Fortnightly
Can the FERC Overcome Special Interest Politics?
October 15, 1995By Jim Rossi
The competitive transformations of the natural gas and telecommunications industries are over a decade in the making. By contrast, competition in the electricity industry is still emerging. Special interests have defeated many proposed competitive reforms. For example, in 1988 the FERC failed in its attempt to adopt regulations to encourage competitive bidding and independent power producers (IPPs).1 Similarly, decades of forceful industry opposition delayed open access in bulk-power markets. In 1992, Congress was able temporarily to transcend special interest politics in EPAct, adding enforceable open-access provisions to federal law.
Often, however, the benevolent hand of "competition" or "the market" becomes rhetoric motivated by special interest politics. Many large industrial users of electricity, for example, would support "competition" \(em as long as smaller captive customers pay the costs of the generation facilities stranded by industrial shopping for low-cost power. IPPs favor "the market" \(em as long as they can sell their power to whomever they choose and share none of the obligations of transmission networks traditionally borne by utilities. Even many vertically integrated electric utilities favor "competition" \(em as long as regulators guarantee their monopoly franchises and rates that allow them to recover their costs.
And so, despite the well-intentioned reforms of state and federal regulators, electric competition has not advanced far beyond the vision of PURPA. We have competition among generating sources for incremental capacity coupled with transmission access among wholesale producers and consumers, but retail competition only exists for very large (primarily industrial) consumers. While many of the electrics have "reinvented" themselves, the industry as a whole remains largely the same as its New Deal predecessor: marked by large, vertically integrated companies that provide a bundle of generation, transmission, and distribution services within a monopoly franchise.
If the FERC has its way, this status quo won't last long.
In the spring of 1995, the FERC issued its NOPR on open-access transmission, consolidating it with a pending stranded-investment rulemaking proceeding.2 The NOPR constitutes the most wide-reaching competitive reform effort to date in the electricity industry.
If approved, the NOPR would move the industry closer to the model of open access and unbundling that has been successful in the natural gas and telecommunications industries. Moreover, as the NOPR illustrates, the FERC has played an active role in tempering the special interests that stand in the way of effective competition. This role signals a stark redefinition of an agency known to most lawyers, political scientists, and economists as the paradigmatic "captured" bureaucracy.
AN ASTUTE STRATEGY
Though clothed in the language and procedures of generic rules, the 1995 NOPR astutely continues a strategy the FERC has used to build support for electricity restructuring in adjudicative proceedings. In recent years the FERC has begun to employ "carrot/stick" incentives to encourage utilities to volunteer to make the choice that regulators desire. For example, in individual cases, the FERC has conditioned its approval of utility mergers or market-based rates on the requesting utility's voluntary adoption of some sort of procompetitive reform, such as an open-access tariff.3 As these incremental carrot/stick choices have increased the number of utilities voluntarily adopting the FERC's proposed reforms, they have also worked to reduce the intensity of special interest opposition.
Like the Commission's case-by-case adjudicative proceedings, the electricity NOPR offers incremental incentives that, if accepted by the industry, will work to reduce special interest opposition to the FERC's reforms. Most significantly, as Professor Richard Pierce of the George Washington University Law School recently observed, the NOPR offers utilities an opportunity to recover 100 percent of their stranded costs \(em which, at an estimated $200-300 billion, stand as the greatest obstacle to competition in the industry4. According to Pierce, the FERC NOPR offers a deal that makes voluntary affiliate separation or corporate divestiture attractive for many utilities by tying separation or divestiture to complete stranded-cost recovery.
Under the NOPR, stranded-cost recovery is allowed for wholesale transactions only. A generating company (GenCo) could, however, make wholesale sales to a distribution company (DisCo) and, if the DisCo finds cheaper power elsewhere, the GenCo could recover stranded costs from it. This arrangement may placate utilities that must wait for individual states to consider retail wheeling proposals prior to complete recovery of stranded costs. Thus, while the FERC's restructuring proposals shy away from mandating complete separation or divestiture (which would certainly raise significant legal challenge), they create a clear incentive designed to encourage them. If firms act on this incentive, their stake in the outcome of the NOPR will have shifted and they will be less likely to oppose the FERC's reforms. Further, the NOPR encourages utilities to adopt a structure compatible with retail access and thus may jump start utility support for state reform efforts.
REFORM HELD HOSTAGE
In addition, the FERC has offered the possibility of PURPA reform as a quid pro quo for support of its restructuring NOPR.
In the spring of 1995, Sen. Nickles (R-OK) introduced a bill5 to repeal the power-purchase mandate contained in section 210 of PURPA. During recent hearings on this bill, FERC chair Elizabeth A. Moler warned that her support of PURPA reform will be held hostage to the FERC's final approval of the electricity restructuring NOPR.6 Although Moler may find sound economic reasons to block PURPA repeal until robust competition develops, the political choice she has presented utilities remains clear: If you support the spirit of FERC's NOPR, FERC will support your efforts to end PURPA's mandatory purchase rules.
The FERC will never be able to satisfy all of the interests affected by electricity industry restructuring. But its use of incremental preference shaping to build support for its transition to a new market structure may mollify the influence of the most powerful special interest factions, allowing more effective competition to emerge from the regulatory process. Unlike competition, special interest politics is certainly inevitable, but even this does not absolve regulators from protect-ing the reform process from its taint. t
Jim Rossi is an assistant professor at the Florida State University College of Law.
1. Regulations Governing Bidding Programs, 53 Fed.Reg. 9324 (1988); Regulations Governing Independent Power Producers, 53 Fed.Reg. 9327 (1988).
2. 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.
3. The NOPR describes the Commission's procompetitive reforms in case-by-case proceedings. See, 60 Fed.Reg. at 17671.
4. See, "Utilities Urged to Break Up Companies to Recover Stranded Costs Under NOPR," Electric Utility Week, May 8, 1995, at 5 (summarizing Pierce's observations).
5. The Electric Utility Ratepayer Act, S. 708 (introduced 104th Cong., 1st Sess., April 5, 1995; referred to Committee on Energy and Natural Resources).
6. "Senators See Possible Deal as NUGs, Utilities Square Off in PURPA Debate," Electric Utility Week, June 12, 1995, at 1.
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