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Fortnightly Magazine - September 1 1997

Uncle Sam buys a lot of power. Who supplies it may depend upon Article I, Sec. 8, Clause 17.

Today's intense competition to sell power should not overlook one large customer - the federal government. The Department of Defense alone consumed $1.4 billion worth of power in fiscal year 1994. Recently, one utility executive was quoted as saying: "We've got power marketers foaming at the mouth for DOD's business."%n1%n

Yet how does a marketer get the business of a federal agency, office or installation if retail wheeling is not mandated? Conversely, does a local utility have any ammunition to preserve service to its federal customer?

In California, New Hampshire, Massachusetts or Rhode Island, where retail wheeling is an eventual certainty, the selling points are the usual ones - price, reliability, term, etc. If the marketer prevails, then in such states the local utility must offer wheeling services. However, if a federal installation, such as a military base, is located in a state without mandatory retail wheeling, does that mean the federal customer can buy power only from the local utility? The answer offered here is "no," but with an important caveat, as will be explained.

The Federal Enclave clause,%n2%n a little noticed provision of the U.S. Constitution, permits a federal government installation to purchase its energy on a competitive basis; not solely from a local utility. An installation adhering to the federal procurement mantra of negotiating lower rates can rely on the Federal Enclave clause and buy lower-priced power from a marketer (or from a competing utility or power producer that holds no franchise rights in the local area). This right creates new opportunities for power marketers, and obvious concerns for local distribution utility.

Will federal installations avail themselves of the route suggested here? In practice, a refusal to wheel by the local utility could force the marketer to turn to antitrust enforcement to complete the sale. And, in that arena, the defense of state action immunity could play a crucial role.

The Law of Federal Enclave

More than 75 years ago, Justice Oliver Wendell Holmes observed that the Federal Enclave clause provides "immunity [for] the instruments of the United States from state control in the performance of their duties."%n3%n

In the seminal Black Hills case,%n4%n the Eighth Circuit applied the Federal Enclave clause, and held that Ellsworth Air Force Base did not have to comply with South Dakota state law in the procurement of its utility services. The state law had authorized the South Dakota Public Utilities Commission to assign retail service territories for local electric utilities. The local utility defended the law as a necessary regulation of utility operations. However, the federal court saw local utility regulation as a poor excuse to interfere with federal authority on government installations. It held that any exclusive utility franchise awarded under state law must give way to the federal government's paramount legislative power over federal enclaves. Summarizing a series of opinions from the U.S. Supreme Court on the Supremacy Clause, (which were found "equally applicable" to federal enclaves), the appeals court offered this