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Commission Watch

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

Commission Watch

FERC's AEP ruling begs the question: Can the feds bypass states that block transmission reform?

In its search for the perfect power market, the Federal Energy Regulatory Commission (FERC) at last has joined the battle that lately has brought state and federal regulators nearly to blows. A recent ruling puts the question squarely on the table:

  • n Can FERC overturn orders issued by the state public utility commissions (PUCs) that otherwise would stand in the way of its vision of regional transmission organizations (RTOs) with a standard market design (SMD)?

Such authority would come from Section 205 of PURPA-the Public Utility Regulatory Policies Act of 1978-which permits FERC to "exempt" electric utilities from compliance with problematic state mandates that might otherwise interfere with the unobstructed coordination of power movement across the interstate transmission grid. And FERC now has invoked Section 205 in no uncertain terms. It did so in a ruling issued late last year, by which it exempted American Electric Power Co. (AEP) from contrary instructions from Kentucky and Virginia, and compelled AEP to join the PJM RTO and to participate fully in PJM market structures, including: (1) the day-ahead and real-time markets for energy and ancillary services; (2) locational marginal pricing (LMP) for market-based management of grid congestion; and (3) centralized (RTO-directed) deployment of power plants and resources under the PJM protocols for bid-based, security-constrained unit commitment and dispatch.

Of course, Section 205 does give some immunity to state regulators. They can enforce their mandates against any purported exemption from FERC, so long as the state ruling is required to: (a) satisfy a requirement issued by some other federal law or agency; (b) protect the environment or guard against a fuel shortage; or (c) ensure the public health, safety, and welfare of the citizens of the affected state.

(And by the way, one might wonder why Congress had thought that the nation's utilities should ever desire an exemption from state regulation. But yes, Virginia, there was a time, back in the late seventies, at the time of PURPA, when Congress saw FERC as a friend to utilities, and the state PUCs-remember prudence reviews?-as their natural adversaries.)

Seizing on this fine print, regulators in Virginia and Kentucky had claimed that their situations meshed exactly with loophole letter "C"-that their states had imposed full economic regulation for traditional, bundled retail utility service, and that such regimes, essential for the "public welfare," would suffer under FERC's exemption. Those two states argued vociferously that FERC under no circumstances could "exempt" electric utilities from a constitutional exercise of state jurisdiction.

Yet FERC had anticipated the arguments from Virginia and Kentucky in its 55-page AEP ruling. Toward the end of the opinion, FERC explained carefully that when Congress had carved out those state-friendly loopholes in Section 205 back in 1978, it was thinking about things like air pollution, land use, and zoning. By contrast, said FERC, the legislative history from the late 1970s showed that when Congress drafted PURPA, it had never intended that protection of a state's system of economic regulation of electric