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Can the FERC Overcome Special Interest Politics?Jim Rossi

Fortnightly Magazine - October 15 1995

adopting the FERC's proposed reforms, they have also worked to reduce the intensity of special interest opposition.

Like the Commission's case-by-case adjudicative proceedings, the electricity NOPR offers incremental incentives that, if accepted by the industry, will work to reduce special interest opposition to the FERC's reforms. Most significantly, as Professor Richard Pierce of the George Washington University Law School recently observed, the NOPR offers utilities an opportunity to recover 100 percent of their stranded costs (em which, at an estimated $200-300 billion, stand as the greatest obstacle to competition in the industry4. According to Pierce, the FERC NOPR offers a deal that makes voluntary affiliate separation or corporate divestiture attractive for many utilities by tying separation or divestiture to complete stranded-cost recovery.

Under the NOPR, stranded-cost recovery is allowed for wholesale transactions only. A generating company (GenCo) could, however, make wholesale sales to a distribution company (DisCo) and, if the DisCo finds cheaper power elsewhere, the GenCo could recover stranded costs from it. This arrangement may placate utilities that must wait for individual states to consider retail wheeling proposals prior to complete recovery of stranded costs. Thus, while the FERC's restructuring proposals shy away from mandating complete separation or divestiture (which would certainly raise significant legal challenge), they create a clear incentive designed to encourage them. If firms act on this incentive, their stake in the outcome of the NOPR will have shifted and they will be less likely to oppose the FERC's reforms. Further, the NOPR encourages utilities to adopt a structure compatible with retail access and thus may jump start utility support for state reform efforts.

REFORM HELD HOSTAGE

In addition, the FERC has offered the possibility of PURPA reform as a quid pro quo for support of its restructuring NOPR.

In the spring of 1995, Sen. Nickles (R-OK) introduced a bill5 to repeal the power-purchase mandate contained in section 210 of PURPA. During recent hearings on this bill, FERC chair Elizabeth A. Moler warned that her support of PURPA reform will be held hostage to the FERC's final approval of the electricity restructuring NOPR.6 Although Moler may find sound economic reasons to block PURPA repeal until robust competition develops, the political choice she has presented utilities remains clear: If you support the spirit of FERC's NOPR, FERC will support your efforts to end PURPA's mandatory purchase rules.

The FERC will never be able to satisfy all of the interests affected by electricity industry restructuring. But its use of incremental preference shaping to build support for its transition to a new market structure may mollify the influence of the most powerful special interest factions, allowing more effective competition to emerge from the regulatory process. Unlike competition, special interest politics is certainly inevitable, but even this does not absolve regulators from protect-ing the reform process from its taint. t

Jim Rossi is an assistant professor at the Florida State University College of Law.

1. Regulations Governing Bidding Programs, 53 Fed.Reg. 9324 (1988); Regulations Governing Independent Power Producers, 53 Fed.Reg. 9327 (1988).

2. Promoting Wholesale Competition Through Open-Access Non-Discriminatory Trans. Servs. By