Modern Legislation And Regulation Of The Industry
The generation, transmission, and distribution of electric power are heavily regulated. At the federal level, the transmission of electric power between utilities is governed by the PUBLIC UTILITIES Regulatory Policies Act (PURPA) (Pub. L. No. 95-617 [codified in various sections of U.S.C.A. tits. 15, 16]). In PURPA, Congress gave the Federal Energy Regulatory Commission (FERC) jurisdiction over energy transmission. PURPA requires that independent power producers (IPPs) be allowed to interconnect with the distribution and transmission grids of major electric utilities. In addition, PURPA protects IPPs from paying burdensome rates for purchasing backup power from major utilities, and sets the rate at which the utilities can purchase power from IPPs at the major utilities' "avoided cost" (market cost minus the production costs "avoided" by purchasing from another utility) of producing the power.
The primary regulation of the generation, distribution, and transmission of electric power occurs at the state level through various state public utility commissions. Because the production of electric energy is connected with a public interest, states have a vested interest in overseeing it and working to guarantee that electricity will be produced in a safe, efficient, and expedient manner. In exchange for a monopoly in a particular geographic region, an electric utility must agree to supply electricity continuously and has a duty to avert unreasonable risks to its consumers. Electric utility companies must provide electricity at applicable lawful rates, and must file rate schedules with the public service commissions. Sometimes these rates are challenged, and administrative hearings are held to allow the utilities to petition for rate increases. Electricity rates must be high enough to cover the cost of production and must allow a fair return on the current value of capital investment. Rates that would allow significantly more than a fair return may be struck down as unreasonably high.
The regulatory landscape began to change in the late 1990s, as FERC endorsed the concept of greater competition in the sale of electricity. Advocates of competition contended that the production and delivery of electricity were two distinct activities that should not be bundled into one charge for energy consumer. Instead, they argued for a free market system where electricity could be bought and sold at the wholesale level for the lowest price and then delivered anywhere in the country. National energy producers and wholesalers sought to end the dominance of state and regional utility companies, which controlled the power lines through which these new competitors wanted to transmit electricity.
FERC issued an order in 1996 that opened up the electrical transmission lines owned by state power utilities to other wholesalers of electricity. The order required that utility companies break out their wholesale electricity rates to show how much was being charged for the generation of power, the transmission of electricity, and other ancillary services. In addition, whatever these companies charged to transmit their own electricity was the maximum amount they could charge other companies that wanted to use their transmission lines.
These regulations were also extended to the retail transmission of electricity in interstate commerce. However, FERC rejected the calls of energy resellers (such as the Texas-based Enron Corporation) to permit this same type of open access to retail power sales. This would have meant that consumers and businesses could obtain their power from an out-of-state provider, much like they can choose their long-distance telephone provider. FERC rejected this approach because it feared that it would be costly and difficult to administer.
The order led some states to deregulate their utilities to permit competition in this new legal environment. However, New York and eight other states objected to the order, believing it usurped state authority. They filed suit in federal court challenging the legality of the order. Enron also filed suit, challenging FERC's denial of access to the retail transmission of electricity. The two lawsuits were consolidated and heard by the Circuit Court of Appeals for the District of Columbia. The appellate court rejected the arguments of the states and Enron, concluding that FERC had authority under the FPA to issue such an order.
The Supreme Court, in New York v. Federal Energy Regulatory Commission, 535 U.S. 1, 122 S.Ct. 1012, 152 L.Ed.2d 47 (2002), upheld the circuit court decision. The Court concluded that although the states had regulated electricity for 60 years, this did not mean they had the underlying authority to make such decisions. The federal government had merely allowed these practices to continue. FERC had the authority to issue the order and had exercised this power lawfully. Though FERC had the authority to allow Enron and other companies to enter the retail sales market, the Court held that FERC had acted within its administrative powers in declining to exercise its jurisdiction at this time. FERC's decision not to claim jurisdiction over the retail market could be changed in the future.
The likelihood of FERC changing its mind anytime soon seemed unlikely. In 2001, the state of California was in the midst of an electricity crisis. A shortage of electricity led to skyrocketing prices, blackouts and brownouts, and expensive long-term contracts by the state to secure a supply of electricity into the future. The price of electricity jumped from $30 per megawatt hour to $361 per megawatt hour. However, within months, allegations surfaced that wholesalers such as Enron had manipulated the market to create artificial shortages, which led to the sale of electricity at inflated prices. A FERC administrative judge ruled in November 2002 that rates in California had been too high and that the state should receive a $1.8 billion refund. This was considerably less than the $8.9 billion refund the state sought.
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