United States: Client Alert - Energy
FERC Requires Reporting Of Damage To Natural Gas Facilities

On August 23, 2006, the Federal Energy Regulatory Commission ("FERC") issued a final rule (Order No. 682) requiring natural gas companies to report serious damage to their facilities caused by hurricanes, other natural disasters, or terrorist activities, or any other damage that could result in serious delivery problems. (Docket No. RM06-18-000) Previously, FERC required natural gas companies to report only serious service disruptions, not infrastructure damage. Companies did not need to report even significant damage to their facilities as long as they avoided service interruptions through schedule adjustments, rerouting to alternate facilities, or drawdown from storage supplies. As a result, FERC had difficulty ascertaining the status of natural gas infrastructure in the aftermath of Hurricanes Rita and Katrina. Order No. 682 remedied this monitoring problem by amending 18 C.F.R. § 260.9 to expand the reporting obligation to facility damage. Liquefied Natural Gas ("LNG") storage facilities are exempted from the new rule because they are already subject to adequate reporting requirements of the Department of Transportation under 49 C.F.R. Part 191.

On July 31, 2006, the Federal Energy Regulatory Commission ("FERC") issued its report to Congress regarding the recommendations of the four Regional Joint Boards for the study of economic dispatch (Northeast, PJM-MISO, South, and West) pursuant to the Energy Policy Act of 2005 ("EPAct 2005"). FERC described Security Constrained Economic Dispatch ("SCED") as the basic way utilities dispatch generation to meet load reliably at the lowest cost within the constraints of the facility limits and certain contingencies (such as line outages and weather).

FERC’s report notes that in the South and West Joint Board regions, dispatch is mostly performed by individual utilities or holding companies with their own generation. In contrast, in the Northeast and PJM MISO Joint Board regions, dispatch is performed by an independent entity for all resources, resulting in locational marginal prices ("LMP"). While none of the Joint Boards recommended a major change in how SCED is implemented in its region, FERC’s report summarized four general issues considered across the regions: (1) Broadening the geographic scope of dispatch, through consolidation of areas or reduction of seams between areas, to reduce the costs to produce power; (2) Transparency and accessibility of dispatching or pricing information to enable market participants to see the price, basis and terms at which electricity was sold or purchased; (3) Independence of the dispatcher from the owners of the resources being dispatched, and whether dispatch by an independent third party (such as an RTO or ISO) was a better alternative to dispatch by transmission-owning utilities; and (4) Inclusion and improvement of demand response in the dispatch to reduce costs and increase overall reliability, though the joint boards did not propose specific recommendations beyond the programs currently used by RTOs or conducted under state direction.

On August 10, 2006, FERC Staff issued its "Assessment of Demand Response and Advanced Metering," as required by EPAct 2005. FERC defined demand response in terms of changes in normal consumption patterns of end use customers in response to changes in electricity prices, or to incentive payments designed to induce lower electricity use when wholesale market prices are high or system reliability is jeopardized.

FERC concluded that demand response has an important role to play and that peak electric demand could be reduced by 3-6% immediately in most regions from existing demand response resources even though the needed technologies are not in wide use. FERC staff also recommended that the Commission: (1) explore how to better accommodate demand response in wholesale markets; (2) explore how to coordinate with utilities, state commissions and other interested parties on demand response in wholesale and retail markets; and (3) consider specific proposals for compatible regulatory approaches, including how to eliminate regulatory barriers to improved participation in demand response, peak reduction and critical peak pricing programs.

FERC also noted the need to address several regulatory barriers to improved customer participation in demand response, peak reduction and critical period pricing programs, including a disconnect between retail pricing and wholesale markets, utility disincentives, lack of cost recovery and incentives for enabling technologies, the need for more research on cost effectiveness and measurement of reductions, state level barriers, limitations in retail and wholesale rules, barriers to third-party provision of demand response services, insufficient market transparency and data access, and inadequate coordination of federal state jurisdiction affecting demand response.

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