Will DR Order Trump FERC’s Regional Transmission Regime

Washington, D.C., June 6, 2014 – Could the U.S. Court of Appeals for the D.C. Circuit’s decision vacating the Federal Energy Regulatory Commission’s demand response rules for organized markets also spill over into the FERC’s controversial rule on regional transmission planning? That thought occurred to me when I read the decision on Order 745, the demand response regulation.

A key aim of FERC’s Order 1000 calling for regional transmission planning is to overcome the barriers to state-oriented, retail-focused objections to siting transmission lines. The FERC order was a response to the failure of the provisions of the Energy Policy Act of 2005 aimed at ending balkanized transmission siting. A state that would see no local benefits from transmission projects that crossed its territory without serving the local needs could stop the project aimed at interstate commerce.

This loomed particularly large in the case of long-distance transmission lines crossing multiple states in order to bring remote renewable energy to major markets. The provisions of the 2005 act utterly failed, under court assaults from the bypassed states. So FERC acted with a controversial order calling for regional transmission planning as a way to trump state parochialism.

The FERC order upset a lot of state and local apple carts, prompting a lot a push back from the states and local utilities that felt they were being rolled over by the federal government (I’ve tried to avoid mixing metaphors too dramatically here and hope I’ve succeeded). As I read the Order 745 case, I thought I could see an argument that the reasoning applies to Order 1000.

Now the Coalition for Fair Transmission Policy, a group representing large regional transmission owners that oppose Order 1000 (CMS Energy, DTE Energy, Northwest Public Power Association, Public Service Enterprise Group, and Salt River Project) has raised that issue. In a filing with the D.C. Circuit in the challenge to Order 1000 (South Carolina Public Service Authority, et. al., v. FERC), the opponents of Order 1000 make a case that the blurred line between retail and wholesale markets that drove the Order 745’s demand response decision also applies to Order 1000 and regional transmission planning. If they prevail, Order 1000 would be in dire straits.

The challengers to the regional transmission planning order say that the Federal Power Act (section 206), as the court held in the demand response case, limits the reach of the agency. “FERC can regulate voluntary utility service arrangements and can ensure that they are not discriminatory, but it cannot mandate either new binding joint transmission planning arrangements or the funding of new transmission developments outside [regional transmission organizations] and then claim the involuntary arrangements it has created are existing ‘practices’ affecting rates subject to regulation under section 206.”

It’s a very clever argument. As Sue Sheridan, a veteran Washington lawyer, a player in electricity politics and policy going back decades, and president of the transmission coalition, put it, “The D.C. Circuit told FERC that its effort to gain jurisdiction over retail electricity rates at the expense of the states [in the case of Order 745] exceeded its authority under the Federal Power Act. The legal rationale the court used to overturn FERC’s demand response order is directly applicable to Order 1000 provisions on transmission planning and cost allocation.”

FERC’s Order 745 made an extraordinary jurisdictional reach. The commission essentially argued that because retail rates, where the states have exclusive jurisdiction, affect wholesale rates, where FERC has exclusive jurisdiction, FERC wins in the end. Writing for the 2-1 majority on the appeals court panel, Judge Janice Rogers Brown rejected that reasoning, concluding that the agency’s rule gave FERC a pathway to unlimited jurisdiction, counter to the intent of the Federal Power Act.

The far-from-bright line between retail and wholesale power is a distinction that has bedeviled FERC and state relationships for decades. Some at FERC have long argued that because electricity travels over both interstate power lines and local distribution lines, and it is impossible to distinguish electrons in interstate commerce from those only flowing in states. The federal jurisdiction runs from the generating plant to your toaster. States, working through the National Association of Regulatory Utility Commissioners, have long challenged this expansive definition of FERC’s jurisdiction.

The D.C. appeals court held oral arguments in March in the challenge that the opponents of Order 1000 filed last year. The court is likely to rule on the case sometime this summer.

Should the appeals court also reject Order 1000, it would mark a telling blow to the regime of former FERC Chairman Jon Wellinghoff. By many estimates, his legacies at the helm of the regulatory commission were the demand response program and the regional transmission planning rule.