Federal & State Regulatory Issues Elizabeth W. Whittle Nixon Peabody LLP 401 9th Street, N.W. Washington, D.C (202) July 25, 2007

2 2 As a wholesale supplier of power, a wind developer will be subject to regulation under the Federal Power Act (FPA). The Federal Energy Regulatory Commission (FERC) administers the FPA. FERC has jurisdiction over both the transmission and the sale of this power. Siting and related matters are subject to the jurisdiction of the states. Federal and State Regulatory Issues

3 3 Transmission service is governed by utility tariffs. In many regions, transmission service is provided by an Independent System operator/regional transmission organization (RTO/ISO). RTO/ISOs do not own the transmission assets, but have operational control over them. Open-access, non-discriminatory transmission service is provided pursuant to a Tariff on file and approved by FERC. Transmission Regulatory Scheme

4 4 Tariffs govern: Interconnection Transmission Ancillary service Rates Dispute resolution Transmission Regulatory Scheme

5 5 Interconnection The interconnection process has been standardized. Each Transmission Owner or RTO/ISO has tariff provisions governing the process from the filing of an interconnection request to the execution of the Interconnection Agreement. While the process is standardized, there are limited regional differences that are permitted by FERC. Milstones must be met to remain in the interconnection queue. The process includes a number of steps, many of which must be followed by deposits. Developer must pay for the costs of all studies. –Interconnection Request - $10,000 –System Reliability Study - $50,000 –Facility Study - $100,000 –Interconnection Agreement - $250,000 if cant show evidence of site control

6 6 Sale of Power at Market-Based Rates FERC authorization is required to sell power at market- based rates – even if power is sold only into the RTO/ISO market. In order to obtain authority to engage in sales for resale at market-based rates the Developer must show that: –It lacks market power over generation –It lacks market power over transmission Cannot erect other barriers to entry; and Neither it nor its affiliates engage in reciprocal deals or otherwise abuse an affiliate relationship.

7 7 Sale of Power at Market-Based Rates (Contd) On June 21, 2007 FERC issued Order No. 697 (119 FERC ¶ 61,295), which revises some of FERCs market-based rates rules. The Final Rule is 643 pages long! FERC examines vertical and horizontal market power.

8 8 Sale of Power at Market-Based Rates (Contd) Horizontal Market Power: If an entity passes the market screens established by the FERC, the entity is presumed to lack market power. If an entity fails the market screens, the entity is presumed to possess market power and must rebut the presumption by performing the delivered price test. The geographic market is usually either the sellers balancing authority area or the RTO/ISO footprint.

9 9 Sale of Power at Market-Based Rates (Contd) Vertical Market Power: FERC assumes that no market power exists if there is an open access transmission tariff on file. FERC can revoke market-based rates and impose cost-based rates on the entity and, in some cases, the entitys affiliates.

10 Ongoing Obligations Market-Based Rates Once a seller obtains market based rate authority, there are reporting obligations. –Each quarter, the seller must report to FERC electronically details of its activities, including Mwh sold, aggregate prices, etc. Even if there is no activity, the report must be filed.

11 Market Power Updates –Category 1 Sellers (those marketers which own or control 500MW or less and not affiliated with a public utility with a franchised service territory) do not have to file market power updates periodically. –Category 2 Sellers (those who are not Category 1) must file updates to show that they continue to qualify. FERC establishes a filing schedule for the periodic updates. –All sellers must file changes in circumstances with the FERC.

12 Qualifying Facility/Exempt Wholesale Generator Wind projects are qualifying small power production facilities. The Public Utility Regulatory Policies Act of 1978 (PURPA) required among other things the utility, if requested, to purchase all of the output (net) of QFs at the utilitys avoided cost. Also, under PURPA, the FERC was given the authority to exempt QFs from provisions of the FPA, including rate regulation under Section 205. On August 8, 2005, Congress enacted the Energy Policy Act of 2005 (EPAct) which among other things gave FERC the authority to allow the utility to escape from the mandatory purchase obligation if QF has non- discriminatory access to three markets defined in the legislation.

13 Qualifying Facility/Exempt Wholesale Generator (Contd) FERC implemented EPAct and issued Order No 688, (71 FR64342 (2006), Order on rehg, 119 FERC ¶ 61,305 (2007), which established guidelines for utilities to escape from the mandatory purchase obligation. FERC created three rebuttable presumptions. For projects with a capacity over 20MW, in Day 2 RTO/ISO markets, there is a rebuttable presumption that those markets are workably competitive. The 4 Day 2 markets are Midwest ISO, New York ISO, PJM and ISO-New England.

14 Qualifying Facility/Exempt Wholesale Generator (Contd) For projects with a capacity over 20MW, QFs located in markets where service is provided under an open access transmission tariff are presumed to have non-discriminatory access to markets in that transmission providers territory. QFs with a net capacity 20MW or less are presumed to not have non-discriminatory access to any markets.

15 Qualifying Facility/Exempt Wholesale Generator (Contd) As a result of these presumptions, many QFs with a net capacity of greater than 20MW will no longer have local utility as an involuntary purchaser of power. That doesnt mean that the utility wont voluntarily purchase the power at an agreed upon or auction-based price. If a project does not avail itself of the benefits of QF status, developers obtain Exempt Wholesale Generator (EWG) Status. EWGs are exempt from certain regulations under the Public Utility Holding Company Act of 2005.

16 Qualifying Facility/Exempt Wholesale Generator (Contd) In EPAct, the Congress repealed the Public Utility Holding Company Act of 1935, eliminating the onerous SEC-related reporting requirements that fell on public utility holding companies. While the exemption from regulations as an EWG may not seem as valuable, it is important to maintain EWG status in order to claim certain exemptions from filing, e.g., to dispose of a facility under FPA Section 203. (See FERC Order No. 669). Once EWG status is obtained, material changes in circumstances -- changes in upstream ownership, etc. must be reported to FERC.

17 State-Related Issues Many wind development requirements are under State jurisdiction. Unlike natural gas pipelines where FERC has siting jurisdiction, siting matters are left to the State. Each State has it own siting schemes. Most require an approval/certificate from the Public Utility Commission (PUC) that the project is in the public convenience and necessity. Often this review entails an environmental assessment or related environmental document and the involvement of state environmental agencies. Many environmental studies are often required - - noise, bats, birds, impacts on landowners, etc. Counties and towns also have authority under local zoning laws.

18 State-Related Issues (Contd) States may be the administrator of renewable energy credit/RPS standards. Many states also regulate the utility as a public utility, although each may have lightened regulation or a way to obtain exemptions from state commission jurisdiction. In New York, for example, developers file an application for lightened regulation.