Energy & Environmental Law Blog

Energy & Environmental Law Blog

Analyzing the critical energy and environmental issues of the day

Diablo Canyon Settlement May Hinge on Cost Allocation

Posted in California, Electric Power

On June 21, 2016, Pacific Gas and Electric Company (“PG&E”) announced a plan to close down the state’s last remaining nuclear power plant, the 2.3 gigawatt Diablo Canyon plant near San Luis Obispo, by 2026. Diablo Canyon currently produces about 9% of the electricity California uses and supplies the electric needs of more than 3 million people. PG&E announced that it intends to replace the lost Diablo Canyon generation through a combination of energy efficiency measures and greenhouse gas (“GHG”) free energy resources (as further described below). If successful, it would be the first time that a large commercial nuclear power plant was replaced by entirely clean energy resources rather than coal or natural gas.

The Joint Proposal for Closing Diablo Canyon

The Diablo closure plan is set forth in a Joint Proposal agreed to by PG&E, several of the main environmental groups that have long called for Diablo Canyon’s closure, and two of the major labor unions that represent Diablo Canyon’s large workforce. PG&E currently plans to submit the Joint Proposal to the California Public Utilities Commission (“CPUC”) for approval by the end of July.

The closure of Diablo Canyon does not come as a major surprise. The Nuclear Regulatory Commission licenses allowing PG&E to operate the plant expire in 2024 and 2025. While PG&E had applied for 20-year license renewals for the plant, the re-licensing was fervently opposed by environmental groups, local residents, and others. Diablo Canyon is also facing billions of dollars of upcoming maintenance at the plant to comply with California’s Once-Though-Cooling regulations, which require the adoption of technologies at certain power plants to reduce the impacts of their water use on marine life and habitats.

In the Joint Proposal, PG&E explains that it will seek to offset the capacity lost when Diablo Canyon is shut down in three steps, which it refers to as “tranches”:

  • Tranche 1: PG&E will obtain a target of 2,000 GWh of energy efficiency by 2025 through a solicitation process starting in June 2018. PG&E retains flexibility to propose its own utility-owned energy efficiency programs to meet this goal.
  • Tranche 2: PG&E will obtain an additional 2,000 GWh of GHG-free resources and/or additional energy efficiency measures through a second solicitation process starting in 2019.
  • Tranche 3: PG&E will procure whatever additional GHG-free energy resources are needed for it to provide 55% of its total retail sales from eligible renewable resources between 2031 and 2045 (which is over and above California’s current mandate that utilities procure 50% of their electricity from eligible renewable energy resources by 2030).

PG&E proposes to rely on the CPUC’s new Integrated Resource Planning process (Rulemaking 16-02-007) to identify what specific types and levels of renewables are needed in its service territory to meet the above procurement goals.

Many Parties Wary of PG&E’s Cost Allocation Proposals

On July 12, PG&E held its first of several meetings with interested parties to discuss the Joint Proposal. Along with other signatories to the Joint Proposal – including representatives from the Natural Resources Defense Council and organized labor – PG&E solicited feedback on the Joint Proposal from numerous interested parties. Many of the most vocal parties at this initial meeting were representing consumer protection groups, environmental groups, and community choice aggregators (“CCAs”) and electric service providers (“ESPs”) which offer competing electric service in PG&E’s service territory.

Many of the party representatives at the July 12 meeting voiced their concerns regarding PG&E’s cost recovery mechanisms set forth in the Joint Proposal. In particular, parties were concerned that PG&E has conditioned the effectiveness of the entire Joint Proposal on the CPUC approving a “non-bypassable” cost allocation mechanism through which PG&E would recover the costs of the Tranche 2 and 3 procurements described above:

PG&E’s commitment to replace Diablo Canyon energy with GHG-free energy resources under tranche 2 (Section 2.3) and tranche 3 (Section 2.4) is therefore conditioned upon CPUC pre-approval that any procurement PG&E makes associated with the Joint Proposal will be subject to a non-bypassable cost allocation mechanism that: 1) equitably allocates costs and benefits, such as [Renewables Portfolio Standard] and Resource Adequacy credits, associated with the procurement among responsible load serving entities; and 2) determines the net capacity costs of such procurement consistent with the methodology for the allocation of net capacity costs describes in California Public Utilities Code section 365.1(c)(2)(C).

See Joint Proposal, Section 2.6 (emphasis added).

The CPUC permits the investor-owned utilities, including PG&E, to pass along certain costs via non-bypassable charges to customers that have chosen to switch from PG&E’s service to either CCA or direct access (i.e. ESP) service. One of the non-bypassable charges that PG&E is already authorized to pass on to CCA and direct access customers in its service territory is a Nuclear Decommissioning Charge to be used in part to shut-down and decommission the Diablo Canyon plant. Given that the CCA and direct access customers are already paying the Nuclear Decommissioning Cost as well as other non-bypassable charges, several parties at the July 12 meeting questioned the fairness and appropriateness of PG&E’s insistence in the Joint Proposal that the costs of its procurement to make up for Diablo Canyon capacity be spread among non-PG&E customers that receive their electric services from CCAs and ESPs.

Next Steps

Whether or not the CPUC will authorize PG&E to pass along the costs of Diablo Canyon procurement through non-bypassable charges will likely be a hotly-contested issue in the upcoming CPUC proceeding to address the Diablo Canyon shutdown. Given that PG&E has expressly conditioned its commitments in the Joint Proposal to replace Diablo Canyon with GHG-free resources on the CPUC’s pre-approval of non-bypassable cost allocation, the CPUC’s resolution of this issue could make or break the entire settlement regarding the closure of the Diablo Canyon plant.


About the Author: Patrick Ferguson is an energy partner in Davis Wright Tremaine’s San Francisco office, where he focuses on energy policy, project development, and energy-related transactions in California and throughout the western United States. The views in this article are his own and do not represent the views of any of Davis Wright Tremaine’s clients.

Whither WOTUS?

Posted in EPA, Federal, Water Law

In June 2015, EPA and the Corps of Engineers released a rule to define “waters of the United States,” affectionately referred to as WOTUS.  This definition goes to the scope of federal jurisdiction over wetlands and other waters that are not obviously free flowing and navigable.  An in-depth analysis of the rule can be found here.

Safe to say the rule hasn’t exactly played to rave reviews.  It attracted over a million comments, mostly negative from those who think the rule represents gross government overreach, and others who believe the rule is not protective enough.  The rule is also the subject of multiple challenges around the country, some filed before the rule was officially released.  The lead case is now pending before the Sixth Circuit Court of Appeals.

On this first anniversary of the rule, we thought a brief summary of the controversies surrounding the rule and current status might be helpful.  The attached article, newly published in The Water Report, attempts to do just that.  Many thanks to Diego Atencio, a third year law student at the University of Oregon and a summer associate at DWT, for his assistance in writing the article.

Securing New Pipeline Capacity in Today’s Turbulent Gas Market: Best Practices and Things to Know

Posted in FERC, Oil & Gas

With the rapid growth of natural gas production from shale plays and growing demand due to low gas prices, pipeline companies have been scrambling to expand and reconfigure their systems to serve the needs of a changing gas marketplace.  Federal Energy Regulatory Commission (FERC) rules generally govern the commercial terms pipelines can offer prospective capacity purchasers, and also provide a measure of protection for the unwary.  If you are looking to contract for capacity, an understanding of these rules not only makes good business sense but may also help you get a leg up on your competitors.  In this article, a condensed version of which was published in the June 2016 issue of Pipeline & Gas Journal, Barbara Jost and Glenn Benson provide the advice you need.

LNG Global Impacts Not FERC’s Problem in Freeport and Sabine Pass Cases

Posted in Federal, Litigation

In companion cases, on June 28 the DC Circuit Court of Appeals held that the Federal Energy Regulatory Commission, in its environmental impacts analysis of two Gulf Coast LNG terminals, need not assess the potential for increased natural gas extraction and use, or market effects.  The first case deals with the Freeport project in Texas, and the second the Sabine Pass project in Louisiana; the court considered these cases in parallel with each other, and the Sabine Pass case follows the reasoning in the Freeport case. Read More

New Amendments To TSCA Invigorate Chemical Regulatory Regime And Empower EPA

Posted in EPA, Health and Safety, Rulemakings

On June 22, 2016, President Obama signed into law the Frank R. Lautenberg Chemical Safety for the 21st Century Act (the Act) which amends the core provisions of the Toxic Substances Control Act (TSCA), an environmental law whose use and enforcement has dwindled somewhat over the years (Available here). TSCA regulates chemical manufacturing and usage, and has not been substantially amended since it was enacted in 1976. The Act, which enjoyed bilateral support in both the House and Senate, updates TSCA to provide EPA with the discretion to prioritize the chemicals it regulates. The 2016 version expands and supports EPA’s authority to regulate industry and enforce the regulations.  The key elements are:

  1. Risk Assessment — EPA is required to review the safety of and to prioritize all chemicals in active commerce. For chemicals the EPA classifies as high-priority, the EPA must conduct a risk-based assessment to determine whether the chemicals pose an unreasonable risk.  The risk-based assessment evaluates the impact of the chemical to human health and the environment.

Importantly, the EPA may not consider “costs or other nonrisk factors” in determining whether to regulate a chemical.  The costs and benefits of  the regulation, including  the availability of alternatives to the chemical, may be considered in determining how to regulate the chemical. However, in all cases, chemicals found to pose an unreasonable risk must be regulated “so that the chemical substance no longer presents such a risk” and to ensure the protection of sensitive populations.  The Act allows anyone to challenge the EPA’s classification of a chemical as “low priority.”

2. Power to Order Testing — The Act empowers EPA to issue an order requiring testing without first having to promulgate a rule or show evidence of a potential risk or high exposure.  Currently, EPA must go through a consent agreement which can be slow and formal.

3. Inventory — EPA must maintain an up-to-date inventory of all chemicals in commerce.

4. Preemption — Federal regulation explicitly preempts states from regulating chemicals under the purview of TSCA.  Preemption is always an issue as companies must comply with a patchwork of state regulation as well as federal.  Under the updated TSCA, the federal government has preemption over the states for regulating a chemical which it has found presents an unreasonable risk.  In the event the federal government finds the opposite, that the risk of chemical is acceptable, then a state may step in and regulate. However, all state actions taken prior to April 22, 2016 are preserved.

5. Hold, please — EPA can hit the “pause” button.  While EPA is assessing the risk of a certain chemical, states may not regulate that chemical.

Simply looking at items 1-3 above, it is clear that the Act invigorates the existing chemical regulatory regime and empowers EPA to prioritize the field and demand testing. The Act also borrows from the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) program in the European Union, which is considered a success and has been used as a template for chemicals management by countries outside of the EU. Within the United States, however, this approach is new and far reaching.

Assessing and prioritizing every chemical in active commerce – and then keeping the inventory of the chemicals current — is a large task.  Many industries will feel the impact.  If a company uses chemicals in making products, it may be worthwhile to analyze the breadth of the updated TSCA.  Manufacturing toys or cosmetics may now trigger new environmental compliance challenges.

The Act also places tighter parameters around a company’s ability to shield information about active chemicals from the public, including setting a 10-year expiration for all confidential business information claims unless the claim is substantiated again.  Companies requesting confidentiality should calendar updates to keep the protections in place.

EPA now has specific power to act and it will act quickly.  The Act imposes aggressive implementation deadlines, requiring EPA to develop rules for the inventory, prioritization and risk evaluation processes within one year; develop all policies and guidance within two years;  and conduct at least 20 risk evaluations and 20 low-priority designations within 3.5 years. Including a certain workload and schedule is a rather rare requirement for environmental regulation, but it shows that Congress wanted EPA to actually use these new procedures. TSCA has been jumpstarted by this upgrade, but the government does not want to see it lay fallow. Therefore, companies should be prepared to see changes based on these amendments happen within the next few years.

The Utility as a Distribution System Platform: NYPSC Issues Order in REV Proceeding to Establish A New Paradigm for Utilities, Customers, and Distributed Energy Resources

Posted in Electric Power, Rulemakings

In an important order (“Order”) issued on May 21, 2016 in its Reforming the Energy Vision (“REV”) proceeding, the New York Public Service Commission (“NYPSC”) announced the details of a new paradigm to govern the relationship among utilities, customers, and distributed energy resources (“DERs”).[1] In this new framework, utilities are to play an important role in stimulating the development of DERs, and empowering customers to become more involved in the management of their energy consumption, to develop a modern power system that is “clean, efficient, transactive and adoptable to integrating and optimizing resources in front of and behind the meter.”  Essentially, utilities will become the distribution system platform (“DSP”) on which this new relationship between DERs and customers will be built.

The NYPSC is creating a new regulatory model under which utilities will have established (e.g., cost-of-service ratemaking) and new sources of revenue and earnings, including: Read More

Steps to Keep OSHA from Raising the Retaliation Issue

Posted in Health and Safety

OSHA’s new anti-retaliation provisions go into effect on August 10, 2016.  The provisions require employers to:  1) inform employees of their right to report work-related injuries and illnesses without being subjected to retaliation; and 2) establish procedures for reporting work-related illnesses and injuries that are reasonable and do not discourage reporting.

Employees may already file anti-retaliation complaints under Section 11(c) of the Occupational Safety and Health Act.  The change will allow OSHA to issue a violation and issue an abatement order instead of suing under 11(c).  OSHA is targeting cases where employees’ firing is justified based on their failure to follow a safety policy when in fact they were terminated for reporting a subsequent injury or illness.  OSHA will investigate complaints to determine whether to issue a citation and order a remedy such as reinstatement of the employee with back pay and purging their personnel file.

Employers should review their policies, update them as necessary, and train managers to be extremely diligent in documenting performance issues in a timely manner. After an accident is reported, the burden may now be on the employer to justify the non-accident-reporting basis for any action.

Unanimous Support for Conservation in Senate Appropriations Committee

Posted in Environmental Quality, Rulemakings, Water Law

Who knew?  On May 19 those wild eyed environmentalists on the Senate Appropriations Committee unanimously (no misprint) passed a FY 2017 agriculture and rural development bill that includes significant funding for conservation work.  The bill now goes to the full Senate for a vote, and if it passes, back to the House for reconciliation. Read More

The Supreme Court Confirms Right to Challenge Jurisdictional Determinations

Posted in Federal, Water Law

Can a landowner challenge a US Army Corps of Engineers determination that a property contains jurisdictional wetlands? In a unanimous opinion, the Supreme Court answered this question in the affirmative May 31, 2016 in USACE v Hawkes Co.

Under Section 404 of the Clean Water Act, the Corps regulates filling in of “waters of the United States,” including wetlands. To determine the presence of wetlands on a property, i.e., if a permit is required, landowners can ask the Corps for a jurisdictional determination (JD) of whether the Clean Water Act applies. Once approved, a JD confirms the presence (or absence) of wetlands subject to regulation on a particular property. A JD is considered an administratively appealable final agency action, and it binds the Corps and the Environmental Protection Agency for five years. Read More

BPA in Plastics Requires a Prop 65 Warning — For Food Containers, California Imposes a Generic Point-of-Sale Warning

Posted in California, Health and Safety

Last year the State of California added Bisphenol A (BPA) to its list of chemicals known to cause cancer or reproductive harm under Prop 65 [the Safe Drinking Water and Toxic Enforcement Act of 1986], a law which requires warnings for such exposures in California. The warning requirement kicked in a year later – May 11, 2016.

BPA is commonly used in plastics, to soften what might be a hard and brittle plastic piece.  Other softeners were previously listed and the lawsuit notices have flooded in. With BPA’s later listing, industry thought the California Office of Environmental Health Hazard Assessment (OEHHA) would have an opportunity to sample and analyze BPA-containing products, and to consider a “safe harbor” level for that chemical, a level of exposure which makes a Prop 65 warning unnecessary.  OEHHA was unable to do so, so the Prop 65 warnings must be affixed to products whose plastic pieces contain BPA.

But a specialized use of BPA-containing products raises new issues which California is addressing through emergency regulation  — BPA in the linings of metal cans and lids of glass bottles containing food and beverage. Read More