The Quiet Evolution of Energy Regulation
By David Huard
Public attention to the energy industry over the past decade and more has focused on four issues: (1) the movement from fossil fuels to more emissions-friendly energy sources, (2) the increased availability and affordable nature of fossil fuels, (3) the greater ability of consumers to control their energy use and (4) the introduction of new market structures.
The public is undoubtedly witnessing the energy industry in the midst of an evolution. However, less well known is that during this same time, the regulation of the energy industry in general, but particularly in the West, has been evolving in ways that will affect energy markets and energy customers.
A "Paper World" No Longer
Traditionally, federal energy regulation was dominated by "rate and routes"—that is, applications by regulated entities for rate increases or approval to construct and operate new facilities.
From the 1920s and into this century, lengthy evidentiary hearings were held on most matters, and even small matters were subject to some level of formal, and individual, preauthorization. In total, participation at the Federal Energy Regulatory Commission (FERC) was time-consuming and expensive.
At the state level, agencies that regulated energy also did so with a somewhat heavy hand. However, these agencies also spread their limited resources across other regulated industries subject to their jurisdiction such as water, transportation and telecommunications. This created delays in processing matters and expenses in the process that were usually passed on to consumers in rates.
Altogether, the process at either level was dominated by the regulated entities, a few large customer groups and, at the FERC, some larger state agencies who could afford to travel to D.C. to participate in the processes. It was a paper world of personal contacts among limited players.
That world either no longer exists or is being reformulated.
Technology has played a significant part. The movement to electronic filings has made the federal and state agencies much more accessible, participation in matters less costly, and processing matters more efficient.
More impactful, new participants have joined the administrative process, bringing with them new agendas that often conflict with entrenched energy interests.
Where energy utilities once dominated the regulatory conversation, they now share the spotlight with groups representing renewable resources or alternate energy sources, new customer groups, and environmental interveners whose advocacy has matured considerably over time. The process is now open to the many, who take full advantage of the opportunity to participate.
Timely Processing Is Challenging
This, in turn, has made it more difficult for regulators to process matters in a timely and effective manner.
The FERC and many states have moved to more expeditious processes dominated by generic rulemakings and regional approaches that allow for meaningful participation from a distance at a fraction of previous costs. Many routine matters are now handled by agency personnel through delegations of authority. In many instances, states have adopted these same process tools (either before or as a result of the changes at the FERC).
However, as the number of parties, interests, matters and areas of responsibility multiply, additional limitations are viewed to be necessary in order to maintain prompt, efficient and less costly regulatory review.
The FERC has increasingly turned to forms of so-called "light-handed" regulation. This approach utilizes rulemakings and workshops, "blanket certificates" requiring only limited reporting, "at risk" pipeline projects that allow for a more expedited review and market-based rates.
In part as a result of the Energy Policy Act of 2005, the FERC has also concentrated on enforcement to prevent market manipulation and act as a check on its "light-handed" regulatory approach. While this "rear-end" form of regulation has drawn some criticism, it has seemingly improved the ability of the FERC to process its workload requirements.
Scrutiny at the State Level
Change has likewise occurred at the state level, often caused by increasing public attention and dissatisfaction with regulators or the regulatory process itself.
Some state agencies have been replaced, such as in New Mexico, with new names and promises of reform. In California, in response to high-profile matters involving safety, access to decision makers and allegations of potentially misleading or incomplete submittals to regulators, several bills have been introduced to address perceived abuses.
Overall, the regulatory process of the states has become increasingly politicized. Election to a public service commission position is no longer ignored or uncontested. Appointments in states that use that process are now prized by many potential applicants. Furthermore, reelection or reappointment is by no means assured. Commissioners cannot count on prolonged service.
As public and industry scrutiny of regulatory actions and regulators themselves increases, so does the interest of elected officials. This politicization and the belief that lobbying efforts can affect results have placed new pressure on regulators to ensure that their processes are fair and open.
All told, regulators are adjusting to new influences from within and outside their agencies.
Part of the ongoing evolution of state agencies includes an internal evaluation of whether the agencies and their staffs are unable to cover all the areas they currently regulate. Contributing to this administrative burden is the wide-ranging and more aggressive participation of nongovernmental organizations.
Further, new forms of energy and markets are often not regulated through the same enabling statutes and present new and constantly changing development, operational and financing models. These factors have complicated meaningful and timely review of agency dockets.
Solutions?
Although federal and state agencies have increasingly adopted forms of regulation designed to streamline review of their heavy calendars, more needs to be done to address this administrative burden.
Potential solutions include creating new agencies, partial deregulation, an expansion of funding for current regulators through fee increases, and adoption of less formal and abbreviated processes—all of which have been tried in the past with varying levels of success.
The emergence of multijurisdictional approaches to reductions in greenhouse-gas emissions, the development of regional energy markets, the greater national interest in renewable energy and the development of new technologies, the development of distributed generation and energy storage products, the creation of microgrids, and the creation of new market structures will all force necessary changes in regulatory systems to adapt to such new technological and market realities.
The next step in this regulatory evolution is not assured.
Changes in the regulation of energy have been shaped by industry restructurings, the addition of new and more diverse participants in energy markets, and the need for more timely actions.
Looking ahead, this evolution will likely be driven by new issues that will challenge the old ways and create new problems for regulators that we can only guess at today.
As the evolution continues, regulators are challenged to make sure that these changes continue to serve the public interest in assuring safe, reliable and affordable energy.
Reprinted with permission from the May 2, 2016 edition of the National Law Journal © 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.
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What's the Latest on AB 32 at the California Air Resources Board?
It seems like a simple question: "What's happening with AB 32 in California these days?" But the answer to that relatively straightforward question is rather complex, potentially very lengthy, constantly changing, and always fascinating. Let me give it a shot in under 1,000 words.
Remember way back in 2006, right about the time that the St. Louis Cardinals were beating the Detroit Tigers in the not-so-memorable World Series? California passed AB 32, which authorized the California Air Resources Board (ARB) to adopt measures to reduce California's statewide greenhouse gas (GHG) emissions to 1990 levels by 2020. This direct mandate was no small task, as it set to change the course of a top-ten world economy. It also became a continuous four-year flurry of regulatory output never before seen from any state agency, even one with a track record such as ARB's. The work started with the 2007 GHG mandatory reporting regulation and ran through the first Low Carbon Fuel Standard (LCFS) and the release of the Original Scoping Plan. It included a variety of smaller regulations known as "complementary measures" and finally ended with the 2011 adoption of the first economy-wide Cap and Trade program. Whew!
Flash forward nine years to Governor Jerry Brown's second inaugural address in January 2015. In it he basically doubled down on these policies, and almost exactly a year ago as of this writing (April 29, 2015) he issued an Executive Order (B-30-15) that proposed a new 2030 GHG target of 40% of the 2020 levels—in a mere 15 years. This nonlegislative action begat another wave of regulatory and planning efforts that are piling up onto the continual legislative and judicial efforts that resulted from AB 32's original implementation. Throw in the actions of other jurisdictions and federal executive action (Clean Power Plan), and it is that tsunami of things that are currently "happening" right now. Let's look at the biggest ones here:
2030 Scoping Plan
Originally designed to be updated every five years, ARB is about to release the third version of their foundational policy document in eight years. The 2030 Scoping Plan must be completed before the other regulatory updates focused on 2030, as it is the document that puts all the pieces together. It is tasked with the following:
- Provide a road map to achieve the 2030 statewide GHG target;
- Address the regional nature of the Clean Power Plan;
- Unite ARB's other major transportation programs—ZEVs and Diesel—under the GHG banner;
- Incorporate a whole new set of policies aimed at Short-Lived Climate Pollutants (SLCP), aka "Super Pollutants";
- Outline a more focused approach to Environmental Justice communities within the state; and
- Achieve all of this in a short time frame, in a cost-effective manner, while looking at its impact on the state's economy and potential for emissions to leak away.
ARB is still conducting workshops about the plan's impacts on various sectors such as agriculture and working lands, but has committed to presenting a final version to the public and their board in the fall of this year.
2016 Cap and Trade Amendments
This rulemaking is currently in the informal development stage, with the formal 45-day regulatory package release date recently delayed from May to July. The existing structure of the Cap and Trade program is a known quantity in California, but ARB is proposing significant changes to its internal mechanisms, including allocation, cost containment, and the cap itself. These changes are quite major and stakeholders have a much firmer grip on what they mean this time around.
If the internal changes weren't significant enough, ARB needs to factor in, and coordinate with Canada's second linked providence, Ontario and the U.S. EPA's implementation of the Clean Power Plan (which was surprisingly stayed by the SCOTUS). So needless to say, the process has become much more deliberate, with lots of weedy stakeholder involvement. The most recent schedule is assumed to be a first hearing in September, with a final readoption next spring or early summer.
Short-Lived Climate Pollutants
The SLCP plan, as it is known, was just released on April 11. It focuses additional spotlights on methane, refrigeration gases, and black carbon. Each of these gases requires a separate control mechanism and comes with its own controversies. The release of this plan was delayed by almost six months due to concerns over its treatment (or lack thereof) of forest issues. One of its main methane control strategies is the Oil/Gas Methane rule, which has been delayed almost a year so that it could be rewritten after stakeholder concerns.
Low Carbon Fuel Standard
The LCFS was recently completely reworked and readopted after a lawsuit caused it to be implemented in suspended animation for three years. The new rule took effect January 1 this year, but is already scheduled for a full program review in 2017 and a regulatory update in 2018, which will focus on the post-2020 LCFS. The revamped regulation required every fuel provider to use updated Carbon Intensity (CI) scores, the first batch of which were released last week. ARB will issue more biofuel CI batches in the coming months.
Outside the ARB
In a recent letter to legislative leadership, the state's legislative counsel opined that the governor does not have the authority, without additional legislative approval, to extend beyond 2020 the provisions of AB 32. ARB disagrees and is continuing to move forward.
There is also a judicial shadow hanging over the Cap and Trade program. Though this isn't a new lawsuit, it is expected that results of a California Chamber of Commerce's appeal of a lower-court decision will be known by the end of this year. That lawsuit questions a fundamental aspect of the program and, depending on the ruling, could impact the current rulemaking efforts.
Legislatively, there is a call for both additional oversight of ARB and its efforts, and also an explicit extension of AB 32 such that lawsuits like the Chamber's would be rendered moot. In addition, the Legislature continues to appropriate the billions of dollars the Cap and Trade program generates each year.
Even with the constant barrage of suggestions, criticisms and attention surrounding ARB's climate change efforts, it is a train that keeps churning down the tracks. By the time we figure out whether the Cubs can finally win the World Series again, I am sure it will be time for another ARB update, as things change constantly out here in the land of wine and surf.
This column is part of a series of articles by law firm Manatt, Phelps & Phillips, LLP's Energy, Environment and Natural Resources practice. Earlier columns in the sixth edition of this series discussed Evaluating Traffic Impacts of Projects, California Water Bond Funding and Export of U.S. Crude Oil.
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