“FERC-LITE,” WHOLESALE REFUND AUTHORITY, AND RELATED PROVISIONS NOVEMBER 10, 2005

1. APPA OVERVIEW OF ENERGY POLICY ACT OF 2005 “FERC-LITE,” WHOLESALE REFUND AUTHORITY,AND RELATED PROVISIONSNOVEMBER 10, 2005 ROBERT R. NORDHAUS VAN NESS FELDMAN WASHINGTON, DC (202) 298-1910 rrn@vnf.com

2. Electricity Provisions Covered • FERC-LITE (FPA § 211A) • Wholesale Refund Authority (FPA § 206(e)) • FERC Market Manipulation Authority (FPA § § 220, 221, 222) • PUHCA Repeal (EPAct § § 1261-1277)

3. FERC-LITE Overview • FERC-lite: FPA § 211A, “open access by unregulated transmitting utilities” • FERC authority to require transmission service • Rates • Filing requirements • Order No. 888 Notice of Inquiry • Implications for public power

4. FERC-LITE: Transmission Services • Applies to unregulated transmitting utilities (public power, coops, PMAs, TVA) • 4 Million MWH/year threshold (combined wholesale and retail) • FERC may by rule or order require transmission services: • At rates comparable to rates the utility charges itself – FERC may remand rate issues to utility • On non-rate terms and conditions (1) that are comparable to those under which it provides service to itself and (2) that are not unduly discriminatory or preferential

5. FERC-LITE: Filing Requirements • “Rate-changing procedures” of § 205(c) and (d) of the Federal Power Act (currently applicable to investor-owned utilities) will apply to unregulated transmitting utilities. Two interpretations: • FERC has authority to require filing of rates, terms and conditions of transmission service and transmission contracts, and 60 days notice of any changes thereof • FERC can only require 60-day notice of changes in rates • Filing provisions not self-executing – FERC must prescribe filing requirements

6. FERC-LITE: Other Provisions • FERC orders cannot require violation of private use rules • FERC cannot order unregulated transmitting utility to join RTO or ISO

7. FERC-LITE: Notice of Inquiry • FERC Notice of Inquiry (NOI) issued September 16, 2005, seeks comment on potential revisions to FERC Order No. 888 pro forma Open Access Transmission Tariff (OATT). Comments due November 22, 2005. • FERC also seeks comment on implementation of the FERC-LITE and native load service obligation provisions of the Energy Policy Act, including: • Should FERC require unregulated transmitting utilities to provide transmission services under FERC-LITE? • If FERC uses FERC-LITE, should it be by rule or case-by-case? • What is the relationship between the requirement that transmission services be comparable and the requirement that they not be unduly discriminatory or preferential?

8. FERC-LITE: Implications for Public Power • No provision of FERC-LITE is self-executing; FERC must issue rules or orders before any of its requirements apply. • FERC’s authority to require LPPC members to provide transmission services is discretionary. In addition, FERC has broad exemption authority. • Unlike earlier versions of FERC-LITE, FERC does not have explicit authority to require public power to conform to the same transmission service rules that apply to investor-owned utilities. • FERC-LITE presents a number of statutory construction issues resolution of which will have major impacts on public power.

9. FERC ENFORCEMENT Overview • FERC Refund Authority (FPA § 206(e)) • Market Transparency (FPA § 220) • Market Manipulation (FPA § 222) • False Information (FPA § 221) • FERC Enforcement Authority Over Public Power (FPA § § 306-307

10. FERC ENFORCEMENT: Wholesale Refund Authority • FERC may order refunds from large public power entities if: • They make voluntary short-term sales in an organized market where the rates are set by FERC tariff (rather than by contract); and • They violate the tariff or applicable FERC rules. • Coverage: Sales over 8 million MWH/Year (wholesale and retail). Coops and ERCOT excluded; TVA and PMAs covered on restricted basis. • “Applicable FERC Rules”: FERC rules applicable to IOUs that FERC decides after notice and comment should also apply to large public power entities for purposes of refund provisions • “Short-term sales”: Wholesale sales 31 days or less • Refunds would be under section FPA § 206

11. FERC ENFORCEMENT: Market Manipulation • Rules apply to all entities, including public power systems and cooperatives (but questions remain as to FERC’s enforcement authority over public power). • Prohibits the use or employment of any manipulative or deceptive device “in connection with the purchase or sale of electric energy or the purchase or sale of transmission services subject to the jurisdiction of the Commission”, as defined by FERC by rule. • FERC issued a Notice of Proposed Rulemaking defining manipulative or deceptive devices on October 20, 2005. Comments due in late November. Final rule by year end.

12. FERC ENFORCEMENT: Market Transparency • Market Transparency • FERC is directed to facilitate market transparency. • FERC must enter into a Memorandum of Understanding (MOU) with the Commodity Futures Trading Commission relating to information sharing. • MOU signed October 12, 2005.

13. FERC ENFORCEMENT: Market Transparency • FERC is authorized to create an electronic system to provide information on the availability and price of wholesale electric energy and transmission services. • If FERC creates an electronic system, it must exempt from disclosure any information that would be • “detrimental to the operation of an effective market,” or • “jeopardize system security.”

14. FERC ENFORCEMENT: False Information • Filing of False Information • New section 221 prohibits the filing false electric price or transmission capacity information with a federal agency with fraudulent intent. • Inadvertent errors will not be the basis of a violation. • Applies to public power (but see enforcement discussion below) • Prohibited conduct is already criminal under 18 USC § 1001

15. FERC ENFORCEMENT: Penalty Authority • EPAct gives FERC increased civil and criminal penalty authority under the FPA. Violations of FPA are subject to new civil penalties of $1,000,000 per day; and higher criminal penalties of 5 years or $1,000,000 or both • Applicability of penalties to public power entities is an issue: • FPA civil and criminal penalties apply only to “persons” (FPA § 306, 307) • FPA definition of “person” does not include municipalities (FPA § 3(4)) • Public power entities would appear not to be subject to FPA civil and criminal penalties • However, FERC policy statement appears to reach opposite conclusion

16. FERC ENFORCEMENT: Penalty Authority (Continued) • Application to officers and employees of municipal systems is uncertain • Many violations of new FPA market manipulation and similar provisions are punishable under general provisions of Federal criminal law • Thus, application of penalty provisions to public power entities and their employees is highly uncertain. • Bottom Line: In light of the magnitude of potential penalties, don’t mess with FERC

17. PUHCA Repeal • Public Utility Holding Company Act of 1935 (“PUHCA/35”) repealed effective February 8, 2006 (EPAct § 1261 – 1267). • New statutory provisions that replace PUHCA/35 – the Public Utility Holding Company Act of 2005 or “PUHCA/05” – take effect on the same date, together with new FERC merger review provisions. • PUHCA/05 provides for Federal and State access to books and records of electric and gas utility holding companies and their affiliates. Public power is exempt. • Savings provisions in PUHCA/05 retain existing FERC and State authority over affiliate transactions. On request of a State commission or a holding company, FERC has cost allocation authority over intra-system non-power goods and services transactions. • Notice of Proposed Rulemaking issued September 16, 2005, comments filed mid-October.