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Renewable Subsidies in the Age of Deregulation

Fortnightly Magazine - December 1997

competitive advantage in the wholesale market. In essence, the state had subsidized the future wholesale activities of the in-state competitors. Tying the subsidy directly to the tax made the illegality worse, not abated.

Wholesale-Retail Conflicts

WHEN can states impose a system benefit charge to promote renewable energy?

Retail. State system benefit charges must be imposed only on retail distribution services - not on wholesale transmission services that are federally regulated. Demand-side management and consumer rate subsidies generally apply on the retail side of the transaction and thus fall within state authority.fn34 Here, the state is regulating retail rates and retail portfolios, without incursion into wholesale transactions.

Wholesale. States cannot impose system benefit charges on wholesale transmission services, but it may prove difficult to judge when this will occur.

Distinction. Where a state adopts a power exchange or pool concept, wherein the actual power supplied to a given customer varies hour-to-hour, the transmission and distribution path and services used hour-to-hour to serve a particular customer would vary correspondingly. Sorting out the retail distribution T&D services which legally may be surcharged becomes legally and factually complex.

Funds collected at the retail rate level but deployed to subsidize prices in the wholesale market[fn35] illustrate precisely the kind of retail charge, redirected to promote in-state suppliers, that the U.S. Supreme Court ruled unconstitutional in West Lynn Creamery v. Healy. (See sidebar, "Tax-Funded Subsidies.")

1California Assembly Bill 1890. This fund will be created by a surcharge on all electric bills, beginning in January 1998, and continuing for four years.

2The FERC does not regulate local distribution, intrastate commerce or the self-generation power. See, e.g., CL&P v. FERC, 324 U.S. 515 (1945). States have regulated what can be sited, where it can be sited, controlling environmental standards of plant operation and the mix of demand-side and supply-side resources. PG&E v. California Energy Resources & Develop. Comm'n, 461 U.S. 190, 204 (1983).

3The Supreme Court has determined that Congress, in enacting the Federal Power Act, intended to vest exclusive jurisdiction in the FERC to regulate interstate wholesale utility rates. FPC v. Southern California Edison Co., 376 U.S. 205, 216, 84 S.Ct. 644, 651, 11 L. Ed.2d. 638, 646 (1964).

4Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953, 963 (1986); Mississippi Power & Light Co. ex rel. Moore v. Mississippi, 487 U.S. 354 (1988).

5Northern Natural Gas Co. v. Kansas Corporation Comm., 372 U.S. 84, 90-91 (1963); Nantahala, 476 U.S. at 966-67.

6See, for example, Kansas City Power & Light Co., 67 FERC ¶ 61,183 (1994).

7So. Calif. Edison and SDG&E Co., 70 FERC ¶ 61,125 (1995), requests for reconsideration denied, 71 FERC ¶ 61,269 (1995). Holding costs of renewable energy to level of cost of all other sources of energy makes ratepayers indifferent as to the procurement of wholesale power.

8This is not to say the price established through a bidding process must select the lowest-priced bid. Some states price winning bidders at the price bid by the least expensive losing bidder. These "second price" auctions are used in California. The marginal clearing bid may also be