August 2005
	The Energy Regulatory Update is distributed periodically without charge and reports on significant developments in U.S. energy regulation.    For more information on this and other energy regulation subjects, contact Michael Hornstein at mhornstein@orrick.com, or visit our web site at www.orrick.com.   The contents of this publication are for informational purposes only and are not meant nor should be construed to be legal advice. No responsibility is assumed for errors made in the publishing process. If you wish to be removed from this mailing list, please reply to this message with "unsubscribe" in the subject line. © 2005, Orrick, Herrington & Sutcliffe LLP			Comprehensive Energy Legislation Approved By Congress Last week, both houses of Congress approved the Energy Policy Act of 2005 (EPAct 2005), which the President is expected to sign within a matter of days.  It is a far-reaching bill that touches on all areas of energy policy.  Included in the bill is an extension of the wind production tax credit at full value through December 31, 2007.  The credit will continue to be indexed to inflation. The electricity title of the bill is expected to result in broad changes to the U.S. utility industry.  The Federal Energy Regulatory Commission (FERC) is required to issue a number of rules to implement the new standards and new authority that it is granted under EPAct 2005, so the full implications of the legislation are not yet known.  The highlights of the electricity title are described below.  Future installments of the Energy Regulatory Update will describe other sections of the bill.    PUHCA Repeal Perhaps the most important provision of the electricity title, and the one that has been sought after the longest, is repeal of the Public Utility Holding Company Act of 1935 (PUHCA).  Under PUHCA, utility holding company systems are limited to a single state or region, with each utility company operating as part of a single, integrated system.  With the demise of PUHCA, ownership of widely dispersed utility companies will be possible, without regard to where they are located or whether they can operate as a single system.  It is expected that this will accelerate the trend towards consolidation in the utility sector, and is likely include an increasing number of foreign investors taking a strong interest in acquiring U.S. utilities. Power projects, moreover, that currently operate as Qualifying Facilities (QFs) under the Public Utility Regulatory Policies Act of 1978  (PURPA) or Exempt Wholesale Generators (EWGs) or Foreign Utility Companies (FUCOs) under PUHCA, will no longer need to maintain that status in order to be exempt from PUHCA.  Nonetheless, QFs likely will want to retain that status in order to remain exempt from FERC regulation under the Federal Power Act.  Many QF power purchase agreements (PPAs), moreover, require that the project company maintain QF status.  Similarly, EWGs and FUCOs also may find it beneficial to retain their status since EPAct 2005 will replace PUHCA with a new holding company act to be called the Public Utility Holding Company Act of 2005, under which utility holding company systems will be required to provide access to their books and records to FERC and any affected state commission.  Holding companies that own only EWGs, FUCOs and QFs, however, will be exempt from the 2005 version of PUHCA as it applies to FERC access to books and records. Repeal of the 1935 version of PUHCA will become effective six months after the date EPAct 2005 is signed into law, and the 2005 version of PUHCA will also become effective at that time.   PURPA Reform Once EPAct 2005 is signed into law, utilities will not be required to enter into any new contract or obligation to purchase power from a QF so long as that QF has access to competitive electricity markets in which it can sell its power.  With regard to cogeneration QFs, the mandatory purchase obligation is eliminated, regardless of whether the QF has access to competitive electricity markets, unless the QF satisfies the new, more restrictive criteria that FERC must establish for cogeneration facilities that are not yet certified as QFs by the date EPAct 2005 is enacted (or by the time FERC issues a final rule implementing this new provision).  These provisions do not affect existing QF PPAs nor any rights a QF may have under a contract or other obligation that is pending approval before a state commission. As noted, FERC must issue a rule specifying the new criteria that cogeneration facilities must satisfy.  Under that rule, the electrical, thermal and any chemical output of the cogeneration facility must be used fundamentally for industrial, commercial or institutional purposes and not be intended fundamentally for sale to an electric utility.  FERC has 180 days to issue that rule, which will apply only to new cogeneration facilities that seek to sell power pursuant to PURPA's mandatory purchase obligation. Finally, EPAct 2005 removes the utility ownership limitation applicable to QFs under PURPA.  While the statutory limitation will be removed upon enactment of the legislation, FERC will need to update its QF ownership rules to reflect this change. Transmission Under EPAct 2005, FERC 's authority to order open access transmission service, and to determine the rates, terms and conditions for that service, is extended to include federal, state and municipal transmitting utilities (which are otherwise exempt from FERC's plenary jurisdiction under the Federal Power Act).  It also authorizes federal utilities (federal power marketing agencies and the Tennessee Valley Authority) to join FERC-approved regional transmission organizations. Further, the legislation grants FERC jurisdiction over an Electric Reliability Organization to be certified by FERC to establish and enforce reliability standards for the bulk power system, as well as over regional entities, and all users, owners and operators of the bulk-power system for purposes of approving reliability standards and enforcing compliance. FERC also is granted enhanced authority over siting of interstate electric transmission facilities in regions that are determined to be experiencing transmission capacity constraints or congestion that adversely affects consumers.  In any such region, FERC may issue a construction permit for transmission facilities if it finds that (i) a state in which the facilities will be located either does not have authority to approve the siting of the line or the applicant does not qualify to apply for a permit in that state; or (ii) a state commission with authority to issue the permit has failed to do so for more than one year after an application was filed.  FERC also must find that the transmission facilities would be used for interstate commerce; that it is consistent with the public interest; that the facilities would significantly reduce congestion; that approval is consistent with sound energy policy; and that the facilities will maximize the transmission capabilities of existing towers or structures. Finally, EPAct 2005 amends the Federal Power Act to direct FERC to establish, by rule, incentive-based (including performance-based) rate treatments for the transmission of electric energy in interstate commerce by public utilities to benefit consumers by ensuring reliability, and reducing the cost of delivered power by reducing transmission congestion.   FERC Merger Authority EPAct 2005 amends section 203 of the Federal Power Act, which sets forth FERC's merger authority, in various respects.  First, it raises the threshold value of the FERC-jurisdictional facilities that would trigger the FERC approval requirements, from $50,000 to $10 million dollars.  In addition, FERC's review authority would be expanded to include the acquisition of generating facilities if those facilities are used for interstate wholesale sales and the Commission has jurisdiction over those facilities for ratemaking purposes.   Similarly, the legislation expressly extends FERC's merger review authority to include acquisitions or mergers undertaken by a holding company whose subsidiaries include a transmission-owning utility or an electric utility, if the company or assets to be acquired involve a transmission-owning utility or an electric utility company (i.e., any company that owns or operates facilities used to generate, transmit or distribute electric energy for sale).  This provision essentially codifies FERC's longstanding view of its authority to review mergers at the holding company level. The bill also would revise the statutory standard applicable to proposed transactions subject to section 203 by codifying FERC's approach to determining whether a proposed merger is consistent with the public interest, taking into account the effect of the transaction on competition in the electricity markets, electric rates, and effective regulation.  The legislation also would require a finding by FERC, before it could approve a merger, that the transaction would not result in cross-subsidization of a non-utility company in the same holding company system as the applicants, or the pledge or encumbrance of utility assets for the benefit of such a company, unless FERC finds that the cross-subsidization, pledge or encumbrance would not be harmful. Finally, the bill would require FERC to issue a rule adopting procedures for the expeditious review of applications under section 203, including the identification of classes of transactions that would normally satisfy the revised statutory approval standard.  The legislation would require that these types of transactions receive expedited review, while any other applications must be approved or denied within 180 days after filing.  This period can be extended for up to an additional 180 days if FERC finds that additional time is required to determine whether the proposed transaction satisfies the statutory standards.  FERC then must either grant or deny the application by the end of the second 180-day period.  The amendments to section 203 take effect 6 months after the enactment of EPAct 2005.