July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Can the FERC Overcome Special Interest Politics?Jim Rossi
The competitive transformations of the natural gas and telecommunications industries are over a decade in the making. By contrast, competition in the electricity industry is still emerging. Special interests have defeated many proposed competitive reforms. For example, in 1988 the FERC failed in its attempt to adopt regulations to encourage competitive bidding and independent power producers (IPPs).1 Similarly, decades of forceful industry opposition delayed open access in bulk-power markets. In 1992, Congress was able temporarily to transcend special interest politics in EPAct, adding enforceable open-access provisions to federal law.
Often, however, the benevolent hand of "competition" or "the market" becomes rhetoric motivated by special interest politics. Many large industrial users of electricity, for example, would support "competition" (em as long as smaller captive customers pay the costs of the generation facilities stranded by industrial shopping for low-cost power. IPPs favor "the market" (em as long as they can sell their power to whomever they choose and share none of the obligations of transmission networks traditionally borne by utilities. Even many vertically integrated electric utilities favor "competition" (em as long as regulators guarantee their monopoly franchises and rates that allow them to recover their costs.
And so, despite the well-intentioned reforms of state and federal regulators, electric competition has not advanced far beyond the vision of PURPA. We have competition among generating sources for incremental capacity coupled with transmission access among wholesale producers and consumers, but retail competition only exists for very large (primarily industrial) consumers. While many of the electrics have "reinvented" themselves, the industry as a whole remains largely the same as its New Deal predecessor: marked by large, vertically integrated companies that provide a bundle of generation, transmission, and distribution services within a monopoly franchise.
If the FERC has its way, this status quo won't last long.
In the spring of 1995, the FERC issued its NOPR on open-access transmission, consolidating it with a pending stranded-investment rulemaking proceeding.2 The NOPR constitutes the most wide-reaching competitive reform effort to date in the electricity industry.
If approved, the NOPR would move the industry closer to the model of open access and unbundling that has been successful in the natural gas and telecommunications industries. Moreover, as the NOPR illustrates, the FERC has played an active role in tempering the special interests that stand in the way of effective competition. This role signals a stark redefinition of an agency known to most lawyers, political scientists, and economists as the paradigmatic "captured" bureaucracy.
AN ASTUTE STRATEGY
Though clothed in the language and procedures of generic rules, the 1995 NOPR astutely continues a strategy the FERC has used to build support for electricity restructuring in adjudicative proceedings. In recent years the FERC has begun to employ "carrot/stick" incentives to encourage utilities to volunteer to make the choice that regulators desire. For example, in individual cases, the FERC has conditioned its approval of utility mergers or market-based rates on the requesting utility's voluntary adoption of some sort of procompetitive reform, such as an open-access tariff.3 As these incremental carrot/stick choices have increased the number of utilities voluntarily