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October 15, 2001 


Jurisdictional Disputes Intensify
As FERC Seeks to Extend Its Authority 



By Will McNamara
Director, Electric Industry Analysis 


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[News item from Dow Jones] The U.S. Federal Energy Regulatory Commission (FERC) kicks off a week of workshops today as part of its effort to reframe rules requiring utilities to turn control of their power-grid assets to independent management. The controversial effort to carve up the nation's electricity system under control of four or five regional transmission organizations (RTOs) is a top objective for FERC Chairman Pat Wood III. The workshops, dubbed "RTO Week," were called by FERC to garner what Wood calls "buy in" for the effort, which is encountering stiff opposition from some utilities, state regulators and members of Congress. 

Analysis: The objective of this week's workshops may be to gain support from the industry for FERC's controversial mandate, but they are also having the effect of casting light on what is a growing debate over FERC's jurisdictional boundaries. The issue has become rather evenly divided. On one side, critics say that FERC has gone too far in its most recent RTO order, which as noted has become somewhat of a "cause c?l?bre" for new Chairman Wood. On the other hand, supporters say Wood has breathed new life into the commission and is taking an important step to ensure equal access for all power suppliers into the nation's transmission system. By Wood's own directive, the discrepancy over how far FERC can extend its regulatory oversight into what were previously considered state or utility matters is reaching a boiling point, as a Dec. 15 deadline that carries stiff penalties for resistant utilities is fast approaching. 

Certainly, the arrival of Pat Wood as FERC chairman (after replacing Curt H?bert last month) has signaled a new era for the federal commission, which oversees much of the energy industry's wholesale market and the nation's power grid. As noted, Pat Wood has made the formation of RTOs one of his key objectives. Wood recently demonstrated that FERC would become much more interventionist when he declared a deadline of Dec. 15, by which time transmission-owning electric utilities across the country must submit plans to join an existing RTO in one of four large regional entities. Using what he has referred to as a "big stick," Wood warned that failing to comply with the Dec. 15 deadline would cost transmission-owning utilities their right to charge market-based rates for power and could delay any merger proceedings in which the utilities might become engaged. 

This issue alone has drawn a line in the sand, but has also sparked an intense debate on the regulatory power that FERC should be given in the deregulating energy market. Standing up to lead the effort to put more constraints on FERC's authority are many state regulatory officials and congressional leaders, who view the commission as stepping into areas in which they traditionally have been the sole jurisdictional gatekeepers. State regulators, particularly from Southern states where electricity prices remain comparatively low, argue that that their system is working just fine the way it is. Such states want to retain their present regulatory oversight (rather than completely forfeit control of these assets over to FERC), and also believe that now is not the time to be making huge changes to the way in which the nation's transmission system is managed. Also in question is the extent to which regulatory conflicts may arise between state and federal commissioners if FERC is successful in mandating very large and broad RTOs that transcend state boundaries. 

Southern Company is one utility that has refuted FERC's authority to force it to participate in an RTO. In its July order, FERC directed Southern Company (along with the Southwest Power Pool, Entergy Corp. and Grid South) to form a single RTO for the Southeast region, most likely adopting a structure modeled after Grid South. However, Southern Company already has sunk about $3 billion into its own 26,000-mile system, over which it wants to retain independent control. 

FERC has said that the formation of regional RTOs will result in significant cost savings for customers because the barriers to competitively priced electricity will be removed and transmission costs will be reduced. However, Southern Company claims that the cost to establish a large regional RTO could run as high as $100 million, which could be passed on to customers in the form of higher rates. Southern also disagrees with FERC from a philosophical point of view and questions whether or not the commission's vision of four regional RTOs will truly make transmission activity more efficient. One of Southern's concerns is that the four regional RTOs could become too large and end up operating like monopolies. Ironically, the issue has caused dissension between Southern and its former subsidiary Mirant, which as an independent power producer seeks equal access to the transmission grid. While Southern disagrees with FERC's authority to force RTO participation, Mirant supports the federal government's efforts to streamline transmission activity. 

Leaders of RTO West-the transmission entity in which FERC wants to include the transmission assets of states in the Northwest, Southwest and California-also question the value of a large regional entity and are resisting FERC's authority to mandate this structure. Leaders in the region have said that the formation of RTO West would result in substantially higher rates, considering that the Northwest transmission grid currently lacks the capacity to meet high demand in the area. In other words, although FERC may be endorsing market-based rates for those transmission-owning utilities that join RTOs, some transmission grids remain unstable and may not be ready for increased activity. 

Nevertheless, along with Mirant stand fellow generating companies such as Dynegy and Enron, which have sunk billions into building merchant facilities and want to ensure that they have access to transmission systems. Hence, these companies agree with FERC's emphasis on RTO formations, as generation companies want to ensure that control of transmission facilities is moved from utilities to independent management companies. 

In addition to the RTO issue, the bankruptcy proceedings of Pacific Gas & Electric Co. have also brought the issue of state versus federal jurisdictional authority to a head. The utility's parent PG&E Corp. is pursuing a "ring fencing" strategy in the restructuring related to the bankruptcy proceedings of Pacific Gas & Electric Co. Put simply, PG&E Corp. is trying to protect other valuable assets by transferring them into a new, federally regulated subsidiary. The restructuring plan has raised jurisdictional issues because the California Public Utility Commission, which presently regulates the utility operations of Pacific Gas & Electric Co., believes that it has the right to approve the transfer of assets into a new subsidiary. Further, the state government in California believes that PG&E Corp.'s plan would give too much regulatory control to FERC, and by the same token reduce the amount of control that California would have over generation assets that are presently contained in a regulated subsidiary. 

The complicated issues surrounding how far FERC should be allowed to extend its regulatory authority are presently working their way through the federal legal system. In fact, last week the Supreme Court began hearing arguments from federal lawyers, state regulators and private industry, addressing not only FERC's authority to mandate RTOs but also the commission's 1996 order that required utilities to provide equal access to their transmission systems. Measures are also moving through Congress that would clarify the Federal Power Act to explicitly give FERC the authority to mandate participation in an RTO. At present, the commission had danced around the issue by calling for "voluntary" participation, yet still affixing stiff penalties for utilities that refuse to comply. 

In addition, Rep. Joe Barton (R-Texas), chairman of the Energy and Air Quality Subcommittee, is reportedly working on a broad electric restructuring bill that he hopes to introduce during this congressional session (which could prove difficult as legislators want to close the current session by early November). Barton is a strong supporter of RTOs, and his draft bill reportedly would give FERC the ability to order RTO membership for public and private utilities that own power lines. At the same time, however, it is believed that Barton's draft bill would give utilities the option for an expedited federal court hearing if they disagree with FERC's order, which again would further temper the extent to which FERC has unrestricted authority on transmission issues. 

Moreover, Congress and federal courtrooms may be the best venues for this debate over FERC's authority as disputes between state and federal regulatory oversight are sure to increase as thorny deregulation issues emerge. However, given FERC's deadline of Dec. 15 for RTO participation, the issue has gained a sense of urgency as big utilities such as Southern Company dig in their heels and rebuff the federal commission's mandate. 


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