The Energy Regulation and Markets Review: USA

Overview

Energy regulation in the United States is complex, broad and enforced by a variety of federal and state government entities. It is continually evolving in response to global, national and regional events, supply–demand balance and other market shifts, political dynamics and priorities, and technological advances. As such, this chapter is intended to provide a high-level overview of the nature and scope of energy regulation and markets.

Regulation

i The regulators

Multiple federal and state agencies, departments and other government entities regulate US energy development, the ownership, control and operation of electric energy assets, and natural gas and oil production, gathering, transmission, transportation and distribution.

The Federal Energy Regulatory Commission (FERC) is an independent federal regulatory agency established by the United States Congress to license hydroelectric facilities and to regulate (1) wholesale sales of electric energy and natural gas, (2) the transmission of electric energy in interstate commerce and (3) the transportation by pipeline of natural gas in interstate commerce. Subsequently, FERC's authority was expanded to include the regulation of interstate shipments of certain liquid fossil fuels via pipelines, including crude oil, petroleum products and natural gas liquids, such as propane and ethane. FERC's authority is granted, and limited, by statutes amended over time, including the Federal Power Act of 1935 (FPA), the Natural Gas Act of 1938 (NGA), the Public Utility Regulatory Policies Act of 1978, the Natural Gas Policy Act of 1978, the Interstate Commerce Act of 1887, the Energy Policy (EP) Acts of 1992 and 2005, the Public Utility Holding Company Act of 2005 and the Department of Energy Organization Act of 1977 (the DOE Organization Act).

The Nuclear Regulatory Commission is an independent federal regulatory agency established by Congress to formulate policies and regulations governing nuclear reactor and materials licensing and safety. The Nuclear Regulatory Commission's authority is granted, and limited, by statutes amended over time, including the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974.

The Department of Energy (DOE) is an executive department created in 1977 via the DOE Organization Act whose current mission 'is to ensure America's security and prosperity by addressing its energy, environmental and nuclear challenges through transformative science and technology solutions'. DOE is led by the Secretary of Energy, a member of the President's cabinet. FERC is an independent regulatory agency within DOE and, under the DOE Organization Act, DOE and FERC have sometimes overlapping and sometimes separate authorities under their relevant organic statutes, including the FPA and the NGA.

Numerous other federal agencies and departments regulate certain aspects of the US energy industry, including the Department of Transportation's Pipeline and Hazardous Materials Safety Administration (PHMSA) and Maritime Administration, the Environmental Protection Agency, the Army Corps of Engineers, the Commodity Futures Trading Commission, the Federal Trade Commission and the United States Departments of Agriculture, Interior, State, Commerce and Justice. The production and gathering of crude oil and natural gas, the siting and construction of energy facilities (except hydroelectric and natural gas facilities regulated by FERC), and the distribution and retail sale of electric energy and natural gas are generally governed by individual state regulatory agencies. In many states, public utility regulation is carried out by public service commissions or public utility commissions (PUCs) or municipal agencies (or both). The jurisdiction of these state and local regulatory agencies over energy companies is created by state constitutions and statutes and, like most state regulation in the United States, is also subject to the supremacy of the US government under the United States Constitution and federal statutes, except in certain limited circumstances.

ii Regulated activities

Many aspects of energy development, generation, production, transmission, transportation and distribution are subject to some federal or state regulation.

FERC regulates the rates, terms and conditions of wholesale sales of electric energy in interstate commerce and the transmission of electric energy in interstate commerce. FERC also regulates the rates, terms and conditions of service on natural gas and oil pipelines. Entities making sales of FERC-jurisdictional products or services obtain rate approval from FERC. FERC rates for electricity transmission and interstate natural gas transportation and storage are typically either cost-based (i.e., based on the costs of providing the product or service, including a reasonable return on equity investment) or market-based (i.e., negotiated or market-determined). Rates for petroleum pipeline transportation services may be based on historical and projected costs, and most pipeline rates are adjusted based on changes in a producer price index that measures the average change over time in the selling prices received by US producers for their output (plus a FERC-specified adjustment). FERC also regulates entities subject to its jurisdiction with respect to matters that may affect rates, including accounting, record-keeping and reporting, and, with respect to companies regulated under the Federal Power Act, direct issuances of securities and direct and indirect transfers of control over FERC-jurisdictional facilities.

Under the NGA, FERC is authorised to approve the construction and operation of new or expanded (and the abandonment of existing) interstate natural gas pipeline and storage facilities, and liquified natural gas (LNG) import and export terminals. Owners of natural gas facilities authorised by FERC (but not LNG terminals) may call on a federal power of eminent domain to condemn land on which to site approved facilities. As a condition to the construction of new natural gas pipeline and storage facilities, FERC may require natural gas companies, among other things, to conduct an 'open season', during which potential customers may subscribe to transportation or storage capacity on a non-discriminatory basis and existing customers may turn back capacity that may result in the downsizing or elimination of the new facilities. In exercising its rate jurisdiction over electricity transmission facilities and oil pipelines, and in conjunction with its open access requirements, FERC has also required open seasons for some or all new or expanded capacity on certain electricity transmission and oil pipeline facilities.

The NGA was amended in 2005 to expedite the authorisation process for the construction of interstate natural gas pipelines and storage facilities, and to clarify and modify FERC's review and approval of the construction and operation of LNG import and export terminals. FERC has also not exercised any authority to regulate the rates, terms and conditions of service of LNG facilities and instead has continued to allow LNG import and export terminals to charge market-based rates and to operate without imposing open access requirements. Under the FPA, FERC also has siting approval authority with respect to hydroelectric generating facilities to be constructed on navigable waterways. In 2005, Congress also gave FERC 'backstop' siting authority under the FPA to issue permits for the construction of transmission lines when DOE designates important 'national interest electric transmission corridors' (NIETC) for geographical areas experiencing transmission constraints or congestion that adversely affects consumers, although the scope of FERC's backstop siting authority and DOE's NIETC designation authority under the FPA remains unclear as a result of judicial decisions in the US Courts of Appeals.

The PHMSA regulates the safety of most US pipelines and LNG terminals. Although it is responsible for enforcement of US laws setting minimum pipeline and LNG safety standards, the PHMSA allows states to assume inspection and enforcement authority if the state has adopted the federal minimum standards into law.

Pipelines located in US waters on the Outer Continental Shelf are subject to regulation by the US Department of Interior under the Outer Continental Shelf Lands Act of 1953, as amended in 1978, by two bureaus: the Bureau of Ocean Energy Management and Bureau of Safety and Environmental Enforcement (BSEE). Offshore pipelines located within three miles of the United States are also often subject to state regulation.

State PUCs generally regulate the distribution and delivery of electricity and natural gas to retail customers, including rates, terms and conditions for retail sales and distribution of electric energy and natural gas, and the safe and reliable delivery of electricity and natural gas to retail customers in the state. State PUCs may also regulate rates and operating conditions for intrastate natural gas pipelines and storage services and for intrastate deliveries of liquid fossil fuels by pipeline. Siting approvals for the development and construction of new energy facilities are often required at the state or local government level.

iii Gathering, terminalling, processing and treatment of natural gas and oil

In states where natural gas and oil exploration and development is active, state agencies often possess regulatory authority over gathering (typically the collection and movement of resources by pipeline from production wells to a centralised processing station or other central collection point) of natural gas and oil. Many states have adopted rateable take and common purchaser statutes, which generally require gatherers to take or purchase, without undue discrimination, production that may be tendered to the gatherer for handling or sale. These statutes are generally enforced by PUCs only when a complaint is filed. The processing and treatment of natural gas and the storage and terminalling of oil are generally not regulated. However, FERC has jurisdiction over the gathering of oil by pipelines if the gathering is part of a movement of the oil in interstate commerce. FERC may regulate a natural gas gathering or processing line if it determines that the primary function of the line is the transmission (not gathering) of gas, and it may regulate an oil pipeline terminal or storage facility if it determines the facility is a necessary component of the pipeline's transportation function.

Regulation of the safety of natural gas gathering and processing facilities largely depends on the location and configuration of the facilities. Some facilities may be unregulated; others may be regulated by one or more state and federal agencies, to include the PUC, the PHMSA, BSEE and the Occupational Safety and Health Administration.

iv Ownership, market access restrictions and transfers of control

The Committee on Foreign Investment in the United States oversees foreign investment in existing companies and assets in the United States, including in the energy industry, with the President having ultimate authority to deny foreign investment that may adversely affect national security. Other than with respect to nuclear energy, there is little restriction on foreign ownership of energy assets in the United States under US energy-specific laws and regulations.

FERC approval is generally required for the direct transfer of natural gas facilities subject to FERC's jurisdiction, including transfers that spin down or partially remove facilities from FERC's jurisdiction (or reduce current services). In reviewing a proposed direct transfer of interstate natural gas facilities, FERC must determine whether the 'abandonment' of the facilities by the transferor is consistent with, and the ownership and operation of the facilities by the transferee 'is or will be required by', the 'present or future public convenience and necessity'. In both cases, FERC applies a public interest test that considers matters such as the effect of the transfer on competitive conditions and existing customers and services, including rates.

FERC also regulates the direct and indirect transfer of ownership or control over electricity transmission and generation facilities as well as the rate schedules pursuant to which electric energy or transmission service is provided. In reviewing a proposed transfer of electricity transmission or generation facilities and associated rate schedules, FERC must determine whether the transaction is consistent with the public interest, including the effects on competition (examining horizontal market power, vertical market power and barriers to entry), rates and regulation. FERC also considers whether the transaction would result in the cross-subsidisation of a non-utility affiliate of a public utility or the pledge or encumbrance of utility assets for the benefit of a non-utility affiliate of a public utility.

The PHMSA requires operators of regulated facilities to provide notice of certain transfers, name changes, acquisitions and divestitures no later than 60 days after the event. New operators must also be fully in compliance with the PHMSA regulations, including drug-testing, record-keeping and operator ID requirements, upon owning or operating an active or idled pipeline.

Certain states also require that entities obtain PUC approval prior to the direct and, in some jurisdictions, indirect transfer of assets subject to the jurisdiction of the PUC. While many state statutes require PUCs to evaluate whether a proposed transaction is consistent with the public interest, PUCs vary as to whether they interpret their jurisdiction as requiring a showing that the transaction will not result in net harm to the public or a showing that the transaction will affirmatively provide net benefits to the public.

Transmission/transportation and distribution services

i Vertical integration, unbundling and open access

During the past four decades, the federal government and many state governments have sought to replace traditional forms of cost-based regulation of services provided by vertically integrated monopolies with regulation designed to promote open access and competitive market forces.

Natural gas sector

Prior to the mid 1980s, the natural gas industry was fairly rigidly structured into three parts:

  1. producers that sold natural gas to pipeline companies;
  2. pipeline companies that resold and delivered that natural gas to distributors on a 'bundled' basis (combining the commodity cost of the natural gas with the cost of transportation service); and
  3. distributors that sold natural gas to retail customers.

Certain large industrial and electrical generating companies bought natural gas directly from producers or pipelines. And many local distributors had, in response to shortages in the 1970s, entered into long-term 'take or pay' contracts with pipelines for firm delivery of natural gas supplies for their customers. When gas prices fell in the 1980s, these distributors' contracts required payment for minimum volumes at the historic, higher prices. In an effort to address this issue, and open natural gas markets to widespread competition, FERC issued Order No. 380 in 1984 voiding contractual requirements that distributors purchase minimum quantities of natural gas from pipelines. The next year FERC issued Order No. 436 encouraging voluntary 'unbundling' of pipelines (i.e., transportation services not tied to purchases of natural gas from a transporting pipeline or its affiliates). Congress then passed the Natural Gas Wellhead Decontrol Act of 1989, lifting price controls on sales of natural gas by producers, and FERC adopted rules effectively deregulating the price of all other wholesale sales of natural gas. These orders were followed by FERC's landmark 'restructuring' order (Order No. 636) in 1992. Order No. 636 enhanced natural gas market competition by imposing new open access rules, requiring interstate pipeline and storage providers to offer unbundled transportation services at tariff rates on non-discriminatory terms and conditions set by FERC, promoting development of market hubs, allowing flexible use of receipt and delivery point rights and release of firm transportation and storage rights, among other reforms. Further, in 1992, the NGA was amended to effectively eliminate DOE permitting procedures associated with all natural gas imports, and exports to free-trade nations (coinciding with an agreement reached under the North American Free Trade Agreement to remove gas tariffs between the United States, Canada and Mexico).

FERC has continued to implement reforms to liberalise US natural gas markets by requiring compliance with standards of conduct that prohibit transmission function personnel from communicating non-public, competitively sensitive information to marketing personnel, requiring interstate natural gas pipelines to phase in standards adopted by the North American Energy Standards Board for internet-based information systems (to facilitate more efficient and transparent scheduling, reporting and use of available pipeline capacity), developing secondary markets for transportation services, market centres and customers' rights to segment transportation capacity into forward and backward hauls, and to use secondary receipt and delivery points on pipeline systems on a non-firm basis, and modifying scheduling timelines to facilitate improved gas-electric coordination. At the same time, many states also modified the exclusive retail franchises of distributors to permit open access competition in the retail sale of natural gas, while continuing to regulate natural gas utility distribution services provided under exclusive franchises. These reforms led to highly competitive natural gas sales markets in the United States, where only pipeline transportation and distribution services, and certain storage services, are subject to rate regulation.

Electricity sector

The electricity sector was also initially dominated by vertically integrated franchised monopolies. Until the early 1990s, vertically integrated electricity utilities with monopoly retail franchises owned and controlled most of the facilities used for the generation, transmission and distribution of electricity within their franchised service territories. Numerous municipally owned or cooperatively owned utilities also distributed electricity at retail, although these publicly owned utilities were typically smaller and more likely to be dependent on investor-owned utilities for transmission services to access generation resources located outside their service territories.

In 1978, Congress enacted the Public Utility Regulatory Policies Act to encourage the deployment of renewable and energy-efficient technologies by requiring electricity utilities to purchase electric power from generating sources using advanced technologies and eliminating all restrictions on the ownership of qualifying generating facilities. In 1992, Congress eliminated all ownership restrictions on facilities generating electricity for sale at wholesale. At the same time, both the federal government and many states began to liberalise their wholesale and retail electricity markets, including state efforts to have state-regulated public utilities divest some or all of their electricity generation and federal efforts to make bulk power transmission facilities and distribution facilities available to others on an open access basis. As envisioned by Congress, this open access would allow bulk power consumers and suppliers to enjoy the benefits of competition in bulk power markets, as well as in those downstream retail power markets liberalised by states.

In 1996, FERC issued landmark Order Nos. 888 and 889 to establish the foundation for the development of competitive bulk power markets by directing that bulk power transmission services be provided on an open access basis that is just, reasonable and not unduly discriminatory or preferential. Order No. 888 required that all FERC-jurisdictional transmitting utilities in the United States file a pro forma open access transmission tariff (OATT) and functionally unbundle their wholesale power services from their wholesale and retail transmission services. Order No. 888 also encouraged transmitting utilities to convey operational control of their transmission facilities to independent system operators (ISOs) or other independent regional transmission organisations (RTOs), which led to the formation of ISOs and RTOs in regions including the large majority of electrical load in the United States.

The pro forma OATT requires transmitting utilities to provide open, not unduly discriminatory access to their transmission system to transmission customers and addresses the terms of transmission service, including the terms for scheduling service, curtailments and the provision of ancillary services. Transmitting utilities are permitted to vary from the required pro forma terms of service if FERC finds that their proposed variations are equally, or more, conducive to the OATT's open access objectives. Order No. 889 required codes of conduct governing how participants in the wholesale power markets should interact with transmission service providers and the establishment of electronic bulletin boards (open access same-time information systems) for the posting of details regarding available transmission capacity.

Since Order Nos. 888 and 889, FERC has issued a range of major orders updating and expanding its open access policies to address such matters as:

  1. the formation of and participation in RTOs;
  2. pro forma procedures and agreements for interconnection of generation to the bulk power grid;
  3. changes to the pro forma generator interconnection procedures and agreements to facilitate interconnection of wind generators;
  4. general rules to facilitate more open and transparent planning and use of wholesale transmission facilities; and
  5. general rules regarding transmission planning and cost allocation.

FERC's Order No. 1000, issued in 2011, adopted significant reforms of its rules on transmission planning and cost allocation established previously in Order No. 890. Order No. 1000 sought to address significant changes in the bulk power industry, including an increased emphasis on integrating renewable generation and reducing congestion, by implementing new policies to push transmission providers and planners to seek more reliable, efficient and cost-efficient solutions. The major reforms of Order No. 1000 include:

  1. requiring each public utility transmission provider to participate in a regional transmission planning process that produces a regional transmission plan and regional and interregional cost allocation methods for planned projects;
  2. requiring each public utility transmission provider to amend its OATT to describe procedures for considering transmission needs driven by public policy requirements established by state or federal laws or regulations, such as state renewable portfolio standards (RPS);
  3. removing from FERC-approved tariffs and agreements any federal right of first refusal for incumbent utilities to build and own certain new transmission facilities; and
  4. improving coordination between neighbouring transmission planning regions.

Oil and liquids sector

Unlike interstate natural gas pipelines, oil pipelines engaged in interstate commerce have been regulated as common carriers (not public utilities) since the Interstate Commerce Act was extended to oil pipelines in 1906. As common carriers, oil pipelines must provide service to all customers without 'undue discrimination' or 'undue preference' to any customer, including affiliated customers and at rates that are 'just and reasonable.' The prohibition on undue discrimination and preference extends to periods when the pipeline is in 'pro-rationing', namely, the situation in which the pipeline must curtail specific shipments when customers' nominations exceed available capacity.

For most of the 20th century, the vast majority of oil pipeline mileage was owned by major oil companies with vertically integrated production, transportation, refining and distribution operations. This situation began to change in the latter part of the century in light of two developments. First, a change in US tax laws in the 1980s allowed companies engaged in (among other sectors) the transportation and storage of natural resources to be organised as master limited partnerships (MLPs), which provide certain tax advantages to their investors and, hence, make investments in those sectors financially attractive. Second, in 1996, FERC began issuing declaratory orders that approved then-novel rate and tariff structures that enhanced pipeline developers' ability to finance new pipelines. Specifically, when new or expanded oil pipeline capacity has been offered to all prospective shippers in a FERC-approved 'open season', FERC's orders provide advance regulatory approval of pipelines' long-term contract ('committed') rates and tariff structures that need not be supported by cost data. These two developments facilitated the development of pipelines by independent entities. Although many pipelines are still owned by vertically integrated oil companies, tens of thousands of oil pipeline miles are also owned by non-integrated companies.

ii Rates

Natural gas sector

Rates for interstate natural gas transportation and storage are generally based on costs, including a reasonable return. Initial rates for service are established for new facilities when FERC certificates construction. Pipelines may change the rates based on a showing that a new cost-based rate is 'just and reasonable', and FERC or other affected parties may require prospective rate adjustments by showing that the existing rates are unjust and unreasonable.

Gas pipelines and storage companies are permitted to offer discounts below the maximum, cost-based rates approved by FERC (also referred to as the 'recourse rates') to meet competition. Any rate discounts offered by an interstate natural gas company must be offered on a non-discriminatory basis to all similarly situated customers. Between rate cases, the natural gas company must bear the cost of any revenue shortfalls attributable to discounts (i.e., it cannot charge higher rates to other customers to make up revenues lost because of discounting). Interstate pipelines and storage companies may also negotiate rates for services either above or below the recourse rate, as long as the customer is given the option to take service under the recourse rate. Independent storage companies are often permitted to charge competitive market-based rates based on a demonstration that they do not have significant market power.

Electricity sector

Economic regulation of most of the bulk power transmission system in the continental United States is administered by FERC, including regulation of the rates, terms and conditions for the transmission of electric energy in interstate commerce. Most FERC-regulated transmission services are provided at embedded cost-of-service rates that provide a return of investment as well as a FERC-determined reasonable rate of return on common equity. In 2005, Congress amended the FPA to direct FERC to develop rate incentives to encourage certain transmission development. In 2006, FERC issued regulations in Order No. 679 to provide, case by case, a variety of cost-of-service rate incentives for new transmission projects that improve reliability or reduce cost. In 2012, FERC issued a policy statement providing further guidance on incentive-based rates for electric transmission.

FERC has also permitted 'merchant' transmission projects (i.e., transmission that is not included in a cost-of-service rate base) to charge negotiated rates for transmission service under certain conditions, including holding open seasons or solicitations for transmission service, demonstrating regional reliability and operational efficiency benefits and requirements that service be provided without undue discrimination or preference.

Oil and liquids sector

Pipelines under FERC's jurisdiction that transport fossil fuel liquids (oil pipelines) may charge cost-based rates, or they may charge market-based rates if they can show that they lack significant market power in their origin and destination markets. FERC-regulated oil pipeline rates may be changed annually based on the US Producer Price Index for Finished Goods, plus a margin established by FERC every five years (0.78 per cent effective 1 July 2021). If, however, oil pipeline indexed rates become significantly higher than a cost-based rate, or any annual increase is substantially greater than actual cost increases, FERC may adjust the rates. FERC allows greater flexibility in rates, terms and conditions of service for interstate service using new or expanded oil pipeline capacity if offered to all shippers and prospective shippers in an open season. FERC permits oil pipelines to offer priority service (i.e., service not subject to pro-rationing during normal pipeline operations) for up to 90 per cent of new capacity if contract (committed) shippers pay rates above those paid by uncommitted (walk-up) shippers, and all shippers had an opportunity to contract for the new capacity in an open season conducted by the pipeline company.

iii Reliability, security and technology restrictions

The North American Electric Reliability Corporation (NERC), the electric reliability organisation certified by FERC develops and enforces a system of mandatory electric reliability standards potentially applicable to all users, owners and operators of the bulk power system, including public and government entities not otherwise subject to FERC jurisdiction under the FPA.

Federal law sets minimum safety standards for all natural gas and hazardous liquids pipelines, and provides for regulation of these facilities by the PHMSA. Although the PHMSA has the authority to regulate all interstate pipelines, it may allow a state to act as its agent, subject to certain limitations. States are permitted to adopt and enforce standards that are more stringent than the federal minimum standards, which in many cases are overseen by each state's PUC. The security of LNG waterfront facilities and deepwater ports is regulated by the US Coast Guard pursuant to a number of federal laws, including the Maritime Transportation Security Act, the Ports and Waterways Safety Act, the Magnuson Act and the Deepwater Port Act.

Federal law and agency-specific regulations require that owners and operators of energy facilities protect sensitive security and critical energy infrastructure information from disclosure to the public, including electronic copies of the information stored in company operating systems, databases and computers.

Energy markets

i Development of wholesale electric energy markets

Throughout certain regions in the United States, ISOs and RTOs operate transmission facilities and administer organised wholesale electricity markets. FERC's Order No. 2000 imposed significant regulatory requirements upon ISOs and RTOs regarding the independence of an energy market administrator, the performance of the energy markets and the elimination of discrimination. FERC leaves considerable discretion to market participants to determine an ISO's or RTO's governance structure, geographical scope and type of market services.

The following seven ISOs and RTOs currently operate in the United States: PJM Interconnection, LLC (PJM), New York Independent System Operator Inc (NYISO), ISO New England Inc (ISO-New England), Midcontinent Independent System Operator Inc (MISO), Electric Reliability Council of Texas (ERCOT), Southwest Power Pool and California Independent System Operator Corp (CAISO). Of these RTOs, only ERCOT is not subject to FERC's regulatory oversight under the FPA, as it is deemed to be electrically isolated from the rest of the transmission grid in the continental United States. (Similarly, Alaska and Hawaii are not subject to FERC's regulatory oversight under the FPA, as their respective electricity transmission systems are not connected to the interstate transmission grid in the continental United States.)

While all the existing ISOs and RTOs administer some form of bid-based markets for one or more energy products (i.e., when the highest price bid for the marginal quantity of supply that satisfies the quantity demanded in any relevant period sets the market price for the product within that applicable region, node or zone), some provide real-time and day-ahead markets, while others do not. In addition, some of the ISOs and RTOs offer forward markets for the sale of capacity (i.e., the ability to produce electric energy) separate from other energy products.

ii Wholesale energy market rules and regulation

Each ISO and RTO develops its own market rules through the market participants' stakeholder approval process. Market rules for all ISOs and RTOs must be filed with and approved by FERC prior to implementation, except for ERCOT, whose market rules are subject to the exclusive jurisdiction of the Public Utility Commission of Texas.

iii Contracts for sale of electric energy at wholesale

The US electricity markets have a long history with bilateral power purchase and sale contracting at wholesale. Even when market participants are located within an applicable ISO or RTO (i.e., bidding or offering into the organised wholesale markets and scheduling flows through the ISO or RTO), market participants often enter into bilateral energy and capacity contracts as a means of hedging the volatility of market prices or providing a reliable source of supply. Bilateral contracts can be in the form of physical purchases and sales or financially settled purchases and sales. Some contracting parties use standardised industry form agreements, such as those developed by the Edison Electric Institute or the International Swap and Derivatives Association, and others negotiate individualised contracts. Physical sales of energy, capacity and ancillary services products in the wholesale markets are subject to FERC jurisdiction and associated contracts must either be filed with FERC or reported through quarterly reports.

iv Natural gas and oil commodity and transportation markets

Unlike in the electricity sector, there are no formal FERC-approved organised wholesale markets for oil and natural gas.

Sales of natural gas or oil commodities may be accomplished through trading platforms, such as the Intercontinental Exchange or bilateral contracts. As with purchase and sale agreements for electricity, bilateral agreements can be in the form of physical purchases and sales or financially settled purchases and sales. Some contracting parties use standardised industry form agreements, such as those developed by the North American Energy Standards Board, and others negotiate individual contracts.

Interstate natural gas pipelines are required to operate secondary markets for the transportation services they offer. Under FERC's rules, any shipper that has contracted for firm transportation service on a natural gas pipeline may release its contracted capacity to other shippers, either by publicly posting the availability of the pipeline capacity on an electronic bulletin board maintained by the pipeline and accepting offers for it, or, if certain criteria are met, in a privately negotiated, but publicly posted, transaction with prices capped at the pipeline's tariff rate (except for releases of one year or less for which the release rate is uncapped).

Given the limited scope of its jurisdiction over oil pipelines under the Interstate Commerce Act, FERC historically has refrained from involvement in crude oil marketers' use of interstate oil pipelines except to ensure that the pipelines' rates, terms and conditions of service for all shippers are 'just and reasonable', and that marketers and other affiliates of oil pipeline companies do not receive preferential treatment in rates, terms and conditions of service.

v Retail energy market regulation

Retail energy markets are regulated at the state and local levels. Across much of the United States, retail consumers buy electricity and natural gas from local utilities, many of whom remain vertically integrated, at rates and under terms and conditions set by local regulators. Since the mid 1990s, there has been a move in some states to unbundle commodity generation or natural gas service from distribution services and allow retail consumers to purchase these commodity services from competitive retail suppliers.

Renewable energy and conservation

i Development of renewable energy

The United States does not have a single comprehensive policy regarding the development of renewable energy. Rather, the federal government provides, or has provided, various targeted tax incentives and financing support programmes, while a large number of states have very aggressive decarbonisation goals or mandates (e.g., net zero emissions from their power sectors by 2045–50) and have implemented renewable portfolio or clean energy standards, clean energy procurement solicitations, and net metering, tax incentives and installation cost rebate programmes for distributed renewable generation resources.

The federal government provides, or has provided various tax incentives for renewable energy, including:

  1. a production tax credit (PTC) (per energy generated) for onshore wind, geothermal, biomass and some other renewable energy resources (but not solar and fuel cells) for 10 years from the date the renewable energy facility is placed in service;
  2. an investment tax credit (ITC) (based on qualified project costs) for a wide range of renewable energy resources (including solar, offshore wind and fuel cells) and for combined heat and power generation; and
  3. special accelerated depreciation rules that provided five-year depreciation for a range of renewable energy resources placed in service before 2027.

The DOE's Loan Programs Office (LPO) has operated various loan guarantee programmes for advanced technology and clean energy projects established under Title XVII of the EP Act of 2005 and Sections 1703 and 1705 of ARRA.

More than half of all states and the District of Columbia have renewable energy portfolio standards or goals requiring retail electric utilities to deliver a certain amount of electricity from renewable or clean energy resources. These standards and goals vary greatly across the states, both in terms of their levels and target dates and the types of energy resources that qualify (e.g., fuel cells, waste energy, combined heat and power, in-state versus out-of-state resources). Some states also have specific requirements or carve-outs for specific energy resources, such as solar or distributed generation. Many of these states also allow utilities to comply with their standards through the purchase of tradable renewable energy credits, though these markets may be fragmented in large part because of the significant differences among states' standards. In addition, a number of states have implemented or mandated the implementation of clean energy procurement solicitations, including combined procurement mandates or goals for a number of eastern states for approximately 30GW of offshore wind by 2035.

More than 40 states and the District of Columbia have established net metering policies that allow retail electricity consumers who own or host distributed renewable generation resources (predominantly solar electricity systems) to supply excess generation to their retail electricity supplier in exchange for credits against their retail electricity bills for periods of more than 12 months, and sometimes longer.

As discussed above, many of the federal tax incentive and financing support programmes have ended, or will end within the next few years, though some of these programmes could be extended by Congress, as has been the case in the past and has been proposed in various pieces of legislation. At the same time, state-based RPS, net metering, tax incentive and rebate programmes for distributed renewable generation resources appear poised to remain in place or be expanded in many states for the foreseeable future and many states are expected to mandate substantial procurements of clean energy. Moreover, a number of states and local governments have established or are considering establishing, public-private partnership clean-energy financing entities, commonly referred to as 'green banks', to support deployment of renewable energy and energy-efficiency projects, and Congress is considering legislation to create a national green bank.

ii Energy efficiency and conservation

The United States has a limited set of comprehensive policies regarding promotion of energy efficiency for electric appliances and energy efficiency standards for federal buildings and properties. In addition, the federal government has various targeted grants and financing support programmes as well as tax incentives for energy efficiency investments.

A large number of states have similar types of programmes (many of which are supported in whole or in part by funds provided by the federal government) and many states have energy efficiency portfolio standards, similar in concept to a renewable energy portfolio standard, that require retail electricity utilities to reduce their total retail sales, peak retail sales, or both, by certain amounts by target dates.

FERC issued Order No. 745 in 2011 to encourage demand responsiveness through market pricing mechanisms. In Order No. 745, FERC required that the ISO-organised and RTO-organised wholesale electricity markets adopt market rules that treat demand reduction (i.e., negawatts) in the same way as generation supply alternatives (i.e., megawatts (MW)) for the purpose of bidding into the markets; however, the ISOs and RTOs were still given flexibility as to how to implement these market incentives.

The year in review

i Electricity

During the last year, FERC has instituted numerous proceedings to advance the clean energy transition with a focus on accommodating new technologies, increasing regional transmission planning, and accelerating policies to address climate change, including by accommodating state policies and goals.

For example, in September, 2020, FERC issued Order No. 2222 to promote the participation of distributed energy resources in wholesale electric energy markets. Specifically, FERC adopted reforms requiring regional wholesale electric energy markets to modify their rules to allow small-scale power generation or storage technologies, including resources located behind a customer meter, to participate in organised capacity, energy and ancillary services markets. Individual RTOs and ISOs are in the process of developing rules to comply with the requirements set forth in Order No. 2222.

FERC also recently issued a policy statement setting forth its principles in evaluating filings by RTOs and ISOs seeking to establish rules to incorporate carbon prices into their markets. FERC stressed that it will evaluate such proposals on a case-by-case basis taking into consideration the specific facts and circumstances for each RTO/ISO, but also provided certain guidance on the types of issues it expects each RTO/ISO to address if it proposes such rule changes. In the policy statement, FERC recognised that states are taking a leading role in efforts to address climate change, and FERC signalled a willingness to try to accommodate specific state policies in the context of the regional markets.

FERC is in the process of holding a number of technical conferences to address a wide variety of issues relating to the clean energy transition and reliability, including relating to resource adequacy issues in a number of regions, potential regional market redesign efforts to accommodate the clean energy transition and the increasing electrification of the economy (e.g., electric vehicles and smart thermostats) and move away from natural gas.

Finally, FERC has expressed a willingness to consider reliability rule changes as a result of unprecedented rolling blackouts in Texas in February 2021, including potentially imposing weatherisation requirements on the electric energy sector in an effort to prevent such blackouts from occurring in the future.

ii Natural gas and hydrocarbon liquids pipelines, LNG terminals and rail transportation of crude oil

In the Omnibus Appropriations Bill of December 2020, FERC was given 180 days to submit a report to Congress describing how it will establish and operate a new Office of Public Participation (OPP), which was authorised in 1978 legislation but not funded until the 2020 legislation. The OPP's purpose is to provide greater public access to, and input in, FERC proceedings. The OPP is scheduled to commence operation in fiscal year 2022.

FERC certificate proceedings for certain gas pipelines and LNG facilities have generated significant controversy in recent years, notably with Democratic FERC commissioners dissenting from numerous authorisation orders, frequently focusing on the analysis of greenhouse gas (GHG) issues. Following the inauguration of President Biden in January 2021, a Democratic commissioner who had frequently issued such dissents became FERC chairman and certain changes in FERC policy promptly began. In February 2021, FERC called for briefing on safety and environmental concerns that had been raised about an operating compressor station of Algonquin Gas Transmission, with two Republican commissioners vociferously dissenting. Also in February 2021, FERC reopened its review of its 1999 policy statement regarding pipeline certificates, seeking industry comment on a wide range of issues, while the new chairman and another Democratic commissioner publicly called for significant changes in long-standing policy. In March 2021, FERC for the first time assessed the significance of GHG emissions in a pipeline certificate proceeding in a Northern Natural Gas Company case, though the facts there lead to an easy conclusion that the emissions were not significant and the project was approved. Finally, in an order first issued in June 2020 (inspired by judicial review of its prior policies) and then modified in January and May of 2021, FERC adopted a new practice of not allowing pipelines to commence construction for certain periods of time if its certificate orders are challenged on re-hearing.

An increased focus on GHG emissions also was reflected in DOE's decision in April 2021 to grant a re-hearing request, filed by the Sierra Club, of the LNG export authorisation for the Alaska LNG project. Accepting arguments that DOE had consistently rejected in the past, DOE required two environmental studies to be conducted, with public comments, focusing on GHG impacts of both upstream gas production in Alaska and a life cycle analysis of the GHG emissions of the LNG exports. DOE will reconsider the export authorisation for the Alaska LNG project after the completion of those studies.

Controversy over the Dakota Access Pipeline continued in 2020 and 2021. After a federal district court found that the US Army Corps of Engineers' environmental review was inadequate, the court vacated the Corps's easement, ordered the Corps to prepare an Environmental Impact Statement (EIS), and ordered the pipeline to be shut down and drained of oil pending completion of the EIS. On appeal, the US Court of Appeals for the DC Circuit upheld the easement vacatur but reversed the district court's order directing that the pipeline be shut down and emptied pending the district court's consideration of a four-factor test for injunctive relief. In May 2021, the Corps stated its intention to complete the EIS by March 2022, but indicated that it would not support the pipeline's shutdown in the interim. On 21 May 2021, the federal district court denied the pipeline opponents' request to shut down the pipeline, finding that they had not shown a likelihood of irreparable harm if the pipeline continues to operate.

In April 2020, a federal district court in Montana, in a case challenging the Keystone XL Pipeline's river crossings in Montana, vacated the US Army Corps of Engineers' Nationwide Permit 12 (NWP 12). NWP 12 is widely used by pipeline developers during construction, maintenance, repair and removal activities throughout the US to authorise certain stream and wetland crossings and any resulting discharge of dredged or fill materials into US waters. In July 2020, the US Supreme Court limited the scope of the district court's vacatur of NWP 12 to the construction of the Keystone XL Pipeline pending appeal of the district court's ruling to the US Court of Appeals for the Ninth Circuit.

In July 2020, the US Court of Appeals for the DC Circuit upheld FERC's exclusion of an income tax allowance from cost-of-service-based rates of pipelines organised as master limited partnerships and other 'tax flow-through' entities that pay no income tax. The court also upheld FERC's decision to permit a pipeline to eliminate the accumulated deferred income tax (ADIT) balance on its ratemaking books (otherwise, the ADIT balance would have been deducted from the pipeline's rate base in setting rates), and not to require the pipeline to return the ADIT balance to shippers in future rates.

Conclusions and outlook

Energy regulation in the United States remains complex and multi-layered, and will continue to evolve for the foreseeable future. Competing economic and political interests (including effects on ratepayers and taxpayers, and state policy initiatives aimed at increased deployment of clean energy resources and decreased carbon emissions) cause conflict surrounding jurisdictional issues, energy security, transmission system planning, pipeline development, cost allocation, renewable development and integration, and many other issues. The variety of energy industry participants and regulators, and the geographical differences across the United States, can provide an opportunity for the development of innovative policies but this heterogeneity may also lead to disjointed or overlapping regulatory obligations and may ultimately undermine the development of a uniform national energy policy.

Footnotes

1 Tyler Brown, Eugene R Elrod, Natasha Gianvecchio and J Patrick Nevins are partners at Latham & Watkins LLP. Michael J Gergen is a retired partner and is of counsel at Latham & Watkins LLP.

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