Federalism and the Dead Poets Society
by Roger Feldman -- Bingham, Dana L.L.P.
Alan Ginsberg was a beatnik poet as a young man, who subsequently became a power industry regulatory analyst. As first California regulation and then Enron disappeared into the sea, Atlantis-like, he penned the immortal words: "I saw the best minds of my generation corrupted by a vision of endlessly profitable commerce in a world of market entropy."
Haunted by these words, and the inability of Congress to begin to act to bring order to the unshackled national electric grid, FERC Chairman Wood confronted the current state of regulatory confusion with "RTO Week": a five-day workshop to formulate policy for the imposition on the entire nation of a limited number of "properly" constructed Regional Transmission Organizations. As the Commission doggedly seeks simultaneously to impose both fairness of generation access and growth of needed transmission through the RTO construct, it has encountered the great American shibboleth incarnate: Federalism.
A former energy regulator-turned-poet, W.H. Auden, in despair had written earlier in this very regard: "The center cannot hold and mere anarchy is loosed upon the land when credence in compromise overcomes a wise understanding of the limitations of self interest."
At a meeting of State Commissioners during "RTO Week" and thereafter in the NARUC annual conference, a number of fearless federalizers emphasized the important need for each state’s role in the RTO formation and market oversight processes, cost benefit analyses on proposed RTOs’ ability to protect presently advantaged retail markets, and participation of states in planning for matters such as full diversity (of fuel source) – all in the name, presumably, of the as yet generally unbenefitted consumer living off the appropriately acronymed "Provider of Last Resort Energy" (PROLE, in literary regulator parlance). Evidently, the movement of graduate students to unionize has now prompted their elders, who have ascended to positions of administrative power, to seek to do likewise.
The Commission, itself now comprised most of former state regulators, has responded by slowing down the RTO implementation timetable past the original December 15 deadline and undertaking the time-honored Washington expedient of co-opting the opposition through apparent empowerment. It is in the process of creating a series of Federal-State RTO panels for the power industry’s moral equivalent of diversity (of governance sources): "[a] constructive dialogue between the Commission and state commissions with respect to RTO development." In an important collateral procedural move, FERC clarified existing regulations to exempt from barriers to ex parte communications, previously existing prohibitions on communications with state agencies that are parties to contested proceedings (including, notably, the current RTO proceedings). Well, with Enron gone, someone must fill the superadvisory gap. . . Guidance on the proposed new Federal-State panel structure will be issued soon.
The same RTO order contemplates an outreach as well to private investors to better understand the financing of independent transmission companies and of transmission construction. Once a sturdy champion of the superiority of the profit motive as a producer of results, the Commission now (to the dismay of the still very nascent ITC and grid management industries) has stated its position as being more ecumenical to both for-profit transcos and not-for-profit ISOs. Lurking in the background in this regard is perhaps a desire to calm state fears concerning the role of the very anti-federalist notion of Federal eminent domain for transmission lines, which is present in some versions of the proposed Federal energy legislation. Needless to say, state regulators see themselves as the body to determine that a particular project is the most efficient alternative – not some Federally super-imposed RTO. State regulators cleverly have framed the Federal eminent domain issue in the manner of a Vermont regulator testifying at the RTO Week that was: "You cannot combine a merchant transmission solution with eminent domain rights." That appears to mean: "if you want for-profit ITCs, you must leave transmission siting control in-state." The commercial stakes of the preservation of Federalism in transmission matters are raised even further by this formulation.
The erosion of the original national FERC RTO dream of "Four Plus One (Ercot)" has begun. In response to Pacific Northwest pressure, FERC has given up on California being part of a single Western RTO: FERC has now determined to go with three RTOs. And the beat to disintegrate goes on: the New York ISO, currently under shotgun marriage orders to NEPOOL from FERC, has initiated a type of energy futures market in which hedging is possible that, the New York ISO has suggested, cuts out the need for a region-wide RTO. The slopes of federalism are greased with smaller, more manageable and more sophisticated trading markets.
In an echo of a Supreme Court opinion (different kind of poetry), FERC has promised to establish time limits for regional RTO establishment on a "progressive, but appropriately measured time line." It has laid out an ambitious parallel timetable for sweeping interconnection standardization by January 2002 and a possible related pricing NOPR by April 2002. Plainly, FERC does not intend that all of the Federal-State panel parleying will slow it down. The question remains: will this fustian Federal sound and fury be cleverly facilitated by FERC’s inclusive approach to Federalism? In the words of a third well-known Elizabethan dead poet, who served briefly as an ALJ: will FERC be "hoisted on its own petard as the agents of parochial interests work their wile in the name of diverse governance." Stay tuned – the game’s not over till the last dead poet sings.
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years. In particular, he has analyzed and executed a wide variety and substantial value of project financings. He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration. He is a graduate of Brown University, Yale Law School and Harvard Business School.