Fortnightly
Electric Restructuring: Not By FERC Alone
October 15, 1995By Vito Stagliano
The restructuring of electric utilities is fundamentally a matter of national policy \(em not a regulatory issue. Regulators are ill-suited to make national policy because they are conditioned to act within the limits of authority specifically granted by legislation, rather than to seek a fresh statutory mandate in response to changed conditions. Policymakers must assess political, social, economic, technological, regional, and national factors to measure the need for reform. They must also decide what level of regulation is suitable.
Regulators tend to justify action on the basis of legal precedent; too narrow a field to accommodate the probability that regulation itself may have contributed to the conditions that require reform. It is not coincidental, then, that each of the major reforms undertaken during the last two decades in the electric, natural gas, and petroleum sectors1 was crafted by policymakers in the Cabinet, usually without the involvement of regulators and often against their will.
The role of the FERC, in the practice and tradition of federal governance, is limited to that of policy implementer, not policymaker. Indeed, none of the statutes that grant regulatory authority over the electric power industry extends a policymaking role to the FERC: not the Federal Power Act; not PURPA; not EPAct. Those directly affected by the restructuring process should be concerned that the FERC currently finds itself the sole, uncontested agent in the field of federal electricity policy.
THE POLICY VACUUM
The reasons for this unprecedented condition are both mundane and regrettable. The Clinton Administration has abandoned the energy policy field almost entirely,2 content to focus its attention on social and trade policy and on government reinvention. Clinton's Department of Energy (DOE) has viewed the utility restructuring debate as essentially a matter for the states. The DOE's most visible initiative was a proposal by former assistant secretary Susan Tierney \(em presented in response to California's retail wheeling plan \(em to restructure utilities experimentally on the West Coast, while preserving the "social benefits" of regulatory support of renewable resources and energy conservation programs.
Congress, historically loath to delve into energy policy unless pressed by an activist administration, has paid scant attention to the restructuring issue. Among the reasons: the staff of the newly Republican oversight committees is unfamiliar with the complex field of electricity policy, and the Republican leadership's agenda is overburdened with other issues. Sen. Nickles's (R-OK) initiative on repeal of PURPA's mandatory purchase provision is the notable, but so far inconclusive, exception.
To be fair, however, Congress can be excused for believing that it has already declared its views on electric utility restructuring in Title VII of EPAct. That provision calls for (a) opening the power generation market to exempt wholesale generators, and (b) permitting conditional access to the transmission system.
LEGISLATIVE INTENT
EPAct is written in language that reflects the rigor of the legislative process, in which the achievement of a balance between the private and public interest is not an option but a requirement on access to transmission. It states that rates should permit recovery of all associated costs, taking into account any benefits accruing to the transmission system from the transaction or the need to enlarge transmission facilities. But such costs are to be recovered from the applicant seeking transmission service \(em not from the utility's existing wholesale, retail, or transmission customers.3 The Act further declares: "No order . . . shall require transmission of electric energy 1) directly to an ultimate consumer, or 2) to, or for the benefit of, an entity[,] if such electric energy would be sold by such entity directly to an ultimate consumer."4
The requirements of EPAct are difficult to reconcile with those of the FERC's proposed rule on transmission access and stranded costs. Congress neither considered nor debated the possibility that EPAct would be used to fundamentally restructure the industry, that the transmission access provisions would be carried out en masse, or that the Act would engender stranded costs. Its final vote was based on the assumption that, "On a case-by-case basis, utilities may be required to allow their competitors access to their transmission lines."5
A POLICY ALTERNATIVE
If the FERC wishes to assume the policymaking authority abdicated by the Department of Energy, it must also assume the associated duties.6 True reform \(em whether in function or structure \(em cannot by any definitional stretch be accorded the status of a mere rate case. The change being contemplated has, rather, all the elements of a new national electricity policy, the achievement of which is as dependent on reform of the regulatory structure as it is on reform of the regulated. What should emerge from the process is not merely a new set of FERC rules, but a revitalized industry subject to the discipline of market competition and overwhelmingly free of government control, except where such control is absolutely justified by residual monopoly functions.7
An effort to craft national policy would require the commissioners at the FERC to step down from their quasijudicial bench, suspend the present proceedings, and embark on a consensus-building process whose results would be subsequently codified into law by Congress. The FERC could undertake this effort within the framework of a regulatory negotiation process that, among other features, would bring the system's key stakeholders to the table as equal players.
The negotiations would fashion a truly competitive new industry free from manipulation for unrelated social purposes or preferences for discrete sets of competitors. The process would optimally create a deregulated generation function, and a transmission market with nondiscriminatory access, operated under unified federal/state regulation via regional transmission groups, as Congress intended. And it would set ground rules to govern the transition to retail wheeling to avoid the chaos inherent in the prospective actions of 50 distinct state commissions, acting separately and with limited regard for multistate pooling and operating structures.
The restructuring agenda is complex; the economic stakes are high; the policy consequences serious. The nation therefore deserves better than the piecemeal, incremental, trial-and-error methods that now dominate. The FERC can exercise leadership, or it can proceed with traditional command-and-control measures that will engender a decade of uncertainty and virtually certain litigation. t
Vito Stagliano, a visiting scholar at Resources for the Future and co-director of the "ESAI Power Market Analysis" firm, was deputy assistant secretary of energy for policy from 1990 to 1993, and contributed to the design of the Energy Policy Act of 1992.
1. The FERC played no role in the enactment of the Public Utility Regulatory Policies Act (PURPA), the Natural Gas Wellhead Decontrol act, repeal of the Powerplant and Industrial Fuel Use Act, or the Energy Policy Act of 1992 (EPAct), except as commentator to proposals designed and analyzed by the DOE and approved by the White House.
2. The DOE recently issued a "Sustainable Energy Strategy," which devoted less than one page to electric restructuring issues.
3. EPAct, sec. 722(1)(a).
4. Id., sec. 722(3)(h) (emphasis added).
5. Senate Record Vote Analysis: Energy Bill Conference Report/Cloture, 102d Congress, 2d Session, Oct. 8, 1992, P. S-17625 Temp. Record (emphasis added).
6. The Bush Administration, it should be noted, actually proposed the abolition of the FERC in the initial draft legislation it submitted to Congress under the National Energy Strategy Act of 1991, but Congress rejected the idea when it enacted EPAct.
7. Even for residual monopoly functions, the regulation should set performance standards and monitor market behavior rather than micronage agents or manipulate prices and trade.
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