The Changing Electric Utility Industry The Litigation Risks Ahead - - PowerPoint PPT Presentation

The Changing Electric Utility Industry – The Litigation Risks Ahead

April 28, 2015

Today’s Agenda

• Energy Litigation Before the U.S. Supreme Court
• Litigation Arising From a Changing Clean Energy

Landscape

• Distributed Generation Litigation Trends

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Today’s Presenters

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Frank Lindh | Partner San Francisco, CA Richard Lehfeldt | Partner Washington, D.C. Cameron Prell | Counsel Washington, D.C. Peter Miller | Senior Counsel Washington, D.C.

ENERGY LITIGATION BEFORE THE UNITED STATES SUPREME COURT

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Today we will discuss three Supreme Court cases – one now decided, the other two still pending – involving questions of federal versus state jurisdiction in the energy industry

Presenter: Frank Lindh

Oneok, Inc. v. Learjet, Inc.

U.S. Supreme Court Case No. 13-271 (Opinion Issued April 24, 2015)

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Last Tuesday, the Court decided a case in which the question presented was whether state-law- based lawsuits against natural gas sellers were preempted by federal law.

Oneok, Inc. v. Learjet, Inc.

(Continued)

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• 1. Context: California Energy

Crisis of 2000-2001

• 2. Genesis: State-law based

lawsuits brought by large natural gas end-use customers against natural gas sellers engaged in both retail and wholesale sales

Oneok, Inc. v. Learjet, Inc.

(Continued)

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• 3. Alleged Misconduct:

Sellers priced their retail sales by reference to market indices, then allegedly manipulated the indices by making false reports to the index publishers, among

• ther alleged misconduct

Oneok, Inc. v. Learjet, Inc.

(Continued)

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• 4. Question Presented: Does

federal regulation of sellers’ wholesale sales, including rules governing reporting to price index publishers, preempt state-law claims by their retail customers?

Oneok, Inc. v. Learjet, Inc.

(Continued)

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• 5. Holding: Lawsuits are not

preempted and can proceed

• 6. Rationale: In the natural

gas industry, the states are free to regulate and police retail sales, while federal authorities regulate only wholesale sales

Oneok, Inc. v. Learjet, Inc.

(Continued)

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Preservation of state authority, and a collaborative relationship between state and federal authorities, characterize both the Natural Gas Act of 1937 and the Federal Power Act of 1935

NEXT UP: ANOTHER ENERGY PREEMPTION CASE

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Pending now are petitions in two companion cases – from New Jersey and Maryland – involving challenges to state authority over power plant construction and ratepayer funding for such projects.

New Jersey and Maryland Power Plant Incentive Programs */

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New Jersey and Maryland enacted programs to fund new in-state power plants via rates paid by retail ratepayers

*/ Disclosure: Crowell & Moring LLP represents

Competitive Power Ventures Inc., a party in both of the cases discussed herein.

New Jersey and Maryland Power Plant Incentive Programs

(Continued)

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PAYMENT STRUCTURE

Competing power plant developers made offers to construct new plants Winning bidder gets paid its offer price, using the device of a “contract for difference” Developer gets (or pays) any “difference” between its offer price and its revenues from sales in a regional capacity market

New Jersey and Maryland Power Plant Incentive Programs

(Continued)

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LITIGATION

Lower federal courts held the New Jersey and Maryland incentives preempted by federal rules governing a regional power plant capacity auction

PPL Energy Plus, LLC v. Solomon, 766 F.3d 241 (3d Cir. 2014), affirming 977 F.Supp.2d 372 (D.N.J. 2013); PPL Energy Plus, LLC v. Nazarian, 753 F.3d 467 (4th Cir. 2014), affirming 974 F.Supp.2d 790 (D.Md. 2013)

Pending Petitions for Certiorari In The New Jersey and Maryland Cases

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On March 23, 2015, the Supreme Court invited the Solicitor General “to file briefs in these cases expressing the views of the United States.”

Nazarian v. PPL Energy Plus, Supreme Court Case Nos. 14-614, et al.

New Jersey and Maryland Cases: What’s Next?

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The Solicitor General will file a brief expressing the U.S. Government’s views, presumably informed by the Court’s intervening decision in Oneok v. Learjet, supra.

New Jersey and Maryland Cases: Options for Disposition

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The Supreme Court will do one of three things:

• Deny certiorari, thus ending

the litigation; or

• Grant the writs and agree to

decide the cases next Term; or

• Grant, summarily vacate, and

remand to the lower courts for further consideration

A THIRD CASE, QUESTIONING THE REACH OF FEDERAL JURISDICTION

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Also pending at the Supreme Court is yet another energy case raising a jurisdictional question, this one concerning a direct challenge to the Federal Energy Regulatory Commission’s authority under the Federal Power Act

THE D.C. CIRCUIT’S “DEMAND RESPONSE” DECISION

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Last May, the D.C. Circuit struck down a demand response program adopted by the Federal Energy Regulatory Commission, holding that it exceeded the agency’s authority under the Federal Power Act.

Electric Power Supply Ass’n v. FERC, D.C. Cir. Case No. 11-1486 (May 23, 2014)

HOW “DEMAND RESPONSE” WORKS

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Retail customers get paid to reduce their electric usage during peak demand periods For regional grid operators, demand response can be a substitute for operating “peaker” power plants Aggregators sign up batches of retail customers, and then sell demand response services to the grid operators

Demand Response Case Reaches the Supreme Court

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The Solicitor General, on behalf

• f the Federal Energy Regulatory

Commission, and an aligned industry group have asked the Supreme Court to review the D.C. Circuit’s decision striking down the FERC demand response program.

FERC v. Electric Power Supply Ass’n, Supreme Court Case Nos. 14-840, et al. (petitions for certiorari pending)

Demand Response Case: Supreme Court Action is Imminent

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The Court is expected to act on the petitions for certiorari in this case next Monday, May 4

Presenter: Cameron Prell

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LITIGATION ARISING FROM A CHANGING CLEAN ENERGY LANDSCAPE

Litigation Risks on the Horizon? States are Being Asked to Reduce Grid Carbon Intensity

• In June 2014, EPA proposed a GHG emissions

reduction rule for existing power plants that could have enormous impact on the design and implementation of state clean energy policies & regulations

• We will highlight the compliance option

constraints states face and discuss a handful of cases challenging state authority to mandate and incentivize clean energy

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The Proposed Rule Sets Diverse State-by-State CO2 Emissions Standards

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GHG Reduction “Building Blocks”

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1. Increase efficiency at coal plants by upgrading equipment and modifying operations 2. Switch from coal-powered plants to less carbon-intensive sources, such as natural gas-fired plants 3. Expand investments in in-state renewable energy or nuclear generation 4. Increase energy efficiency in homes, buildings and industries to reduce power consumption

State Compliance Action Flexibilities

States may devise their own plan to achieve compliance

• 1. They may directly regulate emissions from fossil power plants (EGUs)

and/or take action that indirectly affects those EGUs’ emissions (such as through energy efficiency, policies that encourage more investment in zero-carbon power generation technologies, or changes to electric transmission infrastructure)

• 2. States may propose market-based mechanisms (such as state clean

energy standard, feed-in tariffs, cap-and-trade programs; carbon tax) OR augment, modify or increase the stringency of existing programs (e.g. Renewable Portfolio Standards)

• 3. States may join together for regional plans
• 4. States may use a “rate-based” approach (i.e., CO2/MWh) or a “mass-

based” approach (i.e., a total amount of CO2 allowed to be emitted in the state, sometimes also called a CO2 budget or cap)

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Proposed Rule Already Being Challenged

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State Clean Energy Policies, By Themselves, Subject to Increased Scrutiny

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Recent Cases May be a Sign of Future Litigation as States Attempt to Comply with Clean Power Plan

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North Dakota, et al. v. Heydinger (Minnesota) ; on appeal before Eighth Circuit

• The Chamber asked the U.S. Court of Appeals for the Eighth Circuit to uphold a district court decision that invalidated Minnesota’s Next Generation

Energy Act (NGEA), a law that seeks to combat global climate change by effectively banning power generated from coal-fired power plants from entering the state. The plaintiff argued that the NGEA violates the Commerce Clause by regulating out-of-state energy generation, and threatens to disrupt interstate electricity markets American Tradition Institute et al v. Joshua Epel, et al., Case No. 1:11-cv-00859 (D. Colo., May 9, 2014); on appeal before Tenth Circuit

• Plaintiffs argued on summary judgment that the State RPS places a restriction on how out-of-state goods are manufactured, and requires out-of-state

electricity to be generated according to Colorado requirements. Court did not find discrimination and held that the dormant Commerce Clause “neither protects the profits of any particular business, nor the right to do business in any particular manner” Rocky Mountain Farmers Union, et al., v. Richard W. Corey, et al. 730 F.3d 1070 (9th Cir. 2013)

• The Ninth Circuit rejected arguments that California’s Low Carbon Fuel Standard is facially discriminatory and remanded the case to the District Court

for further proceedings, including a determination of whether the LCFS places a burden on interstate commerce that is “clearly excessive” in relation to its local benefits. The U.S. Supreme Court denied plaintiffs’ petition to review the Ninth Circuit’s ruling In re the Application of Champaign Wind LLC for a Certificate to Construct a Wind Powered Electric Generating Facility in Champaign County, Ohio, Case 2013-1874; before the Supreme Court of Ohio

• Challenge to state AEPS’ in-state clean energy requirement; In June 2014, the Governor signed SB 310, which freezes Ohio’s RPS and energy

efficiency mandate for two years. The bill also permanently removes the requirement that Ohio utilities procure renewable energy from resources located in Ohio. In October, the PUC affirmed the end of the in-State requirement and ordered its staff to propose regulations consistent with SB 310 In Re: Review of Amended Power Purchase Agreement between Narragensett Electric Company d/b/a National Grid and Deepwater Wind, R.I.P.U.C. No. 4185, slip op. (Aug. 16. 2010).

• In 2009, Deepwater Wind and National Grid entered into a power purchase agreement. The Rhode Island PUC rejected the contract based on

standards outlined in a 2009 statute. Following the PUC’s rejection, in 2010 the Rhode Island General Assembly amended the statute, changing the factors that the PUC must consider in its evaluation. TransCanada intervened in the PUC proceeding and argued that the statute’s Deepwater Wind provisions were unconstitutional because they favored in-state generation by requiring National Grid to solicit proposals for an in-state project and thereby reduced the market for out-of-state generators. The Rhode Island PUC presumed that the statute was constitutional and approved of the contract between National Grid and Deepwater. The Rhode Island Supreme Court affirmed the PUC’s decision, but the constitutional issues were not before it WSPP Inc., Docket No ER12-1144-000 (April 20, 2012)

• FERC determination that state renewable energy credits, when sold on a bundled basis with clean energy, potentially subject to FERC federal

jurisdiction over wholesale sales of electricity in interstate commerce

Presenters: Richard Lehfeldt and Peter Miller

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DISTRIBUTED GENERATION LITIGATION TRENDS

Today’s Electric System

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Distributed Generation: Tomorrow’s Electric System?

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Source: Clean Coalition, “Laying the Foundation for a Resilient Electric Grid” (January 2013) http://www.clean-coalition.org/laying-the-foundation-for-a-resilient-electric-grid/

• Photovoltaic panels placed on

the roof of a retail customer

• Industrial, commercial or

residential

• A niche market in the

residential sector until recently

– Substantial upfront capital investment – Who owns, warrants, maintains the installation? – Will the retail customer own his/her home long enough to recoup the investment?

Rooftop Solar: What is it?

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• The good
• The bad
• The getting ugly part…

The Benefits and Challenges

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Antitrust Litigation

• SolarCity Corporation v. Salt River Project Agricultural Improvement

and Power District, Case No. 2:15-cv-00347 (D. Az. Mar. 2, 2015)

– In March 2015, SolarCity filed a lawsuit against Salt River Project (“SRP”), an Arizona utility, alleging violations of federal and state antitrust laws. Claims included unreasonable restraint of trade and maintenance of a monopoly

• SRP’s new rate structure requires a fixed cost (about $600 per year) on

customers who generate their own power

• SRP claims that’s necessary to meet its revenue requirements in an

equitable way

• SolarCity claims that SRP’s rate design is nothing more than an anti-

competitive market entry barrier designed to put rooftop solar out of business in Arizona

• Applications for distributed solar energy systems in SRP’s territory fell

by 96% after the plan became effective on Dec. 8, 2014

• SolarCity has requested injunctive relief and damages. SRP has not yet

filed its Answer

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Example: Hawaii

• Largest rooftop solar penetration (more than 10%) in the nation
• Hawaii Electric (HECO), the state’s utility, and the Hawaii Public Utilities

Commission have been overwhelmed with interconnection applications, and with the adjustments necessary to adjust the utility’s distribution system to the surge

• The Hawaii Commission has had to balance this surge in demand against the

utility’s reasonable efforts to accommodate

• In its most recent order on the topic, the commission held:
• The utility has “an affirmative duty to interconnect a potential customer"
• “Where the [utility] determines that a proposed PV interconnection will impact

circuit- or system-level security and reliability, the [utility] must fully document their reasons for denying the application"

• Denials on delays must be justified to the Commission
• This and 49 other wars are far from over
• NY, GA, NM, WA, others….

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Example: Consumer Protection Class Action

• Shawn Reed v. SunRun, Inc., Case No. BC498002, (Cal. Sup. Ct. Jan. 4,

2013)

– Class action against SunRun, a solar panel company, alleging various deceptive business practices – Plaintiffs alleged that SunRun deceived consumers by:

• Promising they will save money by installing it solar system because electricity prices

will increase. The relative increase of electricity prices is “inherently unknowable.” And because electricity prices in the region plateaued, and some customers had lower-than-estimated electricity prices and did not save money

• Orally misrepresenting that consumers may terminate the contract without penalty

when they move, when the contract both affirms this claim and requires consumers to pay the remainder of their lease upon terminating the contract

– This case is ongoing

• Letter from Congressional members to the Federal Trade Commission

and the federal Consumer Financial Protection Bureau in November 2014

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Solar: The Hill and Consumer Protection Agencies

• 11/19/14 Letter to CFPB from 4 House Republicans:

“Solar leasing companies may be overstating the economic benefits of a long-term solar lease while failing to disclose important information,” such as accuracy of estimated savings and escalation of costs after teaser rate expires

• 12/12/14 Letter to FTC from 14 House Republicans:

Third parties “may be utilizing deceptive marketing strategies,” such as overstating the savings and understating the risks of a solar lease that may be secured by a second deed of trust to the house and may exceed the life of the roof and of lessee’s home ownership

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Electricity, Consumer Protection, and the Federal Trade Commission

• “[P]otential for abuse of environmental claims because of

the premium price, and because consumers cannot verify any of these [environmental] advertising claims themselves”

• In addition to FTC Act – false advertising and unfair or

deceptive acts and practices – other enforcement tools: Telemarketing Sales Rule, Cooling Off Rule, Truth in Lending Act, Equal Credit Opportunity Act

• FTC expects to see consumer protection issues similar to

those associated with telecommunication deregulation

FTC Staff Report (July 2000) Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform

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FTC Act Section 5 (15 U.S.C. § 45)



Deceptive practices

 Material representation or

• mission

 likely to mislead consumers  acting reasonably under the

circumstances



Unfair practices

 substantial injury  not reasonably avoidable  not outweighed by benefits 41

Potential Liability Under the FTC Act

• Companies
• Individual employees and officers with “knew or should

have known” involvement and/or ability to control conduct

• Endorsers and experts
• Affiliates, agents, and other third parties directly involved

in unfair or deceptive practices

• Upstream and downstream entities (not “aiding and

abetting” but “means and instrumentalities”)

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• Conduct Relief

– Bans – Conduct-specific requirements (disclosures, limits on degree of activity, etc.) – Oversight of third parties (contractors, affiliates, marketers, business partners, etc.) – Organizational activities (e.g., training, monitoring personnel, terminating non-compliant business partners, implementing specified practices) – “Follow me” disclosures for individual defendants working in new capacities

• Reporting and monitoring requirements
• Recovery of funds generated by conduct (a.k.a. “ill-gotten gains”)

– Consumer Redress (FTC-run refund program when possible) – Funds may be shared with state co-plaintiffs under certain conditions – Remaining funds returned to U.S. Treasury

Remedies Under the FTC Act: Injunctive and Other Equitable Relief

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FTC Advertising Basics

• Advertising must be truthful and not misleading
• Advertisers must possess a reasonable basis for all
• bjective claims about their products, express or

implied

• Advertisers are responsible for all reasonable

interpretations of their claims, not just those they intend to convey

• Disseminating a false advertisement is unlawful and

constitutes an unfair or deceptive act or practice. 15 U.S.C. § 52

• Guides for the Use of Environmental Marketing

Claims – a.k.a. “Green Guides” (16 C.F.R. Part 260)

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FTC Green Guides (16 C.F.R. Part 260) (issued July 1992, last revised October 2012)

It is deceptive to misrepresent, directly or by implication, that:

• A product or service offers a general

environmental benefit

• A carbon offset represents emission reductions

that have already occurred or will occur in the immediate future

• A product or service has been endorsed or

certified by an independent third party

• A product or service uses renewable energy

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“Deceptive Marketing Practices of Green Mountain Power”: 9/15/2014 Petition to FTC

• GMP, Vermont’s largest electric utility, provides electricity to

260,000+ customers

• GMP develops wind and solar projects, sells Renewable Energy

Credits (RECs) to out-of-state utilities, and uses proceeds from REC sales ($22 million) to lower costs to its customers

• “GMP is claiming to provide renewable energy to its customers

without disclosing the fact that it is selling substantially all of the RECs thereby stripping the electricity of its green environmental attributes”

• “GMP is denying [its customers] the opportunity to look for other

genuine sources of renewable energy or, alternatively, to purchase cheaper energy with similar environmental attributes to what GMP is actually selling them

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“Deceptive Marketing Practices of Green Mountain Power”: 10/14/2014 GMP Response to FTC

• No competition in Vermont’s retail electricity
• market. Customers must purchase electricity from

authorized utility in their area at tariff rate

• Cited GMP statements, “although true, were not

advertising statements made to influence consumers’ purchasing decisions [but] to support the construction and continued operation of renewable generation facilities”

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“Deceptive Marketing Practices of Green Mountain Power: 2/5/2015 FTC Staff Closing Letter

• “[W]hile Vermont consumers do not have a choice of electricity

providers, they can choose to use less electricity, generate their own electricity at their homes, or switch fuel types”

• “A utility should avoid unqualified or poorly qualified

representations that state or imply that its customers will receive renewable electricity from its renewable facilities when, in fact, the utility has sold or will sell RECs from those projects”

• “[W]e urge GMP… to ensure that Vermont customers, and other

market participants, clearly understand that GMP has forfeited its right to characterize the power delivered as renewable [if RECs were sold]”

• “If we identify concerns in the future, we reserve the right to take

further action”

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Managing Risk: Litigation Considerations in Transition to DG and Retail Marketing

• Compliance with broader array of federal and state consumer

protection statutes and regulations (e.g., state “little FTC Acts,” with possible treble damages, criminal component)

• Wide range of potential litigants: FTC, CFPB, SEC, State AGs,

Utility Regulators, private defendants, competitors

• Internal consumer protection compliance program
• Management of vendors and business partners: contractual

provisions, training, accountability, monitoring

• Representations made to consumers directly or indirectly

– Costs, benefits, risks – Environmental attributes – Allocation of responsibilities, costs among utility, third parties (e.g., installers), and consumers (e.g., required maintenance) – Warranties, upgrades, repairs, transferability

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Questions?

Stay Connected!

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Frank Lindh 415-365-7363 flindh@crowell.com Richard Lehfeldt 202-624-2882 rlehfeldt@crowell.com Cameron Prell 202-624-2611 cprell@crowell.com Peter Miller 202-624-2506 pmiller@crowell.com