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States of Denial

Three challenges to federal authority from those unhappy with the status quo.

Fortnightly Magazine - January 2007

We do not focus on them in this report since, if these represent important actual performance improvements, they should ultimately manifest themselves in cost or price benefits. Indeed, it would be double counting to measure both the source of efficiency gain and its direct cost effect.” (Kwoka, p. 8, footnote 4.)

Turn now to the subject of this month’s column: a look at how regulators, grid operators, and consumer advocates in three states have posed challenges to established law and policy at the Federal Energy Regulatory Commission (FERC):

Arkansas. Can state regulators call on FERC as a last resort to force an investor-owned utility with a regional footprint to retire a portion of its generating fleet in favor of newer merchant units that supposedly are more efficient?

California. Should FERC revise its rate-making and funding policies for electric transmission lines to accommodate state regulatory and legislative policies that mandate investments in renewable energy?

Connecticut. Can a state claim cause for redress if it suffers so much from transmission congestion that market tariffs approved by FERC for the regional grid system must be declared unlawful?

Each of these cases illustrates the increasing tension between a regulatory framework keyed to state boundaries and conflicting operational and market structures that have become primarily regional in scope.

Arkansas: The Lure of Merchant Power

In the first of the three examples, the Arkansas Public Service Commission last summer asked FERC to compel Entergy to deploy merchant gen units to displace some of Entergy’s fleet of rate-based assets. The case poses a novel question: Can FERC order the dispatch of merchant power plants (admittedly nonjurisdictional), under the guise of ensuring transmission access? (See, Arkansas PSC v. Entergy Corp., FERC Docket EL06-76, complaint filed June 7, 2006.)

Two key factors drove the Arkansas commission to file its complaint.

First, in the wake of recent FERC decisions, most of Entergy’s electric production costs now “flow through” various interstate agreements, whereby they are equalized and apportioned among several states. Thus, fully 80 percent of such costs have been stripped from the retail rate-making purview in Arkansas. (See Opinion Nos. 480, and 480-A, Docket EL01-88, 111 FERC ¶61,311, and 113 FERC ¶61,282.) Moreover, Entergy’s Arkansas operations already appear more cost-efficient than in other states within Entergy’s multi-state footprint, so that any additional cost savings achieved within Arkansas for the most part would flow to ratepayers in neighboring states through interstate compacts. All of this left the state commission no option but to go to FERC to seek relief of a kind normally associated with retail rate-making.

Second, for years now activists have cited studies and research papers that purport to find that Entergy’s incumbent but aging oil- and gas-fired gen fleet is inefficient (operating at high heat rates) and that ratepayers could save if regulators forced Entergy to procure more energy from third parties. (See Commission Watch, “ Entergy on Edge ,” Oct. 2005.)

According to the Arkansas complaint, Entergy has admitted previously (at a conference in New Orleans in July 2004) that it could save a bundle with