The Honorable John C. Watkins
Chairman, Stranded Costs and Related
Issues Task Force (SJR 91)
Post Office Box 159
Midlothian, Virginia 23113
Re: SJR 91 - State/Federal Jurisdictional Issues
Dear Senator Watkins:
This letter responds to your request at the Stranded Costs and Related Issues Task Force (SJR 91) meeting on September 18, 1998, that the Office of the Attorney General provide a written summary of our conversations with the Staff of the Federal Energy Regulatory Commission ("FERC Staff"). These conversations represent the FERC Staff's response to a letter from this Office dated September 8, 1998, regarding the creation, and regulation, of independent system operators ("ISO") and regional power exchanges ("PX").
FERC Staff chose to respond to our inquiry verbally, suggesting that such medium hopefully would be more productive and informative. The following provides a brief introduction into the genesis of FERC's jurisdiction in this area, and then provides a summary of our discussions on six key questions - which combines our thoughts with those of FERC Staff.
Federal Power Act. Under the Federal Power Act, FERC possesses the exclusive authority to establish the rates, terms and conditions for transmission service, and wholesale sales, in interstate commerce. (See 16 U.S.C.A. § 824 et al.) Pursuant to the FPA, a "public utility" is any person "who owns or operates facilities subject to the jurisdiction of [FERC]." (16 U.S.C.A. § 824(e).) "Jurisdictional facilities, in turn, are … facilities for wholesale sales (sales for resale) in interstate commerce or for transmission in interstate commerce." (Automated Power Exchange, Inc., 82 FERC ¶ 61,287 (March 25, 1998).) An ISO generally is an entity that has entered into contracts with transmission owners to operate the transmission system and provide transmission service. A PX typically is an entity through which buyers and sellers trade in electric power and energy for physical delivery.
1. May a state require a utility to file an ISO agreement with FERC?
There is no clear FERC or court decision on this question. However, this arguably should be permitted since the state action (i.e., requiring the ISO filing) need not, in and of itself, have the effect of modifying transmission rates, terms and conditions. Any such changes will not take effect until FERC approves the filing.1
2. May a state prescribe the detailed contents that must be included by a utility in its ISO filing at FERC?
As with question 1, there is no clear decision on this question. However, also as with question 1, this arguably should be permitted since the state action (i.e., prescribing the contents of the ISO filing) need not, in and of itself, have the effect of modifying transmission rates, terms and conditions. Any such changes will not take effect until FERC approves the filing. If the utility makes the filing under protest, however, FPA preemption considerations likely are heightened. For example, some utilities apparently have contended that the FPA grants them the discretion to determine the contents of their own FERC filings - and that state interference with that discretion is preempted.
3. May a state require the initial ISO filing to contain a clause providing that, if FERC makes any modification, the utility will not accept the change without first obtaining state approval?
It is not clear whether this type of state pre-approval of FERC actions will be preempted by the FPA. However, if the utility initiates the filing at FERC, the utility arguably possesses the right to withdraw the filing before it becomes effective. In addition, if the state is not preempted from directing the utility to make the filing, then the state arguably should be permitted to prescribe the conditions under which the utility may withdraw the filing. The converse also is true; if the state is preempted from directing the utility to make the filing, then the state likely would be preempted from prescribing the conditions under which the utility may withdraw the filing.
4. May a state require a utility to obtain state approval prior to implementing any FERC modifications to an existing ISO?
FERC has the authority to order modifications to an ISO arrangement after it goes into effect. After an agreement (such as an ISO arrangement) is approved by FERC, a utility would have to withdraw from the arrangement to escape a FERC-ordered modification thereto. However, a utility may not lawfully withdraw from a FERC-jurisdictional agreement without FERC's approval. Moreover, as a policy consideration, FERC likely would hold serious reservations about granting a utility permission to withdraw from a regional ISO that is playing an important role in the market.
5. If FERC possesses the authority to order a utility to join an ISO, may a state prohibit the utility from transferring control of transmission assets to the ISO?
In this situation, it is likely that a court would find that a state is preempted from prohibiting a utility from transferring control of transmission assets necessary for participation in the ISO. It currently remains an open question, however, as to whether FERC possesses the authority to require a utility to join a regional grid management institution, such as an ISO. For example, it has been suggested that FERC could use the same statutory authority relied upon to order open access transmission tariffs (in Order Nos. 888 and 889) to require utilities to join ISOs (e.g., by finding that current interstate transmission operations result in undue discrimination under § 205 of the FPA). FERC has yet to attempt to assert such authority, and in fact has requested the United States Congress to make such authority explicit.
6. What is the extent of FERC's jurisdiction over a PX?
For examples of FERC's view on this issue, FERC Staff referenced orders involving the California PX. In these orders FERC concludes, among other things:
As discussed at the full Subcommittee meeting on October 20, 1998, there are indications that FERC is moving towards mandating ISOs (or other forms of regional grid management). FERC Chairman James Hoecker reportedly has concluded that utilities must form regional grid management institutions to permit development of competitive markets, that the industry has not moved fast enough in this direction, and that FERC will initiate a formal proceeding (to conclude by the end of next year) to reach a policy decision on this issue. Moreover, the U.S. Department of Energy's proposed electric restructuring legislation explicitly grants FERC the authority to order ISO-type arrangements.
In addition, a state should retain its traditional jurisdiction over matters such as reliability, safety, and siting. For example, in establishing the California ISO, FERC noted that the State of California would retain its existing authority over matters such as "reliability generally, the setting of state required reliability standards in particular, emergency response and coordination, system expansion, resource planning, and system failure and outage impact analysis." (Pacific Gas and Electric Co., et al., 82 FERC ¶ 61,223 (March 4, 1998).) The actual extent of this authority, and a state's ability to implement the same, however, remains to be seen; it is unclear whether state actions in this area might affect the ISO's FERC-jurisdictional activities.
Nonetheless, until FERC decides to mandate ISOs (with or without explicit authority to do so), it basically must rely upon voluntary action by utilities to establish the same. Thus, FERC Staff hopes that states will take actions that would lead to the formation of ISOs.
Our Office is available to further discuss this matter with the Task Force. Please contact me with any additional questions.
Very truly yours,John F. Dudley
Senior Assistant Attorney General & Chief
cc: Members of the Joint Subcommittee:
The Honorable Jackson E. Reasor,
Jr., Chairman
The Honorable Clifton A. Woodrum,
Vice-Chairman
The Honorable Richard J. Holland
The Honorable Thomas K. Norment,
Jr.
The Honorable Kenneth W. Stolle
The Honorable Kenneth R. Plum
The Honorable Jerrauld C. Jones
The Honorable Harry J. Parrish
The Honorable Eric I. Cantor
The Honorable Terry G. Kilgore
Arlen K. Bolstad, Esq. (via electronic mail)
James C. Dimitri, Esq.
Judith Williams Jagdmann, Esq.
1 Nonetheless, some utilities have argued that the decision in Commonwealth of Massachusetts v. U.S., 729 F.2d 886 (1st Cir. 1984), demonstrates that the FPA preempts a state from taking this action. However, in conditionally authorizing the California ISO and PX proposals jointly filed by three California investor-owned utilities ("IOUs"), FERC recognized that the IOUs made such filings "at the direction of the Public Utilities Commission of the State of California." (Pacific Gas and Electric Co., et al., 77 FERC ¶ 61,204 (Nov. 26, 1996).)