not a grab for power.
The jurisdictional issues posed by Order 888 continue to breed tension between federal and state officials. Unfortunately, most of this tension too often elevates form over substance. This jurisdictional tension shifts the focus of decisionmaking from securing the benefits of competition to preserving regulatory turf.
In Order 888, the Federal Energy Regulatory Commission (FERC) extends four important olive branches to those states that want to introduce customer choice at the retail level. While these olive branches are not a fundamental concession by the FERC, state officials should pursue them before attacking Order 888 for its broad claims over jurisdiction.
Some of the most outspoken advocates of states' rights within the National Association of Regulatory Utility Commissioners (NARUC) would likely call my response overly generous to the FERC, as well as overly optimistic. My more zealous colleagues in state regulation would argue that what I describe as olive branches are brittle twigs at most (em no more than fig leaves to cover the preemptive heart that beats deep within the supposedly imperialist FERC.
Yet I am not a state official who is itching to fight the feds. I care not about FERC/state jurisdictional disputes for their own sake. I am not a state official who believes that an adequate response to this complex and crucial matter is to chant "state rights or no preemption." I care about the jurisdictional issues only because I want to bring the considerable benefits of electric generation competition to the families and businesses of Pennsylvania.
As a state commissioner who believes that the generation of electricity is not a natural monopoly and who, therefore, believes that the government should not be setting the price of electric generation, I support competition in electric generation in both wholesale and retail markets. Both wholesale and retail buyers of electric generation should enjoy a choice among suppliers of generation. Consequently, when I examine the FERC's final rules, I look first to their impact on competition. How do they help the states furnish real choice for retail customers?
Cooperative Federalism
Since the states and the federal government both lay claim to legitimate interests in the restructuring of the electric industry, many have called for something called "cooperative federalism" to delineate appropriate federal and state roles. The term "cooperative federalism" assumes that plain, old "federalism" will not do. Too often, federalism has meant that the federal government dictates to the states. Cooperative federalism would require a commitment by the federal government and by the states to collaborate as they restructure the electric industry to allow competition in generation.
For cooperative federalism to become reality, cooperation must flow in two directions. States cannot expect deference from the federal government if they act like protectionists intent on impeding interstate commerce. The federal government cannot expect teamwork from the states if it preempts state authority even when states act in a manner that promotes the interstate commerce of electricity and competition in generation.
Olive Branch #1. The FERC emphasizes in Order 888 that it will defer to state PUCs on where to draw the line and how to allocate costs between transmission and local distribution in the case of "unbundled retail wheeling." Here is what the FERC says:
"[I]in instances of unbundled retail wheeling that occur as a result of a state retail-access program, we will defer to recommendations by state regulatory authorities concerning where to draw the jurisdictional line under the Commission's technical test for local distribution facilities, and how to allocate costs for such facilities to be included in rates, provided that such recommendations are consistent with the essential elements of the Final Rule."
It adds that it will defer to jurisdictional recommendations from states that employ technical factors other than those used in the FERC's seven-part test,1 if the states believe the historical uses of particular facilities support the application of different criteria.
Conditioned on respect for the core principles of open access and comparability, the FERC offers to the states an opportunity to define "transmission" and "distribution." Here is no meaningless offer.
Olive Branch #2. The FERC requires public utilities to consult their state regulatory authorities before they petition the FERC for a ruling on the classification of facilities as either transmission or local distribution.
Olive Branch #3. The Final Rule concludes that "there is an element of local distribution service in any unbundled retail transaction." The FERC emphasizes that "even when our technical test for local distribution facilities identifies no local distribution facilities for a specific transaction, we believe that states have authority over the service [FERC's emphasis] of delivering electric energy to end users." Consequently, states retain the jurisdictional ability to collect retail stranded costs, to support low-income programs and energy conservation policies, and to fund other "stranded benefits."
The FERC also clarifies its ruling to preserve state jurisdiction over matters of local concern if retail unbundling occurs.
Olive Branch #4. Finally, the FERC may defer to states
concerning the terms and conditions of the unbundled retail transmission tariffs as long as the states honor the principles of open access and comparable pricing:
"If the unbundled retail wheeling occurs as part of a state retail access program, it may be appropriate to have a separate retail transmission tariff to accommodate the design and special needs of such programs. In such situations, the Commission will defer to state requests for variations from the FERC wholesale tariff to meet these local concerns, so long as the separate retail tariff is consistent with the Commission's open-access policies and comparability principles."
Deference by the FERC in this area could remove a potential obstacle to state implementation of retail choice by letting states participate in determining the content of unbundled retail transmission tariffs. Consequently, this forms the most important part of the jurisdictional discussion if the FERC and the states truly intend to cooperate.
Taken together, these four olive branches could and should create a cooperative, working relationship between the FERC and the states. Whether, in fact, these olive branches will create a workable relationship will depend upon how the FERC carries out its promise of "deference to the states." Will the Commission really defer when the states take actions consistent with the principles of open access and comparability?
But the FERC's behavior alone will not define the success of cooperative federalism. Will state officials avoid protectionist policies designed designed to favor native utilities? Will state officials really give the FERC a chance to demonstrate that "deference" means "deference," before charging to the appellate courts?
Where Interests Lie
The federal and state governments possess legitimate interests and important roles to play in creating wholesale and retail markets in electric generation. The federal government shoulders a constitutional duty to ensure free interstate movement of goods, services, and products, including electricity. The supply, movement, and price of electricity remains vital to the economies of Pennsylvania and the nation. Americans spend more than $200 billion on electricity each year. Approximately 50 percent of the nation's Gross National Product is powered by electricity. In my opinion, the price of electricity affects our nation's economic well-being more than the price of oil.
All these facts give the federal government a legitimate interest in ensuring that the regulation of the electric industry promotes efficiency. And while the federal interest is legitimate, it is not exclusive. Nor should it preclude state action that does nothing to impede the interstate movement of electricity.
States, too, have a vital interest in their electric industries and the restructuring efforts rapidly taking place. The electric industry is vital to the economy and public safety of every neighborhood. It has also historically been regulated by states.
The existence of legitimate federal and state interests in restructuring underlines an inescapable reality: Federal and state officials need each other to achieve full competition in wholesale and retail electric generation. Moreover, America's families and businesses need federal and state cooperation for the benefits of generation competition to become real.
Reciprocity, Not Protectionism
Reciprocity may require federal-state cooperation. Some protectionists stand determined to erect barriers to the retail interstate commerce of electricity. Given that some states have begun a transition to retail customer choice but many states have not, what should happen? This area invites the federal government to step in and resolve conflicts between states.
The Supreme Court suggests that the Constitution forbids electric protectionism:2
"We have interpreted the Commerce Clause to ... prohibit state or municipal laws whose object is local economic protectionism. ... [Such] discrimination is per se invalid, save in a narrow class of cases in which the municipality can demonstrate, under rigorous scrutiny, that it has no other means to advance a legitimate local interest."
Retail electric laws that discriminate against the interstate commerce of electricity by prohibiting retail buyers and sellers of electricity that are located in different states from completing interstate sales may well fail this Constitutional test.
As long as they do not frustrate or impede interstate commerce by erecting barriers to the retail sale and movement of electricity, states should be allowed to decide how they will implement customer choice. That right should include set-asides for renewable energy, incentives for conservation, aggregation rights for small-volume users, universal service funds, a "PoolCo," or pure direct access. Policy on stranded investment (em including rights and duties of recovery and mitigation (em should fall within that group.
Only time will tell whether Order 888 offers fig leaves to cover a FERC power grab or olive branches for genuine cooperation. At this juncture, I believe the FERC wants to cooperate and has set forth the means to do it. States should accept and pursue the FERC's offer. t
John Hanger is a commissioner with the Pennsylvania Public Utility Commission.
Federal-State Conflicts
Separating Transmission from Distribution
Order 888 has drawn controversy over conflicting federal and state jurisdiction over transmission and distribution. (E.g., "Jurisdictional Gridlock: A Pathway Out of Darkness," by Craig A. Glazer, Public Utilities Fortnightly, Jan. 1, 1996, p. 29.)
In Order 888, the FERC asserts authority over the transmission component of an unbundled interstate retail wheeling transaction, even though, previously, it has conceded state jurisdiction over retail transmission when bundled in the traditional manner with electric energy as a delivered product.
"When a retail transaction is broken into two products that are sold separately (perhaps by two different suppliers: an electric energy supplier and a transmission supplier), we believe the jurisdictional lines change. In this situation, the state clearly retains jurisdiction over the sale of the power. However, the unbundled transmission service involves only the provision of "transmission in interstate commerce," which, under the Federal Power Act, is exclusively within the jurisdiction of the Commission. Therefore, when a bundled retail sale is unbundled and becomes separate [transactions for] transmission and power sales ... the resulting transmission transaction falls within the federal sphere of regulation."
--FERC Order 888, April 24, 1996, pp. 430-31.
FERC's Concessions
States' Rights in Order 888
s The Bright Line. The FERC will defer to state PUCs on when to draw the line and how to allocate costs under the FERC's technical test for dividing jurisdiction between transmission and local distribution in cases of "unbundled retail wheeling."
s The Preferred Forum. Utilities must consult state PUCs before petitioning the FERC for a ruling to classify transmission from distribution.
s The "Service" Element. The FERC concedes that unbundled retail wheeling always involves an element of service to end users--a matter that falls within state jurisdiction even if the technical test fails to identify local distribution.
s Meeting Local Needs. As part of a state retail access program, the FERC will defer to state requests for special features to meet local concerns in a separate tariff for retail transmission, as long as the retail tariff satisfies the FERC's open-access policy.
1. As proposed in its "Mega-NOPR," and ratified in Order 888, the FERC on a case-by-case basis with consider seven factors as indicators of local distribution: 1) close proximity to retail customers; 2) radial design; 3) inflows are common, outflows are rate; 4) power is not reconsigned or transported on to other markets; 5) power is consumed in a comparatively restricted geographical area; 6) meters measure flows at the interface interface between transmission and local distribution; and 7) distribution systems feature reduced voltage. FERC Order 888, Apr. 24, 1996, pp. 401-402.
2. C & A Carbone, Inc., et al. v. Town of Clarkstown, 114 S.Ct. 1677 (1994).
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