Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Commission Watch

FERC's AEP ruling begs the question: Can the feds bypass states that block transmission reform?
Fortnightly Magazine - January 2004

utilities would qualify as an element of "public welfare" deserving protection against FERC's pre-emptive power described in Section 205.

And so it has come down to this:

By order of FERC Administrative Law Judge William J. Cowan, hearings will now begin Jan. 26 on whether FERC can rely on PURPA Section 205 to bring AEP to heel as a full-fledged market participant in PJM. But Virginia and Kentucky have balked, demanding an extension of time to prepare the defense. As those two states explained in their motion filed on Dec. 10, "this case represents the first time in the 25-year history of section 205 of PURPA that [FERC] has invoked that provision to exempt an electric utility from state law. … [T]he commission has never sought, until this proceeding, to utilize this statutory provision to preempt state law, let alone the laws of two sovereign states simultaneously."

Can this be so? Can FERC simply sidestep state opposition under the guise of creating the perfect power market?

Origins of Policy

The perfect is often the enemy of the good. Whether this proves to be the case with FERC is a question worth pondering.

The trouble began when certain former utility members of the now-defunct Alliance grid group announced their choices to join either the Midwest Independent System Transmission Operator (MISO) or the PJM Interconnection. Ameren chose MISO; AEP, Illinois Power, Commonwealth Edison, and Dayton Power & Light all chose PJM, forming a group now known as the "New PJM Companies," as distinguished from the "Classic" PJM members. These choices proved troubling to FERC, however, as they seemed to the commission to be counterintuitive. Thus vexed, FERC had opened an investigation concerning membership in MISO and PJM, covering such issues as market "seams," historic trading patterns, loop flows created by transactional patterns, and interfaces of different market and pricing regimes.

FERC aimed to create a "seamless" common market among MISO, PJM, and utilities that formerly had belonged to the now-defunct Alliance grid group. A seam can be defined as an interface between transmission providers that separates markets for artificial reasons-such as different business practices, market design, reliability rules, or software-that are not linked to fundamental economic characteristics, such as the cost of production. Surcharges are commonly assessed at such seams, with "pancaked" rates being a prime example. FERC sought to eliminate these seams, but all was not so simple.

FERC's guiding policy, announced in Order 2000, demanded removal of seams within regional markets. But could FERC also iron out seams separating the regions themselves? Wouldn't that imply a merging of regions and markets?

Such questions lead to a troubling thought: even if an RTO (such as PJM) once was deemed properly constituted, it might later become "undone" if the addition of new members in geographically inopportune locations would turn the once-efficient regional market into a larger but unwieldly one, riddled with seams and inefficient interfaces. Such a result might likely put a crimp in financing new RTOs. Yet this was exactly where FERC arrived in a series of key decisions:

  • Forging a New Footprint.