FERC To Expand PJM’s Minimum Offer Price Rule to All Planned and Existing Resources – A Battle To Preserve States Jurisdiction Over Generation Facilities and to Carve Out Appropriate Exemptions Ensues

On June 29, 2018, FERC issued an order rejecting two proposals (i.e., the Capacity Repricing and the MOPR-Ex proposals) filed by PJM Interconnection, L.L.C. (“PJM”) to address subsidization of resources in its capacity markets (Docket No. ER18-1314). The FERC order also granted in part a complaint filed by Calpine Corporation and others challenging PJM’s minimum offer price rule (“MOPR”) as unjust and unreasonable. The complainants proposed interim Tariff revisions for immediate implementation that would extend the MOPR to a limited set of existing resources and asked the Commission to direct PJM to conduct a stakeholder process to develop and submit a long-term solution (Docket No. EL16-49). FERC agreed with Calpine’s argument that the PJM MOPR is unjust and unreasonable because it does not prevent market price suppression by subsidized resources. However, FERC rejected the solutions separately proposed by PJM and the first Calpine complaint. Notably, another complaint filed by Calpine and others proposing to expand the MOPR to apply to all existing resources, with no exceptions (the so-called “Clean MOPR” proposal in Docket No. EL18-169), is still pending.

In order to build a record allowing the Commission to establish a just and reasonable solution, FERC initiated a paper hearing under section 206 of the Federal Power Act in Docket No. EL18-178. FERC proposed establishing an expanded MOPR with few or no exceptions. FERC seeks comment on the type of exceptions (if any) that should be allowed in an expanded MOPR construct. Responses will likely include comments seeking to exempt particular resources, such as demand response, renewables, and self-supply resources, among others.

The exemptions issue is particularly challenging because FERC no longer sees the MOPR solely as a means to address buyer-side market manipulation, but rather as means to address the effect of out-of-market state subsidies on capacity market prices. As a result, capacity resources that have no incentive to manipulate or suppress market prices may be subject to mitigation if the impact on the market is viewed by FERC as sufficiently material to warrant attention. This threshold will likely be determined as FERC addresses what constitutes a material subsidy in the newly opened proceeding.

FERC recognizes that an expansion of the MOPR to all resources may lead to states paying twice for capacity. While suggesting that such an outcome would be appropriate pursuant to the court’s ruling in Connecticut Dept. of Pub. Util. Control v. FERC, 569 F.3d 477 (D.C. Cir. 2009), the Commission seeks to accommodate resources receiving state subsidies by proposing a resource-specific fixed resource requirement (“FRR”) alternative. This FRR alternative would allow individual resources receiving subsidies to exit the capacity market with a commensurate amount of load and operating reserves (rather than requiring LSEs to remove their entire footprint from the capacity market as the existing FRR construct does). Resources and load that take advantage of this new resource-specific FRR would not participate in the PJM capacity market, but would continue to participate in the PJM energy and ancillary services markets (as is the case under the current FRR construct).

Commissioner LaFleur and Commissioner Glick each filed dissenting statements. Both commissioners are concerned about reforming the PJM capacity market through a section 206 proceeding without appropriate stakeholder input and participation. Commissioner Glick suggests that the order inappropriately limits states’ jurisdiction over electric generation facilities by taking subsidized resources out of the capacity market. Commissioner Powelson filed a concurring statement expressing strong support for the order.

The deadline for intervention in Docket No. EL17-178 is July 20, 2018.  Initial briefs are due August 28, 2018. Reply briefs are due September 27, 2018. The refund date for the new section 206 proceeding will be the date of publication in the Federal Register. FERC expects to render a decision in this proceeding by January 4, 2019. Finally, the order suggests that PJM should file any requests for waiver or other relief that would be necessary due to delays in implementing market modifications before the next base residual auction in May 2019.

For more information on this topic or other energy matters, please contact any of the following attorneys at Jennings, Strouss & Salmon, P.L.C.

Andrea Sarmentero Garzon, Member – asarmentero@jsslaw.com

Gerit Hull, Member – ghull@jsslaw.com

Omar Bustami, Associate – obustami@jsslaw.com

Joel Greene, Member – jgreene@jsslaw.com

Gary Newell, Member – gnewell@jsslaw.com

Alan Robbins, Member – arobbins@jsslaw.com

Debra Roby, Chair – droby@jsslaw.com

Matthew Ross, Member – mross@jsslaw.com

Debbie Swanstrom, Member – dswanstrom@jsslaw.com

The U.S. Supreme Court Nexus Required for State Taxation of Online Sales: But Questions Still Remain

by Otto S. Shill, III, Member, Jennings, Strouss& Salmon, P.L.C.

Yesterday morning, the United States Supreme Court announced its highly anticipated decision in South Dakota v. Wayfair, __ U.S. __ (No. 17-494, 2018) in which it revisited the Court’s long-standing precedent that a state may only tax businesses that establish “nexus” with a state by having a sufficient physical presence in that state. (See Quill Corp v. North Dakota, 504 U.S. 298 (1992)). Now the Court, in a 5-4 split decision, has concluded that physical presence is not required to establish sufficient constitutional nexus with a state because that view is too narrow given the evolving economic realities of our national marketplace. But many issues still remain in the ongoing discussion of state taxation of online sales.

Quill and its physical presence test have governed state taxation of interstate commerce since 1992. In the meantime, interstate commerce has changed and technology has fueled the accelerating growth of remote sales that require neither storefronts nor distribution networks of the past. Thus, the Court in Wayfair observed that “Each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the states.”

The Court has long held that state regulations may not discriminate against, or impose undue burdens on, interstate commerce. But the Court has also said that interstate commerce may be required to pay its fair share of state taxes. Historically, taxation of interstate commerce has required states to meet a four-pronged test:

1. The taxed activity must have substantial nexus to the taxing state;
2. The tax must be fairly apportioned;
3. The tax must not discriminate against interested commerce; and
4. The tax must be fairly related to the services the state provides.

Wayfair addresses the first and fourth of these tests. The Court expressly recognized that goods provided by online sellers such as Wayfair are purchased by customers who enjoy the benefits provided by state governments. Thus, the sales of such companies have a direct relationship to the services provided by the state in which a purchaser resides. Moreover, in light of changed market conditions and the rise of online sales, the “physical presence test” no longer represents our national economic reality, and that test, “must give way to the far-reaching systemic and structural changes in the economy and many other societal dimensions caused by the Cyber Age … The Internet’s prevalence and power have changed the dynamics of the national economy.” The Court found sufficient nexus with the state of South Dakota because the state limited its taxation to online retailers with a defined minimum dollar volume of sales or a minimum number of annual transactions. Thus, “nexus is clearly sufficient based on both the economic and virtual contacts respondents have with the state.” The seller could not have met the statutory minimums, “unless the seller availed itself of the substantial privilege of carrying on business in South Dakota.”

The lesson of Wayfair is straightforward. Because economic realities of interstate commerce have changed, then changes in states’ tax regulations to meet those changes in interstate commerce will not discriminate against or overly burden, interstate commerce. We can now expect states to move forward with new legislation that will adjust state laws to the new economic reality internet purchasing. Nexus is still a cornerstone of state taxation of interstate commerce, but nexus need not be established by physical presence alone.

During its most recent legislative session, Arizona began the debate to define the difference between digital goods and digital services. Several other states have addressed or are now addressing these issues, and we can expect that debate to continue. In Arizona, as in most states, services remain largely non-taxable; however, there remains an open issue in some states, including Arizona, concerning how content delivered solely by the Internet should be taxed. The questions for future legislatures will be to define the line between digital goods and services, and to apply the principles of Wayfair to purely digital, as opposed to physical, products. Wayfair does not resolve that issue. Wayfair clarifies the definition of nexus. It also dealt only with the taxation of physical goods purchased through the internet. The Supreme Court has not addressed the taxation of digital content or the distinction between digital goods and digital services. This debate juxtaposes state and local jurisdictions that rely on sales or transaction privilege taxes against taxpayers seeking parity in the taxation of digital and physical goods. While Wayfair resolves none of these issues, it makes clear that state tax schemes may change to reflect substantial changes in the national economy. And states must continue to debate where those lines may be drawn.

Before Wayfair, several states were already enacting legislation to challenge physical nexus. In light of South Dakota’s victory, we can expect an acceleration of state efforts to expand their tax bases. The members of the Jennings, Strouss & Salmon, P.L.C. Tax and Estate Planning Group have extensive experience in state and local tax matters as well as federal tax matters. We will provide updated information and analysis of the impact of Wayfair concerning interstate commerce as states react to the decision and, in particular, how the Wayfair decision will influence Arizona’s upcoming legislative session.
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For more than 30 years, Mr. Shill has helped businesses and business owners comply with government regulations, navigate government investigations, and build wealth through business transactions and long-term planning. He has significant experience in federal and state tax compliance and tax controversies; compensation, benefits, and employment regulation; and government contracting compliance and disputes.

Mr. Shill regularly represents clients before federal and state government agencies, including the Internal Revenue Service, the Equal Employment Opportunity Commission, U.S. Department of Labor (DOL), the National Labor Relations Board, Arizona Attorney General's office, Arizona Industrial Commission, Arizona Department of Revenue and other Arizona regulatory boards. Mr. Shill also drafts and lobbies for the passage of legislation to address client issues.

What employers are doing about #RedForEd teacher walkout in Phoenix

Jennings Strouss attorney John J. Balitis is quoted in the Phoenix Business Journal article, "What employers are doing about #RedForEd teacher walkout in Phoenix. "He discusses the  laws employers need to consider for employees who have requested leave as a result of the teacher walk-out, particularly for parents of children with special needs and health conditions. 

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Mr. Balitis counsels private sector clients as well as government agencies, including the Arizona legislature, on a broad range of employment law and labor relations matters. Over his 30 years of practice, he has represented clients in administrative proceedings before the Equal Employment Opportunity Commission, U.S. Department of Labor, National Labor Relations Board, Arizona Civil Rights Division, Arizona Industrial Commission, Arizona Department of Occupational Safety and Health, and the Arizona Department of Economic Security. Recognizing that some issues need to be resolved at the legislative level, Mr. Balitis has participated in drafting and testifying on Arizona employment-related legislation.

In addition to the administrative and transactional aspects of his practice, Mr. Balitis litigates employment-related disputes in federal and state courts, where he has both bench and jury trial experience, and has appeared and argued before the Arizona Court of Appeals. He has considerable experience prosecuting and defending employment claims in preliminary injunction proceedings, and representing union employers in labor arbitrations involving disputes under collective bargaining agreements.  Mr. Balitis also is experienced in training, investigating, writing, speaking, publishing, and interacting with the media on employment-related topics and developments.

Mr. Balitis can be reached at 602.262.5928 or jbalitis@jsslaw.com.

FERC Initiates Review of Its Long-Standing Pipeline Certificate Policy Statement

Last Thursday, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued a Notice of Inquiry (“NOI”) seeking comment on possible changes needed to its 1999 Policy Statement 
on certification of new interstate pipelines. The NOI notes the almost two decades since the 1999 Policy Statement was approved and acknowledges that the Commission may have to reconsider how it balances project benefits against adverse consequences in light of the shale gas revolution, technological changes, global warming, and other environmental concerns, as well as increasing concerns raised by land owners and communities affected by the projects.

While all five commissioners welcomed an in-depth review of the Policy Statement, Chairman McIntyre cautioned that the Commission’s issuance of the NOI does not mean FERC will ultimately change its current procedures. The Commission will consider only generic issues and will not consider any comments that refer to open, contested proceedings currently before FERC.

The NOI identified four general areas of examination: (1) potential adjustments to the Commission’s determination of need; (2) the potential exercise of eminent domain and landowner interests; (3) the Commission’s evaluation of alternatives and environmental effects under the National Environmental Policy Act and the Natural Gas Act; and (4) the efficiency and effectiveness of the Commission’s certificate processes. These four areas will frame a debate over whether and how the Commission should take into account new environmental and social considerations – such as evaluating greenhouse gas impacts of new pipelines or requiring that applicants work with landowners and communities affected by proposed projects – while at the same time expediting pipeline approvals in response to President Trump’s Executive Order #13807.

Currently, the Commission does not look “behind” or “beyond” precedent agreements when making a determination about the need for new projects or the needs of the individual shippers. The Commission appears willing to consider changes in how it determines whether there is a public need for a proposed project. The NOI seeks comments as to the types of additional or alternative evidence that the Commission should examine to determine project need as well as the litigation risk that may arise in considering such new evidence. The Commission further questions whether evidence of need, in general, should be examined on a regional basis, particularly where there are multiple pipeline applications in the same geographic area. With respect to the precedent agreements themselves, the NOI seeks comments about additional factors that may need to be taken into account when considering these agreements, such as the counterparty to the precedent agreement (affiliates or non-affiliates), the duration of the precedent agreement, or the need for state approval of the precedent agreement.

To address increasing concerns expressed by landowners and affected communities in recent cases, the NOI seeks comments about ways to improve the current certificate process to adequately take into account landowner interests and encourage landowner participation in the certificate process. Among other things, the Commission inquires whether: (1) the use of eminent domain should be considered in reviewing each application against the need for the project; (2) the Commission should take additional measures to minimize the use of eminent domain; and (3) there is a need to evaluate alternatives beyond those currently evaluated (i.e. no-action alternative, system alternatives, design alternatives, and route alternatives).

Environmental assessment is a key issue in the NOI. One of the main questions is whether the Commission should take into account the cumulative environmental impacts at the regional level instead of on a project-to-project basis and, if so, how to define the relevant region. New types of environmental impacts — such as the social cost of carbon — are also addressed in the NOI. The Commission seeks comments as to how to quantify, monetize, and assess these impacts against the need for the project.

Finally, the NOI seeks to streamline the Commission’s certification process in compliance with Executive Order #13807, which encourages agencies to make timely decisions with the goal of completing all federal environmental reviews and authorization decisions for major infrastructure projects within 2 years. To that end, the NOI inquires whether certain aspects of the Commission’s application review process (i.e., pre-filing, post-filing, and post-order-issuance) should be shortened, performed concurrently with other activities, or eliminated to make the overall process more efficient. And, to the extent that the process is streamlined, the Commission inquires as to how it can ensure that interested stakeholders have an adequate opportunity to participate in the evaluation process, and whether efficiency gains can be achieved by improving the Commission’s interactions with other federal agencies and the states.

Overall, the NOI signals a consensus that the 1999 Policy Statement may be outdated. However, with four new Commissioners, it is difficult to gauge the direction any review might take. Comments on the NOI are due 60 days after its publication in the Federal Register. (FERC Docket No. PL-1-000.)

For more information about the issues discussed in this post, please contact us.

Deducting Attorneys’ Fees Under the Tax Cuts and Jobs Act of 2017

By Otto S. Shill, III, Member, Jennings, Strouss & Salmon, P.L.C.

The Tax Cuts and Jobs Act of 2017 (the “2017 Act”) purports to bring broadly lower tax rates to most U.S. individuals and companies; however, it does so at the expense of clear tax policy objectives in many areas. That lack of a comprehensive, policy-based approach will now have consequences related to the deductibility of costs associated with controversies for both businesses and individuals. Business defendants in sexual harassment suits will not be allowed to deduct the cost of settlements that contain confidentiality requirements, potentially making settlement a less attractive option. Individual plaintiffs in cases that are not related to unlawful discrimination or whistle blowing will not be permitted to deduct attorneys’ fees, making such lawsuits potentially less attractive. Also due to ambiguity in the statutory language prohibiting non-disclosure agreements, individual plaintiffs in sexual harassment cases now face greater uncertainty concerning the deductibility of their litigation costs.

Deductibility for Businesses
Litigation has become an all too common part of doing business in the United States. In most cases, expenditures for business-related litigation are deductible under section 162 of the Internal Revenue Code of 1986, as amended (the “Code”). Section 162 generally governs which expenses may be deducted as ordinary and necessary expenses of operating a trade or business. The 2017 Act added new section 162(q) to the Code, which provides that, “no deduction shall be allowed for any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a non-disclosure agreement; or attorneys’ fees related to such a settlement or payment.” Thus, a trade or business that includes confidentiality obligations as a condition of settlement of sexual harassment cases will be denied a deduction both for any settlement payment and for related attorneys’ fees. In addition, the new provision does not address the deductibility of expenditures where sexual harassment or abuse is only one of several claims. Because the new statutory language references “settlement or payment,” it is possible that a deduction could be denied for all costs of litigation when a case, which contains an allegation of sexual harassment or sexual abuse, ends in a resolution other than a final judgment. Apparently intended as a response to the current social reaction to recently-publicized cases in which people were paid for silence concerning sexual relationships with, or sexual harassment by, high-profile figures, this statute may now give employers less incentive to settle cases where liability is questionable. This means the impact of the new law may be very different from what its drafters intended.

Deductibility for Individuals
While businesses are allowed to deduct ordinary and necessary business-related expenses, individuals who are not engaged in a trade or business historically have been compelled to deduct personal litigation expenses, including attorneys’ fees, as miscellaneous itemized deductions. Now, the 2017 Act has suspended deductions for miscellaneous itemized deductions through December 31, 2025. Thus, most plaintiffs will no longer be able to deduct the costs and attorneys’ fees associated with non-business related litigation. However, plaintiffs engaged in litigation concerning whistle blowing or unlawful discrimination enjoy an exemption from this new rule. In 2004, Congress added section 62(a)(20) to the Code, which allows plaintiffs in cases involving unlawful discrimination to deduct fees and expenses directly against gross income in computing adjusted gross income, and not as miscellaneous itemized deductions. New Code section 62(a)(21) added the same protections for whistle blower plaintiffs. The 2017 Act did not make any changes to Code section 62(a)(20) and so, going forward, plaintiffs may continue to deduct litigation expenses related to unlawful discrimination. The 2017 Act expanded the deductibility of expenses related to whistleblower litigation to include (i) claims under section 21F of the Securities and Exchange Act of 1934, (ii) state false claims act statutes, including those with qui tam provisions, and (iii) claims under section 23 of the Commodity Exchange Act. Such deductions are limited to the amount of the overall award includible in a plaintiff’s gross income for the year in which the award is made, and may not be taken more than once. This deduction is expressly coordinated with the 20% deduction available to certain pass-through entities allowed under new section 199A of the Code.

Some commentators have speculated that the language of new Code section 162(q), which references “attorneys’ fees related to such settlements or payments,” may jeopardize this deduction for plaintiffs, as well as for defendants, because of the breadth of the statutory language. However, this result seems unlikely because, both before and under the 2017 Act, section 162 of the Code applies only to expenses of a trade or business. Individual plaintiffs who are not engaged in a trade or business generally cannot deduct expenses under section 162 of the Code. Prior to the 2017 Act, individuals could deduct a very limited range of expenses related to the production of income (such as unreimbursed expenses required for one’s employment) as miscellaneous itemized deductions. Under the 2017 Act, personal litigation expenses are deductible only if related to unlawful discrimination or the whistle blower type cases discussed above. Thus, although the new limitations on deductions under section 162(q) should not affect the non-business claims of individual claimants, the issue is not entirely clear at present.

Conclusion
The 2017 Act provisions regarding the deductibility of legal fees are likely to make certain types of litigation more expensive for both plaintiffs and defendants. Plaintiffs in cases involving unlawful discrimination may still deduct related attorneys’ fees and costs, but the defendants in those cases may be less willing to settle because of limitation on trade or business deductions for costs associated with settlements of sexual harassment cases involving confidentiality requirements. Plaintiffs with claims other than those related to unlawful discrimination or whistleblower claims will not be able to deduct fees and costs, which may discourage some plaintiffs from pursuing those claims. Only time will tell what financial impact the 2017 Act will truly have on individuals and businesses, particularly those involved in litigation.
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For more than 30 years, Mr. Shill has helped businesses and business owners comply with government regulations, navigate government investigations, and build wealth through business transactions and long-term planning. He has significant experience in federal and state tax compliance and tax controversies; compensation, benefits, and employment regulation; and government contracting compliance and disputes.

Mr. Shill regularly represents clients before federal and state government agencies, including the Internal Revenue Service, the Equal Employment Opportunity Commission, U.S. Department of Labor (DOL), the National Labor Relations Board, Arizona Attorney General's office, Arizona Industrial Commission, Arizona Department of Revenue and other Arizona regulatory boards. Mr. Shill also drafts and lobbies for the passage of legislation to address client issues.

FATCA and FBAR: The IRS is discontinuing its Offshore Voluntary Disclosure Program

by Otto S. Shill, III, Member, Jennings, Strouss & Salmon, P.L.C.

The Internal Revenue Service (IRS) announced last week that it will terminate its Offshore Voluntary Disclosure Program as of September 28, 2018. Taxpayers who have not reported foreign bank accounts and income now have only six months to do so.

In the mid-2000s, the IRS began aggressively pursuing foreign financial institutions for information concerning deposits held by those institutions on behalf of U.S. taxpayers. That effort has resulted in an unprecedented period of world-wide intra-governmental cooperation to identify unreported accounts and untaxed income. The Bank Secrecy Act and the Foreign Account Tax Compliance Act require both foreign financial institutions and U.S. taxpayers to disclose the non-U.S. assets of U.S. taxpayers. Compliance failures can result in both civil and criminal penalties and interest charges. The IRS reports that its programs have gathered approximately $11 billion in delinquent tax, penalties, and interest, and more than 1,500 indictments in recent years.

In 2009, the IRS instituted voluntary compliance programs because some taxpayers either inadvertently or “willfully” failed to comply with disclosure requirements. The IRS’ primary voluntary compliance programs are the Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures, which the IRS says, together have helped more than 100,000 taxpayers come into compliance. In particular, the Offshore Voluntary Disclosure Program has helped taxpayers whose nondisclosures could be classified as “willful” avoid even more stringent penalties and potential criminal prosecution.

Now, because of waning participation, the IRS is ending the Offshore Voluntary Disclosure Program. Taxpayers who are willfully concealing foreign assets may want to consider taking advantage of the program before the September 28 deadline. For now, the IRS apparently will retain its Streamlined Filing Compliance Procedures for those whose failures are non-willful; however, establishing a lack of “willfulness” is difficult under applicable legal standards, especially in light of the IRS’s efforts to publicize its compliance programs over the last few years. In addition, where potential criminal liability exists, care must be taken in determining how to come into compliance. To protect their interests and avoid potential penalties and criminal prosecution, taxpayers should seek knowledgeable legal counsel to assist with choosing the voluntary compliance alternative that is best for their individual circumstances.

The tax attorneys at Jennings Strouss are experienced in assisting clients with the reporting of foreign accounts and assets and in using the IRS’s voluntary compliance programs. If you have assets or bank accounts overseas and have postponed compliance, we encourage you to consult with your tax advisors about the Voluntary Offshore Disclosure Program while it is still available.

NOTE: This client alert has been prepared by Jennings, Strouss & Salmon, P.L.C. for informational purposes only. These materials do not constitute, and should not be considered, legal advice, and you are urged to consult with an attorney on your own specific legal matters. Transmission of the information contained in this client alert is not intended to create, and receipt by the reader does not constitute, an attorney-client relationship with Jennings, Strouss & Salmon or any of its individual attorneys.
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For more than 30 years, Mr. Shill has helped businesses and business owners comply with government regulations, navigate government investigations, and build wealth through business transactions and long-term planning.

He has significant experience in federal and state tax compliance and tax controversies; compensation, benefits, and employment regulation; and government contracting compliance and disputes.

Mr. Shill regularly represents clients before federal and state government agencies, including the Internal Revenue Service, the Equal Employment Opportunity Commission, U.S. Department of Labor (DOL), the National Labor Relations Board, Arizona Attorney General's office, Arizona Industrial Commission, Arizona Department of Revenue and other Arizona regulatory boards. Mr. Shill also drafts and lobbies for the passage of legislation to address client issues. Mr. Shill can be reached at 602.262.5956 or oshill@jsslaw.com. 

FERC Issues Final Rule Requiring RTOs to Provide for Participation of Electric Storage Resources in Organized Markets

On February 15, 2018, the Federal Energy Regulatory Commission (“FERC”) issued Order No. 841, Electric Storage in Markets Operated by Regional Transmission Organizations and Independent System Operators. Order No. 841 requires tariff reforms in order to facilitate the participation of electric storage resources in capacity, energy, and ancillary services markets operated by Regional Transmission Organizations (“RTOs”) and Independent System Operators (“ISOs”).

After soliciting public input on its Notice of Proposed Rulemaking (“NOPR”), FERC concluded that existing market rules designed for traditional generation resources create barriers to entry for many electric storage resources. Order No. 841 requires each RTO and ISO to propose tariff revisions (the “participation model”) that properly recognize the physical and operational characteristics of electric storage resources, and to allow those resources to participate in organized markets.

Each tariff’s participation model must ensure that a resource using the model: (1) is eligible to provide all capacity, energy, and ancillary services that it is technically capable of providing; (2) can be dispatched and is a price maker in the wholesale market as both a seller and buyer, consistent with existing market rules; (3) accounts for the physical and operational characteristics of electric storage resources through bidding parameters or other means; and, (4) establishes a minimum size requirement, which may not exceed 100 kilowatts. The Final Rule also requires that the sale of electric energy from the wholesale electricity market to an electric storage resource that the resource then resells back to those markets must be at the wholesale locational marginal price.

In its NOPR, FERC also had proposed reforms related to distributed energy resource aggregation. However, in issuing Order No. 841, FERC concluded that it had insufficient information to proceed with those proposed reforms. Instead, the Commission scheduled a Technical Conference in RM18-9-000 for April 10-11, 2018 to gather additional information on distributed energy resource aggregation. This Technical Conference will also provide an opportunity to discuss other impacts of distributed generation on the bulk power system. Attendance is open to all interested persons, but those wishing to participate in the conference must submit a nomination by March 15, 2018.

Order No. 841 will take effect 90 days after publication in the Federal Register. Compliance filings by RTOs and ISOs are due 270 days after the effective date. The RTOs and ISOs then will have an additional 365 days to implement the tariff revisions.

(FERC Docket Nos. RM16-23-000 | RM18-9-000 | AD16-20-000)

For more information on this topic or other energy matters, please contact any of the following attorneys at Jennings, Strouss & Salmon, P.L.C.

Debra Roby – droby@jsslaw.com
Andrea Sarmentero Garzon – asarmentero@jsslaw.com
Joel Greene – jgreene@jsslaw.com
Gerit Hull – ghull@jsslaw.com
Gary Newell – gnewell@jsslaw.com
Alan I. Robbins – arobbins@jsslaw.com
Matt Ross – mross@jsslaw.com
Debbie Swanstrom – dswanstrom@jsslaw.com
Omar Bustami – obustami@jsslaw.com

Contingency Fees in Arizona: Paper is Worth its Weight in Gold

By J. Scott Rhodes, Member, and Ashley M. Mahoney, Legal Intern, Jennings Strouss

Attention Arizona attorneys: to receive compensation for your contingent fee work, make sure your fee agreement is in writing and signed by the client – or, you might not get paid at all. This is the message from the Arizona Court of Appeals, announced through Levine v. Haralson, Miller, Pitt, Feldman & McAnally, P.L.C., 2018 WL 543052 (Ariz. Ct. App. 2018). The Levine case involved a dispute over attorneys’ fees between the law firm Haralson, Miller, Pitt, Feldman & McAnally, P.L.C. (“Haralson”) and attorney Jack Levine. Levine claimed to have worked over 400 hours on a contingency fee case before the clients retained Haralson to take over the representation. The clients had signed a contingent fee agreement with an attorney sharing office space with Levine; however, they did not have a written or signed fee agreement with Levine, nor was there a fee-sharing agreement between Levine and the original attorney. The clients eventually fired both the original attorney and Levine, and hired Haralson before settling the case. The court awarded Haralson attorneys’ fees. Levine then initiated an action to recover a portion of the fee in quantum meruit.

Most jurisdictions allow an attorney to recover in quantum meruit when a written agreement is invalid or does not exist. But, in Levine, the Court disregarded that general rule by declaring that neither the Arizona Ethical Rules nor the State’s “public policy is subject to meaningful analysis by applying the law of other jurisdictions.” Because the “clear and unambiguous” rules “have the same force and effect as state statutes and are equally binding,” the Court held that a violation of ER 1.5(c) renders a contingent fee agreement void as against public policy, thus barring Levine from any recovery.

Although the Levine holding is limited to contingent fee agreements, might a court extend it to other fee agreements that violate the letter of the Ethical Rules in Arizona? For example, unlike the Model Rules, Arizona’s ER 1.5(b) mandates that all fee agreements shall be communicated to the client in writing. The Levine Court reasoned that the failure to obtain a written agreement invites unnecessary litigation, as parties might attempt to alter the terms of an oral agreement after a matter’s resolution. In these situations, a court would be forced to rely on the parties’ “self-serving recollections” to reconstruct the details of the original agreement.

Does this analysis of public policy in Levine foreshadow that a lawyer’s failure to communicate a traditional (non-contingent) fee agreement in writing might mean the lawyer can receive no compensation at all for legal services as a matter of public policy? In other words, does Levine sound the death knell for quantum meruit recovery in Arizona?

As a practical matter, some of the Levine Court’s public policy concerns may not apply to a non-contingent fee agreement. A contingent fee, by definition, is settled and paid when a matter concludes. On the other hand, a traditional fee agreement typically includes periodic billing and payment, which in turn allows for an earlier opportunity to resolve any misunderstandings. That is, a client can address with her lawyer any concerns about accruing fees, and the lawyer can address a client’s inability or unwillingness to pay. By receiving invoices and submitting payments as the matter progresses, a client essentially acknowledges that the attorney is providing a service and deserves some compensation for them. Moreover, unlike ER 1.5(c), which requires a written agreement signed by the client, ER 1.5(b) contains a lesser requirement -- to simply communicate the fee terms in writing.

At the time this article was published, there was still time for Levine to be appealed to the Arizona Supreme Court, which will have discretion regarding whether to accept review. Ultimately, whether Levine will remain good law and, if so, whether it will remain tethered to its facts or will be expanded to cover other kinds of fee agreements, or similar arrangements, is yet to be seen. One thing is certain – for the present, lawyers in Arizona should assume that work performed without a written and, for some cases, signed fee agreement might turn out to be work performed with “no meaningful expectation of compensation.”

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Mr. Rhodes has an extensive background in legal ethics. He regularly advises attorneys and law firms in matters relating to State Bar complaints, fee disputes, disciplinary matters, bar admission and other licensing, ethics, and professional responsibility issues. Mr. Rhodes was named The Best Lawyers in America® 2018 Phoenix Ethics and Professional Responsibility Law Lawyer of the Year. srhodes@jsslaw.com  |  602-262-5911

FERC Terminates Rulemaking Aimed At Increasing RTO/ISO Reliance On Merchant Coal and Nuclear Resources, Initiates New Proceeding To Explore RTO/ISO Resilience Issues

On January 8, 2018, the Federal Energy Regulatory Commission (FERC or Commission) issued an Order terminating a rulemaking initiated in Docket No. RM18-1-000 in which the Commission, acting at the request of the Department of Energy (DOE), considered requiring Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish tariff mechanisms ensuring appropriate compensation to “baseload” generating units with a ninety-day supply of onsite fuel storage when they participate in regional electricity markets, including full recovery of allocated costs and a fair return on equity. The Proposed Rule on Grid Reliability and Resilience Pricing (Proposed Rule) was submitted to the Commission by Secretary of Energy Rick Perry last fall pursuant to a rarely used procedure under section 403 of the DOE Organization Act, 42 U.S.C. § 7173. The criteria included in the Proposed Rule were interpreted largely as favoring merchant coal and nuclear resources over other resources.

The Commission terminated the proceeding after reviewing extensive industry comments, finding that neither the Proposed Rule nor the record evidence met the threshold statutory requirement under section 206 of the Federal Power Act showing that the existing RTO/ISO tariffs are unjust and unreasonable. The Commission also found that the proposal would guarantee compensation to owners of certain resources regardless of the need or cost of those resources to the system, rendering the proposed remedy unduly discriminatory or preferential.

Commissioners Richard Glick, Cheryl LaFleur, and Neal Chatterjee each issued separate, concurring opinions supporting the termination of the Proposed Rule. Commissioner Glick noted that the Department’s own study concluded that “changes in the generation mix, including the retirement of coal and nuclear generators, have not diminished the grid’s reliability or otherwise posed a significant and immediate threat to the resilience of the electric grid,” and that the record failed to support the proposed remedy of a “multi-billion dollar bailout targeted at coal and nuclear generating facilities.” Glick observed that RTOs and ISOs should consider how best to mitigate resiliency challenges within their markets and without prejudging what technology or fuel-type provides the best solution. Commissioner LaFleur wrote separately that the transformation of the nation’s resource mix is ever-evolving, noting that the Department of Energy’s proposed remedy would “freeze yesterday’s resources in place indefinitely rather than adapting resilience to the resources that the market is selecting today or toward which it is trending in the future.” Commissioner Chatterjee highlighted his concern that existing RTO/ISO tariffs may not adequately compensate resources for contributions to bulk power system resilience, and expressed his expectation that exploring resilience issues within RTOs/ISOs is the first step in a more systematic effort to ensure the resilience of the nation’s bulk power system.

In its Order terminating the Proposed Rule, the Commission acknowledged allegations of the existence of grid resilience or reliability issues due to the retirement of particular resources. Although the Commission concluded that such concerns do not demonstrate the unjustness or unreasonableness of the existing tariffs, it found that the record developed to date warrants further examination of the risks to the bulk power system and ways to address those risks in the changing electric markets. To that end, the Commission initiated a new proceeding (Docket No. AD18-7-000) and directed each RTO and ISO to submit information concerning resilience within their respective footprints. 

The stated goal of the new proceeding is to: (1) develop a common understanding among the Commission, industry, and others of what resilience of the bulk power system means and requires; (2) understand how each RTO and ISO assesses resilience in its geographic footprint; and (3) use this information to evaluate whether additional Commission action regarding resilience is appropriate at this time. Each RTO and ISO must submit within 60 days of the date of this Order (i.e. March 9, 2018) specific information explaining how it currently addresses resilience of the bulk power system within its footprint, highlighting any specific or unique resilience challenges it faces. Each RTO and ISO may also propose resolutions to any identified gaps or exposure on the resilience of the bulk power system. Specific questions posed by the Commission begin on page 12 of the Order. These questions generally seek information regarding how RTOs/ISOs define resiliency, measure resiliency of the system, and evaluate options to mitigate resiliency risks. Those wishing to comment on the RTO/ISO submissions will have 30 days following the RTO/ISO submissions to do so (i.e. April 8, 2018).

(FERC Docket Nos. RM18-1-000 | AD18-7-000) 

For more information on this topic or other energy matters, please contact any of the following attorneys at Jennings, Strouss & Salmon, P.L.C. :

Debra Roby – droby@jsslaw.com

Andrea Sarmentero Garzon – asarmentero@jsslaw.com

Omar Bustami – obustami@jsslaw.com

Joel Greene – jgreene@jsslaw.com

Gerit Hull – ghull@jsslaw.com

Gary Newell – gnewell@jsslaw.com

Alan Robbins – arobbins@jsslaw.com

Debbie Swanstrom – dswanstrom@jsslaw.com