The electricity industry started out subject entirely to state regulation.[1] Over the years, however, the federal government has gradually grafted-in additional laws and regulations in response to specific management “gaps”[2] and transmission constraints, as well to promote values like deregulation and market competition.[3]
1. Origins: the Federal Power Act and Public Utility Regulatory Policies Act
Federal regulation of energy rates and transmission began with passage of Part II of the Federal Power Act (FPA) in 1935. In the early decades of the 20th century, electricity production and transmission were regulated solely by the states, and public utility commissions (PUCs) arose as the local governing bodies responsible for regulating such in-state retail sales to end-use customers.[4] The Supreme Court made it clear in Public Utilities. Commission v. Attleboro Steam & Electric Company (Attleboro)[5] that state PUCs could not regulate interstate wholesale service.[6] The Attleboro decision left a significant regulatory gap in wholesale power regulation, which Congress stepped in to fill with the FPA.[7] The FPA gave the Federal Power Commission—today known as the Federal Energy Regulatory Commission (FERC or the Commission)—the authority to set “just and reasonable” wholesale interstate transmission rates,[8] while preserving states’ traditional role as in-state retail regulators.[9] Today, it is commonly understood that FERC will assert jurisdiction over any wholesale power transfer—regardless of whether such a transfer is instate or interstate.[10]
The shift away from vertically-integrated utilities began in the 1970s, with the passage of the Public Utility Regulatory Policies Act (PURPA).[11] PURPA required electric utilities to buy electricity generated from non-utility small power producers at rates equivalent to the utility’s own generation or procurement costs.[12] Independent power producers typically lack the economies of scale and cheaper production costs enjoyed by large utilities, and prior to PURPA, utilities had little incentive to purchase from these producers.[13] For the first time, small power producers—many of whom were pioneering renewable-energy technologies[14]—were given more equitable access to the grid. Through PURPA, the federal government opened the door to generation market competition in the electricity sector. Just as more power producers came online quickly, their generation capabilities also increased rapidly,[15] revealing the main “bottleneck” in the system: transmission.[16]
2. The Energy Policy Act of 1992
The Energy Policy Act of 1992 (EPAct 1992)[17] continued to reduce barriers to grid-access for independent power producers. In addition to exempting these small-scale producers from onerous securities regulations,[18] EPAct 1992 also authorized FERC to require transmission-owning utilities to transmit (“wheel”) wholesale power across their transmission systems.[19] Although FERC was prohibited from ordering retail-level transmission access,[20] EPAct 1992 enabled FERC to require “virtually any transmission owning entity in the U.S. to wheel power for wholesale transactions at the request of a broad range of potential applicants involved in wholesale power transactions.”[21] FERC implemented this mandate through orders 888[22] and 889,[23] which further promoted market competition among power producers, and set the stage for restructuring of the entire generation sector in many parts of the country.
Restructuring: The Effects of FERC Orders 888, 889, and 2000
The Energy Policy Act of 2005 and FERC Order 890
FERC Order 1000 (forthcoming)
[1] See, e.g., Joseph T. Kelliher & Maria Farinella, The Changing Landscape of Federal Energy Law, 61 Admin L. Rev. 611, 613-14 (2009) (noting that electricity markets prior to 1935 were “local in nature”).
[2] See infra, note 5 and accompanying text (discussing the “attleboro gap” and the resulting congressional response that allowed for Federal regulation of wholesale power transmission).
[3] See the page titled Restructuring: The Effects of FERC Orders 888, 889, and 2000.
[4] See MIT, The Future of the Electric Grid, 235–36 (2011).
[5] Public Utils. Comm’n v. Attleboro Steam & Elec. Co., 273 U.S. 83 (1927) (Attleboro).
[6] See, e.g., id. at 89; Missouri ex rel. Barrett v. Kansas Natural Gas Co., 265 U.S. 298, 309 (1924); Pennsylvania Gas Co. v. Public Serv. Comm’n, 252 U.S. 23, 28 (1920). This line of cases, culminating in Attleboro, established the limits of state authority to regulate interstate electricity and natural gas service. The Supreme Court found that such interstate regulation posed a “direct burden upon interstate commerce, from which the state is restrained by the force of the commerce clause.” Attleboro, 273 U.S. at 83.
[7] McGuire, supra note 20, at 553.
[8] Id. at 554.
[9] 16 U.S.C. § 824(b) (2012). Specifically, FERC holds exclusive jurisdiction over “transmission of electric energy in interstate commerce,” and over the “sale of electric energy at wholesale in interstate commerce,” and over “all facilities for such transmission or sale of electric energy.” Id.
[10] Fed. Power Comm’n v. Fla. Power & Light Co., 404 U.S. 453, 462–63 (1972). The Court noted that the “elusive nature of electrons” makes it difficult to definitively know whether power is being transmitted interstate, or whether it is being transmitted intrastate (and thus, subject only to state PUC regulation). Id. at 460. The Court held that it was sufficient that the energy “commingles” on the grid. Id. Thus, the test that has arisen that separates state and federal electricity regulation is whether a transfer is done at the retail level (state jurisdiction) or wholesale level (FERC jurisdiction). McGuire, supra note 20, at 555.
[11] 16 U.S.C. § 824a-3(a) (2012).
[12] Id. PURPA refers to this cost as the “Incremental cost of alternative electric energy.” Id. § 824a-3(a)(d). This is also referred to as “avoided costs.” Beth Dunlop, Qualifying Facilities Under PURPA: What Qualifies? 15 Environs 7, 7 (1991).
[13] Dunlop, supra note 88, at 7.
[14] Id.
[15] Tomain, supra note 73, at 452 (“From 1989 through 1993, both the number of QFs and installed QF capacity doubled.”).
[16] Id. at 454.
[17] 15 U.S.C. § 79z-5a (2012).
[18] Prior to EPAct 1992, many non-utility generators were required to adhere to the Public Utility Holding Company Act, 15 U.S.C. § 79 (2012), an act that was meant primarily to manage the market influence of larger utilities. Tomain, supra note 73, at 444. “EPAct advanced restructuring by authorizing firms exclusively in the business of selling electric energy at wholesale (exempt wholesale generators (EWGs)) to be exempt from PUHCA’s ownership restrictions.” Id. at 453.
[19] 15 U.S.C. § 79z-5a (2012).
[20] Id. § 792-5b.
[21] Reinier H.J.H. Lock & Marlene L. Stein, Electricity Transmission, in 4 Energy Law and Transactions § 81.01[4][a] (David J. Muchow & William A. Mogel eds., 1994).
[22] Order No. 888, Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities and Transmitting Utilities, 61 Fed. Reg. 21,540, 21,544 (May 10, 1996) (codified at 18 C.F.R. pts. 35, 385) [hereinafter Order 888].
[23] Order 889, Open Access Same-Time Information System and Standards of Conduct, 61 Fed. Reg. 21,737, 21,737 (May 10, 1996) (codified at 18 C.F.R. pt. 37).
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