Bridging the Regulatory Divide

Deck: 

Regional committees may improve collaboration between federal and state regulators.

Fortnightly Magazine - December 2005

In light of the extensive degree of restructuring and change in the energy industry during the last several years, and the increased degree of complexity such restructuring has created, the lines of demarcation between federal and state authority are not as bright as they once were.

Now, layered on top of ever-evolving industry restructuring and corresponding Federal Energy Regulatory Commission (FERC) rulemakings, we have the provisions of the Energy Policy Act of 2005 (EPACT), which greatly expand the legal authority of FERC and Department of Energy (DOE). These agencies’ new authorities will blur the lines further between traditional state regulatory authority and the domain of the federal government. The concept of “cooperative federalism,” which is supposed to embody the spirit of the Tenth Amendment, has become very difficult to define, and even more difficult to achieve.

Rather than continuing to focus on the tension between the goals and statutory responsibilities of state and federal regulators, the focus today should be on ways in which these officials can bridge that regulatory divide. Even if we can’t build the perfect bridge, considerable strides can be made toward working collaboratively as allies and partners. For the sake of customers, both residential and business, we must stay focused on achieving a reasonable “balance” between the long-respected rights of self-determination and retail ratepayer protection at the state level, and the broader national interests and concerns at the federal level.

From Contention to Communication

Although as a state commissioner I vehemently fought the original standard market design (SMD) proposal, I want to state that I absolutely do not question the sincerity of the objectives behind that proposed rulemaking, or the honorable intentions of the individuals who drafted and issued it. However, it did illustrate the very delicate balance that exists and that must be handled carefully between the legitimate economic interests of state officials, and the national goals and objectives of federal officials.

Interestingly enough, through the course of the SMD firestorm, many state and federal officials alike recognized the very real concerns—and, in fact, federal and state statutory authorities—on the other side of the divide. Black-and-white issues had to be accommodated, as did many gray areas where different but equally lawful authority for both state and federal regulators had to be reconciled.

This led to many conversations, meetings, and negotiating sessions between state and federal regulators, many of which I participated in, and which ultimately resulted in the crafting and release of a FERC white paper in April of 2003 (Docket No. RM01-12-000).

The white paper acknowledged several subject areas that were the pre-eminent authority of individual states to decide; listed goals that FERC still intended to pursue because of its beliefs regarding its statutory responsibility; and enumerated more gray areas where FERC agreed it could defer to the collective consensus of the affected states in a region, determined through a regional state committee (RSC) decision-making process.

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Those areas of agreed deference, or RSC-decisional authority, were regulatory decision-making functions, such as: determining the most reasonable cost allocation methodology for new regional transmission investment; choosing which type of RTO market would be the most beneficial for ratepayers in that region; and determining the structure of regional access charges.

FERC’s creative development of a consensus-based, RSC-driven decisional approach to those specific issues stems from its understanding that those RTO issues were the ones that would have the greatest economic impact on retail ratepayers and arguably would involve overlapping or “shared” jurisdiction. This type of acknowledgement and this type of regional regulatory framework will have to be institutionalized, to varying degrees of formality, regarding the many electric industry issues that lie ahead of us. For this reason, I view the white paper as a pivotal event in the development of the current federal-state relationships in the electric industry, and as a contribution to the continuing evolution of that relationship.

Regional State Committees: Model for the Future

The most salient feature of the 2003 white paper was FERC’s outline for the use and authority of RSCs. The RSC concept embodies the principle of forming this “bridge” between state and federal concerns, more so than any other regulatory device or approach that has been tried to date.

Today, little more than two years after the issuance of the white paper, four regional state committees exist throughout the country, at varying levels of maturity. The first was the Organization of Midwest Independent System Operator (MISO) States (OMS), which the Honorable Kevin Wright now chairs; the second was the Southwest Power Pool (SPP) RSC, in which I have been involved; the third is the RSC for the New England Independent System Operator (ISO); and the most recent is the Organization of PJM States.

Up until now, the RSC concept has been applied only within regional transmission organizations (RTOs), but the concept is equally valid, (whether or not the RSC acronym is used) and should be applied prospectively within non-RTO regions as well. It will be particularly apropos as multi-jurisdictional utilities or groups of utilities begin contracting with independent but non-FERC jurisdictional entities known as Independent Coordinators of Transmission Service (ICTs).

The ICT concept has taken root and now is growing throughout the southeastern United States. Moreover, the RSC organizational tool will prove useful for all states, regardless of their regulatory framework, if they want to find a useful mechanism to coordinate re-gional state interests with those of FERC and DOE as those federal agencies determine how best to implement their new authorities granted them in EPACT. Some of those new federal authorities most likely to engender federal-state tensions include:

  • Determinations of “national interest transmission corridors,” or, more specifically, the designation of transmission congestion that should be alleviated via federally driven economic upgrades to the transmission system;
  • FERC backstop transmission siting authority;
  • Economic dispatch process evaluations and potential Congressional recommendations for future change; and
  • New pre-approval authority for the sale and purchase of any generation facility involved in wholesale markets.

States will have to continue, and in some cases begin, coordinating their efforts and activities in an organized and structured manner with respect to multi-jurisdictional utilities, regional transmission planning, and the development and integration of regional wholesale markets, if they desire to have a viable partnership with federal regulators and industry stakeholders moving forward. There must be a shared recognition of the physical realities of the electric grid and a shared desire to maximize available synergies and cost-saving opportunities for the benefit of end-use customers.

How to Implement a Regional Approach

RSCs can operate on two different levels, as can RTOs and ICTs. At one activity level there is, or at least has been, complete state autonomy and decisional authority, although such authority should be coordinated with adjoining states to get the most optimal results, with the RTO or ICT playing a “consulting” or advisory role. These subject matter areas include generation resource adequacy, integrated resource planning and demand-response programs, transmission siting, and construction and ownership authority for incremental infrastructure investment.

At the second level there is either some degree of federal involvement, or a great deal of federal involvement, depending upon the nature and extent of the RTO or ICT design. These matters include: regional transmission planning; need for reliability versus economic upgrades; cost allocation methodology for new transmission investment; evaluation of most prudent economic dispatch; and generation pooling or market design.

At each of these two levels we have the need for state cooperation and coordination, but the levels differ in terms of the respective authority and autonomy between the state and federal governmental bodies, and the degree to which either the state or federal parties can be “advisory” versus “decisional.”

Whether a state is in an RTO with organized markets, or not in an RTO at all, the states historically have had the following clear statutory authority:

  • Determining the manner in which generation assets will be regulated in that state;
  • Determining who gets to serve the end-use customers;
  • Determining who gets to build, own, and operate generation, transmission, and distribution facilities in that state;
  • Determining how service territories are to be allocated;
  • Determining how much money a utility can charge for each type of asset it owns and service it provides;
  • Determining how the utility should plan for and meet the usage needs of its customers, and through what blend of construction and ownership versus short- or long-term purchases;
  • Deciding how the utility should purchase its commodity and what constitutes prudent purchasing; and
  • Determining what costs are recoverable, from whom, and how.

However, almost without exception, very few of these previously sacrosanct categories of state jurisdiction are 100 percent unfettered anymore, in light of EPACT. Today, and most certainly tomorrow, things will become murky and potentially confrontational whenever a formally “clear” state authority runs up against a regional interest that is or will be governed by the RTO, an ICT, or a federal agency. That’s where the “regional regulatory framework,” pragmatically embodied by the workings of an RSC, can be used to attempt to bridge the state vs. federal divide. It isn’t black and white—it’s gray at its very best—but it is the most pragmatic and reasonable solution to the untenable alternative of “either/or” litigation or federal pre-emption.

As a matter of fact, at a recent meeting of the National Council on Electricity Policy, a representative of the Department of Energy assured me that DOE would love to have RSCs, or a regional group of states, be the ones to determine the “national interest transmission corridors” in their regions, based on a democratic regional transmission planning process and consensus position of the affected states and stakeholders. This gives me great hope that the concept of a “regional regulatory framework,” with well-functioning and democratic RSCs at the heart, can work to stave off a show-down between state and federal authorities over issues that are critically important to both sides.

State-Federal Challenges

On a going-forward basis, there is no doubt that there will be numerous challenges for both state and federal regulators, particularly as we try to harmonize existing state statutory authority with many of the new federal authorities outlined in EPACT. The bill suggests that it preserves many areas of traditional state jurisdiction, and one will find many savings-clause provisions sprinkled throughout the legislation in an attempt to do that, such as in the reliability section and native-load protection language.

Several suggested mechanisms are intended to provide states with a presumed partnership role with their federal counterparts on some issues, and a strong advisory role on others. There is FERC-state joint board language in the area of economic dispatch investigations, regional advisory board language in the reliability title, and regional compact language with respect to the siting of new transmission infrastructure.

However, when viewed in totality, the new energy legislation provides the federal government with substantial new authority over generation and transmission that can, and might well be, used to alter the outcome of what a state would have decided under its previously exclusive jurisdictional domain. Whether we can avoid unhappy and rancorous confrontations with the use of joint boards, regional compacts, or regional state committees is yet to be seen, but it is my sincere hope that we can do so.