempt qualified bonds.  Renewable energy entities such as solar, wind and geothermal producers will also be affected by the legislation.   

The legislation maintains the status quo on investment tax credits (ITC) for solar projects for which the tax credit continues as scheduled in a previously agreed phaseout.  The ITC was not extended for projects using combined heat and power, geothermal, fuel cells, and small wind.  A separate bill was introduced in the Senate that would extend the ITC to these and other technologies.  The ITC remains at 30% until 2022 with a plant in service date no later than January 1, 2024.  After calendar year 2022, the ITC drops down to 10%.   The ITC will not be available for solar projects if construction does not begin by December 31, 2027.   The value of the production tax credit (PTC) for wind, solar, geothermal and closed-loop biomass has been maintained by keeping the inflation adjustment at the current rate of 2.3 cents/kWh, despite the earlier House version reducing it to 1.5 cents/kWh.  The legislation also maintains the PTC availability in its current form and phases it out as scheduled by the end of 2019.   

For nuclear generators, however, the tax legislation does not extend the advanced nuclear facilities tax credits that are currently scheduled to expire by December 31, 2020.  An earlier version of the tax bill in the House had extended this credit indefinitely to the extent that there were unused tax credits up to a cap of 6,000 megawatts of national capacity from qualifying nuclear facilities.  An extension of the nuclear tax credit would have been used to ensure that the Vogtle nuclear facility in Georgia, and the summer nuclear facility in South Carolina, progress toward completion.  The separate tax extenders legislation that is currently pending in the Senate may also be the vehicle for the nuclear tax credit extension.    

The final legislation added a new tax, the base erosion and anti-abuse tax (BEAT), to prevent companies from reducing their tax liability by transferring funds to foreign affiliates.  For companies that utilize the ITC and PTC, such tax credit investments, which help to strip down their tax liability, might diminish in value if utilizing the credit pulls them into the new BEAT tax. 

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DOE Grants FERC Extension on Grid Resiliency Pricing Rule

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 FERC Chariman, Kevin J. McIntyre      DOE Secretary, Rick Perry

On December 7, 2017, the new Chairman of the Federal Energy Regulatory Commission (“FERC”), Kevin J. McIntyre, submitted a letter to Department of Energy (“DOE”) Secretary Rick Perry requesting a 30-day extension for final FERC action on a proposed rule regarding new valuation measures for reliability and resiliency attributes provided by electric generation resources.  On December 8, 2017, Secretary Perry granted FERC a 30-day extension to take final action on the proposed rule.  The new deadline by which FERC must take its final action is January 10, 2018. 

The proposed “Grid Resiliency Pricing Rule,” which was docketed at FERC pursuant to a request by Secretary Perry, aims to more accurately price baseload generation resources that help maintain the reliability and resiliency of the nation’s electric grid.   The Rule would require the regional transmission organizations (“RTOs”) and independent system operators (“ISOs”) to establish new rates to compensate generators that support reliability and resiliency by providing, among other things, a 90-day supply of on-site fuel assurance.  Compensable costs would include operating and fuel expenses, costs of capital and debt, and a fair return on equity and investment.  The RTOs/ISOs would have to file tariff revisions within 30 days of publication of a final rule.  For more information on the proposed rule, please see here.  

In granting the extension, Secretary Perry noted that the “voluminous comments filed in the record of this proceeding” was evidence on the need for urgent FERC action.  Chairman McIntyre also cited the large number of comments received, and noted that they would have to be given due deliberation by a Commission that was only recently fully empaneled.  Indeed, Chairman McIntyre was only recently confirmed to his position and was sworn in as Chairman of the Commission the same day that he submitted to DOE his extension request.  Chairman McIntyre and Commissioner Richard Glick are the two newest members of the Commission, with Commissioner Glick having been sworn in on November 29, 2017. 

To view Chairman McIntyre’s extension request, please see here.

To view Secretary Perry’s letter granting extension, please see here.

For more information, please contact Thomas Rudebusch, Michael Postar, Sean Neal or Jason Gray.

House and Senate Panel Approve Tax Reform Bills

Tax Reform

On November 16, 2017, the U.S. House of Representatives passed a comprehensive tax bill, H.R. 1, the “Tax Cuts and Jobs Act” while the Senate Finance Committee advanced its own version of a tax bill (available here), which the Republican leadership hopes to bring to a vote in the full Senate during the last week of November. The House and Senate bills differ in terms of the timing of new tax rates, interest deductibility on certain types of redevelopment bonds, issuance of certain types of tax credit bonds, electric vehicle credits, and investment tax credits for certain types of alternative energy sources, and a variety of other provisions.

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CPUC Hosts Workshop at the California State Capitol Regarding Customer Choice

California State Capitol

On October 31, 2017, the California Public Utilities Commission (“CPUC”) held an informal public workshop at the State Capitol in Sacramento to discuss issues concerning customer choice of electricity. This workshop follows two, prior agency en banc discussions on choice of energy providers. DWGP attended this workshop to continue to be closely apprised of developments in the customer choice space for electricity.

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CPUC Decision Bolsters Community Choice Aggregators and Direct Access Demand Response Programs

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On October 26, 2017, the California Public Utilities Commission (“CPUC”) approved Rulemaking (R.) 13-09-011, adopting steps to implement the Competitive Neutrality Cost Causation Principle, which enables Community Choice Aggregators (“CCA”) or Direct Access providers to create Demand Response programs to compete with those of investor-owned utilities.  In addition, to combat barriers to market integration and develop a framework for new models of Demand Response, this Decision establishes two working groups: the Supply Side Working Group and the Load Shift Working Group.

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House Republicans Release Tax Proposal

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On November 2, 2017, the House Ways and Means Committee released the initial draft of, H.R. 1, the “Tax Cuts and Jobs Act” with the aim of lowering taxes and amending the Internal Revenue Code.   The draft legislation lowers the corporate tax rate and restructures personal income tax brackets while also making structural changes to taxing businesses including energy companies, state and local entities, and owners and issuers of tax exempt qualified bonds. 

Under the House bill, state and local entities can continue to rely on the tax exempt status of municipal bonds.  However, other types of bonds that are issued by private entities that have some public purpose would be eliminated under the bill.  Private activity bonds (PABs), which are utilized by state and local governments to help private entities raise money for development projects, will be cut.  The bill also eliminates qualified tax credit bonds, which state and local governments often rely upon to help finance projects such as school construction, energy efficiency or renewable energy projects.   Private bond holders rely on the federal tax credits in lieu of interest payments from state and local issuers, including Tribal governments and public power utilities.

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CFTC Issues Order Extending Current Swap Dealer Registration De Minimis Threshold to December 2019

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On October 26, 2017, the Commodity Futures Trading Commission (“CFTC” or “Commission”) issued an order extending the termination of the phase-in period for keeping the swap dealer de minimis threshold at $8 billion.  The new phase-in termination date is extended by one year to end on December 31, 2019.  The CFTC had previously set December 31, 2018 as the date by which the de minimis threshold would be automatically lowered to $3 billion. In extending the deadline, the Commission reasoned that it will have, in the near future, more detailed swap data analysis to predicate any possible modifications to the de minimis exception.  The CFTC would then need to go through certain procedural steps to propose a rule, seek public comment and finalize any amendments.  Since the threshold takes into account a full twelve-month look back for entities’ swap transactions, the extension to 2019 gives certainty to swaps dealers that might be affected by a reporting requirement in 2018.  According to the order, the extension also gives new CFTC commissioners and staff time to parse through the issues surrounding the swap dealer definition and the de minimis exception.  A copy of the order can be accessed here

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