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FERC’s Station Power Policies

Issue 5 and Volume 84.

Lack of uniformity continues to engender needless litigation.

Station power is the electric energy used by a generator for its heating, cooling and lighting needs, and for operating electric equipment at the generating facility. When a generator is not producing sufficient power to meet its own station power needs (“self-supplying”), it must acquire that power from an external source, either from another unit owned by the generator or from a third party. Whether incurred or avoided, station power costs can be significant and so considerable litigation has occurred over questions of who owes how much to whom and for what.

Recently, these questions were addressed by the D.C. Circuit, but not entirely resolved, in Niagara Mohawk v. FERC, 452 F.3d 822 (2006) (“Niagara Mohawk”), reh’g pending, which upheld FERC’s orders approving N.Y. ISO tariff provisions allowing generators that sell wholesale power to avoid having to purchase station power at retail and pay for related transmission and local distribution charges, so long as over a monthly period the power the generators produce exceeds the amount of their station power purchases. This affirmation of FERC’s authority to order the monthly netting of station power “load” against output provides not only a considerable benefit to generators, but also the opportunity for FERC to further clarify its station power policies and, hopefully, to put an end to needless litigation on this subject.

Prior to FERC’s Order 888, questions about whether station power was purchased at retail or self-supplied were non-existent. The vertically-integrated utilities were allowed to treat station power as “negative generation” and simply to net these amounts against the gross generation output. But, with the divestiture of many vertically-integrated utilities’ generation and the advent of independent power producers (IPPs), this was no longer the case. Generators wishing to compete in the marketplace sought to avoid unnecessary and costly purchases. And T&D companies sought to impose retail power and delivery charges even for distribution “services” that were not actually provided when the station power was being procured exclusively over transmission facilities. Many of these companies also sought to include in their retail rates stranded cost charges which, under traditional principles of cost causation, were attributable to departing retail customers, not to the new suppliers such as IPPs. Obviously, these retail charges place IPPs at a competitive disadvantage and eat into profit margins. Hence for many years now, FERC has been called upon to standardize rules that permit self-supply and to resolve the many jurisdictional and other issues regarding station power.

FERC’s jurisdiction is limited to the transmission and sale of electric energy at wholesale in interstate commerce, and does not extend to retail sales to end users. In general, FERC has held that, when a generator is self-supplying station power, either from the same unit or from another unit owned by the same generator (“remote self-supply”), such self-supply does not constitute a “sale.” Moreover, although the D.C. Circuit has now affirmed that FERC also has the authority to approve reasonable netting periods for determining when a generator is self-supplying, FERC has not yet adopted a uniform netting period. That means there is a monthly netting in New York and PJM and hourly netting in New England. However, because the length of the netting period is crucial to determining when a generator is deemed to have self-supplied or to have purchased its station power, this lack of uniformity continues to engender litigation.

For example, during periods when a generator is not self-supplying, but is procuring station power from a third party, either bilaterally or from the wholesale market, exclusively over transmission facilities, FERC’s decisions prohibit T&D companies from imposing retail charges (including stranded costs). However, many T&D companies continue to assert their right to recover these retail charges, even when their local distribution facilities are not used at all. Thus, were FERC to adopt a uniform netting period of one month, this would reduce the need to purchase station power in the first place and thereby reduce much of the controversy as to what, if any, delivery charges should be associated with such purchases.

Moreover, FERC should also make it clear that the provision of station power by a third party is a wholesale sale subject to its exclusive jurisdiction in light of the Court of Appeals’ statement in Niagara Mohawk that it would be “reasonable” for the Commission “to carve out an exception from the term ‘end user’ for wholesale generators,” i.e., even if station power supplied from the N.Y. ISO-controlled grid were deemed a sale, rather than netted against its monthly output, such a sale should be treated as a wholesale sale. Together, these clarifications likely would eliminate altogether the controversy over retail station power delivery charges.

Finally, FERC should require uniform station power rules even where there are no organized markets. There is no logical or legal basis by which competitive generators should be denied the right to self-supply station power or to purchase their station power requirements at wholesale simply because they are located in a control area where no such organized market exists.

Authors

Larry Eisenstat is head of the electric power practice and Michael Wentworth is an energy associate with Dickstein Shapiro LLP. They can be reached at [email protected] and [email protected], respectively.