Potomac Economics, the Independent Market Monitor (IMM) for the ERCOT market, released its “2017 State of the Market Report for the ERCOT Electricity Markets,” which contains several important insights for market participants and offered seven recommendations for market improvements.

Prices and Demand Move Higher in 2017

First, the IMM found that energy prices increased 14.7% over 2016, to $28.25 per MWh. This price is still significantly less than 2011’s average annual price of $52.23 per MWh and even 2014’s average annual price of $40.64 per MWh. The 2017 price increase correlates with a 22% increase in the cost of natural gas, the most widely-used fuel in ERCOT, as fuel costs represent the majority of most suppliers’ marginal production costs.  The IMM also found price convergence to be very good in 2017, with the day-ahead and real-time prices both averaging $26 per MWh.  However, the absolute difference between day-ahead and real-time prices still increased from $7.44 per MWh in 2016 to $8.60 per MWh in 2017.

Average demand also increased, rising 1.9% from 2016, with demand in the West Zone seeing the largest average load increase at 8.3% (possibly due to oil and natural gas production activity in that zone). Despite this increase in average demand, peak demand in ERCOT reached 69,512 MW on July 28, 2017, which is lower than the ERCOT-wide coincident peak hourly demand record of 71,100 MW, set on August 11, 2016.  Even with general price and demand increases, market conditions were rarely tight as real-time prices didn’t exceed $3,000 per MWh and exceeded $1,000 per MWh for just 3.5 hours in all of 2017.

Congestion Costs Skyrocket

Surprisingly, the IMM found congestion in the ERCOT real-time market increased considerably, contributing significantly to price increases in 2017 with total congestion costs equaling $967 million – a 95% increase from 2016.  The IMM stated that this increase is due to three main factors: (1) limitations on export capacity from the Panhandle; (2) planned outages associated with the construction of the Houston Import Project; and (3) the aftermath of Hurricane Harvey.

While congestion was more frequent in 2017 than in 2016, congestion on the North to Houston constraint declined after June due to the completion of a new 1,200 MW combined cycle generator located in Houston. The completion of the Houston Import Project in 2018 should reduce congestion in this area even further. Continue Reading ERCOT’s State of the Market Report

It appears the Texas Legislature has taken note of the several news articles and industry insiders sounding the alarm bells for ratepayers to brace for record high electricity prices this summer in a market applauded for its consistently low prices. The Committee convened because the Lt. Governor charged it to study/respond to the reserve margin issue. Approximately 5,600 megawatts (MW) of electric generation have recently retired in Texas causing a concern over whether enough reserve capacity exits to avoid rolling blackouts during the peak summer heat. On May 1, 2018, the Texas Senate Committee on Business and Commerce (Committee) held a meeting to discuss concerns amongst the Senators whether the Electric Reliability Council of Texas (ERCOT) had all of the tools necessary to address the lower reserve margins.  The speculation over what might occur this summer began with ERCOT’s Winter Capacity Demand Report estimated the reserve margins in ERCOT as 9.3% for the summer.

During the hearing, both the Public Utility Commission of Texas (PUCT) Chairman Walker and ERCOT representatives promoted ERCOT’s preparation for the summer and insisted ERCOT had all of the tools necessary to respond to system shortages. PUCT Chairman Walker specifically pointed to ERCOT’s demand response tool, where large customers come offline at times of high system demand.  In addition the low reserve margin reported at 9.3% a few months ago resulted in 525MW of generation coming back online.  The current reserve margin going into summer is now approximately 11%.  ERCOT stated that most of the megawatts coming back online were from mothballed units and that it is likely the possibility of higher prices this summer has made these units economical to run, and can be viewed as an indication the market is functioning as expected.

While the primary concern of the Committee was the potential for record high electricity prices, the Committee also discussed capacity markets more generally and what has changed in the market since the last time the topic of a capacity market was brought up in the Texas Legislature. To respond, PUCT Chairman Walker emphasized her strong belief in the ERCOT market and any changes regarding price fluctuations are merely a result of the cyclical nature of the market.  Chairman Walker pointed to the high prices and low capacity experienced by the market in 2005 and 2006 that encouraged more generation investment was made as a response to these price signals.  PUCT Chairman Walker also reiterated her support of the energy only market and her belief that it will work this summer.

The Committee also spent time discussed the impacts of the Federal Production Tax Credit (PTC) on the ERCOT system, the transparency of the prices in the Texas Government Land Office (GLO) contracts, and presentations from Austin Energy and CPS Energy on successes and failures for both of these municipally owned utilities. From the broad discussions taking place at the meeting it is safe to assume the Texas Legislature will be watching the ERCOT market this summer and energy is likely to be a topic of debate in the coming legislative session.

If you have questions about this or other related matters please contact Chris Reeder, Chris Hughes, Maria Faconti, Jessica Morgan or Mark Vane.

The Federal Energy Regulatory Commission (FERC) took swift action to respond to the recent United Airlines v. FERC decision regarding income tax allowances, as well as to implement changes stemming from the Tax Cuts and Jobs Act “to ensure that the economic benefits related to the reduction in the Federal corporate income tax rate are passed through to customers.” Specifically, FERC revised its income tax allowance policy for Master Limited Partnership (MLP) pipelines, with implications for other pass-through entities. In addition, it acted to implement federal income tax rate reductions and ordered changes affecting all FERC regulated entities.

Continue Reading FERC Acts on Income Tax Allowance and Implements the Tax Cuts and Jobs Act

Federal environmental requirements and regulations have been relaxed (or are proposed to be relaxed) since President Trump was elected, but those environmental regulatory changes have not yet realized benefits for renewable energy and transmission project permitting.

As mainstream media sources like the New York Times have reported, the Trump administration’s efforts to weaken environmental laws has been somewhat substantial; to date, 67 environmental actions have been targeted by the administration, including 33 that already have been overturned, 24 with rollbacks in progress, and 10 regulations in limbo. However, most of those regulatory changes are unrelated to transmission or renewable energy project permitting. And even those regulatory changes that are loosely related to permitting haven’t yet impacted the speed with which permits are issued by federal agencies (or state agencies with delegated authority to implement federal programs), or the number of permits issued (versus denied). However, the key here is that the impacts haven’t been realized yet; permit processing efficiency and issuance are likely to improve as time goes on, particularly since some of the changes are directly intended to speed up permitting. Continue Reading Trump Administration Actions to Relax Environmental Regulations Should Eventually Benefit Renewable Energy and Transmission Project Permitting

As a reminder, the State of Texas’s new stormwater construction general permit is now in effect.  The Texas Commission on Environmental Quality’s (TCEQ) has renewed its General Permit to Discharge under the Texas Pollutant Discharge Elimination System Permit, Permit No. TXR150000, which authorizes discharges from construction sites into surface water in the state.  Operators of large construction activities that were covered under the prior permit and continue to operate must now submit a Notice of Intent (NOI) to renew authorization within 90 days of the March 5 effective date.  For more information on these changes, see our prior blog post on this topic.

U.S. Environmental Protection Agency’s January 25 change to its “once in always in” policy will allow facilities that have historically been regulated as “major sources” of hazardous air pollutants to be reclassified as “area” sources if they have reduced their potential to emit to below major source thresholds. This is important because companies that are no longer regulated as major sources could see significant cost savings. Husch Blackwell has prepared a list of questions to help facilities evaluate possible benefits from this policy change, as well as other resources including a summary of affected emission standards and a look back at the regulatory language EPA previously proposed to implement a similar change in policy. Review the complete materials on Husch Blackwell’s website.

On February 20, 2018, the U.S. Environmental Protection Agency (EPA) requested comments on whether pollutant discharges from point sources that reach jurisdictional surface waters via groundwater or other subsurface flow with a direct hydrologic connection to the jurisdictional surface water may be subject to regulation under the Clean Water Act (CWA).

The answer to this question will have far reaching implications because the scope of the agency’s powers under the CWA determines the scope of:

  • National Pollutant Discharge Elimination System (NPDES) permitting programs;
  • Section 404 wetlands permitting programs;
  • Section 311 oil/hazardous substance release requirements; and
  • Spill Prevention Control and Countermeasure (SPCC) requirements.

As a result, the extent to which a discharge to groundwater that reaches jurisdictional surface waters is subject to regulation under the CWA is a significant issue for farmers, manufacturers, and anyone who discharges to groundwater.

Background

The CWA regulates the discharge of pollutants and placement of fill into “navigable waters,” and defines navigable waters as “the waters of the United States.” Since the CWA was passed in 1972, there has been much debate over the extent to which waters that are not considered navigable in fact and wetlands may be regulated as waters of the United States. This uncertainty has given rise to a variety of CWA citizen suits alleging that discharges from point sources that migrate via groundwater to waters of the United States require NPDES permits.

Over the years, various federal courts have reached differing conclusions on the question of whether discharges to groundwater can be considered discharges to waters of the United States. Most recently, the Ninth Circuit addressed this issue in Hawaii Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018). In that case, the County of Maui (the “County”) discharged treated effluent from its wastewater reclamation facility into injection wells. Tracer dye studies confirmed that this effluent migrated through the groundwater to the Pacific Ocean. A three-judge panel for the Ninth Circuit Court of Appeals ruled that the County’s discharge triggered Clean Water Act jurisdiction and the need for an NPDES permit because the groundwater was hydrologically connected to the Pacific Ocean, a water of the United States. Under the court’s ruling, an indirect discharge of contaminants from point sources that travels through groundwater and ultimately reaches navigable waters will now be subject to federal permitting requirements. Continue Reading EPA Considers Whether a Discharge of Pollutants to Groundwater that is Connected to Navigable Waters Requires a Federal Permit

The U.S. Environmental Protection Agency (“EPA”) and the U.S. Department of Justice (“DOJ”) have recently issued memoranda concerning civil enforcement of violations, including violations of environmental laws.

The January 22, 2018 EPA memorandum, entitled “Interim [Office of Enforcement and Compliance Assurance] Guidance on Enhancing Regional-State Planning and Communication on Compliance Assurance Work in Authorized States,” provides interim guidance on a collaborative partnership between EPA and authorized States in their compliance assurance activities. The document lays out plans for collaboration by EPA and States to meet and share information on environmental compliance issues. Further, the memorandum specifies that, with respect to inspections and enforcement, EPA will generally defer to authorized States to handle the primary day-to-day implementation of their programs.

The January 25, 2018 DOJ memorandum, entitled “Limiting Use of Agency Guidance Documents in Affirmative Civil Enforcement Cases,” provides that DOJ may not use its enforcement authority to convert agency documents into binding rules, and DOJ litigators may not use non-compliance with agency guidance documents as a basis for proving violations of law or treat lack of compliance as a presumption of a violation. DOJ may continue to use agency guidance documents for other purposes. This will reduce the environmental compliance burden on companies who previously sought to comply not only with clearly mandatory laws and regulations but also with advisory guidance documents, and keep the Department in check when seeking to use those guidance documents in negotiating penalties for violations.

The policies announced by this memoranda are unsurprising given the current political climate in which EPA Administrator Scott Pruitt and President Trump seek to reduce EPA responsibilities and shift environmental duties to the States and to minimize the burdens facing companies.

On January 25, 2018, the U.S. Environmental Protection Agency (“EPA”) withdrew its 1995 “once in always in” guidance. Under that guidance, facilities classified as “major sources” of hazardous air pollutants (“HAP”) as of the “first compliance date” of a maximum achievable control technology (“MACT”) standard under Section 112 of the Clean Air Act are required to comply permanently with the MACT standard. Now, EPA’s current policy is that a major source that limits its potential to emit (“PTE”) to below major source thresholds can become an area source and will no longer be subject to the major source MACT.

The Clean Air Act defines “major source” as “any stationary source or group of stationary sources located within a contiguous area and under common control that emits or has the potential to emit considering controls, in the aggregate, 10 tons per year or more of any hazardous air pollutant or 25 tons per year or more of any combination of hazardous air pollutants.” This definition expressly allows PTE to be calculated “considering controls,” and does not address the timing for when a source will be classified as a major source. As a result, EPA found that its “once in always in” policy “created an artificial time limit” contrary to the plain language of the Clean Air Act and must be withdrawn. Continue Reading Withdrawal of EPA’s “Once in Always In” Policy for Major Sources of Hazardous Air Pollutants Reduces Burdens and Encourages Emission Reduction

On the heels of last week’s Hearing on the Merits, the proposed transition of Lubbock Power & Light (“LP&L”) from the Southwest Power Pool (“SPP”) to the Electric Reliability Council of Texas (“ERCOT”) was back on the agenda at this week’s Public Utility Commission of Texas (“PUCT” or the “Commission”) open meeting.

During last week’s hearing Chairman DeAnn Walker instructed representatives of LP&L and ERCOT to finalize an agreement in which LP&L pays to help counterbalance some of the transmission infrastructure costs that may be incurred by ERCOT customers as a result of the transition. Walker also advised LP&L and SPP to try to reach a similar agreement for the benefit of the ratepayers in that region.

In response to that directive, LP&L, the Commission Staff, the Office of Public Utility Counsel (“OPUC”), and the Texas Industrial Energy Consumers (“TIEC”) have reached an agreement in principle that would, if approved by the Commission, resolve the outstanding ERCOT issues. A letter summarizing the terms of the agreement in principle filed in PUCT Docket No. 47576 last week states that LP&L will pay $22 million each year for five years to ERCOT wholesale transmission customers through the tariff proposed by Commission Staff to shield ERCOT ratepayers against the expected financial impacts of LP&L’s requested transition, and that LP&L will pay SPP’s study costs of approximately $172,000.

Discussions with ERCOT continued this week regarding what terms the final transition agreement will need to contain to satisfy ERCOT’s concerns. LP&L has completed a draft settlement agreement with ERCOT’s guidance in mind and circulated it to all parties the day before the open meeting. LP&L’s attorney conducted preliminary conversations with the parties regarding the draft and the settlement discussion is ongoing; LP&L expects to gain more guidance from the parties over the course of the next several days. Continue Reading Updates in the LP&L Case on the Heels of the Hearing on the Merits