The current Federal Energy Regulatory Commission (FERC) got off to a rocky start, but it seems to have “hit its stride,” said a former FERC commissioner last Thursday.

“I think the new Commission quite frankly early on kind of stubbed its toe” when it got “ahead of itself” on several initiatives, such as the four regional transmission organization (RTO) orders, supply margin assessment (SMA) and the new Section 206 standard for market-based tariffs, said Donald Santa Jr., now a partner in the law firm of Troutman Sanders, during the Natural Gas Roundtable in Washington, DC.

On each initiative, “it has had to retreat a little bit, perhaps even retreat a lot,” he noted. But “I think now the Commission really seems to have hit its stride a little bit better,” said Santa, who noted that FERC’s outreach efforts to the states have gone well, it has done a “good job” with technical conferences on standardized market design, and it took a “big step” in breaking the “RTO logjam” with the Alliance and Midwest ISO orders.

FERC also has been bolstered by the Supreme Court’s recent decision upholding the agency’s electricity restructuring rule (Order 888). This is an “important club in the closet in terms of pushing the RTO [agenda]…Clearly the Commission’s hand has been greatly enhanced by this.”

Santa, who left FERC in 1997, urged the existing Commission to move quickly to settle the controversial issues involving California, such as refunds on past electricity sales. “I know it would take kind of an act of political courage for the Commission to do it, but I really strongly encourage it to move on and get those issues resolved.” He conceded, however, that any resolution short of giving California an “open checkbook” is likely to be viewed as unacceptable by the state.

He observed that the focus of this FERC — at least so far — has been on electricity, not natural gas. “It seems pretty clear to me…that a decision has been made at the Commission that the highest and best uses of the Commission’s limited resources is in finishing the job on electricity and not on initiating new generic proceedings [on gas].”

While this is “not all bad” from the gas industry’s perspective, Santa said, it’s not time for gas to turn away. “I think it’s important for those in the gas industry to pay attention to what’s happening on the electricity front.” For starters, electricity generation is the biggest potential growth market for gas, he noted. Secondly, “as much as gas restructuring shaped the Commission’s early thinking on electricity restructuring, on the rebound it is highly possible that the Commission’s future approach to natural gas issues will be shaped by the current intense focus on electricity.”

Santa, a former Capitol Hill staffer who helped shape the National Energy Policy Act (NEPA) of 1992, says that predicting whether an omnibus energy bill will emerge from the Senate is a tough call. The “conventional wisdom…seems to change from week to week, and day to day,” he noted. “If you had asked me [a month ago] was there going to be an energy bill, I would have said, ‘No Way.’ A couple of weeks ago, it looked like the decks were cleared for getting something done. Now, I’m beginning to hear about some [senators] getting cold feet, and maybe looking for a way to walk away from the bill. So who knows.”

Senate Majority Leader Tom Daschle’s (D-SD) office said Democrats and GOP senators last week were unable to agree on a “finite list” of amendments that they plan to offer as part of the Senate energy bill. “It’s been suggested…that if [he could not] get such a finite list, the leadership may choose not to return to the bill when they get back” after Easter recess, Santa said.

Although Daschle was disappointed the two sides did not come up with a list, a spokeswoman for the senator indicated that he intends to proceed with the energy bill when the Senate returns on April 8. The “first order of business” will be Sen. Frank Murkowski’s (R-AK) amendment to open the Arctic National Wildlife Refuge to oil and natural gas drilling, she noted. The Senate has spent “14 full days on the energy bill,” and Daschle feels it’s important to finish it.

One of the biggest differences in the current energy legislation, compared to the NEPA bill in 1992, is the treatment of gas. “The last time around natural gas was one of the most contentious issues in the energy bill,” said Santa, but that’s not the case time around. “I think in the past decade since the last energy bill gas really has delivered on its promise.”

The Senate legislation contains a number of incentives for gas, including hydraulic fracturing provisions, extension of the Section 29 credit, expensing of geological costs, and accelerated depreciation for pipelines and distribution lines. There also are a lot of what Santa called “cats and dogs” provisions, such as pipeline safety, and a directive to the White House Council on Environmental Quality to convene an agency group to explore ways to expedite the authorization of gas pipelines.

“In some ways, the gas industry may be affected most greatly by what is in the electricity title” of the Senate bill, according to Santa.

It’s “difficult to discern…an emphatic message in the electricity provisions,” he said, adding that some of the bill’s proposals appear to be mostly “symptomatic of the post-California, post-Enron muddle.” If there’s any message at all, Santa believes it was in the amendments of Sen. Craig Thomas (R-WY), which he said reveal a “reluctance to vest the FERC with much new authority to pursue its agenda.” The Thomas initiatives, which the Senate approved last week, scaled back the Democrats’ efforts to expand the Commission’s merger authority, federalize transmission siting, augment market-based rate authority, and remedy “unjust” electricity rates, among other things.

On the plus side, Santa noted the Senate legislation seeks to prospectively repeal the Public Utility Holding Company Act (PUHCA) and the Public Utility Regulatory Policies Act (PURPA) of 1978. “So if enacted, I think this legislation will do a lot to clear away the statutory underbrush that frustrates further rationalization of the gas and electric industries.”

He said there was one remaining threat to the electricity title of the bill. Sen. Larry Craig reportedly has said he may offer an amendment to strike the title, with the exception of PUHCA, PURPA and the energy reliability provisions, according to Santa.

A vote on the amendment of Sen. Dianne Feinstein (D-CA), which seeks to bring energy and metals derivatives under the regulatory umbrella of the Commodity Futures Trading Commission, is “likely to be very, very close,” he told energy officials. He noted Senate sentiment has swelled in opposition to “moving so quickly on so complicated an issue.”

Feinstein has argued that the largely unregulated energy derivatives market was to blame for high natural gas and electricity prices in California in 2000 and 2001. However, Santa noted this still was the subject of investigations at FERC and elsewhere, and that “the book is far from closed on whether such a causal connection exists.”

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