Frontlines
FERC Throws Down The Gauntlet
The legal battle of the century is ready to begin.
January 2004
By Richard Stavros
Tantamount to a declaration of war with state regulators was the order from the Federal Energy Regulatory Commission (FERC) late last year, over the objections of Kentucky and Virginia, that AEP must join the PJM grid to meet conditions of its 2000 merger with Central and Southwest Corp.
At the center of the issue is whether FERC has authority to pre-empt the states on development of regional transmission organizations. (For a full outline of the relevant legal arguments, see our "Commission Watch" column, p. 20).
While state and federal regulators have debated this question ad nauseam for the last two years, FERC's order makes it a real legal battle in which both states and the feds now risk their pride, turf, and reputations.
Most legal experts say the final arbiter of state or federal pre-eminence may end up being the Supreme Court, as the loser will certainly appeal again and again.
So, one might ask, what is to happen to U.S. energy markets if the Supremes make FERC God of the Grid? Can markets develop without some check and balance from states? Conversely, if Congress counters and legislates states as the rulers of RTO development in their region, how can you have RTO markets without federal coordination?
Moreover, what happens if the justices strike down this action as unconstitutional?
Would Congress have the momentum to rewrite the law to sidestep any such ruling, assuming there is one?
Some may feel that this legal battle will fall short of going to the highest court of the land. But just listen to the Kentucky and Virginia PSCs in their response to FERC: "This is a case of first impression implicating important issues of national scope and constitutional import. … Moreover, such issues of sovereignty and jurisdiction implicate matters of paramount importance to the future of the electric industry in this country, including the proper factors to be considered in reviewing regional transmission organization applications and the proper balance between federal and state jurisdiction over such applications."
Barely the first shot has been fired, and it is already clear that the states, the feds, and the industry are headed for a long, drawn-out civil war, with the states' rights argument a proxy for regulators' and industry's disagreement over electric restructuring.
This legal battle could be made moot if Congress this year musters the small number of votes needed to pass last year's proposed energy bill, which would delay implementation of FERC's initiatives on standard market design.
In taking on the states, FERC Chairman Pat Wood III put his future and that of his commission on the line, letting the courts decide once and for all who will be king. Will the states be willing to risk as much? FERC's actions have certainly raised the stakes, and nothing less than the future of an entire industry may hang in the balance.
Do the PUCs Know the Will of the People?
Most of the debate so far has focused on FERC's use of Section 205 of PURPA-the Public Utility Regulatory Policies Act of 1978- that the commission used in ordering AEP into PJM.
PURPA permits FERC to "exempt" electric utilities from compliance with problematic state mandates that might otherwise interfere with the unobstructed coordination of power movements across the interstate transmission grid.
But no debate has so far focused on whether the Kentucky and Virginia public service commissions are in fact truly representing the wishes of their state when they oppose membership in regional power markets.
The state action doctrine, the product of the Supreme Court's 1943 opinion in Parker v. Brown, shields states from federal antitrust scrutiny in certain situations. Certainly, the decision by Kentucky and Virginia to oppose AEP's involvement in PJM could be considered anticompetitive conduct.
In a report issued last year, the Federal Trade Commission evaluated the state action doctrine and raised some interesting questions that apply to the Virginia and Kentucky PUCs. The first question: Do the utility commissions qualify as instrumentalities of the sovereign state?
The FTC points out that the state action doctrine rests on principles of federalism and the doctrine shields "sovereign" activities of the state itself, including the actions of the state legislature, a governor, or a state supreme court-provided these entities are acting in their sovereign capacity under the state constitution.
A state public service commission, for example, is not a sovereign empowered to articulate state policy. It merely performs tasks delegated to it by the state legislature. The doctrine extends to PSCs only if such agencies are acting pursuant to a delegation of authority from a governmental actor with independent, sovereign status, and if the recipient is understood as a voice of state policy.
According to the FTC, "To successfully assert a state action defense, these lower-level entities must demonstrate that they have used the delegation of authority to advance the interests of the state, rather than their own interests, by showing that the alleged anticompetitive regulatory conduct (1) is in conformity with a clearly articulated state policy, and (2) has been actively supervised by the state."
In its report, the FTC finds that some courts have applied the doctrine with little or no evidence that the state intended to restrain competition, even if anticompetitive effects spill over into other states. The FTC says, "Some courts have applied the doctrine in a manner that could potentially endanger national competition goals."
The report does not specifically address the issue among FERC, Kentucky, and Virginia. However, the report recommends clarification and reaffirmation of the original purposes of the state action doctrine to help ensure robust competition continues to protect consumers.
Even as Kentucky and the Virginia PSCs have established some record of state legislative backing, the question arises whether the PSCs in fact represent "deliberate and intended state policy." As states question the premise by which FERC acts, so too should the courts evaluate the premise by which the states act.
Articles found on this page are available to subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.
Public
Utilities Fortnightly & Spark
