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Inside Energy & Environment

U.S. Supreme Court Confirms FERC’s Broad Jurisdictional Reach over Demand Response and other Activities that Affect Wholesale Electricity Markets

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In FERC v. EPSA, issued on January 25, 2016, the U.S. Supreme Court ruled, in a 6-2 decision, that FERC has jurisdiction under the Federal Power Act (FPA) to regulate demand response transactions in wholesale electricity markets administered by independent system operators (ISOs) and regional transmission organizations (RTOs).  The Court also upheld, as reasoned decision-making, FERC’s determination that ISOs/RTOs should pay the same compensation (i.e., the market clearing price) to generators and demand response resources participating in the day-ahead and real-time energy auction markets.  In so holding, the Supreme Court may have paved the way for FERC to provide regulatory incentives for other emerging electricity transactions and practices that blur the historical distinction between FERC-regulated wholesale sales and state-regulated retail sales. Continue Reading

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FWS to Update Regulations Governing Drilling on National Wildlife Refuges

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The United States Fish and Wildlife Service (FWS) recently announced its intent to update regulations governing its management of oil and gas activities on national wildlife refuges.  The proposal responds in part to a March 2015 report by the Inspector General of the Department of the Interior, which called management of oil and gas development “inconsistent, and at times, nonexistent” due to lack of data about the locations and operational statuses of drilling wells and drilling infrastructure. Continue Reading

The European Commission Adopts Circular Economy Package

Posted in Europe

The European Commission has adopted a Circular Economy Package (“Package”) intended to create a single market for the reuse of materials and resources.  The policy initiatives discussed in the Package will impose on companies manufacturing or marketing goods in Europe additional eco-design, waste take back, and other producer responsibility requirements.  Some initiatives may also encourage the development of second hand and other alternative markets.

The Package consists of a framework Communication and various upcoming legislative and non-legislative initiatives, including:

  • legislative proposals to amend the Waste Directive, the Packaging and Packaging Waste Directive, the Waste Landfill Directive, and the Directive on Waste Electrical and Electronic Equipment;
  •  announcements of upcoming legislative proposals to amend the EU Fertilizers Regulation, to introduce new product design, and marking requirements to facilitate the dismantling, reuse and recycling of electronic displays;
  •  an initiative on Green Public Procurement; and
  •  the review of the voluntary EU eco-label criteria.

The Package is intended to replace a series of previous legislative and policy initiatives on waste and resource efficiency that, in a controversial move, the Commission withdrew earlier this year. Continue Reading

What’s the Deal with Low Oil Prices?

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The International Energy Agency (IEA)’s latest monthly market report, published on November 13, 2015, revealed that the already “massive cushion” of oil stockpiles has inflated further to reach a record level of almost 3 billion barrels.  Following the announcement, oil prices reportedly dropped to a two-month low.

The IEA described this stockpile as “an unprecedented buffer against geopolitical shocks or unexpected supply disruptions.”  The glut in oil supplies is expected to maintain pressure on global oil prices, which many analysts predict will remain at the lower end of a $54-$64.0/bbl range during 2016.

In this post, we highlight two observable trends in the M&A activities of industry participants during 2015 as they navigate the current challenges facing the sector.

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California Enacts Law Requiring 50% Renewables By 2030

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Last week, California Governor Jerry Brown signed the Clean Energy and Pollution Reduction Act of 2015.  The law establishes ambitious energy efficiency and renewable energy goals for California, including increasing from 33% to 50% the procurement of California’s electricity from renewable sources and doubling the energy efficiency savings through energy efficiency and conservation.

Key provisions of the new law:

  • Renewable Energy: California’s existing Renewables Portfolio Standards Program aims to increase the amount of electricity generated from renewable energy sources to at least 33% by December 31, 2020.  The new law increases that renewable energy target to 50% by December 31, 2030, with interim targets of 40% by the end of 2024 and 45% by the end of 2027.
  • Energy Efficiency: The new law requires the California’s Energy Resources Conservation and Development Commission to set annual targets for statewide energy efficiency savings, with the goal of doubling of statewide energy efficiency savings in electricity and natural gas final end uses of retail customers (such as homes, businesses and factories) by January 1, 2030.  California’s Public Utilities Commission must establish efficiency targets for electrical and gas corporations consistent with this goal.
  • California Independent Systems Operator (“ISO”): Current law requires the ISO to ensure efficient and reliable operation of California’s electrical transmission grid.  The new law provides for the transformation of the California ISO into a regional organization to promote the development of regional electricity transmission markets in the western states.  Specifically, the new law requires the ISO to propose governance modifications to accomplish this goal, which must be approved and implemented by the state legislature.

Cairn Energy Compels India to Engage in Arbitration Proceedings

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Cairn Energy’s investment arbitration proceedings against India recently demonstrated the importance of default arbitrator nomination procedures in international arbitration.

Cairn Energy’s dispute with India

In March 2015, Cairn UK Holdings Limited received a draft assessment order from Indian tax authorities, requiring payment equivalent to US$1.6 billion, plus any applicable interest and penalties, in respect of the 2006-2007 fiscal year.[1]  The assessment was made under a 2012 law pursuant to which the Indian government has tried to tax transactions retrospectively,[2] in this case due to a group reorganization that facilitated Cairn Indian Limited’s IPO Cairn Energy, the ultimate parent company of both Cairn UK Holdings Limited and Cairn India Limited, contests the assessment.

While other companies have sought to resolve similar issues before the national Indian courts, Cairn Energy commenced a claim under the UK-India Investment Promotion and Protection Treaty, arguing that India has expropriated Cairn Energy’s investments by attaching its shares in Cairn Indian Limited.[3]  Cairn Energy filed its notice of dispute in March 2015 and appointed an arbitrator for a three-person tribunal in late May 2015.[4] Continue Reading

Can Courts Oblige States to Increase Greenhouse Gas Emission Cuts? Urgenda vs. Dutch State

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On September 23, the Dutch Government appealed a decision* of the District Court in The Hague that obliges the Dutch State to reduce its greenhouse gas (“GHG”) emissions by at least 25%, instead of the currently envisaged 17%, compared to 1990 levels.  The decision is unique in its kind in Europe: it forces a government to change its policies in pursuit of more ambitious climate change targets on the basis of the State’s “duty of care.”  The ruling comes at a time where NGOs in Europe are becoming increasingly active in pressuring governments to tighten environmental regulations. Continue Reading

Greater Sage-Grouse Numbers Rise as FWS Poises to Announce the Bird’s ESA Listing Status

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Since the United States Fish and Wildlife Service (FWS) designated the Greater Sage-Grouse as a candidate for listing under the Endangered Species Act (ESA) in 2010, environmentalists and industry stakeholders have vehemently disagreed about the species’ need for federal protection. While FWS is expected to announce its decision later this month, new data suggests that local efforts to protect the sage grouse may be succeeding. Continue Reading

EU Court of Justice Decides on Complex Articles Under REACH

Posted in Europe

Yesterday, the Court of Justice of the European Union (“CJEU”) held that the obligations on importers to notify the European Chemicals Agency (“ECHA”) and on suppliers to inform customers under the REACH Regulation apply to each of the articles contained in a complex article and not only to the complex article as a whole. The CJEU’s decision sides with the “once an article, always an article” approach already followed by several Member States, and will require foreign manufacturers and EU/EEA importers and suppliers of articles to quickly adjust their REACH compliance programs. The decision will have most impact outside the EU/EEA, where it will increase the pressure on foreign supply chains to disclose, and keep track of, the presence of substances listed in the Candidate List of Substances of Very High Concern for Authorization (“Candidate List”) in all types of articles and their components (e.g., electronic equipment, paper and board products, textiles) that may be shipped to the EU/EEA.

Background

Article 7(2) of the REACH Regulation requires producers and importers of articles to notify the ECHA of the presence of Candidate List substances in their articles if: (i) the use of the Candidate List substances has not been previously registered; (ii) the concentration of that substance exceeds the threshold of 0.1% in the article; (iii) the quantity of the substance exceeds one ton per year per producer or importer; and (iv) it cannot be excluded that humans and the environment may be exposed to the substance during the article’s normal or reasonably foreseeable conditions of use, including disposal. Article 33 of the Regulation requires suppliers of articles that contain Candidate List substances in concentrations above 0.1% to provide their customers with sufficient information, including the name of the substance, to allow the safe use of the article.

Article 3(3) of the REACH Regulation defines an article as “an object which during production is given a special shape, surface or design which determines its function to a greater degree that does its chemical composition.” The Regulation, however, does not specifically address the situation of complex articles (articles produced by assembling other articles), i.e., most products marketed in the EU/EEA. The Commission, ECHA and a majority of Member States took the position that the 0.1% concentration threshold should be measured on the basis of the whole article (e.g., a computer). In contrast, France, Belgium, Germany and other Member States took the view that the concentration threshold should be measured on the basis of each of the articles (e.g., components of a computer) composing the complex article.

The Decision

The CJEU’s decision was in response to a reference for a preliminary ruling from the French Conseil d’État in the context of proceedings brought by French Federation of Businesses in the Trade and Distribution Sector and the Federation of DIY and Home Improvement Shops. The proceedings concerned the validity of a Notice of the French Ministry of Environment on the duty to communicate information on substances contained in articles in accordance with Articles 7(2) and 33 of the REACH Regulation. That Notice expressed the French view that the concentration limits should be measured on the basis of each of the articles composing a complex article.

Clearly influenced by the REACH Regulation’s objective to achieve a high level of protection of human health and the environment, the CJEU’s decision sides with the most restrictive interpretation and does not give much weight to proportionality and international trade concerns. The Court takes the view that under REACH an article “does not cease to be an article when it is assembled or joined with other objects in order to form with them a complex product.” According to the CJEU, an article remains an article “so as long as it retains its shape, surface or design which is more decisive for its function than its chemical composition or as long as it does not become waste.”

However, the CJEU distinguishes between the Article 7(2) notification obligations that apply to producers and importers of articles and the Article 33 information obligations that apply to suppliers of articles. On that basis, the Court allocates different obligations to the different operators taking into account the REACH Regulation’s objective of a high level of human health and environment protection, and its principles of industry (producer) responsibility and substitution:

Article 7(2) of the REACH Regulation

  • EU/EEA producers must notify ECHA only of the presence of Candidate List substances in “their” articles. According to the Court, this means that producers are not required to notify ECHA of the presence of Candidate List substances in the articles that they use to assemble or produce their complex articles.
  •  In contrast, importers of complex articles must notify ECHA of the presence of Candidate List substances in concentrations above 0.1% in any of the articles that compose the imported complex articles. The Court bases this interpretation on the REACH Regulation’s definition of importer, as “any natural or legal person established within the Community who is responsible for import” (emphasis added).

Importantly, the CJEU argues that any difficulties for importers to obtain the required information from non EU/EEA supply chains do not affect the interpretation of Article 7(2).

Article 33 of the REACH Regulation

  • Suppliers of complex articles must provide their customers with information on the safe use of their products, including at least the name of the Candidate List substance, if any of the articles composing the complex article contain a Candidate List substance in concentrations above 0,1%. The CJEU’s decision argues that this interpretation is necessary to ensure the effectiveness of the duty to provide information all along the supply chain through to the final consumer.

The CJEU’s emphasis on the protection of human health and the environment and the principle of industry responsibility and its little concern for the possible impact of its decision on international trade is in line with the its prior ruling in C-558/07 S.P.C.M and Others on the concept of monomer substances under the REACH Regulation. In that case, the Court held that “in order to ensure genuine competition within the Community, importers of monomer substances must be subject to the same obligations as those to which manufacturers are subject or to similar obligations which lead to an adjustment of costs.” In fact, as the Advocate General stated in its Opinion, the Court’s decision will “disseminate the standards established by the REACH Regulation outside the European Union.”

While the decision is not likely to trigger immediate enforcement actions, it will require importers and suppliers to reconsider how they assess the presence of Candidate List substances in their articles. In effect, this increases the pressure on foreign suppliers, and the administrative costs of supplying information to professional users and responding to requests from consumers in the EU/EEA.

*David Haughan is a Stagiaire with Covington & Burling LLP and attends King’s College, London.

Risk and Reward in the UKCS: Recent Positive Development

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Our Risk and Reward in the United Kingdom Continental Shelf (“UKCS”) series has reported on the challenging times recently faced by the UKCS oil and gas industry.  The past week has seen positive developments in the form of newly awarded exploration licences and the first modest improvement in the industry’s quarterly outlook since 2013.  In this post, we outline these developments and their potential impact.

41 New Licences Awarded in the 28th Offshore Licensing Round

On 27 July 2015, the Oil and Gas Authority (the “OGA”) (the newly created UK oil and gas regulator) announced the award of a further 41 new licences in the 28th Offshore Licensing Round, in addition to the 134 licences confirmed by the Secretary of State for Energy and Climate Change on 6 November 2014.

This award makes the 28th Offshore Licensing Round one of the largest rounds in the five decades since the first licensing round took place in 1964, with a total of 175 licences covering 353 blocks.

The UK Government described the award as “a welcome boost” to oil and gas exploration in the UKCS. Andy Samuel, Chief Executive of the OGA, added that “licences are however just a start and industry, government and the OGA now need to work together to revitalise exploration activity across the basin and convert licences into successful exploration wells.”

Mr Samuel’s comments appear to broadly reflect the current mood of companies active in the UKCS, according to Oil & Gas UK’s Business Sentiment Index, which was published on 29 July 2015.

Business Sentiment Index for Q2 2015 Shows Modest Improvement in Outlook for First Time Since 2013

Oil & Gas UK’s Business Sentiment Index measures a number of economic indicators to capture the outlook of the industry for each quarter.  As the graph below shows, in the second quarter of 2015 (Q2 2015), optimism in the UK oil and gas industry increased from minus 31 points to minus 27 points (on a -50/+50 scale):

Chart - Catherine Karia

Business Sentiment Trend, Oil & Gas UK Sentiment Index, Q2 2015

 

Oonagh Werngren, Oil & Gas UK’s operations director, said: “While the overall index remains in negative territory for the fourth quarter in a row, this slight improvement in mood is the first upward movement we have seen since Q1 2013.”

The Office for National Statistics (the “ONS”) estimated that the UK’s economy grew by 0.7% in Q2 2015, with a “surge” in North Sea oil and gas production lifting overall industrial output by 1%.  The ONS reported that this increase was driven by the package of support for the UKCS oil and gas industry announced by the UK Government in March 2015 (see our blog post on UKCS developments in Q1 2015).

However, Oil & Gas UK’s Business Sentiment Index reported that higher activity levels in Q2 2015 may be due to preparations for the annual summer maintenance programmes, when levels traditionally increase on the UKCS.

While the above developments hint at a moderate improvement in the outlook for the UKCS oil and gas industry, it may not signal the start of a upward trajectory in the long-term.  Oil & Gas UK emphasises that the business environment remains tough and the industry fragile, with respondents to the Business Sentiment Index expressing concerns over significant issues in the future if the oil price does not recover.

UK Energy Minister Andrea Leadsom confirmed on 27 July 2015 that the UK Government is “determined to make the most of our North Sea resources” and was “backing our oil and gas industry.”  To that end, the Energy Bill 2015-16 was introduced into the House of Lords on 9 July 2015, with an emphasis upon continuing to “support the development of North Sea oil and gas.”  We will continue to monitor UKCS developments, including the progress of the Energy Bill 2015-16 through the UK Parliament.