Energy Policy Act of 2005 Fact Sheet

FEDERAL ENERGY

REGULATORY COMMISSION

WASHINGTON, D.C. 20426

FACT SHEET

AUGUST 8, 2006

ENERGY POLICY ACT OF 2005

Significant Policy Changes

The Energy Policy Act of 2005 (EPAct) is the first major energy law enacted in

more than a decade, and makes the most significant changes in Commission authority

since the New Deal’s Federal Power Act of 1935 and the Natural Gas Act of 1938. In

passing EPAct, Congress signaled a strong vote of confidence in the Commission. The

Commission has taken on new duties and authorities with a sense of purpose, mindful of

the public trust they entail. Moreover, the Commission has been dedicated to meeting

these obligations within the time allotted by Congress.

EPAct had three principal policy goals in the areas of the statute that relate to the

Commission: (1) it reaffirmed a commitment to competition in wholesale power markets

as national policy, the third major federal law in the last 30 years to do so; (2) it

strengthened the Commission’s regulatory tools, recognizing that effective regulation is

necessary to protect the consumer from exploitation and assure fair competition; and (3)

it provided for development of a stronger energy infrastructure.

EPAct granted the Commission significant new responsibilities and significant

new authority to discharge these responsibilities by modifying the Federal Power Act, the

Natural Gas Act and the Public Utility Regulatory Policies Act of 1978 (PURPA).

New Responsibilities

Significant new responsibilities include:

• overseeing the reliability of the nation’s electricity transmission grid;

• implementing new tools, including penalty authority, to prevent market

manipulation;

• providing rate incentives to promote electric transmission investment;

• supplementing state transmission siting efforts in national interest electric

transmission corridors; and

• reviewing certain holding company mergers and acquisitions involving electric

utility facilities, a well as certain public utility acquisitions of generating facilities.

EPAct also specified a number of actions to be taken by the Commission. In

fulfilling these requirements during the first year since EPAct was signed into law on

August 8, 2005, the Commission has promulgated nine final rules, issued three additional

notices of proposed rulemaking, authored and submitted seven reports to Congress, and

entered into a memorandum of understanding with the Commodity Futures Trading

Commission. The Commission has taken these actions in a timely manner – meeting

every deadline set for the Commission in EPAct.

Some of these deadlines were challenging, particularly the task of implementing

the repeal of the Public Utility Holding Company Act of 1935 (PUHCA 1935) and

promulgating a new rule to implement the Public Utility Holding Company Act of 2005,

as well as implementing rules to address the Commission’s expanded corporate

transaction review authority under the Federal Power Act.

Market Manipulation

EPAct gave the Commission the authority to issue rules to prevent market

manipulation in jurisdictional wholesale power and gas markets, and in jurisdictional

transmission and transportation services. For the Commission, this is one of the most

important and challenging provisions of the Act. Congress granted this authority out of

recognition that wholesale power and gas markets had changed dramatically since the

1930s. While the Commission’s legal duty remains the same – protecting the wholesale

power and gas customer – it needed additional regulatory tools to discharge this duty.

EPAct gives the Commission civil penalty authority, which the Commission has

indicated it will exercise carefully by assuring that its market manipulation rules are

clear. That will make it easier for regulated entities to assure compliance, and make it

easier for the Commission to identify violations.

Electricity Reliability and Infrastructure

EPAct significantly augmented the Commission’s electricity authorities. Perhaps

the most important of these are the provisions governing reliability of the bulk power

system. For the first time, the Commission was granted authority to oversee mandatory

reliability standards governing the nation’s electricity grid. The Commission finalized

rules on the certification of an Electric Reliability Organization (ERO) and on procedures

for the establishment, approval and enforcement of mandatory electric reliability

standards. The Commission has now certified the ERO and issued a preliminary staff

assessment of 102 reliability standards filed by the ERO for Commission approval.

EPAct also contained a number of provisions directed at expanding and

modernizing the nation’s electricity grid. The Commission has issued a rule on electric

transmission pricing reforms designed to promote needed investment in energy

infrastructure and benefit energy customers. This will bolster power grid reliability and

lower costs for delivered power by reducing transmission congestion. In addition, the

Commission issued a rule to require transmission organizations with organized electricity

markets to make available to load-serving entities long-term firm transmission rights that

satisfy certain guidelines. This will help customers who want to make long term supply

arrangements. These customers want to be able to enter into long term transmission

service arrangements without being exposed to unhedged congestion cost risk. The final

rule goes far to reduce the risk exposure to transmission customers, and is important to

development of the grid.

EPAct addressed the difficulties of siting major new transmission facilities. It

authorized the Secretary of Energy to designate “national interest electric transmission

corridors” where there is major transmission congestion. EPAct allows applicants

seeking to build transmission within these corridors to seek construction permits from the

Commission under certain conditions. While most transmission projects will continue to

be sited by states under state law, EPAct granted the Commission this important

supplemental siting authority. FERC has proposed rules on transmission siting that will

govern the issuance of construction permits by the Commission for projects that meet the

statutory criteria.

Also with respect to transmission, the Commission signed a Memorandum of

Understanding with the Department of Energy and other federal agencies with authority

to issue federal authorizations for electric transmission facilities to establish a

coordinated federal review and permitting process that continues strong federal

environmental protections.

In addition to the provisions relating to transmission grid improvements, EPAct

addressed a significant generation issue within the jurisdiction of the Commission.

Pursuant to directives in EPAct, the Commission tightened the thermal efficiency

requirements for qualifying cogeneration facilities under PURPA. These rules should

limit the potential for abuse under PURPA, curtail sham transactions, and prevent new

PURPA “machines.” At the same time, the rules support the development of new

cogeneration facilities that truly conserve energy, by ensuring that new qualifying

cogeneration facilities use thermal output in a productive and beneficial manner, and that

the electrical, thermal, chemical or mechanical output of new qualifying cogeneration

facilities is used fundamentally for industrial, commercial or institutional purposes. Also

pursuant to EPAct amendments to the Federal Power Act, the Commission eliminated

ownership restrictions on qualifying cogeneration and small power production facilities.

Only minor changes to the Commission’s hydroelectric regulations were enacted

with the passage of EPAct. For example, the first action the Commission took upon

enactment of the law was to extend the Flint Creek Project preliminary permit for three

years. Pursuant to section 241 of EPAct, the Commission has worked with other resource

agencies to develop mandatory license conditions that are fairer and more balanced. The

Commission also has issued a guidance document to help hydropower licensees seeking

renewable tax credit certification for incremental energy gains from efficiency

improvements.

Natural Gas Infrastructure

Pursuant to EPAct, the Commission has acted to encourage more investment in the

nation’s natural gas infrastructure. In order to promote the expansion of natural gas

storage capacity and mitigate natural gas price volatility, the Commission has issued new

rules for allowing market-based rates for interstate natural gas storage.

To decrease the time needed for creating a complete application for new liquefied

natural gas

(LNG) terminals, the Commission adopted a rule requiring potential developers to

initiate pre-filing procedures at least six months prior to filing a formal application with

the Commission. The Commission has proposed rules to implement provisions that grant

authority to coordinate the processing of federal and state authorizations required under

federal law for natural gas projects, as well as maintain a consolidated record of decisions

for judicial review.

Mergers and Acquisitions

Pursuant to EPAct, the Commission implemented the repeal of PUHCA 1935 and

the provisions of a new PUHCA 2005. PUHCA 2005 permits Commission access to

books and records of holding companies and their members if necessary for determining

jurisdictional rates. The Commission implemented PUHCA rules governing accounting,

record retention and reporting, including certain blanket waivers and exemptions, within

the deadlines in EPAct.

Along with the repeal of PUHCA 1935, EPAct expanded the Commission’s

corporate review authority to include authority over certain holding company mergers

and acquisitions, as well as certain public utility acquisitions of generating facilities. It

also imposed statutory deadlines for acting on mergers and other jurisdictional corporate

transactions. The Commission implemented these new provisions of EPAct by providing

blanket authorizations for certain transactions while ensuring that captive utility

customers are protected. The Commission acted quickly, so that new rules would be in

effect before the effective dates of the new corporate review authority and PUHCA 2005,

and the repeal of PUHCA 1935, all of which became effective on February 8, 2006.

Studies and Reports

The Commission has issued seven reports as mandated by EPAct. In December

2005, the Commission issued a report on its investigation of the California electricity

crisis, detailing the actions the Commission has taken and the timetable for future action

to resolve outstanding refund claims from this time period. Also in December, the

Commission submitted to Congress a report on whether any PUHCA technical and

conforming changes were needed as a result of the repeal of the 1935 act. In February

2006, the Commission together with the Department of Energy issued a report on the

steps which must be taken to establish a system to make available to all transmission

owners and regional transmission organizations in the Eastern and Western

interconnections real-time information on the functional status of all transmission lines

within the interconnections. Also in February, the Commission issued its initial report on

the progress made in licensing and constructing the Alaska natural gas pipeline; and a

subsequent progress report was issued in July 2006, as required by EPAct.

Meeting EPAct deadlines of August 8, 2006, the Commission issued two

additional reports. First is a report assessing, by region, demand response resources and

the use of advanced metering resources. The second is a report detailing the

recommendations of regional joint boards to study the issue of security-constrained

economic dispatch for the various market regions, what constitutes security-constrained

economic dispatch and how it affects or enhances the reliability and affordability of

electric service.

Future Responsibilities of the Commission

Other EPAct requirements that the Commission will be implementing in the

future:

• Approve or remand more than 100 separate proposed electric reliability standards,

act on proposed regional delegation agreements, and oversee the effective

enforcement of approved mandatory reliability standards.

• Issue a final rule setting up procedures for the Commission to exercise its siting

authority for transmission applications in national interest transmission corridors.

• Issue a final rule on termination of the mandatory purchase obligation under

section 210 of PURPA.

• Issue a final rule on coordinating the processing of interstate natural gas

infrastructure proposals among federal and state authorities and to maintain a

consolidated record of decisions for judicial review.

• Enter into a Memorandum of Understanding with the Secretary of Defense to

ensure coordination of LNG facilities that may affect an active military

installation.

• Work jointly with other resource agencies to designate corridors for oil, gas, and

hydrogen pipelines and electricity transmission and distribution facilities on

federal land in the 11 contiguous Western states, perform environmental reviews

for such designations and incorporate the designated corridors into the relevant

agency land use and resource management plans.

• Along with the Department of Energy, study and submit a report to Congress on

the benefits of cogeneration and small power production.

• Determine the appropriate exercise of authority under new Federal Power Act and

Natural Gas Act transparency provisions.

• Along with the Departments of Justice, Energy, Agriculture and the Federal Trade

Commission, submit a report to Congress on competition within the wholesale and

retail markets for electric energy in the United States.

In Conclusion

EPAct has significantly changed the Commission’s role in electricity and natural

gas markets, and has added to the Commission’s historical functions. Throughout it all,

the Commission has been faithful to execute the law in the manner Congress intended

and will continue to do so.

Implementation of EPAct was and is a huge undertaking. Although, the

Commission so far has met every deadline Congress set, some of the EPAct requirements

have 18-month deadlines and others four years, so clearly the Commission’s work is not

done. Also, the Commission must address petitions for rehearing and compliance filings

associated with the numerous rulemakings it has promulgated. More information is

available at www.ferc.gov

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