Fortnightly
Mandatory Wheeling: Is the FERC Overstepping its Bounds?
October 15, 1995By Donald B. Craven and Anthony F. Shelley
In its recent Notice of Proposed Rulemaking (NOPR) on wholesale competition and open-access transmission,1 the Federal Energy Regulatory Commission (FERC) has outlined a plan to revolutionize the electricity industry. The linchpin of its new plan is open access to transmission facilities \(em or, in more traditional terms, "mandatory wheeling" of electricity.
The FERC proposes that all utilities file tariffs requiring them generally to wheel power from any electric generator on nondiscriminatory terms. By providing all comers with equal access to the grid, the Commission hopes to foster development of cheaper power sources and encourage transactions between these new power producers and wholesale and retail purchasers.
But there is a catch. The FERC may lack authority to compel wheeling on such a grand scale. In fact, the Commission admits in the NOPR that it cannot satisfy the stringent conditions prerequisite under current law to compel wheeling. Under these circumstances, the courts may well find that the FERC's new plan \(em while admirable in purpose \(em may exceed its legal authority.
THE RATIONALE: HARD PRESSED
As the Commission observes, many nontraditional generators can now build and operate new generating capacity at prices "substantially lower" than utilities' embedded costs.2 That puts new capacity in danger of being under-utilized. As the FERC puts it, "It is in the [utilities'] self-interest to maintain and use market power to retain (or expand) market share for their existing generation facilities, at least until they can get their generation costs in line with current market prices."3
The FERC's solution is to order the broad-scale wheeling of electricity through nondiscriminatory tariffs of general application. The tariffs would apply 1) to sales for resale (wholesale sales) by any generator of electricity (including the transmitting utility itself), and 2) when an end user arranges
to buy power from a third-party supplier and a public utility transmits that energy in interstate commerce and includes it as part of a "bundled" retail sale to the end user (so-called "buy-sell" transactions).4 The first category amounts to wholesale wheeling. The second appears closer to retail wheeling, since the utility would transmit energy to ultimate consumers.
To accomplish its goals, the Commission invokes Federal Power Act (FPA) sections 205 and 206. Section 205 bars discriminatory conduct; section 206 empowers the FERC to remedy the problem, but only in the case of a "transmission or sale" already subject to its jurisdiction. In the NOPR, the FERC finds discrimination in the absence of tariffs for open-access transmission, which impedes competition. It defends its authority to mandate wheeling to correct that discrimination.
Does the FERC's rationale find support in law?
In 1973, the U.S. Supreme Court examined federal authority to compel wheeling. In the celebrated case of Otter Tail Power Co. v. United States,5 the high court found no congressional intent for federal regulators to compel wheeling: "Congress rejected a pervasive regulatory scheme
for controlling the interstate
distribution of power in favor of voluntary commercial relationships."6 Relying on Otter Tail, the lower courts have held, in a variety of settings, that the FERC lacks authority to compel wheeling.7
Against this backdrop, the Commission's expansive open-access requirement would appear subject to serious attack. At a minimum, the FERC will be hard pressed to explain how its current plan comports with original intent.
EPACT AND PURPA: STRICT LIMITS
In 1978 and again in 1992, Congress did expand FERC authority to mandate wheeling, amending FPA sections 211 and 212 by passing the Public Utility Regulatory Policies Act of 1978 (PURPA) and the Energy Policy Act of 1992 (EPAct). Nevertheless, that authority remains strictly circumscribed.
For instance, the FERC can issue wheeling orders only upon application from a utility or generator selling for resale \(em and then only if the applicant has submitted a request to the transmitting utility 60 days before filing its petition with the FERC. The Commission must also issue a proposed order that leaves the parties with "reasonable time" to "agree to terms and conditions under which such order is to be carried out."8
Sections 211 and 212 similarly place substantive limits on the FERC's authority to mandate wheeling. The FERC is barred from issuing a wheeling order that would "unreasonably impair the continued reliability of electric systems affected by the order."9 And the FERC is categorically barred from ordering retail wheeling: "No order ... shall be conditioned upon or require the transmission of electric energy ... directly to an ultimate consumer."10 Even with respect to wholesale wheeling, the FPA forbids the Commission from mandating transmission service unless the recipient does not sell directly to ultimate consumers. (Or, if it does sell directly, the recipient must qualify as a state or federal authority, utility, or firm with an obligation to serve arising under state or local law.11)
THE RESPONSE: IT WORKED FOR GAS
The FERC's open-access proposal does not comport with these conditions.
First, the FERC candidly admits that its NOPR forgoes compliance with the statutory prerequisites because "[m]any competitive opportunities will be lost by the time the Commission [could] issue a final order under [sections 211 and 212]."12 Second, the Commission has nowhere addressed whether the NOPR will enhance or hinder the reliability of particular electric systems. Third, in the case of buy-sell arrangements, the Commission appears to be requiring a form of retail wheeling. And finally, at the wholesale level, the FERC's broad requirements seem to ensure that firms not specifically identified in the FPA can nevertheless secure power through wheeling.
Thus, the Commission is endeavoring to mandate wheeling without satisfying the conditions set out in sections 211 and 212. It offers three defenses.
1. This Case Is Different. The Commission dismisses Otter Tail and its progeny as not applicable where, as in the NOPR, the FERC has deemed wheeling necessary to correct a specific case of discrimination. Indeed, at least one court13 has acknowledged that idea; another denied wheeling only after finding no evidence of anticompetitive or discriminatory behavior.14 Nevertheless, Otter Tail itself appears to blunt this argument, since the Supreme Court found no federal authority to mandate wheeling despite the trial court's specific finding of anticompetitive and monopolistic practices.
2. Look Elsewhere. After rebutting Otter Tail, the FERC then switches gears. It claims that FPA sections 205 and 206 are an independent source of wheeling authority, even if its power under sections 211 and 212 proves problematic. But this argument, too, might not be well taken. The legislative history to sections 211 and 212 leaves little doubt that Congress expected these provisions alone to form the basis for any wheeling order. When amending sections 211 and 212 in 1992, Congress noted that the FERC's lack of clear wheeling authority marked a major impediment to the development of independent power producers (IPPs): "Absent clarification of FERC wheeling authority, it can be expected that some utilities will try to exercise their monopoly power to block IPPs' and others' legitimate transmission requests."15
3. It Worked For Gas. Finally, the FERC relies heavily on a decision from 1987 that forced natural gas pipelines to provide transportation services to all would-be shippers. In that case, Associated Gas Distributors v. FERC (AGD), the D.C. Circuit distinguished Otter Tail and found that the Commission's authority to remedy discrimination included an expansive power to mandate interstate gas transportation.16 Now, in the electric NOPR, the FERC notes that the FPA was patterned after the Natural Gas Act (NGA), and that the AGD result should hold sway.17
But the FERC ignores entirely a passage in AGD in which the court noted explicitly that the open-access issue might demand different treatment under the FPA than under the NGA: "The legislative history of the two acts is, on this point, materially different."18 Moreover, the NGA contains no counterparts to FPA sections 211 or 212. Thus, in affirming the FERC's open-access policy for natural gas pipelines, the court did not face a situation (as in the FPA) in which Congress had acted first to afford a remedy and the FERC had not complied with the statute.
The courts will of course defer to the FERC on any permissible construction of the FPA. Nevertheless, there is good reason to suspect that they might view the Commission's broad reading of sections 205 and 206 (and its disregard for sections 211 and 212) as inconsistent with congressional intent. The outlook suggests an ardu- ous defense ahead for the Commission. t
Donald B. Craven and Anthony F. Shelley are members of Miller & Chevalier, Chartered, a law firm in Washington, DC. They practice in the firm's regulatory litigation group and specialize in energy issues.
FERC SHOULD ANTICIPATE THE INEVITABLE JURISDICTIONAL CHALLENGES, AND SHOULD LINK ITS AUTHORITY TO ACHIEVE BROAD SCALE OPEN ACCESS TO FPA SECTION 211
Strong Arguments Will Be Made That the Commission Lacks Authority Under FPA section 206 to Order Utilities to File Open Access Tariffs
The Commission founds its authority to order utilities to file open-access tariffs on FPA section 206.[It] goes to considerable lengths in the NOPR to explain how it gleaned this authority from the case law. ...It is reasonable to assume that there are entitles that have not found the Commission's analysis of its authority under FPA section 206 to be persuasive.
Although Edison is not now challenging the Commission's authority to order the filing of open-access tariffs, it recognizes the likelihood of a substantial challenge by others, and that the Commission's interpretation of its authority under FPA section 206 arguably is impermissibly overbroad. Were that to be successfully demonstrated, the legal underpinnings for the NOPR would be done.
Excepted (footnotes omitted) from: Comments of Southern California Edison Company on Notice of Proposed Rulemaking and Supplemental Notice of Proposed Rulemaking. FERC Dkts. RM95-8-000, RM94-7-001, dated Aug. 4, 1995. Filed by Ann P. Cohn, Christa Piantadosi, and Jennifer L. Key, attorneys for Southern California Edison Co.
1. Promoting Wholesale Competition Through Open-Access Non-Discriminatory Trans. Servs. By Pub. Utils., Dkt. RM95-8-000, and Recovery of Stranded Costs by Pub. Utils. and Transmitting Utils., Dkt. RM94-7-001, March 29, 1995, 70 FERC \(pp 61,357, 60 Fed.Reg. 17662, 17675 (April 7, 1995).
2. NOPR, 60 Fed.Reg. at 17675.
3. Id., at 17676.
4. Id., at 17682.
5. 410 U.S. 366 (1973).
6. Id., at 374.
7. See, e.g., Florida P&L Co. v. FERC, 660 F.2d 668 (5th Cir.1981), cert. denied, 459 U.S. 1156 (1983) (no authority despite utility's prior wheeling contracts); Cent. Iowa Pwr. Co-op. v. FERC, 606 F.2d 1156 (D.C.Cir.1979), and NY State Elec. & Gas Corp. v. FERC, 638 F.2d 388 (2d Cir.1980), cert. denied, 454 U.S. 821 (1981) (FERC cannot expand voluntary pooling agreement to nongenerating electric systems); and Richmond P&L v. FERC, 574 F.2d 610 (D.C.Cir.1978) (no general power to mandate wheeling to alleviate energy crisis).
8. 16 U.S.C.A. secs. 824j(a), 824k(c)(1) (West Supp.1995).
9. 16 U.S.C.A. sec. 824j(b) (West Supp.1995).
10. 16 U.S.C.A. sec. 824(h)(1) (West Supp.1995).
11. U.S.C.A. sec. 824(h)(2) (West Supp.1995).
12. NOPR, 60 Fed.Reg. at 17668.
13. See, Florida P&L v. FERC, supra, note 7 (questioning whether the FERC can compel wheeling to remedy findings of anticompetitive activities or antitrust violations).
14. See, Richmond P&L Co. v. FERC, supra, note 7.
15. H.R. Rep. No. 474 (Part I), 102d Cong., 2d Sess. 139 (1992), reprinted in 1992 U.S. Code Cong. & Admin. News 1953, 1962.
16. 824 F.2d 981 (D.C.Cir.1987), cert. denied, 485 U.S. 1006 (1988).
17. NOPR, 60 Fed.Reg. at 17668.
18. AGD, 824 F.2d at 998.
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