NewEnergyNews: TODAY’S STUDY: Should States Or The Feds Regulate Electricity Delivery?

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    Monday, January 09, 2017

    TODAY’S STUDY: Should States Or The Feds Regulate Electricity Delivery?

    Federal/State Jurisdictional Split: Implications for Emerging Electricity Technologies

    Jeffery S. Dennis, Suedeen G. Kelly, Robert R. Nordhaus, and Douglas W. Smith, December 2016 (Lawrence Berkeley National Laboratory)

    Executive Summary

    The first Administration-wide Quadrennial Energy Review (QER), released in April 2015, found that the “interacting and overlapping” division of authority between “federal, regional and state institutions and regulatory structures” for the electricity sector could “impede development of the grid of the future [and] . . . the development of markets that efficiently integrate” new and emerging technologies.1 While “technology is indifferent to state-Federal boundaries and jurisdictions,” the QER explained, “technology users cannot be.”2 The report concluded that “[b]oth Federal and state governments need to play constructive and collaborative roles in the future to ensure that consumers and industry are able to maximize the value of new technologies.”

    The QER recommended that the Department of Energy (“DOE”) facilitate such collaboration by playing a “convening role” to bring together state and federal regulators and other stakeholders to consider these issues.4 This paper provides background and analysis on these jurisdictional issues and the impact they may have on adoption of emerging energy technologies and coordination of markets for those technologies, in support of future dialogs on these subjects.

    In particular, this paper reviews the structure of the Federal Power Act (“FPA”),5 and compares the division of authority between the federal and state governments adopted there with other federal energy and energy-related statutes. It then goes on to review some of the key decisions from the Supreme Court that further shaped this jurisdictional split, and some recent and current jurisdictional disputes that are bringing the FPA’s division of authority back into focus. This review leads to the following key observations:

    -The Federal Power Act established a “bright line” between federal and state regulation based on the electricity sector that existed in 1935. The FPA assigned some electricity sector regulatory functions to the federal government, and explicitly reserved other functions to the states. This so-called “bright line” between federal and state regulation – federal regulation of wholesale sales and transmission in interstate commerce and state regulation of generation, distribution, and retail sales – was laid out with the electricity industry of 1935 in mind, and was further defined by courts based on the traditional, vertically-integrated industry structure that existed for most of the 20th century.

    -Recent technology innovations were not anticipated by the FPA. New technologies – such as distributed generation, storage, sophisticated load controls that facilitate active demand management, and microgrids – have different attributes than the electricity technologies that existed when the FPA was enacted. These differing attributes have driven, and will continue to drive, new jurisdictional issues and tensions. (Given the pace of innovation, it is entirely conceivable that there will be future technologies not yet invented that also will raise jurisdictional issues and tensions.) Such technologies are capable of providing multiple services across the traditional generation, transmission, and distribution classifications, making the “bright line” between federal and state jurisdiction less “easily ascertained.” For example:

    o When end-users adjust their retail demand in response to price signals in wholesale markets or to provide a wholesale service (such as capacity), which side of the federal-state bright line does that fall on?

    o When residential customers install rooftop solar and provide any generation beyond their immediate needs to the local utility, do they become subject to federal utility regulation?

    o When a distributed generation resource, energy storage asset, or other new technology is capable of providing both retail and wholesale services simultaneously, can it provide those services across both state and federal regulatory structures?

    − Judicial resolution of jurisdictional disputes may not lead to outcomes that support collaboration among federal and state policymakers. When jurisdictional disputes under the FPA are arbitrated in the courts, they are generally resolved by “picking sides” – i.e., the legal question presented is whether or not the Federal Energy Regulatory Commission (“FERC”) or the state acted within the constraints of the FPA. The recent FERC v. Electric Power Supply Ass’n6 and Hughes v. Talen Energy Marketing, LLC7 Supreme Court decisions provide examples of the courts applying the FPA’s jurisdictional division to new sets of technology and market challenges. (In both of those cases, the Court found for the broader view of the federal role.) The jurisdictional provisions of the FPA do not explicitly provide tools for regulators and policymakers to develop middle ground, “win-win” approaches that would allow for shared authority or encourage coordination across jurisdictions and markets.

    − Competitive interests can drive jurisdictional disputes. In today’s electric sector, federal regulators (and in some cases state regulators) rely on competitive markets to ensure just and reasonable outcomes for consumers. The value of very significant investments in those markets is determined by regulatory decisions concerning market rules and market structure. New entrants – including developers of new generation resources, demand response and energy efficiency developers, non-traditional transmission developers, and new technology developers – are challenging incumbent generators and utilities. The federal-state jurisdictional divide can sometimes be used as a tool in efforts to gain or preserve market share. The recent EPSA and Hughes cases both illustrate this phenomenon: both pit new entrants (demand response in EPSA, new developers of generation resources that may displace existing resources in Hughes) against incumbent market participants. As new distributed technologies seek to gain greater market share, jurisdiction is likely to continue to be a point of leverage.

    After reviewing the current jurisdictional map and the historic, recent, and foreseeable future jurisdictional issues and disputes, the paper explores several available approaches to better align jurisdiction so it does not become a roadblock to advanced technology adaptation:

    − Muddling through. Most often, questions regarding the scope of federal and state authority under the FPA are resolved on a case-by-case basis. The Supreme Court cases decided in the last two terms each made a fact-bound determination regarding the jurisdictional question presented, and did not attempt to establish a new “bright line” between federal and state authority or establish broader principles for federal-state coordination that might cleanly resolve future disputes. Without further action by Congress to address the issues presented by the current regulatory divide, regulators, policymakers, and the courts will have to try to apply the existing framework to new technologies in a workable fashion. Such “muddling through” will entail litigation, uncertainty, and delay. Moreover, even where both federal and state governments operate within their “jurisdictional lane,” they may still end up reaching results that frustrate the other’s policy goals.

    − Judicious interpretation or exercise of jurisdiction. FERC has, at least at times, tread softly in areas where it might have a claim of jurisdiction, but where it did not have a policy interest in overriding state regulation. In Order No. 888, for instance, FERC chose not to exercise jurisdiction over the transmission component of bundled retail rates, and the majority of the Supreme Court deferred to its choice (while noting that FERC could have gone further). Likewise, FERC has interpreted net metering not to involve a wholesale sale, and thus has avoided triggering federal regulation. And in its demand response orders, FERC made clear that states may “opt out,” i.e., choose not to allow retail customers to participate as demand response resources in organized markets. These examples, and the Court’s favorable view of FERC’s “notable solicitude toward the States” in EPSA, suggest that the creation of frameworks that explicitly recognize and accommodate state policy goals and jurisdictional responsibilities could be a tool at FERC’s disposal to address jurisdictional uncertainty and market integration problems impacting new and emerging technologies.

    − Adoption of frameworks for federal/state collaboration under existing law. FERC and the states have pursued efforts to collaborate on shared priorities, and could do so again in the context of new and emerging energy technologies. For example, FERC and the National Association of Regulatory Utility Commissioners (“NARUC”) have conducted “joint collaboratives” on topics such as demand response, smart grid, and other issues. In addition, just as FERC has chosen to cautiously exercise its jurisdiction to respect the impact it may have on the states, FERC has also adopted frameworks in its own rules to explicitly account for state and local public policies. In Order No. 1000, for example, FERC required that regional and local transmission planning processes consider transmission needs driven by state policies. Such frameworks could be a tool for FERC and states to reconcile their respective jurisdictional authorities and account for the ability of new and emerging energy technologies to simultaneously provide services in both wholesale and retail markets.

    − Formal collaboration/delegation under existing but rarely used FPA provisions. The FPA authorizes FERC to hold joint hearings with state commissioners. The joint hearing provision permits FERC and states to hear cases together, but provides for no joint decisional procedure. The FPA also authorizes FERC to set up joint boards, consisting of state utility commissioners, to consider matters otherwise within FERC’s jurisdiction. This is essentially a limited delegation of FERC decision-making to a board of state commissioners (there is no federal representation on a joint board.) While rarely used, these provisions of existing law may provide potential tools to improve federal/state coordination on particular issues.

    − Legislative changes. It may not be possible to address some jurisdictional obstacles to deployment of advanced technologies without legislative changes. Such changes could be specific to a particular technology (e.g., legislation on regulatory treatment and jurisdiction over energy storage), or changes to authorize FERC and state regulators to agree to issuespecific adjustments to jurisdiction.

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