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1 Boston Brussels Chicago Düsseldorf Houston London Los Angeles Miami Milan Munich New York Orange County Rome San Diego Silicon Valley Washington, D.C. Strategic alliance with MWE China Law Offices (Shanghai) © 2010 McDermott Will & Emery LLP. McDermott operates its practice through separate legal entities in each of the countries where it has offices. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery/Stanbrook LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, MWE Steuerberatungsgesellschaft mbH, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered advertising under the rules regulating the legal profession. Michael A. Yuffee 202.756.8066 September 23, 2010 Meanwhile, Back at FERC

2 www.mwe.com2 Federal Regulatory Issues  Transmission Access  Enforcement and Compliance  Capacity Procurement  Station Power

3 www.mwe.com3 Federal Regulatory Issues Transmission Access  FERC has taken a number of actions intended to improve access to transmission – Efficient integration of renewables into the grid – New transmission planning and cost allocation principles – Promote secondary market for transmission capacity by lifting price cap for capacity reassignments

4 www.mwe.com4 Federal Regulatory Issues Enforcement  FERC has refined its enforcement policy – Allowed private cause of action to litigate alleged enforcement violation – Established enforcement penalty guidelines based upon sentencing guidelines

5 www.mwe.com5 Federal Regulatory Issues Capacity Markets  CAISO Backstop Capacity Procurement – Pending Dec. 1, 2010 filing of Capacity Procurement Mechanism

6 www.mwe.com6 Transmission Access  Efficient Integration of Renewables Into Grid – January 2010 Notice of Inquiry- Looking into regulatory policies to integrate increase in variable energy resources into the grid in the most efficient and non-discriminatory manner while maintaining system reliability Sought public comment on the effects, if any, of variable energy resources on the following: – Data and reporting requirements (forecasting) – Scheduling flexibility and incentives for accurate scheduling – Forward market structure and reliability commitments – Balancing Authority Area size and coordination – Suitability of reserve products – Capacity market reforms – Redispatch and curtailment practices

7 www.mwe.com7 Transmission Access  New Transmission Planning and Cost Allocation Principles – June 2010 Notice of Proposed Rulemaking Proposes to require transmission providers to consider public policy objectives in their planning, treat all transmission providers equally, enhance interregional cooperation, and better align transmission planning with cost allocation methods Core proposals in the NOPR: – Regional planning- require participation in regional process that produces an Order No. 890 compliant plan – Consideration of public policy- transmission planning process must account for transmission needs driven by public policy- e.g., RPS

8 www.mwe.com8 Transmission Access  New Transmission Planning and Cost Allocation Principles Core proposals in the NOPR cont.: – Equal treatment of incumbents and non-incumbents- Incumbent transmission providers have no ROFR with respect to facilities included in the regional plan and are treated equally with non-incumbents vis-à-vis the benefits and obligations of the transmission plan – Interregional planning reforms- Each transmission provider, through the regional planning process, must coordinate with the providers in neighboring, interconnected transmission planning regions, and file an interregional planning agreement with FERC – Cost allocation- must demonstrate that costs of new transmission facilities are allocated to entities within its region in a manner that is at least roughly commensurate with estimated benefits

9 www.mwe.com9 Transmission Access  Lift Price Caps for Transmission Capacity Reassignment – Capacity resales/assignments were capped at the maximum tariffed transmission rate – April 2010 NOPR proposed lifting price caps for transmission capacity reassignment – September 16, 2010 final rule Lifted price caps on capacity resales/reassignments Based on study of temporary lifting of price caps which showed increased volume in secondary market (200 to 32,000 transactions and 3,000gwh to 36,000gwh) with prices that rarely exceed the former price cap and reflected market fundamentals

10 www.mwe.com10 Enforcement  Private cause of action for enforcement claims – FPA Section 222(b) does not provide a private right of action for someone to bring an energy market manipulation claim – Richard Blumenthal v. ISO New England, Et al, 128 FERC ¶ 61,182 (2009) FERC set for hearing an energy market manipulation claim brought by the Connecticut Attorney General FPA Section 306 permits a complaint to brought to FERC for any alleged violation of the FPA, including violations of FPA Section 222(b) – the provison on energy market manipulation

11 www.mwe.com11 Enforcement  Enforcement Penalty Guidelines – September 17, 2010- Revised Policy Statement on Penalty Guidelines Five Step Analysis to determine enforcement penalties – Step One- determine Base Violation Level (depends upon violation category) – Step Two- Adjust Base Violation Level to reflect seriousness of offense (e.g., violation that poses serious threat to market transparency) – Step Three- Establish Base Penalty = greater of: » Violation Level dollar amount (adjusted Base Violation Level); » Dollar amount of pecuniary gain from violation; or » Dollar amount of pecuniary loss from violation caused by organization

12 www.mwe.com12 Enforcement  Enforcement Penalty Guidelines Five Step Analysis cont. – Step Four- Determine Culpability Score which reflects: » Degree of senior management involvement/company’s acceptance of responsibility » Company’s history of violations » Organization’s compliance and ethics program » Extent to which company self-reported the violations – Step Five- Multiply Base Penalty (from Step Three) by the Culpability Score FERC will have discretion within a range of penalties Penalties will not displace disgorgement of unjust profits

13 www.mwe.com13 Enforcement  Enforcement Penalty Guidelines Reliability violations will not be assessed based on loss of load resulting from reliability violation Partial Compliance Credit for company’s that meet some, but not all, of the elements of a complete compliance program Independent credit given for self-reporting, cooperation, avoidance of trial- type hearing, and acceptance of responsibility

14 www.mwe.com14 Capacity Market  California capacity market – CPUC RA program June 2010 CPUC Decision revising prior Proposed Decision which had endorsed a coalition-backed centralized, forward capacity market Retained current annual bilateral RA program model – CPUC Long Term Procurement Plan Used to allow LSEs to purchase needed capacity and determine rate recovery – CAISO capacity backstop RCST TCPM ICPM CPM

15 www.mwe.com15 Capacity Market  CAISO’s CPM Proposal – Limited backstop mechanism to complement and supplement the CPUC’s RA program – Available to non-RA capacity – Voluntary- no obligation to accept a CPM designation – If accepted, scheduling and dispatch obligations comparable to RA obligations

16 www.mwe.com16 Capacity Market  CAISO’s CPM Proposal – CAISO may procure capacity for following needs: Backstop when aggregate RA capacity is insufficient at system or local level Significant Events To retain and compensate for 30 days any RA capacity that was issued an Exceptional Dispatch in the CAISO’s DAM or RTM To financially sustain a needed resource that is in danger of shutting down due to lack of sufficient revenues

17 www.mwe.com17 Capacity Market  CAISO’s CPM Proposal – Designation preference for non-use limited resources CAISO will consider resources’ operational characteristics Designations for one month or multiple months – CPM compensation Going-forward fixed costs for a reference resource, described in the 2009 CEC Report- $55/kW-yr Payment will be pro rata, reflecting CPM capacity’s availability while under the CPM designation Considered and rejected using a Net CONE and demand curve model

18 www.mwe.com18 Station Power  Controversy began with Duke FERC complaint to direct CAISO to adopt a monthly netting interval for generators' local use of station power. – Duke's complaint had directly followed a recent order by FERC approving a monthly netting in other markets - which was later upheld by the DC Circuit in Niagara Mohawk Power Corp. v. FERC  Southern California Edison opposed Duke's complaint on the basis that states - not FERC - have jurisdiction over retail energy sales.  FERC directed CAISO to adopt the monthly netting interval, finding that no retail sale actually takes place when a generator is a net positive seller over the course of a month. FERC later approved CAISO's revisions over SCE's continued objections

19 www.mwe.com19 Station Power  On appeal, the DC Circuit vacated and remanded FERC's orders stemming from the Duke complaint finding that: – although FERC was within its authority to determine how much electricity generators deliver to and take from the grid for transmission purposes, FERC exceeded its statutory authority in concluding that a retail sale has not taken place. – The DC Circuit further determined that FERC and states can use different methods to determine transmission charges and charges for retail sales

20 www.mwe.com20 Station Power  DC Circuit distinguished Niagara Mohawk on the basis that the petitioner in Niagara Mohawk never challenged FERC's authority to prescribe a netting period for retail sales – Duke orders squarely placed the question of FERC's jurisdiction before the Court  August 30, 2010 FERC order clarifying that it will not encroach upon a state's right to establish netting periods for station power. – FERC concluded that it and the states can use different methodologies when FERC determines the amount of station power that is transmitted on the FERC-jurisdictional transmission grid and the states determine the amount of station power that is sold in state-jurisdictional retail sales – FERC directed that CAISO's tariff should address only FERC-jurisdictional transmission of station power and utilize a FERC-approved monthly netting period to calculate transmission load.

21 www.mwe.com21 FERC Regulatory Issues  Transmission Access – Active steps to improve transmission access and renewable integration – Promote more efficient cost allocation of transmission upgrades  Enforcement – Comprehensive compliance programs are necessary  Capacity procurement – Uncertain future  Station Power – Issue remains live, but second and third rounds went to the states

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