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The legal battle of the century is ready to begin.
Fortnightly Magazine - January 2004


The legal battle of the century is ready to begin.

Tantamount to a declaration of war with state regulators was the order from the Federal Energy Regulatory Commission (FERC) late last year, over the objections of Kentucky and Virginia, that AEP must join the PJM grid to meet conditions of its 2000 merger with Central and Southwest Corp.

At the center of the issue is whether FERC has authority to pre-empt the states on development of regional transmission organizations. (For a full outline of the relevant legal arguments, see our "Commission Watch" column, p. 20).

While state and federal regulators have debated this question ad nauseam for the last two years, FERC's order makes it a real legal battle in which both states and the feds now risk their pride, turf, and reputations.

Most legal experts say the final arbiter of state or federal pre-eminence may end up being the Supreme Court, as the loser will certainly appeal again and again.

So, one might ask, what is to happen to U.S. energy markets if the Supremes make FERC God of the Grid? Can markets develop without some check and balance from states? Conversely, if Congress counters and legislates states as the rulers of RTO development in their region, how can you have RTO markets without federal coordination?

Moreover, what happens if the justices strike down this action as unconstitutional?

Would Congress have the momentum to rewrite the law to sidestep any such ruling, assuming there is one?

Some may feel that this legal battle will fall short of going to the highest court of the land. But just listen to the Kentucky and Virginia PSCs in their response to FERC: "This is a case of first impression implicating important issues of national scope and constitutional import. … Moreover, such issues of sovereignty and jurisdiction implicate matters of paramount importance to the future of the electric industry in this country, including the proper factors to be considered in reviewing regional transmission organization applications and the proper balance between federal and state jurisdiction over such applications."

Barely the first shot has been fired, and it is already clear that the states, the feds, and the industry are headed for a long, drawn-out civil war, with the states' rights argument a proxy for regulators' and industry's disagreement over electric restructuring.

This legal battle could be made moot if Congress this year musters the small number of votes needed to pass last year's proposed energy bill, which would delay implementation of FERC's initiatives on standard market design.

In taking on the states, FERC Chairman Pat Wood III put his future and that of his commission on the line, letting the courts decide once and for all who will be king. Will the states be willing to risk as much? FERC's actions have certainly raised the stakes, and nothing less than the future of an entire industry may hang in the balance.

Do the PUCs Know the Will of the People?

Most of the debate so far has focused on FERC's use of Section 205 of