Civil engineers grade Maine dams D+

A group of civil engineers have released a report card for Maine infrastructure, giving Maine a C- overall and giving Maine's dams a D+.

ASCE's 2012 Report Card for Maine's Infrastructure (71-page PDF) comes four years after its first Report Card was issued in 2008.  The Report Card covers infrastructure including roads, bridges, railroads, ports and waterways, passenger transportation, airports, dams, municipal wastewater, municipal drinking water, contaminated site remediation, solid waste, schools, energy, and state parks.  It was prepared by a team of nineteen ASCE infrastructure leaders who analyzed issues including existing conditions, capacity, operations & maintenance or deferred maintenance, public safety & security, risk and consequences of failure, and current and projected levels of funding.

As the report notes, Maine has over a 1,000 dams, mostly privately owned.  153 of Maine's dams are classified as high- or significant-hazard-potential.  Dam safety is an important issue, both for dam owners and from a public policy perspective.  When dams fail, they can pose risks to people, communities, properties, and the environment.  According to the report, 131 federally regulated dams are in good repair, but most non-hydropower dams are subject only to state regulation.  Most of Maine’s dams are low-hazard potential, but are more than 50 years old.  Moreover, most of these dams do not generate revenues, making it harder to fund their upkeep even though they may provide values like maintaining lake environments for people and wildlife.

The ASCE report finds that Maine continues to fall well below the needed funding for dam safety inspectors and ranks near the bottom nationally for dam safety program funding.  The report critiques Maine’s Dam Safety Program, which spends much less than the other Northern New England states, is understaffed and has no enforcement division.

Will the ASCE report card lead to changes in how Maine regulates dams?  What funding sources are available to help private dam owners maintain their facilities in safe condition?  Will the state respond by revamping its dam safety program?

IRS reverses tax ruling on wind PPAs

The U.S. Internal Revenue Service has reversed its previous position on how it will treat power purchase agreements from wind energy facilities. 

Earlier this year, IRS issued a private letter ruling addressing a tax issue arising when a taxpayer purchases wind energy facilities operating under facility-specific power purchase agreements.  Under Section 167 of the Internal Revenue Code, which establishes how depreciation works under tax law, the computation of an adjusted basis for an asset is essential to calculating tax values and liabilities.  What happens when a taxpayer purchases a wind project that operates under one or more PPAs?  Should the purchase price affect the basis of the facilities, or should part of the purchase price be allocated to the PPAs?

In January 2012, in Private Letter Ruling 201214007, the IRS concluded that the purchase price should be included in the adjusted basis of the facilities, rather than allocating any portion of it to the PPAs.  Last week, the IRS issued Private Letter Ruling 201249013, which revokes its previous private letter ruling.  According to the new ruling, "the Service has determined that Private Letter Ruling 201214007 is not in accord with the current views of the Service."  Rather, the IRS now holds that the portion of the purchase price paid by the taxpayer that is attributable to the PPAs is to be allocated to the PPAs and not to the wind energy facilities.

While private letter rulings are directed to the specific taxpayers involved and may have limited precedential value, the ruling indicates a shift in the IRS's thinking about the tax treatment of transactions involving operating renewable energy generation projects.

Canada's largest wind farm built in Quebec

A newly expanded wind farm on Quebec’s Gaspé Peninsula became Canada’s largest. commissioned wind project. The second phase of the Gros-Morne project came online, bringing the project’s total operating nameplate capacity to 211 megawatts.

Cartier Wind Energy Inc. developed and operates the Gros-Morne project. The company, known as Cartier Énergie Éolienne in French, was founded in 2004 as a partnership of TransCanada Corporation (62% owner) and Innergex Renewable Energy or its associated Innergex Power Income Fund (38).

Cartier submitted winning bids to provincial electric utility Hydro-Québec Distribution in response to its request for proposals seeking to buy 1000 megawatts of wind power from merchant projects on the Gaspé Peninsula. As a result, the company was selected to construct and operate six wind farms spread around the administrative region of Gaspesie, Iles-de-la-Madeleine and the Regional County Municipality of Matane.

Collectively, the Cartier projects’ total nameplate capacity will be 740 megawatts. Over 600 megawatts have now been commissioned, including the Baie-des-Sables, Carleton, L'Anse-à-Valleau, and Montagne Sèche projects in addition to Gros-Morne.

Cartier now ranks among Canada’s largest owners of wind generation capacity. Wind is a growing sector in Canada, with the Canadian Wind Energy Association projecting that the country will host 6,400 megawatts of wind capacity by the end of 2012, with Quebec alone accounting for over 1,247 megawatts.

FERC enforcement of energy laws

The Federal Energy Regulatory Commission is charged with enforcing statutes and rules covering much of the U.S. energy industry.  Its jurisdiction includes wholesale electricity market activity, electric and natural gas transmission and storage, and hydropower.  A report recently issued by the FERC's Office of Enforcement documents its enforcement activities in fiscal year 2012 (ending September 30, 2012).  The report illustrates the role of the Office of Enforcement and the importance of compliance by regulated entities.

According to the report, in FY2012, Enforcement focused on matters involving four kinds of conduct:

• Fraud and market manipulation;
• Serious violations of the Reliability Standards; 
• Anticompetitive conduct; and
• Conduct that threatens the transparency of regulated markets.

The report states that Enforcement does not intend to change its priorities in FY2013.

Organizationally, Enforcement currently houses four divisions: the Division of Investigations, the Division of Audits, the Division of Energy Market Oversight, and the Division of Analytics and Surveillance.  While these divisions are designed to coordinate on some enforcement operations, each has a specific mandate.

The Division of Investigations conducts public and non-public investigations of possible violations of the statutes, regulations, rules, orders, and tariffs administered by the Commission.  These investigations typically arise from self-reports, tips, calls to the Enforcement Hotline, referrals from organized markets or their monitoring units, other agencies, other offices within the Commission, or as a result of other investigations.  Where FERC Enforcement staff finds violations of sufficient seriousness, staff reports its findings to the Commission and attempts to settle the investigation for appropriate sanctions and future compliance before recommending that the Commission initiate a public show cause proceeding.

The Division of Audits administers the Commission’s audit and accounting programs. These programs help the Commission achieve effective and appropriate oversight of jurisdictional entities while maintaining accountability and transparency. To accomplish its mission, Audits conducts operational and financial performance and compliance audits of jurisdictional entities, and conducts other activities that aid the Commission. These audits and other activities assess how jurisdictional entities implement statutes, orders, rules, tariffs, and regulations the Commission administers.

The Division of Energy Market Oversight is responsible for monitoring and overseeing the nation’s wholesale natural gas and electric power markets. On a daily basis, Market Oversight examines and monitors the structure and operation of these markets to identify market anomalies, flawed or inadequate market rules, tariff and rule violations, and other unlawful behavior. Market Oversight administers, analyzes, and ensures compliance with the filing requirements for Electronic Quarterly Reports (EQRs) and various Commission financial forms.

The newest branch of FERC's Enforcement office is its Division of Analytics and Surveillance, created in February 2012 to develop surveillance tools, conduct surveillance, and analyze transactional and market data to detect potential manipulation, anticompetitive behavior, and other anomalous activities in the energy markets.  Analytics and Surveillance focuses on three areas: (1) natural gas surveillance; (2) electric surveillance; and (3) transactional analysis.  Within these areas, the Division of Analytics and Surveillance develops and refines surveillance tools to perform continuous surveillance and analysis of market participant behavior, economic incentives, operations, and price formation on both the natural gas and electric markets, to detect anomalous activities in the markets and identify potential investigative subjects.

Together, these divisions' FY2012 activities led to almost four hundred recommendations for corrective action and over $5.8 million in refunds, over $148 million in civil penalties and disgorgement of over $119 million in unjust profits in FY2012, and penalties for over 904 possible or confirmed violations.  In a future post, I will look at some of these specific enforcement cases in more detail.  It is clear that the FERC Office of Enforcement wields considerable power and is increasingly active.

Gila River Power, FERC enforcement settle for $3.4 million in market manipulation case

Federal regulators have amped up their investigations of businesses involved in U.S. energy markets in recent years.  This week the Federal Energy Regulatory Commission (FERC) approved a settlement between its Office of Enforcement and Gila River Power LLC over market manipulation claims, requiring Gila River to pay a punitive fine of $2.5 million, and disgorge unjust profits of $911,553 plus interest.  Notably, this settlement represents the first time that a market participant accused of manipulating power markets has admitted to unlawful energy trades.

Gila River is a subsidiary of Entegra Power Group LLC.  Entegra owns and operates four combined cycle power plants capable of producing about 3,300 MW of power.  Two of these plants are located at the 2,200 MW Gila River Power Station in Arizona, while the other four are located at the Union Power Station in Arkansas.  Entegra markets energy from these facilities to customers in the southeastern and southwestern U.S.

In the settlement agreement, Gila River admitted to using energy transactions known as "wheeling-through transactions" between July 2009 and October 2010 to manipulate prices in markets operated by the California Independent System Operator.  Because congestion on the transmission grid limited both the amount of power Gila River could import into California as well as the price it could get for that power, the company designed its transactions to avoid creating congestion so that it would receive a higher price on a higher quantity of energy imports.  This strategy involved claiming that it was simply passing power between two points outside California over transmission facilities located inside California, even though its transactions lacked a resource and a load outside the California markets as required by the CAISO tariff.

Under the FERC's enforcement procedures and penalty guidelines, the FERC assessed a base penalty amount based on its powers under the Federal Power Act, which allows it to levy fines of $1,000,000 per day for each violation.  The FERC then considered mitigating factors, including Gila River's cooperation in the enforcement investigation and its acceptance of responsibility for its violations.  Based on these factors, and negotiations between Gila River's legal counsel and the FERC's Office of Enforcement, the parties settled on a fine of $2.5 million, and disgorge unjust profits of $911,553 plus interest. 

While the Gila River settlement represents the first time an accused company has admitted market manipulation, FERC has used its enforcement powers more extensively in recent years.  In fiscal 2012, FERC approved nine settlement agreements entered into by Enforcement for total civil penalty payments of more than $148 million and disgorgement of more than $119 million plus interest.

Long Island utility exec resigns, hurricane response blamed

The Long Island Power Authority announced this week that its Chief Operating Officer, Mike Hervey, has resigned from LIPA effective at the end of 2012.

LIPA is a political subdivision of the State of New York.  LIPA was formed in 1985 as a non-profit municipal electric utility to take over the assets of former investor-owned utility Long Island Lighting Company.  Today, LIPA owns the electric grid in most of Long Island.  LIPA does not own electric generation assets on the island but serves 1.1 million customers with electricity generated off-island.  Its electric distribution network was hard hit by Hurricane Sandy, with over 1.1 million customers losing power.  As of earlier this week, 10,000 customers just east of New York City were still without power, while 35,000 more farther onto Long Island suffered significant flood damage and will need repairs before electric service can be restored.  County executives and other leaders are calling for federal involvement, and have criticized LIPA for its management of the restoration process.

In a statement released November 13, LIPA Chairman Howard E. Steinberg stated that he had accepted Hervey's resignation, with regret, on behalf of the Board of Trustees.  The announcement noted that Hervey had worked for LIPA for 12 years, including serving as CEP for two years.

Also on Tuesday, New York Governor Andrew Cuomo formed a commission to investigate utility companies' storm preparedness and management.  Governor Cuomo used his powers under the Moreland Act to form the commission, whose mandate also includes an examination of the regulatory and legal structures for oversight of utility operations.  Citing storms including Hurricane Irene, Tropical Storm Lee, and Hurricane Sandy in the past two years, Governor Cuomo also addressed the adaptation process of adjusting "to the reality of more frequent major weather incidents".

One utility executive has already resigned, and the commission's investigation will soon be under way.  What other changes lie ahead for utility companies in New York and elsewhere as a result of utility responses to hostile weather?

From brownfields to renewable energy sites

Contaminated lands, landfills, and mine sites are increasingly being used as sites for renewable energy projects.  For example, many landfills may be suitable for siting solar photovoltaic panels.  Former industrial sites with subsoil contamination may not be suitable for redevelopment with buildings, but may be able to host solar or wind-based electric generation.  According to the U.S. Environmental Protection Agency, renewable energy systems have been installed at 60 such sites in 25 states.  What is the future of this trend?
 
EPA policy encourages renewable energy development on current and formerly contaminated land and mine sites when it is aligned with the community’s vision for the site.  Under EPA's RE-Powering America's Land initiative, EPA identifies the renewable energy potential of these sites and provides resources for communities, developers, industry, state and local governments.

An EPA report released earlier this month describes 60 renewable systems installed on potentially contaminated lands, landfills, and mine sites.  Of these, the majority (49) generate electricity through solar photovoltaic technology.  Seven generate electricity from the wind; biomass, geothermal, hydropower, and combined solar/wind round out the count.  Together, these resources provide 184.7 MW of electric generation capacity.  Most sell their power into the wholesale market, while some use the power on-site.

Host sites are split among private, federal, municipal, and state ownership.  Sites include those regulated under EPA's Comprehensive Environmental Response, Compensation, and Liability Act program (CERCLA, or Superfund), EPA's Resource Conservation and Recovery Act program (RCRA), brownfields, and landfills.

Many more potential sites exist.  Thousands of properties across the country face redevelopment challenges from contamination.  The country is home to over 3,000 active commercial landfills and 10,000 municipal landfills.  While not all may be suitable for renewable energy development, the concept offers the opportunity to create a revenue stream from property otherwise limited in use and saddled with environmental liabilities.  This revenue could be used for remediation of the sites' contamination, as well as for other purposes.  The trend of developing renewable energy facilities on contaminated lands, landfills, and mine sites is likely to continue for the foreseeable future.