# FEDERAL ENERGY REGULATORY COMMISSION

WASHINGTON, D.C. 20426



# FACT SHEET

A UGUST 8, 2006



## E NERGY 

## P OLICY 

## A CT OF 

## 2005

Significant Policy Changes

The Energy Policy Act of 20 05 (EPAct) is the first ma jor energy law enacted in more than a decade, and ma kes the most significant cha nges in Commission authority

since the New Deal’s Federal Power Act of 1 935 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 dutie s and authorities with a sens e of purpose, mindful of the public trust they entail. Moreover, th e Commission has been dedicated to meeting these obligations within the time allotted by Congress.

EPAct had three principal polic y goals in the areas of the statute that relate to the Commission: (1) it reaffirmed a commitment to competition in whol esale 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 explo itation and assure fair competition; and (3) it provided for development of a st ronger energy infrastructure.

EPAct granted the Commission significant new responsibilities and significant new authority to discharge these responsib ilities by modifying the Federal Power Act, the Natural Gas Act and the Public Utility Re gulatory Policies Act of 1978 (PURPA).

New Responsibilities

Significant new responsibilities include:

• overseeing the reliability of the na tion’s electricity transmission grid;

• implementing new tools, including pe nalty authority, to prevent market manipulation;

• providing rate incentives to promote electric transmission investment;

• supplementing state transmission siting e fforts in national interest electric transmission corridors; and• reviewing certain holding company merg ers and acquisitions involving electric utility facilities, a well as cer tain 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 Co mmission has promulgated nine final rules, issued three additional notices of proposed rulemaking, authored a nd submitted seven reports to Congress, and

entered into a memorandum of understand ing with the Commodi ty Futures Trading

Commission. The Commission has taken thes e 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 im plement the Public Utility Holding Compan y Act of 2005, as well as implementing rules to addr ess the Commission’s expanded corporate transaction review authority under the Federal Power Act.

Market Manipulation

EPAct gave the Commission the authorit y to issue rules to prevent market manipulation in jurisdictional wholesale powe r and gas markets, and in jurisdictional transmission and transportation services. Fo r the Commission, this is one of the most important and challenging provis ions of the Act. Congress gr anted this authority out of recognition that wholesale power and gas ma rkets had changed dram atically since the 1930s. While the Commission’s legal duty re mains the same – protecting the wholesale power and gas customer – it needed additiona l regulatory tools to discharge this duty.

EPAct gives the Commission civil pena lty authority, which the Commission has indicated it will exercise carefully by assu ring 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 Commiss ion’s electricity authorities. Perhaps the most important of these are the provis ions governing reliability of the bulk power system. For the first time, the Commission wa s granted authority to oversee mandatory reliability standards governing the nation’s electricity grid. Th e Commission finalized

rules on the certification of an Electric Relia bility Organization (ERO ) and on procedures for the establishment, approval and enfo rcement of mandatory electric reliabilitystandards. The Commission has now certifie d 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 prov isions directed at expanding and modernizing the nation’s electri city grid. The Commission ha s issued a rule on electric transmission pricing reforms designed to promote needed investment in energy

infrastructure and benefit ener gy customers. This will bolst er power grid reliability and lower costs for delivered power by reducing transmission congestion. In addition, the

Commission issued a rule to re quire transmission organizations with organized electricity

markets to make available to load-serving entities long-term firm transmission rights that satisfy certain guidelines. Th is will help customers who want to make long term supply arrangements. These customers want to be ab le to enter into lo ng term transmission service arrangements without be ing exposed to unhedged cong estion cost risk. The final rule goes far to reduce the risk exposure to transmission cust omers, and is important to development of the grid.

EPAct addressed the difficulties of siting major new transmission facilities. It authorized the Secretary of En ergy to designate “national interest electric transmission

corridors” where there is ma jor transmission congestion. EPAct allows applicants seeking to build transmission wi thin these corridors to seek construction permits from the

Commission under certain conditi ons. While most transmissi on projects will continue to be sited by states under state law, EP Act granted the Commission this important supplemental siting authority. FERC has proposed rules on transmission siting that will govern the issuance of constr uction 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 elec tric transmission facilities to establish a coordinated federal review and permitting process that conti nues strong federal environmental protections.

In addition to the provisions relating to transmission grid improvements, EPAct addressed a significant generation issue with in the jurisdiction of the Commission. Pursuant to directives in EPAct, the Commission tightened the thermal efficiency requirements for qualifying cogeneration fa cilities under PURPA. These rules should limit the potential for abuse under PURPA, cu rtail sham transactions, and prevent new PURPA “machines.” At the same time, th e rules support the development of new cogeneration facilities that tr uly conserve energy, by en suring that new qualifying cogeneration facilities use thermal output in a productive and beneficial manner, and that the electrical, thermal, chemical or mech anical output of new qualifying cogeneration facilities is used fundamentally for industrial, commercial or institutional purposes. Alsopursuant to EPAct amendments to the Federal Power Act, the Commission eliminated ownership restrictions on qua lifying cogeneration an d small power production facilities.

Only minor changes to the Commission’s hydroelectric regulations were enacted with the passage of EPAct. For exampl e, the first action the Commission took upon

enactment of the law was to extend the Flint Creek Projec t preliminary permit for three years. Pursuant to section 241 of EPAct, the Commission has worked with other resource agencies to develop mandatory license conditi ons that are fairer an d more balanced. The

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

renewable tax credit certification for in cremental energy gains from efficiency improvements.

Natural Gas Infrastructure

Pursuant to EPAct, the Commission has acte d to encourage more investment in the nation’s natural gas infrastructure. In or der to promote the expansion of natural gas storage capacity and mitigate natural gas pr ice volatility, the Commission has issued new rules for allowing market-based rates fo r interstate natural gas storage.

To decrease the time needed for creating a complete app lication 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 f iling a formal application with the Commission. The Commission has proposed ru les to implement provisions that grant authority to coordinate the processing of fede ral and state authorizations required under federal law for natural gas projec ts, as well as maintain a cons olidated record of decisions for judicial review.

Mergers and Acquisitions

Pursuant to EPAct, the Commission implem ented 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 nece ssary for determining jurisdictional rates. The Commission impl emented PUHCA rules governing accounting, record retention and reporting, including cert ain 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 au thority over certain holding company mergers and acquisitions, as well as certain public u tility acquisitions of generating facilities. It also imposed statutory deadlines for acting on mergers and other jurisdictional corporate transactions. The Commission implemented thes e new provisions of EPAct by providingblanket authorizations for certain transa ctions 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 ne w corporate review authority and PUHCA 2005, and the repeal of PUHCA 1935, all of whic h became effective on February 8, 2006.

Studies and Reports

The Commission has issued seven reports as mandated by EPAct. In December 2005, the Commission issu ed a report on its investigation of the California electricity crisis, detailing the actions the Commission ha s 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 PUHC A 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 En ergy issued a report on the steps which must be taken to establish a sy stem to make available to all transmission owners and regional transmission organizations in the Eastern and Western

interconnections real-time in formation on the functional stat us of all transmission lines

within the interconnections. Also in February, the Commi ssion issued its initial report on the progress made in licensing and constructi ng the Alaska natural gas pipeline; and a subsequent progress report was issued in July 2006, as requi red by EPAct.

Meeting EPAct deadlines of August 8, 2006, the Commission issued two additional reports. First is a report assessi ng, 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 vari ous market regions, what constitutes security-constrained economic dispatch and how it affects or enhances the re liability and a ffordability of

electric service.

Future Responsibilities of the Commission

Other EPAct requirements that the Co mmission will be implementing in the

future:

• Approve or remand more than 100 separate proposed elec tric reliability standards, act on proposed regional delegation ag reements, and oversee the effective enforcement of approved manda tory 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 th e mandatory purchase obligation under

section 210 of PURPA.

• Issue a final rule on coordinating the processing of interstate natural gas infrastructure proposals among federal an d state authorities and to maintain a

consolidated record of deci sions for judicial review.

• Enter into a Memorandum of Understand ing 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 tran smission and distribution facilities on federal land in the 11 contiguous Wester n states, perform environmental reviews for such designations and incorporate th e 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 au thority under new Federal Power Act and Natural Gas Act transp arency 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 en ergy in the United States.

In Conclusion

EPAct has significantly changed the Commissi on’s role in electricity and natural gas markets, and has added to the Commission’ s historical functions. Throughout it all,

the Commission has been faithfu l to execute the law in th e 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 Cong ress set, some of the EPAct requirements have 18-month deadlines and others four year s, so clearly the Commission’s work is not done. Also, the Commission must address pe titions 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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