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Policy Shift: 2009 Law & Lawyers Report

Legal and regulatory changes are transforming the industry.

Fortnightly Magazine - November 2009

and RTOs.

“FERC has generated a lot of controversy, for better or worse, by involving themselves in issues that heretofore have been the province of the states,” Fallon says. “But it shouldn’t be news to anybody that FERC has to work through transmission issues. As an energy policy matter, if the country wants to move a lot of wind generation out of the Midwest, and solar generation from Arizona to California, then we’ll have to drastically rethink [transmission-cost allocation] issues.”

Case by case, docket by docket, that rethinking process is happening across the country. And while many stakeholders agree that FERC eventually will need to assert its authority to establish clearer rules for transmission planning and cost allocation, they remain skeptical that FERC will do the right thing with its authority. Memories of the commission’s abortive standard-market design initiative under Chairman Pat Wood remain fresh in the industry’s collective mind.

“Pushing down a federal policy on states isn’t going to work,” says Cliff Sikora, a partner and co-lead of the energy practice group at Troutman Sanders. “Ultimately there has to be a partnership, where a state can make its decisions as to how it wants to source its energy, and those decisions go hand-in-glove with federal policy. How that partnership gets worked out has yet to be seen, but it has to be reconcilable.”

The trick will be working it out in a way that accommodates regional differences and also achieves overriding national policy goals—all while delivering the greatest value for the least cost to ratepayers. Such a utopian ideal might be unachievable, but the industry’s advocates insist that FERC has no choice but to keep working toward it, if only because the alternatives are worse.

“You can’t get away from having a market design,” says Donald J. Sipe, a partner with Preti Flaherty. “The failure to have a certain type of market design is itself a market design. It’s less helpful and efficient than making a conscious choice, and it might lead to a clumsy result.

“I don’t think FERC will ever be able to get off the market-design horse,” he says.

Market Mashup

The major energy policy debates proceeding in America today might be distilled to a pair of questions: 1) What is the purpose of competition in U.S. electric and gas markets? and 2) What regulatory mechanisms will best ensure competitive markets achieve their purpose? These aren’t new questions, and how the industry’s leaders and lawmakers answer them largely determines the direction of energy policy at federal, regional and state levels.

“One school of thought suggests regulation should just set up a system of markets based on the commodity model and let the prices fall where they may,” Sipe says. “The other says the purpose is to produce rates that are just and reasonable.”

Over time, these viewpoints fundamentally shape U.S. energy markets, and produce the signals policy makers attempt to send through regulations. As various market forces play out, and as social trends evolve and shift direction, policy makers respond with changes in regulations and market structures—for better