Opinion ID: 3040019
Heading Depth: 3
Heading Rank: 2

Heading: Federal and State Regulatory Reform

Text: Our description thus far covers the regulatory landscape through the mid-1990s. Beginning then, the electric power industry saw “complementary initiatives by the FERC and state agencies” to shift from a cost-based rate regulation regime to a market-based regime. Carmen L. Gentile, The Mobile-Sierra Rule: Its Illustrious Past and Uncertain Future, 21 ENERGY L.J. 353, 373 (2000). This move toward energy regulation reform was premised on a new set of widely-shared assumptions: First, cost-based regulation did not effectively check public utilities’ market power. See Verizon, 535 U.S. at 486 (“[T]he prudent-investment rule in practice often [was] no match for the capacity of utilities having all the relevant information to manipulate the rate base . . . .”); Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, FERC Order 888-A, 62 Fed. Reg. 12,274, 12,275 (Mar. 14, 1997) (“[A]bsent open access, undue discrimination will continue . . . .”); HIRSH, supra, at 33-54 (describing how “[u]tility [m]anagers [g]ain[ed] [d]ominance” within the earlier regulaPUBLIC UTILITY DISTRICT v. FERC 19561 tory scheme). Also, local utilities would often deny competitors access to their transmission networks, protecting their monopoly status within a geographic area. See Atl. City Elec. Co. v. FERC, 295 F.3d 1, 4 (D.C. Cir. 2002). Second, with technological changes, public power utilities no longer needed to be monopolies. Technological innovations now permitted transmission of power over longer distances, allowing consumers to obtain power from beyond the geographic range of their local utility. See Transmission Access Policy Study Group v. FERC, 225 F.3d 667, 681 (D.C. Cir. 2000) (per curiam) (upholding FERC’s 1996 reform orders), aff’d sub nom. New York v. FERC, 535 U.S. 1 (2002). Third, the newly feasible market competition could drive down wholesale prices and measure the cost of service, including the cost of long-term investments, more accurately than did the previous regulatory regime. Competition, this thesis posits, “at least over the long pull,” will lead to prices that “approximate [marginal] cost,” including a return on capital sufficient to ensure that companies have financial incentives to provide power. Interstate Natural Gas Ass’n of Am. v. FERC (INGAA), 285 F.3d 18, 31 (D.C. Cir. 2002). Based on these assumptions, FERC decided in 1996 to fundamentally reform its regulation of the nation’s interstate wholesale electricity markets. FERC’s orders implementing this electrical power reform, Orders 888 and 889, required each utility that operates transmission lines to allow any other utility in the interstate energy market to use its transmission lines on the same terms applicable to the operating utility itself.10 10 According to FERC, open access is the first of “two central components.” Order 888-A, 62 Fed. Reg. at 12,276. The second central component of the 1996 Orders is their mechanism for allowing utilities to recover “stranded costs,” that is, costs which they incurred under the previous regulatory regime based upon an expectation of repayment that may not occur in newly competitive markets. Id. 19562 PUBLIC UTILITY DISTRICT v. FERC Transmission Access, 225 F.3d at 681-82; Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, FERC Order No. 888, 61 Fed. Reg. 21,540, 21,541 (May 10, 1996). Taking advantage of the newly available “open access,” utilities would, in theory, have both the market incentives and the legal right to compete with each other. This competition would provide retail consumers with the opportunity to purchase power from a wide variety of producers at relatively lower rates. Transmission Access, 225 F.3d at 683. A factory in Albany, California, for example, could, in theory, purchase power from a power plant in Albany, New York, no longer limited in its options to whatever the local utility would sell. Local energy utilities, could, rather than producing their own power to sell to the public, choose between various competing producers and then transfer the expected savings from this competition to the public. FERC estimated that, as a result of such competition, consumers would benefit from annual savings of $3.8 billion to $5.4 billion. Order 888-A, 62 Fed. Reg. at 12,276. A crucial element of FERC’s 1996 “open access” reforms was the connection between “open access” and an “open access” utility’s authority to charge whatever rates the market would bear. “[A]pproximately a decade ago, companies began to file market-based tariffs that did not specify the precise rate to be charged,” and instead indicated that they would charge market-based rates. Lockyer, 383 F.3d at 1012. FERC would approve those tariffs if the public utility proved that it lacked, or had adequately mitigated, any ability to significantly affect market prices. La. Energy & Power Auth. v. FERC, 141 F.3d 364, 365 & n.1 (D.C. Cir. 1998); see also Sw. Pub. Serv. Co., 72 F.E.R.C. ¶ 61,208, at ¶ 61,966 (1995) (summarizing criteria for approving market-based rate tariffs). Such grants of market-based rate authorization were open-ended. See, e.g., So. Co. Servs., Inc., 87 F.E.R.C. ¶ 61,214, at ¶ 61,847 n.3. PUBLIC UTILITY DISTRICT v. FERC 19563 FERC’s 1990s reforms specified open access as one criteria necessary to demonstrate the lack, or adequate mitigation, of market power. When a public utility implemented an “open access” policy, it demonstrated that it lacked market power regarding “sales from its existing [power generation] capacity” and was thus entitled to market-based rate authority — that is, the ability to charge whatever rates the market would bear — when it sold power over open access transmission grids. See Order No. 888, 61 Fed. Reg. at 21,553; see Lockyer, 383 F.3d at 1013 (describing FERC’s test for granting market-based rate authority as “consist[ing] of a finding that the applicant lacks market power (or has taken sufficient steps to mitigate market power)”); cf. EDWARD KAHN, ELECTRIC UTILITY PLANNING AND REGULATION 319 (1991) (describing the lack of open access as allowing “market power [to] interfere with market efficiency”). FERC thus based its 1996 reform — and, as this case makes clear, much of its subsequent regulation — on the belief that “open access” would create market forces helping to ensure that no utility could exercise market power when selling wholesale power. See Order No. 888, 61 Fed. Reg. at 21,554 (“[I]ncreased competition resulting from open access transmission may reduce or even eliminate generation-related market power in the short-run market . . . .”); id. at 21,555 (“[T]he Commission expects this Rule to facilitate the development of competitive bulk power markets . . . .”). FERC tempered this expectation by promising to “continue our caseby-case approach” to granting market-based rate authority. Id. FERC’s “case-by-case approach” includes ensuring that sellers seeking market-based rate authority lack, or have sufficiently mitigated, market power and that FERC has a sufficient “means of monitoring the market in which [the seller’s] sales will take place.” Entergy Servs., Inc., 58 F.E.R.C. ¶ 61,234, ¶ 61,753-54 (1992); see also Lockyer, 383 F.3d at 1016 (requiring a market-based regime to include “implied enforcement mechanisms sufficient to provide substitute remedies for the obtaining of refunds”); Transwestern Pipeline 19564 PUBLIC UTILITY DISTRICT v. FERC Co., 43 F.E.R.C. ¶ 61,240, at ¶ 61,650 (1988) (requiring a finding that “competition in the relevant markets will operate as a meaningful constraint on the exercise of market power”). Following the Entergy approach, FERC also promised to “modify our market rate criteria if and when appropriate,” but specified that any such modification would “not upset transactions entered into pursuant to existing market-based rate authority.” Order 888, 61 Fed. Reg. at 21,555. Like FERC, California challenged the monopoly power of electric power utilities. California’s efforts to foster competition between utility monopolies had begun after the energy crises of the 1970s. See Duane, supra, at 482-87. Federal law then allowed a “qualifying small power production facility” to compete in wholesale power markets. See Public Utility Regulatory Policies Act of 1978, Pub. L. No. 95-617, §§ 201, 210, 92 Stat. 3117, 3134-35, 3144-47 (codified at 16 U.S.C. §§ 796(17)(C), 824a-3). California pursued these new options particularly aggressively so that, by 1991, California received a third of its energy from producers other than the monopolies held by local utilities. HIRSH, supra, at 93. Those producers demonstrated that a utility could efficiently produce power without taking advantage of economies of scale that supposedly made electricity monopolies “natural.” Through these reforms and market changes, the monopoly status of local utilities and the methodology of state regulation of monopoly utilities was eroding. California A.B. 1890, passed in 1996, sought to accelerate this breakup of local utility monopolies by requiring them to divest a substantial amount of their electricity generation facilities. Act of Sept. 23, 1996, ch. 854, 1996 Cal. Legis. Serv. 854 (West). Local utilities also were required to sell power generated by remaining facilities to the California Power Exchange Corporation (CalPX), which was to serve as PUBLIC UTILITY DISTRICT v. FERC 19565 an auction market for wholesale electricity sales. Lockyer, 383 F.3d at 1008-09.11