Transmission Preemption

Deck: 

Federal policy trumps state siting authority.

Fortnightly Magazine - November 2010

Tradition holds that the siting of electricity transmission infrastructure lies within the bailiwick of state authorities. But growing concerns about the integrity of the interconnected system recently have led to greater regional and federal involvement in determining the need for new lines and getting them built.

Consider the following hypothetical. After a lengthy and heated regional planning process conducted pursuant to the regional transmission organization’s (RTO’s) open-access transmission tariff, a utility receives approval to include a new transmission line in the regional system plan to meet reliability needs, thus qualifying the project for regional cost recovery. In the subsequent state approval proceeding on where the line will be located, however, the state commission staff or intervenors challenge the need for the line, and seek to use different need assumptions (e.g., lower load forecasts, transfer capability, weaker risk scenarios) to support approval of a smaller project.

To what extent may a state commission, in considering an application for approval of a new transmission line or transmission upgrade, revisit the analysis performed in a FERC-approved regional transmission planning process that has determined the line or upgrade is necessary for regional reliability?

As a practical matter, if the state commission can revisit the RTO’s need assumptions and conclusions, the utility easily could find itself whipsawed between two authorities, with nothing getting built. A recent amendment to the Federal Power Act (Section 216) allowing FERC to authorize transmission construction if a state fails to approve lines in certain corridors within one year of application was interpreted narrowly by the Fourth Circuit not to permit FERC to override a state’s express denial of a construction permit.1 But, even assuming this view prevails, it doesn’t follow that federal control over the need determinations driving the construction of new lines, within or outside those corridors, is without teeth.

Take, for example, Section 215 of the Federal Power Act (FPA), enacted, like Section 216, as a part of the Energy Policy Act of 2005 (EPAct).2 Section 215 provides for the establishment of FERC-approved reliability standards to be followed by all transmission system users, owners, and operators. Section 215, together with other longstanding FPA provisions (e.g., Sections 201, 205 and 206), constrain a state agency’s or intervenor’s efforts to prevent construction of transmission lines in a state approval proceeding. FERC’s primary jurisdiction over the reliability of transmission service means that, when a transmission project has been determined necessary by the regional body authorized by FERC (i.e., an RTO), a state must honor that needs assessment, and may not collaterally attack the underlying assumptions to determine a different scope of need. If a state doesn’t give binding effect to the findings resulting from the regional planning process—for example, by requiring the utility to model different assumptions in order to support a reduction in the size of the project—it violates Sections 201, 205, 206 and 215 of the FPA, including the filed-rate doctrine. And while Section 215 provides FERC with more specific tools to address transmission reliability, including approval of reliability standards, as discussed below, the FPA gave FERC authority in this area of transmission service even before EPAct was enacted.

Grid Reliability Authority

FERC had jurisdiction over grid reliability even prior to enactment of Section 215.3 FERC has referenced its authority over rates under Sections 205 and 206 as a basis for actions it has taken to strengthen reliability. For example, in upholding ISO New England’s installed-capacity requirement, FERC noted that it could act to assure generation resource adequacy given the interface among reliability, costs and rates:

[W]here an interconnected transmission system is operated on [a] regional basis as part of an organized market for electricity… all users of the system are interdependent, particularly with respect to reliability, i.e., one participant’s reliability decisions can impact the reliability of service available to other participants and the related costs the other participants must bear.... We find that, in situations where one party’s resource adequacy decisions can cause adverse reliability and costs impacts on other participants in a regionally operated system, it is appropriate for us to consider resource adequacy in determining whether rates remain just and reasonable and not unduly discriminatory.4

Because FERC has exclusive jurisdiction over transmission under Section 201, the reliability of FERC-jurisdictional infrastructure falls squarely within this transmission authority, even in the absence of Section 215. When there’s an upgrade to the transmission grid, absent a voluntary assumption of cost, everyone using the grid pays for that upgrade in their transmission rates, per the rules established by FERC.5 And because reliability affects costs, it also falls within FERC’s purview under FPA Sections 205 and 206.

Regional Transmission Planning

In Order 2000, adopted in December 1999, FERC established RTOs in part because of concerns that a more regionalized approach was needed to fulfill FERC’s jurisdictional goals, including transmission reliability.6 The changes in the industry from unbundling and a more competitive market further resulted in a more intense and different use of the grid. FERC observed:

According to the North American Electric Reliability Council (NERC), “the adequacy of the bulk transmission system has been challenged to support the movement of power in unprecedented amounts and in unexpected directions.” These changes in the use of the transmission system “will test the electric industry’s ability to maintain system security in operating the transmission system under conditions for which it was not planned or designed.”7

One goal noted in particular in Order 2000 was more efficient transmission-system planning. With the close coordination between generation and transmission planning diminishing as vertically integrated utilities unbundled, it was necessary to establish regional organizations to ensure reliability. The independence of an RTO was deemed a crucial element in meeting these reliability and competitive market objectives, as was the RTO’s ultimate authority and responsibility over planning and grid expansion.

Eight years later, in Order 890, FERC required transmission providers (i.e., notably the now fully established RTOs) to adopt an open transmission planning process that coordinates with stakeholders, including state authorities.8 This process must include a “reasonable and meaningful opportunity” for stakeholders, including state commissions, “to meet or otherwise interact meaningfully,” during which all assumptions underlying transmission system plans are disclosed.9 Order 890 also provides for a resolution process to manage disputes arising from the planning process. The planning process is designed to be participatory to avoid discrimination or lack of independence, and to increase transparency, with a Section 206 complaint contemplated in the absence of consensus. The thrust of Order 890 is that its requirements are being imposed under FERC’s authority pursuant to Section 206 of the FPA to prevent undue discrimination in open-access transmission service: “Transmission customers have complained that even in RTO markets there are instances when comparable transmission service is not provided, particularly in the area of transmission planning.”10

While FERC recognized that certain issues, such as retail load, fell within the states’ bailiwick, and that siting is primarily a state concern, it stressed in Order 890 that the ultimate control over planning was within the RTO’s authority and required compliance with the FERC-approved planning process in order to ensure open and equal treatment. Even if discrimination concerns do not arise in the generally understood sense, (e.g., enabling a generation-owning transmission owner to block equal access to its lines) regional consistency in assumptions discourages discrimination and prevents disparate treatment as a general matter. In contrast, a state agency’s statutorily authorized charge is state-centric (i.e., to examine a proposed project solely within the prism of benefit to its citizens and ratepayers).

Reliability Planning

In enacting FPA Section 215, Congress explicitly gave FERC jurisdiction over all users, owners, and operators of the bulk-power system for purposes of approving reliability standards and enforcing compliance. Section 215 defines a reliability standard as:

[A] requirement, approved by the Commission under this section, to provide for reliable operation of the bulk-power system. The term includes requirements for the … design of planned additions or modifications to such facilities to the extent necessary to provide for reliable operation of the bulk-power system, but the term does not include any requirement to enlarge such facilities or to construct new transmission capacity or generation capacity.

Read in the context of Section 215 and the FPA as a whole, this provision envisions that FERC identifies through its reliability standards the extent of need for reliability purposes, while state authorities determine how to meet that need—e.g., whether to build more transmission or employ non-transmission alternatives. The remaining provisions in Section 215 support this conclusion, in that they identify federal and regional bodies as the arbiters of reliability standards.

Consistent with the definition of a reliability standard, Section 215 specifically states that it doesn’t authorize FERC or NERC to order construction—as noted, a state is free to meet a defined need through non-transmission alternatives, such as energy efficiency and other load-reducing mechanisms. Section 215 goes on to provide that it also doesn’t authorize FERC or NERC to “set and enforce compliance with standards for adequacy or safety of electric facilities or services.” Notably, however, this language excludes reliability, indicating, consistent with the remainder of Section 215, that the statute does authorize FERC and its designees to set and enforce compliance with reliability standards. Hence, while the state can adopt different approaches to meet need, it can’t revisit the calculation of need resulting from the application of a reliability standard within the RTO planning process.

Section 215 clarifies FERC’s enforcement powers with regard to a transmission provider’s compliance with reliability standards:

On its own motion or upon complaint, the Commission [FERC] may order compliance with a reliability standard and may impose a penalty against a user or owner or operator of the bulk-power system if the Commission finds, after notice and opportunity for a hearing, that the user or owner or operator of the bulk-power system has engaged or is about to engage in any acts or practices that constitute or will constitute a violation of a reliability standard.

If the entity engaged in violative activity isn’t a transmission user, owner or operator, but rather a state authority, Section 215 provides that NERC and affected parties may file a petition with FERC to obtain an order determining whether the state’s action is inconsistent with a reliability standard. NERC Rules of Procedure, § 314, provides that a system owner must promptly tell the state commission, NERC and the RTO of such a potential conflict:

If a bulk power system owner … determines that a NERC … Reliability Standard may conflict with a[n] …order … that has been accepted, approved, or ordered by a governmental authority affecting that entity, the entity shall expeditiously notify the governmental authority, NERC and the relevant regional entity of the conflict.

FERC may stay state action pending issuance of its inconsistency order. Section 215 is silent, however, as to what happens after the issuance of a FERC inconsistency order. This may mean that a FERC inconsistency determination isn’t self-executing, but rather is entitled to Chevron deference in a Supremacy Clause claim that the affected party may assert as a declaratory judgment,11 or may be cited in another appropriate adjudicatory forum, such as a Section 206 complaint proceeding.

With this context in mind, the regulatory framework established under Section 215 delegates decisions over the assumptions to determine need for reliability purposes to the transmission provider (e.g., the RTO). Compliance with these standards is carried out pursuant to the collaborative process required by Order 890 and embodied in the transmission provider’s OATT. Under the relevant NERC transmission planning reliability standards (TPL-001 to TPL-003), if a state commission uses different modeling assumptions to suggest that the reliability need isn’t as great as the regional planning process indicates, there’s a direct conflict between a NERC reliability standard and the state’s different assumptions. The transmission-planning standards specifically delegate identification of the assumptions to be used in a needs assessment to the RTO, which in turn establishes the assumptions applied pursuant to a process described in its filed tariff.12 State agencies are entitled to participate in that process. Against this backdrop, the action of a state commission rejecting the RTO’s conclusions after the regional collaborative process and simply superseding the RTO’s role in determining regional reliability needs undermines all the regional coordination objectives of FERC’s Orders 890 and 2000 and the authority bestowed by Section 215.

FERC is further fortifying this reliability arsenal through its recently issued Notice of Proposed Rulemaking (NOPR), Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities,13 which seeks to bring more of the individual state issues into the regional planning process, to reduce the incidence of later disputes in state forums.

Filed-rate Doctrine

The filed-rate doctrine reinforces the conclusion that the determination made in the regional planning process by the RTO of the assumptions to use in applying those standards must be accepted in a state proceeding. The regional transmission planning process, as noted, is a part of the RTO’s OATT, i.e., its filed tariff. Under Sections 205 and 206 of the FPA, rates filed or fixed by FERC “must be given binding effect” by the state agency.14 The filed-rate doctrine doesn’t mean that FERC can order what a state rate must be, or circumvent a state rate proceeding and set its own retail rates. Under the doctrine, however, a state commission in setting retail rates must give binding effect to the FERC-filed rate.

Under this filed-rate doctrine, the concept of rates is broad; it isn’t limited to rates per se, but includes utility practices that affect rates.15 Focusing on this practice element, the D.C. Circuit found a violation of the doctrine with respect to a reliability rule in Keyspan-Ravenswood LLC v. FERC.16 There, the Court of Appeals held that failure by the New York ISO to follow NYSRC reliability rules incorporated in its tariff (i.e., by using a formula for translating installed capacity into unforced capacity that significantly affected compliance with those rules) violated the filed-rate doctrine. Noting that “NYISO may only change its rates or ‘practices … affecting such rates’ by first filing with” FERC,17 the D.C. Circuit found that NYISO’s decision to use different time spans for calculating outage rates for load-serving entities (LSEs) and generators in setting the required installed reserve margin made that calculation fall short of the installed capacity required under the NYSRC reliability rules, and thus contrary to the filed rate.

Like NYISO’s incorporation of the NYSRC reliability rules, many RTOs and transmission providers specifically incorporate compliance with NERC reliability standards into their tariffs’ Order 890-mandated transmission-planning process. In those cases, if a state’s deviation from the RTO’s assumptions violates the reliability standards, such actions would violate the filed-rate doctrine.

Precedent supports this. First, requiring the state agency to accept the assumptions and conclusions of the regional planning needs assessment doesn’t interfere with the state’s authority over siting, because nothing in the RTO’s reliability need conclusions compels construction. In ruling that establishing installed capacity requirements (ICR) was within the jurisdiction of FERC, the D.C. Circuit noted that while ICRs encouraged generation, which isn’t within FERC’s jurisdiction under FPA Section 201(b), they don’t require construction: The state can control how an LSE meets its capacity obligation by limiting the amount or type of generation built in the state, and making the LSE use demand response or buy capacity contracts.18

Second, it’s irrelevant that the assumption decision was delegated to the RTO and not made by FERC. In applying the filed-rate doctrine to reject a state’s imprudence ruling relating to a provider’s cost allocation set pursuant to a FERC-filed service agreement, the Supreme Court found it immaterial that the agreement left discretion to the provider’s operating committee to decide, stating: “We see no reason to create an exception to the filed-rate doctrine for tariffs of this type that would substantially limit FERC’s flexibility in approving cost allocation arrangements.”19 If the RTO’s filed tariff dictates who will make the needs-assessment determination, and how, a state authority can’t revisit the same issue.

Third, the filed-rate doctrine also precludes a state authority from interpreting and applying a federal tariff itself—hence the state can’t substitute its own assumptions based on its conclusion that the RTO misapplied NERC reliability standards. The Fifth Circuit held that a state commission couldn’t set retail rates based on its own determination that a utility failed to comply with its FERC tariff, further noting that the filed-rate doctrine didn’t just apply to the allocation formula in the filed tariff per se, but to the entire system integration agreement filed as a part of the tariff. “If each state could enforce its own findings as to the meaning of a filed tariff, in opposition to the conclusions of a FERC-approved agent, the conflicting interpretations would undermine FERC’s ability to ensure that a filed rate is uniform across different states, and intrude upon its exclusive jurisdiction over interstate power transactions.”20

Federal Preemption

The general preemption principles applied under the Supremacy Clause of the Constitution confirm that the federal framework precludes states from revisiting need determinations.

Preemption occurs when Congress shows an intent to occupy a field, or when state action conflicts with federal law. The latter conflict preemption arises either when it’s impossible to comply with both the state and federal law or “where the state law stands as an obstacle to the accomplishment of the full purposes and objectives of Congress…”21 While Section 215’s language that nothing therein shall be construed to preempt any authority of any state to take action to ensure “the safety, adequacy, and reliability of electric service within that State, as long as such action is not inconsistent with any Reliability Standard” tends to suggest only a conflict, not field preemptive scope, an equally plausible reading of this language is that a state may regulate as it chooses on its side of the bright-line jurisdictional divide between transmission and local retail service. If something relates to transmission, or interstate, reliability, then it lies within FERC’s exclusive jurisdiction.

Regardless of whether FERC’s exclusive control over transmission triggers field preemption analysis, state revisitation of RTO need assumptions and conclusions undermines the FPA’s objectives, as set forth in the statute itself and FERC orders and precedent, triggering conflict preemption. As the Fourth Circuit stated when findings preempted a state commission’s revisitation of a cost allocation embodied in a filed transmission- equalization agreement (TEA):

Preemption principles deny state authority to act in a way that would undermine the purposes of federal law. The FPA’s policy statement expresses the Act’s purpose as protection of the public interest affected by the transmission and sale of electric energy in interstate commerce. [See 16 U.S.C. § 824(a)]. The public interest thus protected is, of course, national in scope. The history of the FPA underlines the importance of the broad scope of the public interest the legislation seeks to protect.

Contrasted with this broad public interest protected by federal regulation is the narrower state public interest advanced by PSC regulation. Because the prudence inquiry is inseparable from an inquiry into the TEA’s justness and reasonableness, FERC and the PSC would be making identical, independent inquiries regarding the merits of the TEA but from the perspective of different public interests. It is possible that FERC and the PSC would reach conflicting conclusions regarding the impact of the agreement on their respective publics. Only FERC, as a central regulatory body, can make the comprehensive public-interest determination contemplated by the FPA and achieve the coordinated approach to regulation found necessary in [Public Utilities Comm’n of R. I. v. Attleboro Steam & Electric Co., 273 U.S. 83 (1927)]. No single state commission has the jurisdiction, and neither can it be expected to have the competence or inclination, to make this broad determination… 22

The same reasoning applies to regional planning assumptions. FERC, NERC and RTOs haven’t been given power under Section 215 to force the state agency to approve a particular transmission project, or to circumvent the state agency and order the project to be built. If a utility wanted to obtain such an order, it would need to seek it from FERC under Section 216. But this doesn’t mean the state agency can ignore or re-examine RTO assumptions in its siting proceeding. FERC’s exclusive control over transmission in interstate commerce and RTO regional planning processes requires a state authority, charged with different, parochial concerns, to respect the reliability determination established through the regional process set forth in a FERC-filed tariff.

Finally, there’s nothing novel about a federal regulatory framework whose preemptive scope limits the justification for, but not the entire sphere of, the state action. This is precisely the delineation used in the Atomic Energy Act when addressing issues relating to the siting of nuclear plants.23 A federal-state jurisdictional divide in which the federal authority and its regional designee are in charge of setting reliability standards and applying them to determine the scope of need, and state authorities are in charge of determining whether to meet that need through transmission (and where to place the transmission), is thus consistent with other federal legislation.24

In sum, while the exact ambit of FERC’s siting authority under Section 216 after the Fourth Circuit’s decision in Piedmont will no doubt be thrashed out at a later date, Section 215, bolstered by pre-existing FPA provisions, the filed-rate doctrine and general preemption principles, shouldn’t be overlooked when determining the scope of the RTO’s authority over transmission planning and authorization versus that of state and local authorities. If the interconnected transmission system is to be protected through regional oversight and federally authorized reliability standards, states can’t be permitted to substitute their own need determinations for that of the RTO and thus bring the construction of new infrastructure to a standstill.

The current federal framework certainly encourages cooperation among federal, regional and state authorities, seeking mightily to avoid conflict. But if such conflict happens, that current federal framework contains the legislative and regulatory authority needed to preserve federal and regional control over the transmission system.

 

Endnotes:

1. Piedmont Environmental Council v. FERC, 558 F. 3d 304 (4th Cir. 2009).

2. Sections 215 and 216 of the FPA, referenced throughout this article, are codified at 16 U.S.C. §§ 824o & 824p.

3. See Gainesville U. Dept. v. Fla. Power Corp., 402 U.S. 515, 529 (1971) (referencing FERC’s “responsibility to the public to assure reliable efficient electric service”).

4. ISO New England, Inc., 119 FERC ¶ 61,161 at P25 (2007) (citation omitted), pet’n for rev. denied, sub nom. Connecticut DPU v. FERC, 569 F.3d 477 (2009).

5. See Exxon Mobil Corp. v. FERC, 571 F.3d 1208, 1213 (D.C. Cir. 2009) (“Network Upgrades … improve the entire network, thus their cost must be spread among all users.”).

6. See, e.g., Order 2000, 65 Fed. Reg. 810, 811 (Jan. 6, 2000) (89 FERC ¶ 61,285 (Dec. 20, 1999).

7. Id. at 814 (citations omitted). NERC later became the Electric Reliability Organization certified by FERC under Section 215 to develop, propose, and enforce (subject to FERC review) grid-reliability standards.

8. See Order 890, Preventing Undue Discrimination and Preference in Transmission Service, 72 Fed. Reg. 12266 (Mar. 15, 2007) [slip op. P 438 (Feb. 16, 2007)].

9. Id. PP 453, 460, 471.

10. See id. P 21.

11. See Tennessee v. U.S. DOT, 326 F.3d 729, 736 (6th Cir. 2003) (interpreting somewhat similar 49 U.S.C. § 5125).

12. See, e.g., NERC TPL-003, Requirement 1.3.2; Order on Reliability Standards Interpretations, 131 FERC ¶ 61,068 (2010).

13. 131 FERC ¶61,253 (June 17, 2010).

14. Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953, 962 (1986).

15. See Nantahala, 476 U.S. at 966 (“[T]he filed rate doctrine is not limited to ‘rates’ per se: ‘our inquiry is not at an end because the orders do not deal in terms of prices or volumes of purchase.’”) (citations omitted).

16. 474 F.3d 804 (D.C. 2007).

17. Id. at 810.

18. Connecticut DPU v. FERC, 569 F.3d 477 (D.C. Cir. 2009).

19. Entergy La. Inc. v. La. PSC, 539 U.S. 39, 50 (2003) (“It matters . . . only whether the FERC tariff dictates how and by whom [the] classification should be made.”).

20. AEP v. Texas, 473 F.3d 581, 582, 586 (5th Cir. 2006) (citations omitted).

21. Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 247 (1984); see also Grays Harbor WA v. Idacorp, 379 F.3d 641, 645 (9th Cir. 2004); Gade v. National Waste Management Ass’n, 505 U.S. 88, 103 (1992) (“A state law also is pre-empted if it interferes with the methods by which the federal statute was designed to reach th[at] goal.”).

22. Appalachian Power Co. v. Public Service Comm’n of West Virginia, 812 F.2d 898, 904-905 (4th Cir. 1987) (citation omitted).

23. See Pacific Gas & Elec. v. Energy Resources Commission, 461 U.S. 190 (1983) (under AEA, state may preclude construction of plant based on economic, but not nuclear, factors such as safety).

24. This is not to say that the totality of federal preemption in the area of reliability planning is determined by the rationale on which the state authority indicates it is making its determination; effect, as well as purpose, is relevant. Cf. English v. General Electric Co., 496 U.S. 72, 84 (1990) (Although “part of the pre-empted field is defined by reference to the purpose of the state law in question, ... another part of the field is defined by the state law’s actual effect.”) (citing Pacific Gas, 461 U.S. at 212-13).