Pushing the Envelope: Development of Federal Electric Transmission Access Policy
PUSHING THE ENVELOPE: DEVELOPMENT OF FEDERAL ELECTRIC TRANSMISSION ACCESS POLICY
JOSEPH T. KELLIHER
TABLE OF CONTENTS
unrelated to mitigation of market power over
transmission ................................. 562
c. Reassignment promotes competition rather
than mitigates anticompetitive effects of
m ergers ..................................... 563
B. FERC Has Imposed Transmission Access Through
Its Ratemaking Authority ........................... 563
1. FERC has broad discretion to set rates for
wholesale power sales and transmission services . 568
2. Efforts to use ratemaking authority to order
wheeling directly have been rejected by the
courts .......................................... 569
3. Exercise of discretion in ratemaking authority as
means to impose transmission access ............ 570
a. FERC separately measures market power in
generation and transmission ................. 570
b. Market power test has been applied more
rigidly to transmission than to generation .... 572
c. Market power test in transmission has been
tightened .................................... 576
d. FERC concedes open access cannot be
imposed on utilities that lack any market
power ....................................... 577
III. Beyond the Pale: Transmission Access Conditions
Imposed by FERC Are Inconsistent with the Federal
Power Act .............................................. 578
A. Transmission Access Conditions Imposed by FERC
Subordinate Duty to Promote Conservation and
Efficiency ........................................... 580
1. FERC has duty to promote conservation and
effi ciency ........................................ 580
2. Encouraging economy transactions is wholly
consistent with FERC's duty to promote
efficiency ........................................ 581
3. Transmission access conditions imposed by
FERC subordinate economy transactions to firm
wheeling ........................................ 582
B. Transmission Access Conditions Fail to Protect
Native Load Customers ............................. 583
1. Federal Power Act protects native load customers
from economic harm attributable to wheeling.... 583
2. Refusal to permit full recovery of forgone
A current major policy goal of the Federal Energy Regulatory
Commission (FERC) I in the field of wholesale electric regulation 2 is
the promotion of competition among generators, both utility and
1. The Federal Energy Regulatory Commission was created in 1977 as the successor to
the Federal Power Commission (FPC). Department of Energy Organization Act, Pub. L. No.
95-91, § 401, 91 Stat. 565, 582 (1977) (codified as amended at 42 U.S.C. § 7171 (1988)).
FERC's responsibilities include regulating hydroelectric power, natural gas transportation
and sale, and electricity transmission and sale. 42 U.S.C. § 7172 (1988).
2. See Federal Power Act of 1935 (FPA) § 201(d), 16 U.S.C. § 824(d) (1988) (defining
term "wholesale" in context of wholesale electric regulation to mean sale of electric energy
for subsequent resale).
nonutility, 3 in order to lower rates to consumers. 4 FERC believes
3. There are two basic classes of electric generators in the United States, namely
utilities and nonutilities. In 1990, utilities generated 92% of the U.S. electric supply, while
nonutilities accounted for 8% of generation. EDISON ELEC. INST., 1990 CAPACITY AND GENERATION
OF NON-UTILITY SOURCES OF ENERGY 3 (1991) (reviewing sources of electric supply in United
States). There are various types of electric utilities, including investor-owned utilities,
publicly owned utilities, federal agencies, and rural cooperatives. ENERGY INFO. ADMIN., U.S.
DEP'T OF ENERGY, ELECTRIC POWER ANNUAL 1990 1 (1992) [hereinafter ELECTRIC POWER
ANNUAL 1990] (profiling structure of electric power industry in United States). In 1990, there
were 3241 utilities in the United States, id. at 5, and although investor-owned utilities
represented only 8% of all utilities, id., they accounted for 71%6 of total generating capacity, 70%6 of
sales, and 72%o of generation. Id. at 3-4. Publicly owned utilities, which include
municipalities, public power districts, state agencies, irrigation districts, and other state organizations,
id. at 1, supplied 9%6 of generation. d at 4. Federal agencies, including the U.S. Army Corps
of Engineers, U.S. Bureau of Reclamation, International Water and Boundary Commission,
U.S. Department of Energy, Alaska Power Administration, and the Tennessee Valley
Authority, id at 1-2, accounted for 8%6 of electric generation in 1990. Id. at 4. Although numerous,
rural cooperatives supplied only 4% of total generation. Id. at 4-5.
A fundamental difference between utilities and nonutilities is that utilities are established
under state or federal law, or by franchise. See 2 ALFRED E. KAHN, THE ECONOMICS OF
REGULATION 8 (1988) (noting that public utilities typically have been given exclusive franchises in
return for assuming obligations of common carriers and duty to provide service). By contrast,
nonutilities are privately held companies that have entered the field of electric generation
without any legal mandate or charter, but rely solely on contractual relationships with utilities.
See ELECTRIC POWER ANNUAL 1990, supra, at 2 (noting that nonutility power generators, unlike
electric utilities, do not have designated franchise service area). Nonutilities are comprised of
qualifying facilities (QFs) under the Public Utility Regulatory Policies Act (PURPA) of 1978,
Pub. L. No. 95-617, § 210, 92 Stat. 3117, 3144-47 (codified at 16 U.S.C. § 824a-3 (1988)),
and independent power producers. ELECTRIC POWER ANNUAL 1990, supra, at 1. Qualifying
facilities under PURPA are either cogenerators or small power producers. Id. Cogenerators
are generating facilities that produce electricity and another form of useful thermal energy
such as heat or steam for industrial, commercial, heating, or cooling purposes and meet other
criteria established under PURPA. Id. Small power producers generate electricity using
waste, renewable energy sources such as water, wind, and solar, or geothermal energy as
primary energy sources. Id. Independent power producers are nonutility electric generators
other than QFs that sell at wholesale to franchised electric utilities. Id. Significantly, some of
the independent power producers in the United States are very large firms with substantial
resources. INDEPENDENT POWER REPORT, 110 INDEPENDENT POWER COMPANIES 1 (1991)
(listing top 25 independent power producers, including subsidiaries of Bechtel, Dow Chemical,
Enron Corporation, Mitsubishi Corporation, and Texaco). In 1990, cogenerators and small
power producers accounted for 94% of nonutility generation, while independent power
producers represented only 6%y. EDISON ELEC. INST., supra, at 6.
4. See, e.g., Entergy Servs., Inc., 58 F.E.R.C. 61,234, at 61,753 (1992) (stating that
competitive markets can provide greater efficiencies than traditional cost-based rate
regulation in electric generation and supply); Public Serv. Co. of Ind., 51 F.E.R.C. V 61,367, at
62,225 (noting that "improved supply options should allow the purchasing utilities to reduce
their costs, which will benefit their ratepayers when these cost reductions are passed through
in their bills"), modified sub nom. PSI Energy, Inc., 52 F.E.R.C. 9 61,260, ciarified,53 F.E.R.C.
61,131 (1990), petition dismissedsub nomaN.orthern Ind. Pub. Serv. Co. v. FERC, 954 F.2d 736
(D.C. Cir. 1992); Pacific Gas & Elec. Co., 38 F.E.R.C. 61,242, at 61,790 (1987) (allowing
experimental competitive rates because "competition ...encourages utilities to make efficient
decisions with a minimum of regulatory intervention. Ultimately, consumers should benefit
from lower prices as competition improves efficiency."), modified, 47 F.E.R.C. 61,121 (1989),
modified, 50 F.E.R.C. $ 61,339 (1990), modified sub nomaW.estern Sys. Power Pool, 55 F.E.R.C.
61,099, at 61,319 (rejecting flexible pricing for bulk power because applicant had failed to
eliminate anticompetitive effects by mitigating market power in generation or transmission),
grantingstay, 55 F.E.R.C. 61,154, reh 'g granted in part, 55 F.E.R.C. T 61,495, appealfiled, No.
91-1404 (D.C. Cir. Aug. 26, 1991), modified, 59 F.E.R.C. 61,249 (1992); Public Serv. Co. of
N.M., 25 F.E.R.C. T 61,469, at 62,038 (1983) (declaring that "competition penalizes a seller
that an increase in the number of potential electric generation
suppliers will create competitive pressures that will improve efficiency5
and promote bulk power trades6 among utilities having different
generation costs. 7 This policy is a deliberate departure from
traditional cost-based ratemaking,8 which is focused not on fostering
efficiency but rather on preventing abuse of monopoly power. 9 By
contrast, market-based ratemaking relies on competitive forces to
promote efficiency and should concentrate new electric generation
in the hands of the most efficient generators.
In large part, FERC is attempting to advance trends that have
althat is inefficient or has an unreasonable pricing strategy" and that "[c]onsumers ... benefit
because the improvements in efficiency [due to competition] lead to lower prices").
5. See Entergy Sews., Inc., 58 F.E.R.C. at 61,753 (approving market-based rates for large
bulk power sales because rates set via competitive forces will increase number of potential
suppliers and result in cost savings to ratepayers); Public Sew. Co. of Ind, 51 F.E.R.C. at
62,224-25 (stating that competitive pricing improves efficiency by creating incentives for full
utilization of existing capacity and innovation).
6. See infra note 14 (defining bulk power trades).
7. See Public Sew. Co. oflnd., 51 F.E.R.C. at 62,225 (approving market-based rates for
firm wholesale power sales in order to provide less costly means of supplying new power
demands); Pacific Gas & Elec. Co., 38 F.E.R.C. at 61,789 (stating that "[b]ecause not all utilities
are equally good at building and operating generating plants, we believe that a rational
regulatory policy requires that we encourage electric utilities to engage in bulk power trades that
coordinate their resources and thus produce efficiency gains") (footnote omitted); PublicServ.
Co. of N.M., 25 F.E.R.C. at 62,059-60 (approving experiment to promote efficiency in bulk
power markets through market-based pricing of wholesale sales among utilities with differing
8. A basic principle of traditional rate regulation is that public utility rates are based on
the utility's cost of service. STEPHEN BREYER, REGULATION AND ITS REFORM 15-59 (1982)
(examining typical justifications for regulation and methods of cost-of-service ratemaking); I
KAHN, supra note 3, at 26-57 (detailing nature of cost-of-service regulation); see also Entergy
Sews., Inc., 58 F.E.R.C. at 61,753 (justifying agency policy change supporting market-based
rate regulation by pointing out that traditional cost-of-service regulation is not always
adequate to meet needs of growing competitive bulk power market); HousE COMM. ON ENERGY
AND COMMERCE, 102D CONG., IST SESs., ELECTRICITY: A NEw REGULATORY ORDER? 132-44
(Comm. Print F 1991) [hereinafter ELECTRICITY: A NEW REGULATORY ORDER?] (discussing
development of utility rate regulation and explaining rate methodology designed to ensure
"fair return on fair value" based on operating expenses, depreciation, capital improvements,
and other costs). FERC has held, however, that a departure from cost-based ratemaking is
justified where an industry is experiencing "contrasting or changing characteristics." Entergy
Servs., Inc., 58 F.E.R.C. at 61,752 (quoting from opinion in Farmers Union Cent. Exch., Inc. v.
FERC, 734 F.2d 1486, 1503 (D.C. Cir.), cert. denied, 469 U.S. 1034 (1984)). The FPA requires
that FERC set electricity rates that are "just and reasonable." 16 U.S.C. § 824d(a) (1988).
The "just and reasonable" standard is a longstanding one, having been established early in
the context of government rate regulation, and the standard seeks to provide utilities a fair
return on value. See, e.g., Bluefield Waterworks & Improvement Co. v. Public Serv. Comm'n
of W. Va., 262 U.S. 679, 690 (1923) (holding that governmentally imposed utility rates that
are not sufficient to yield reasonable rates of return are unjust, and that public utilities are
entitled to earn return on value of property employed in provision of service that is equal to
return earned by other businesses facing similar risks); see also Smyth v. Ames, 169 U.S. 466,
546-47 (1898) (ruling that fair value of property used, costs of construction, improvements,
and other expenses should be examined when calculating reasonableness of rates set by
federal government for railroad).
9. See I KAHN, supra note 3, at 26-29 (describing need for regulation to restrain
monopolies such as utility companies from charging higher rates than would be possible in
ready had a dramatic impact on electric generation in the United
States. Just thirteen years ago, utilities controlled over ninety-seven
percent of U.S. electric generating capacity.' 0 In recent years,
however, the growth in nonutility generating capacity has increased
much more rapidly than utility additions,I and the nonutility share
of total capacity is projected to nearly quadruple between 1979 and
2010.12 Increasingly, state public utility commissions have adopted
competitive bidding programs that award the construction of new
generation facilities to the lowest bidder, which promotes efficiency
and encourages nonutility entry into the electric generation
One obstacle that FERC perceives as hindering greater
competitiveness in bulk power markets 14 is the largely unfettered control of
transmission systems by individual electric utilities.' 5 Control of
10. See EDISON ELEc. INST., 1988 CAPACITY AND GENERATION OF NON-UTILITY SOURCES OF
ENERGY 7 (1990) (detailing generating capacity in U.S. by type of producer, i.e., utility versus
11. While utility generating capacity increased from 688,733 to 735,129 megawatts
between 1985 and 1990, a rise of less than 77%, nonutility generating capacity grew from 22,920
to 45,127 megawatts, a surge of nearly 100%. See EDISON ELEC. INST., ADVANCE RELEASE OF
DATA FOR THE 1991 STATISTICAL YEARBOOK OF THE ELECTRIC UTILITY INDUSTRY 4 (1992)
(providing data on additions to installed generating capacity by utilities and nonutilities in 1990);
EDISON ELEC. INST., STATISTICAL YEARBOOK OF THE ELECTRIC UTILITY INDUSTRY 1990 7 (1991)
(showing increase in electric generating capacity ofutilities and nonutilities between 1985 and
12. Compare EDISON ELEC. INST., supra note 10, at 7 (showing that 2.9% of total electric
generating capacity in 1979 was controlled by nonutilities) with ENERGY INFO. ADMIN., U.S.
DEP'T OF ENERGY, ANNUAL ENERGY OuTLooK-WrrH PROJECTIONS TO 2010 69 (1992)
(projecting that 11 % of total electric generating capacity in 2010 will be owned by nonutilities).
13. See NATIONAL INDEP. ENERGY PRODUCERS, BIDDING FOR POWER: THE EMERGENCE OF
COMPETrVE BIDDING IN ELECTRIC GENERATION 11 (1990) (stating that at least 27 states have
adopted, allowed, or are considering competitive bidding for new electric generation
14. The phrase "bulk power sales" or "bulk power markets" denotes wholesale electric
sales or markets. OFFICE OF TECHNOLOGY ASSESSMENT, U.S. CONG., ELECTRIC POWER
WHEELING AND DEALING: TECHNOLOGICAL CONSIDERATIONS FOR INCREASING COMPETITION 41 (1989)
[hereinafter OTA, WHEELING AND DEALING]. Two categories of wholesale power sales exist:
) requirements sales, which generally take the form of firm sales from an investor-owned
utility to a publicly owned utility that has little or no generating capacity; and (
sales undertaken for reliability or economy purposes, typically involving short-term sales
between investor-owned utilities. ELECTRICITY: A NEW REGULATORY ORDER?, supra note 8, at
68-71. For a discussion of firm and nonfirm wheeling, see infra note 54.
15. See Public Serv. Co. of Col., 58 F.E.R.C. 61,322, at 62,038 (1992) (noting that
FERC's "fundamental competitive concern... is that an increase in control over key
transmission facilities may lead to a greater ability to block competing lower-cost suppliers from
reaching wholesale electric customers"); Northeast Utils. Serv. Co., 56 F.E.R.C. 61,269, at 62,010
(holding that restrictive transmission access conditions are necessary for approval of merger
because Northeast Utilities' domination of key transmission corridors and facilities would
otherwise allow it to control bulk power trade), reh'g granted, 57 F.E.R.C. 61,340 (1991),
modified, 58 F.E.R.C. 61,070, reh'g dismissed as moot, 59 F.E.R.C. 61,089 (1992); Public Serv.
Co. of Ind., 51 F.E.R.C. 61,367, at 62,192 (conditioning approval of market-based rates on
public utility's acceptance of open access transmission conditions, out of concern that utility's
complete control of transmission assets could otherwise be used to gain advantage over
competing power suppliers), modifiedsub noma.PSI Energy, Inc., 52 F.E.R.C. 61,260, clarified, 53
transmission lines may enable utilities to deny other generators
access to bulk power markets that are not directly interconnected with
those generators. For this reason, FERC is convinced that increased
access to utility transmission lines must be provided to potential
electric suppliers so that the full benefits of generator competition
may be realized.1 6 Through a series of administrative orders,' 7
FERC has developed a transmission access policy that promotes
"wheeling," which is the transfer of electricity from a generator to a
purchaser over the transmission system of an intermediate utility.' 8
Apparently, FERC views electric utilities as akin to the walled cities
of medieval Europe, and intends to wield its transmission access
policy as a battering ram to knock down these walls and expand
electric wholesale markets.
Part I of this Comment examines FERC's limited authority to
order wheeling under sections 211 and 212 of the Federal Power Act
of 1935 (FPA). 19 Part II studies FERC's exercise of its broad
statutory authority to condition mergers and approve rates in order to
entice utilities to accept transmission service obligations and achieve
the agency's open access transmission goal. Part III criticizes
certain transmission service conditions imposed by FERC as either
beyond the agency's authority or inconsistent with goals of the FPA.
Part IV reviews recently enacted legislation that sharply expands
FERC's authority to order wheeling. Finally, Part V offers
recommendations for the development of electric transmission policy by
F.E.R.C. 61,131 (1990),petitiondismissedsub nom. Northern Ind. Pub. Serv. Co. v. FERC, 954
F.2d 736 (D.C. Cir. 1992); Utah Power & Light Co., 45 F.E.R.C. 1 61,095, at 61,288-89
(describing potential anticompetitive harm from individual utility's control of transmission
system), clarified, 45 F.E.R.C. 61,132, reh'ggranted,45 F.E.R.C. $ 61,500 (1988), reh'ggranted
in part,47 F.E.R.C. 61,209, at 61,736 (1989), enforced, 51 F.E.R.C. T 61,295 (1990), remanded
on othergroundssub nom. Environmental Action, Inc. v. FERC, 939 F.2d 1057 (D.C. Cir. 1991);
Public Serv. Co. of N.M., 25 F.E.R.C. 61,469, at 62,046 (1983) ("Without a guarantee that
wheeling service will be provided on these occasions, it is unlikely that a competitive market
for [bulk power] could emerge.").
16. See Public Serv. Co. of CoL, 58 F.E.R.C. at 62,039 (finding merged utility's offer to
satisfy all requests from other utilities for transmission sufficient to avoid anticompetitive
effects of merger); Public Sero. Co. of Ind., 51 F.E.R.C. at 62,193 (requiring public utility to
reduce its market power by offering transmission service to other generators); Utah Power &
Light Co., 45 F.E.R.C. at 61,289 (stating that access to transmission facilities by competitors is
required for efficiency purposes).
17. See infra notes 46-50, 96 and accompanying text (reviewing merger and market-based
rate orders that established foundation of FERC transmission access policy).
18. See Otter Tail Power Co. v. United States, 410 U.S. 366, 368 (1973) (defining
19. 16 U.S.C. §§ 824j-824k (1988). Sections 211 and 212 of the FPA were substantially
revised by the Energy Policy Act of 1992. Energy Policy Act of 1992, Pub. L. No. 102-486,
§§ 721-722, 106 Stat. 2776, 2915-19 (to be codified at 16 U.S.C. §§ 824j-824k). See infra
notes 218-50 and accompanying text (discussing Energy Policy Act of 1992).
FERC AUTHORITY TO ORDER WHEELING WAS LIMITED
FederalPower Act of 1935
As originally conceived, Part II of the FPA would have imposed
common carrier obligations on electric utilities by making it "the
duty of every public utility to .. .transmit energy for any person
upon reasonable request." 20 Further, the 1935 legislation would
have empowered FERC's predecessor, the Federal Power
Commission (FPC), to order wheeling if it found such action to be
"necessary or desirable in the public interest." 2' Enactment of this bill
would have granted the FPC and its successor wide discretion to
mandate wheeling. Instead, Congress deleted these broad
provisions from the proposed legislation, thereby rejecting the
imposition of common carrier status on electric utilities in favor of
allowing voluntary action by the utilities. 2 2 The Supreme Court
recognized FERC's lack of wheeling authority in Otter Tail Power Co. v.
United States,23 where it held that "there is no authority granted the
Commission under Part II of the Federal Power Act to order
Public Utility Regulatory Policies Act of 1978
The Public Utility Regulatory Policies Act of 1978 (PURPA)2 5
granted FERC limited authority to order wheeling by adding
sections 211 and 212 to the FPA. 26 FERC authority to order wheeling
under section 211 was sharply expanded by the Energy Policy Act of
1992.27 For purposes of this Comment, FERC transmission access
policy will be evaluated based on the standards in sections 211 and
212 before the wholesale revisions to these sections in the Energy
Policy Act. Under section 211, FERC could issue a wheeling order if
it found that such order: (
) was in the public interest; (
conserve energy, promote efficiency, or improve reliability; and (3)
met the criteria of section 212.28 Section 212 prohibited issuance of
a wheeling order if such order: (
) was not likely to result in a
economic loss for any
affected utility;29 (
) would not place an undue burden on any affected
utility; (3)would not unreasonably impair the reliability of any
affected utility; or (4) would not impair the ability of any electric utility
affected by the order to render adequate service to its customers. 30
As was the case with the FPA, the version of PURPA originally
granted FERC sweeping authority to order wheeling. 31
Congress again chose not to include those provisions in the version of
the bill enacted into law.3 2
Deletion of the wheeling authority con
stituted an express rejection by Congress of the role of common
carrier for electric utilities.
Moreover, the addition of section 211
further limited FERC's authority to mandate transmission service by
prohibiting a wheeling order absent a finding that "such an order
would reasonably preserve existing competitive relationships." 3 3 As
a result of this restriction on mandated wheeling, FERC has never
issued a wheeling order under the authority granted in PURPA.3 4
Essentially, sections 211 and 212 proved to be dead letters. 3 5 While
FERC sought to encourage competition through transmission
access, the agency lacked power to order wheeling for the sole
purpose of enhancing competition. The Second Circuit held that
sections 211 and 212 clearly indicated that wheeling cannot be
ordered solely on the basis of the public interest and the enhancement
of competition.3 6 In addition, the Fifth Circuit rebuked an effort by
FERC to foster competition through mandatory transmission access,
stating that although its goal was "laudable," the agency "is without
authority under the FPA to compel wheeling." 3 7
SEIZING THE BRASS RING: FERC IMPOSES OPEN ACCESS
CONDITIONS IN MERGER AND RATE CASES
Upon discovering the stark limits on its authority under sections
211 and 212 to order wheeling, FERC resorted to other powers
granted it under the FPA to induce utilities to provide transmission
services voluntarily. The broadest grants of discretionary authority
provided FERC by the FPA reside in its section 203 authority to
approve and condition utility mergers3 8 and its section 205 and 206
authority to set wholesale rates. 39 These powers supplied FERC
with an indirect means by which to implement its transmission
FERC Has Imposed TransmissionAccess Through Its Discretionary
Authority to Approve Mergers
FERC enjoys broad discretion to impose conditions under its section
Electric utilities seeking to merge must obtain, as a preliminary
matter, FERC's approval of their proposed merger. 40 Such
approval will only be granted if the merger is found to be "consistent
with the public interest." 4 1 Typically, a utility merger will be held to
454 U.S. 821 (1981); Southeastern PowerAdmin., 25 F.E.R.C. at 61,530 (rejecting application for
wheeling order under §§ 211 and 212 of FPA because § 21 l(c)(
) prohibited wheeling order
that does not "reasonably preserve existing competitive relationships" of transmitting utility).
36. See New York State Elec. & Gas Corp., 638 F.2d at 402 ("[I]t is clear from the express
requirements of §§ 211 and 212 that the public interest and the enhancement of competition
are not alone sufficient justification for compelling wheeling.").
37. See FloridaPower & Light Co., 660 F.2d at 677-79 (reversing FERC order compelling
utility company to file amended tariff schedule for interchange transmission service, on basis
that order would impermissibly impose common carrier status on utility).
38. 16 U.S.C. § 824b (1988); see also infra notes 40-43 and accompanying text (reviewing
FERC's authority to condition approval of mergers).
39. 16 U.S.C. §§ 824c-d (1988); see also infra notes 103-06 and accompanying text
(reviewing FERC's discretion to set rates for wholesale power sales and transmission services).
40. 16 U.S.C. § 824b(a) (1988).
be consistent with the public interest if it is deemed to be consistent
with the standards of the FPA.4 2 Consistency with the public
interest is a very broad mandate, and FERC therefore enjoys wide
latitude in directly and conditionally approving utility mergers. 4 3
FERC has imposed open access transmission through its merger
Fortunately for FERC, the number of mergers in the electric
utility industry increased in the 1980s. 44 For that reason, merger
appli42. See 16 U.S.C. § 824b(b) (1988) (granting FERC explicit authority under § 203(b) to
condition mergers to "secure the maintenance of adequate service and the coordination in the
public interest of facilities subject to the jurisdiction of the Commission"). Judicial review of
agency rulemakings is governed by the Administrative Procedure Act and courts may revise a
rule only if the rule is found to be "arbitrary, capricious, an abuse of discretion, or otherwise
not in accordance with law." Administrative Procedure Act, § 706(
)(A), 5 U.S.C. § 706(
(1988). The U.S. Court of Appeals for the District of Columbia reaffirmed FERC's broad
discretion to condition mergers in EnvironmentalAction, Inc. v. FERC,939 F.2d 1057 (D.C. Cir.
1991), holding that "[w]e set aside a decision of the FERC only if it is arbitrary and capricious
or otherwise contrary to law." Id- at 1061. The appeals court observed that FERC may
approve a merger only if the merger is found to be consistent with the public interest and
explained that "the relevant 'public interest' includes both the preservation of economic
competition, as expressed in the antitrust laws of general application, and the various policies
reflected in the statutes specific to energy regulation." l (citations omitted). In this case,
the relevant statute was the FPA, id at 1059, so the policies of that act helped define the
public interest to be protected.
43. See 16 U.S.C. § 824b (1988) (requiring FERC approval for proposed mergers but
failing to grant express authority to FERC to impose merger conditions). Despite its lack of
explicit conditioning power in § 203(a), FERC has found implicit authority to condition
mergers under the section by maintaining that the power to condition merger approval is
subsumed within the power to deny merger consummation. See Northeast Utils. Serv. Co., 56
F.E.R.C. 61,269, at 62,011-13 (defining FERC's broad authority to condition mergers in
public interest under § 203(a) and (b)), reh'g granted,57 F.E.R.C. 61,340 (1991), modified, 58
F.E.R.C. 61,070, reh'gdismissedasmoot, 59 F.E.R.C. 61,089 (1992); Utah Power & Light Co.,
45 F.E.R.C. 61,095, at 61,280 (stating that power to condition mergers is not impermissible
extension of FERC's authority to deny merger requests), clarfied, 45 F.E.R.C. 61,132, reh'g
granted, 45 F.E.R.C. 161,500 (1988), reh'ggrantedin part,47 F.E.R.C. 61,209 (1989), enforced,
51 F.E.R.C. 61,295 (1990), remandedon othergrounds sub nom. Environmental Action, Inc. v.
FERC, 939 F.2d 1057 (D.C. Cir. 1991). By contrast, § 203(b) of the FPA expressly authorizes
FERC to condition mergers to "secure the maintenance of adequate service and the
coordination in the public interest of facilities subject to the jurisdiction of the Commission." 16
U.S.C. § 824b(b) (1988). According to FERC, conditioning approval achieves the same end
as requiring the applicant to submit a new application that resolves the concerns that caused
the initial rejection of the merger proposal. Utah Power & Light Co., 45 F.E.R.C. at 61,280.
Historically, the public interest findings required by § 203 have been based on the test in
Commonwealth Edison Co. See Commonwealth Edison Co., 36 F.P.C. 927, 931 (1966), aff'd sub
nom. Utility Users League v. FPC, 394 F.2d 16 (7th Cir.) (denying petition for review of FPC
order approving merger of electric and gas companies on ground that no showing was made
of merger's adverse effect on competition), cert. denied, 393 U.S. 953 (1968). The decision
established a nonexclusive list of criteria to be considered when evaluating whether a
proposed merger is consistent with the public interest. See id. at 932 (requiring merged company
to conform to purposes of both FPA and Public Utility Holding Company Act on public
interest grounds). One of the central factors mentioned in the opinion as a public interest
consideration is "the effect the proposed merger may have on the existing competitive situation."
44. ELECTRIcrrY: A Naw REGULATORY ORDER?, supra note 8, at 94. Following the
enactment of the Public Utility Holding Company Act of 1935, ch. 687, 49 Stat. 803 (codified as
cations represented a promising vehicle for the development of
FERC's open access transmission policy through exercise of its
section 203 authority. FERC has conditioned approval of utility
mergers on companies' acceptance of broad obligations to provide
transmission services to third parties, a practice that is otherwise
known as "open access." '4 5 The landmark case in this method of
implementation for FERC's transmission access policy is Utah Power
& Light Co.4 6
This case approved the merger of Pacific Power &
Light and Utah Power & Light into a large utility holding companty
called PacifiCorp, whose subsidiaries would serve seven states. 4 7
Although FERC explicitly disavowed the precedential value of the
decision,48 the conditions imposed in Utah Power & Light were
nevertheless adopted in Northeast Utilities Service Co.4 9 and in several other
amended at 15 U.S.C. §§ 79a to 79z-6 (1988)), there was very little merger activity among
electric utilities. ELECTRICITY: A NEW REGULATORY ORDER?, supra note 8, at 94. However, the
pace of merger activity accelerated in the early 1980s. Id. at 94-95; see also U.S. GEN.
AcCOUNTING OFFICE, ELECTRICITY SUPPLY: REGULATING UTILITY HOLDING COMPANIES IN A
CHANGING ELECTRIC INDUSTRY 4 (1992) (noting that over 53 utilities were reported to have
been merged with or acquired by utilities or utility holding companies between 1980 and
1991). Furthermore, some analysts believe that a massive consolidation is in the offing. See
ScoTr A. FENN, INVESTOR RESPONSIBILITY RESEARCH CTR., MERGERS AND FINANCIAL
RESTRUCTURING IN THE ELECTRIC POWER INDUSTRY 29-51 (1988) (concluding that electric utility
industry is entering period of major restructuring); Edward Tirello, Consolidation Coming to Industry
Says Analyst, ELECTRIC LIGHT & POWER, May 1987, at 17-18 (predicting industry consolidation
will occur as result of continued increase in competition).
45. See Public Serv. Co. of Col., 58 F.E.R.C. 61,322, at 62,039 (1992) (approving
proposed merger because applicant agreed to provide transmission access to third parties in
arrangement that was deemed "generally consistent with the Commission's recently announced
guidelines"); Kansas Power & Light Co., 56 F.E.R.C. V61,356, at 62,378-79 (1991) (accepting
merger request that included open access transmission commitment); Northeast Utils. Serv. Co.,
56 F.E.R.C. at 62,017-24 (conditioning approval for requested merger on utility's acceptance
of open access transmission service obligations); Utah Power & Light Co., 45 F.E.R.C. at
61,289-95 (accepting merger between Pacific Power & Light and Utah Power & Light upon
their acceptance of open access transmission service obligations).
46. 45 F.E.R.C. 1 61,095 (1988).
47. See Utah Power & Light Co., 45 F.E.R.C. 61,095, at 61,269 (approving merger
subject to acceptance of open access transmission service obligations by applicants), clarified,
45 F.E.R.C. 61,132, reh'ggranted, 45 F.E.R.C. 61,500 (1988), reh'ggrantedin part, 47 F.E.R.C.
V61,209 (1989), enforced, 51 F.E.R.C. 61,295 (1990), remandedon othergrounds sub
noma.Environmental Action, Inc. v. FERC, 939 F.2d 1057 (D.C. Cir. 1991).
48. See Utah Power & Light Co., 47 F.E.R.C. at 61,733 ("[No inference should be drawn
that the transmission access conditions set forth [in Utah Power & Light Co., 45 F.E.R.C.
61,095 (1988)] represent Commission policy, to be applied generically in the future,
regarding transmission access").
49. 56 F.E.R.C. 61,269, reh 'ggranted,57 F.E.R.C. 1 61,340 (1991), modified, 58 F.E.R.C.
61,070, reh 'g dismissed as moot, 59 F.E.R.C. 61,089 (1992). A number of significant
differences exist between the factual situations in Utah Power & Light and Northeast Utilities. First, in
contrast to Utah Power & Light, see infra note 50 (discussing prior anticompetitive practices of
Utah Power & Light Company), the applicant in Northeast Utilitieshad never denied a wheeling
request for anticompetitive reasons. Northeast Utils. Serv. Co., 56 F.E.R.C. at 62,009-10.
Second, FERC imposed transmission access conditions in Utah Power &Light partly because there
was no regional power pool within the service area of the combined company that would
potentially be able to prevent the company from exercising market power over transmission.
Utah Power & Light Co., 45 F.E.R.C. at 61,283. Northeast Utilities, however, operated within
It should be noted that in order to approve the proposed merger
in Utah Power & Light, FERC reversed an administrative law judge's
decision to the contrary. 51 The administrative law judge had
recommended that the proposed merger be rejected and specifically
refused to attach conditions that would "transmogrify a statutorily
unacceptable proposal into one that meets the public interest."5 2
the New England Power Pool, which effectively prevented the utility from exercising market
power. Northeast Utils. Serv. Co., 56 F.E.R.C. at 61,985. Third, FERC was influenced in Utah
Power & Light by the prospect that the merged company would control over 88% of the
transmission capacity in the Northwest and Rocky Mountain areas. Utah Power & Light Co., 45
F.E.R.C. at 61,286-87. FERC attempted to draw a parallel in Northeast Utilities, charging that
the merged company would control a "transmission curtain" around Eastern Massachusetts
and Rhode Island, Northeast Utils. Serv. Co., 56 F.E.R.C. at 62,005-06, but in actuality, the
merged company would control only five percent of the uncommitted transmission capacity in
the region. Request for Rehearing of Applicant at 58, Northeast Utils. Serv. Co., 56 F.E.R.C.
61,269 (1991), reh'g granted, 58 F.E.R.C. 61,070 (1992).
50. See Public Serv. Co. of Col., 58 F.E.R.C. 61,322, at 62,034 (1992) ("Colorado...
attempted to model the proposed tariff after transmission conditions imposed or approved by
the Commission in other merger cases[,]" including Utah Power & Light); Kansas Power &
Light Co. & Kansas Gas & Elec. Co., 56 F.E.R.C. 61,356, at 62,378-79 (1991) (accepting
offer of settlement that included open access transmission commitment based on conditions
in Utah Power & Light); Kansas City Power & Light Co. & Kansas Gas & Elec. Co., 53 F.E.R.C.
61,097, at 61,276 (1990) (noting that applicants are "prepared to accept extensive
transmission obligations" that are "substantially similar" to those imposed in UtahPower & Light). But
see UtiliCorp United, Inc. & Centel Corp., 56 F.E.R.C. 61,031, at 61,120-22 (1991) (refusing
to impose Utah Power & Light transmission access conditions because there is no evidence that
merger will consolidate control over transmission).
The merger of Pacific Power & Light and Utah Power & Light occurred under certain
unique circumstances. The most striking aspect of the merger was the sheer size of the
merged company, which would span seven states. See Utah Power & Light Co., 45 F.E.R.C. at
61,268-69 (describing service territory of merged company). Further, one of the applicants in
the case had previously engaged in anticompetitive practices. lId at 61,287 (observing that
Utah Power & Light "exercised... monopoly control by foreclosing competitors from using
its transmission facilities to sell power at UP&L's southern interconnections" and
"consistently refused to permit the wheeling of low-cost power across its system"). Utah Power &
Light "admit[ted] that it ha[d] never provided firm wheeling service to any major Northwest
utility wishing to sell to buyers in the Desert Southwest, southern Nevada or California." Id.
FERC used this factor to support its decision to impose conditions on the Utah Power & Light
merger, and FERC also justified the conditions by noting that no regional power pool existed
within the service area of the combined company. Id at 61,283 (commenting that absence of
power pool would enable merged company to exercise greater market power over
coordination services because of its strategic control over transmission). Another factor that
influenced FERC in Utah Power & Light was the prospect that the merged company would control
over 88% of the transmission capacity between the Northwest and the Rocky Mountain area.
Id. at 61,286-87.
51. See Utah Power & Light Co., 43 F.E.R.C. 63,030, at 65,354 (rejecting merger
request because merger would "substantially lessen competition"), rev'd, 45 F.E.R.C. 61,095,
at 61,289-95 (approving merger subject to acceptance of open access transmission service
obligations by applicants), claified, 45 F.E.R.C. 61,132, reh'g granted, 45 F.E.R.C. 61,500
(1988), reh 'ggrantedin part, 47 F.E.R.C. 61,209 (1989), enforced, 51 F.E.R.C. 61,295 (1990),
remanded on other grounds sub nom. Environmental Action, Inc. v. FERC, 939 F.2d 1057 (D.C.
52. Id. (holding that FERC cannot approve proposed merger because it clearly "tends to
substantially lessen competition and create a monopoly, [and] cannot be resurrected by the
application of ineffective CPR conditions").
FERC showed no such reticence to allow the merger, perhaps
because the merger presented a golden opportunity for the agency to
develop its transmission access policy.
Absolute obligation to providefirm transmission out of existing
Although FERC reserved the decision whether to expand
transmission capacity for the merged company and its state regulators to
make, 53 the agency imposed an absolute duty to satisfy firm
wheeling requests54 on the Utah Power & Light applicants. 55 That is, if the
merged company lacks available transmission capacity to honor a
request from an eligible utility beyond that needed to serve its
native load customers, 56 the company is required within five years of
the request to make sufficient capacity available to satisfy all such
requests by reducing or altering its system use. 57 This absolute
obligation to provide transmission service, even at the expense of
increased costs to
native load customers, is known as the "Utah
Hammer." 5 8 The only exception FERC allows to this absolute duty
53. Utah Power & Light Co., 45 F.E.R.C. at 61,294.
54. There are two types of wheeling service offered by electric utilities: "firm" and
"nonfirm" wheeling. Firm wheeling may be offered in long-term contracts ranging up to 20
to 40 years in length, while nonfirm wheeling is generally of shorter duration. KEVIN KELLY ET
AL., NATIONAL REGULATORY RESEARCH INST., SOME ECONOMIC PRINCIPLES FOR PRICING
WHEELED POWER 330-31 (1987). FERC has defined firm wheeling as a utility's contractual
obligation to be prepared to transmit a specified amount of electric power for a specified
period of time, subject to the terms and conditions in a service agreement, and nonfirm
wheeling as transmission service that is interruptible at the option of the transmitting utility.
See Utah Power&Light Co., 45 F.E.R.C. at 61,310 (defining terms that govern wheeling policy).
55. Utah Power & Light Co., 45 F.E.R.C. at 61,294.
56. See Northeast Utils. Serv. Co., 56 F.E.R.C. 61,269, at 62,014 n.259 (defining native
load customers as customers for whom utility, "by statute, franchise or contract, has
undertaken an obligation to plan, construct, and operate its system to provide reliable service"),
reh ggranted,57 F.E.R.C. 61,340 (1991), modified, 58 F.E.R.C. 61,070, reh 'g dismissedas moot,
59 F.E.R.C. 61,089 (1992).
57. Utah Power & Light Co., 45 F.E.R.C. 61,095, at 61,294, clarified, 45 F.E.R.C.
61,132, reh'g granted,45 F.E.R.C. 61,500 (1988), reh'g granted in part, 47 F.E.R.C. 61,209
(1989), enforced, 51 F.E.R.C. 61,295 (1990), remanded on othergrounds sub nom. Environmental
Action, Inc. v. FERC, 939 F.2d 1057 (D.C. Cir. 1991).
58. See Utah Power &Light Co., 45 F.E.R.C. at 61,295 (requiring merged company to limit
low-cost off-system transactions to satisfy firm wheeling requests). An eligible utility whose
request is not met within five years may institute a complaint before FERC. Id, at 61,294. If
the complainant shows that the merged company has failed to meet its wheeling service
obligation within five years of a request, the merged company will be required to reduce its use of
transmission capacity for economy transactions to the extent necessary to meet all ottstand.
ing requests for firm transmission service. Northeast Utils. Serv. Co., 56 F.E.R.C. at 62,024; Utah
Power & Light Co., 45 F.E.R.C. at 61,295. In Utah Power & Light, Commissioner Trabandt
sharply criticized the majority's use of the "Utah Hammer" to sanction the merged company
for failure to provide transmission service, despite the company's good faith efforts to fulfill
its transmission obligations. Utah Power & Light Co., 47 F.E.R.C. at 61,764 (Trabandt,
Comm'r, dissenting). The Commissioner argued that, "[b]y definition, if the merged
company exercised due diligence, that means the failure to accommodate wheeling arose from
circumstances beyond its control." Id. Commissioner Trabandt preferred to adopt a due
to wheel, even in the face of immutable constraints on utility system
expansion, occurs when provision of firm wheeling on behalf of
third parties will impair the reliability of service to native load
customers.5 9 A duty to wheel applies even where satisfaction of a
transmission request is unnecessary
mitigate the anticompetitive
effects of a merger, because FERC requires merged companies to
honor the resale or reassignment of capacity from eligible utilities to
third parties.6 0 FERC imposes this absolute duty in lieu of utilities'
voluntary commitments to provide transmission service.6 1
Mandatory construction of new transmission capacity to provide
wheelingfor third parties
FERC also imposed an absolute obligation on the merged
companies in Utah Power& Light and Northeast Utilities to expand their
transmission systems to
rejected the reservations proposed
meet demand from eligible utilities.6 2 FERC
by Northeast Utilities on the
company's voluntary commitment to construct transmission
facilities, because such an exception would excuse companies' inability to
expand systems after "reasonable best efforts" to do so are made. 63
diligence standard of review for wheeling requests rather than to impose an absolute duty on
utilities to provide transmission services. Id.
59. See Northeast Utils. Serv. Co., 58 F.E.R.C. at 61,199 (holding that Northeast Utilities
would not be required to provide firm transmission service to third parties when immutable
constraints such as siting or environmental regulations prevent expansion of transmission
facilities, if wheeling would impair service to native load customers, and stressing that "under
no circumstances will NU be required to provide firm wheeling service out of existing
transmission capacity where doing so would impair or degrade reliability of service to native load
customers"); see also Utah Power & Light Co., 45 F.E.R.C. at 61,294 (affirming that merged
company may refuse to wheel during transition period if honoring request would impair
60. See Utah Power & Light Co., 45 F.E.R.C. at 61,295 (proscribing utility-imposed
restrictions on resale or reassignment of transmission capacity to third parties).
61. See Northeast Utils. Serv. Co., 56 F.E.R.C. 61,269, at 62,012 (finding Northeast
Utilities' voluntary transmission commitments insufficient to satisfy public interest), reh'g
granted, 57 F.E.R.C. 61,340 (1991), modified, 58 F.E.R.C. 61,070, reh'g dismissed as moot, 59
F.E.R.C. 61,089 (1992); Utah Power & Light Co., 45 F.E.R.C. at 61,290 (reviewing public
benefit of applicants' voluntary commitment to consider requests for transmission service on
case-by-case basis). In Northeast Utilities, FERC rejected voluntary commitments that it
conceded would result in improved transmission. Northeast Utils. Sewv. Co., 56 F.E.R.C. at 62,012
("The issue is not simply whether the merged company will offer improved transmission
62. See Northeast Utils. Serv. Co., 56 F.E.R.C. at 62,022-24 (conditioning approval of
merger in part on acceptance of duty to satisfy wheeling requests by third parties by
constructing new transmission facilities); Utah Power & Light Co., 45 F.E.R.C. 61,095, at
61,293 (requiring merged company to expand its system as necessary if sufficient lead time is
provided and contract term is economically adequate to support enlarged facilities) clarified,
45 F.E.R.C. 61,132, reh'g granted, 45 F.E.R.C. 61,500 (1988), reh'g granted in part, 47
F.E.R.C. 61,209 (1989), enforced, 51 F.E.R.C. 61,295 (1990), remanded on othergrounds sub
nom. Environmental Action, Inc. v. FERC, 939 F.2d 1057 (D.C. Cir. 1991).
63. Northeast Utils. Ser. Co., 56 F.E.R.C. at 62,022. Northeast Utilities had proposed the
following three limitations on its voluntary commitment to build new transmission facilities:
THE AMERICAN UNIVERsITY LAW REVIEW
The presiding administrative law judge in Northeast Utilities had
approved this "due diligence" exception to the company's
commitment, in light of concerns that, without the exception, native
load customers would be adversely affected "where a transmission
constraint that arises cannot be removed, due to siting,
environmental or other regulatory impasse." 6 4 FERC overruled this seemingly
practical standard in favor of imposing an absolute duty to satisfy all
requests for system expansion.
FERC asserted that "five years is a reasonable maximum period of
time for the merged company to obtain sufficient additional
transmission capacity... to satisfy all bona fide requests by other utilities
wheeling, as well as its own
agency position contradicts the North American Electric Reliability
Council's warning that "growing obstacles to the siting and
certification of new lines could make necessary expansion of the
transmission systems extremely difficult." 6 7
Further, FERC's own
Transmission Task Force reported in 1989 that completion of certain
transmission projects may take as long as sixteen years, a fact that
makes the agency's decision even more puzzling. 68
) The affected wheeling customers must commit in advance to contribute to the
costs associated with such construction...;
) NU is able feasibly to construct the additional facilities, consistent with local
and regional reliability and siting considerations ... ; and
(3) NU,after using reasonablebest efforts, is able to obtain all regulatory approvals
required for such construction to take place on terms that do not impair the feasibility
of the project.
Id.(emphasis added). FERC accepted the first limitation proposed by Northeast Utilities, but
rejected the second and third limitations and required substantial modifications. Id. at
64. Northeast Utils. Serv. Co., 53 F.E.R.C. 63,020, at 65,221-22 (1990) (accepting
utility's preference for serving native load customers over satisfying third-party requests where
system is constrained, because "merging companies' very existences are linked to their
obligation to serve native load customers" and native load customers have borne costs of
construction of transmission system), modified, 56 F.E.R.C. 61,269, at 62,022, reh'g granted, 57
F.E.R.C. 61,340 (1991), modified, 58 F.E.R.C. 61,070, reh'g dismissed as moot, 59 F.E.R.C.
65. See Northeast Utils. Serv. Co., 56 F.E.R.C. 61,269, at 62,022-24 (overruling
administrative law judge's due diligence exception and requiring applicant to satisfy all requests for
firm transmission service within five years), reh 'ggranted,57 F.E.R.C. 161,340 (1991), modified,
58 F.E.R.C. 61,070, reh'g dismissed as moot, 59 F.E.R.C. 61,089 (1992).
66. Utah Power & Light Co., 45 F.E.R.C. at 61,294; see also Northeast Utils. Serv. Co., 56
F.E.R.C. at 62,021-22 (requiring provision of transmission service within five years of
67. NORTH Am. ELEC. RELIABILITY COUNCIL, RELIABILITY ASSESSMENT 1991-2000, THE
FUTURE OF BULK ELECTRICITY SYSTEM RELIABILITY IN NORTH AMERICA 23 (1991) [hereinafter
NERC, RELIABILITY ASSESSMENT]. Delays in transmission siting and construction are not
uncommon. According to the NERC report, one transmission line between Baltimore and
Washington, D.C. originally planned for completion in 1974 is 20 years behind schedule. Id.;
see also NORTH Am.ELEC. RELIABILITY COUNCIL, 1990 RELIABILITY ASSESSMENT 28-29 (1990)
(reviewing other cases where construction of transmission lines was delayed due to variety of
68. TRANSMISSION TASK FORCE, FEDERAL ENERGY REGULATORY CoMM'N, THE
Transmission access conditions only imposed after limits established on
FERC's authority to order wheeling
Interestingly, FERC only imposed open access conditions in
merger cases after efforts to order wheeling based on section 211
were frustrated and the severe limits of that authority became
apparent.6 9 Prior to the realization of these limits, FERC had not insisted
on attaching open access transmission conditions to merger
requests. 70 In fact, the reason FERC provided for rejecting a request
that a proposed utility merger be conditioned on acceptance of
open access transmission service obligations was that the agency
had authority under sections 211 and 212 to order wheeling to
remedy anticompetitive practices. 7 ' FERC relied on the potential use of
this remedial authority when it found that "the merger has had and
appears to have no potential effect on the availability of wheeling
service." 7 2 This approach evaporated with FERC's growing
appreciation of the limited nature of its authority under sections 211 and
FERC has imposed transmissionaccess conditions beyond those
necessary to mitigate mergers' anticompetitive effects
FERC is authorized by section 203 of the FPA to condition the
approval of a merger that, but for such conditions, would not be
consistent with the public interest.73 Although FERC may impose
conditions requiring mitigation of a proposed merger's likely
anticompetitive effects, the agency is not authorized to impose
conditions that are not directly related to specific adverse effects. 74
SION TASK FORCE'S REPORT TO THE COMMISSION 39-43 (1989) (discussing difficulty in
expanding transmission systems and providing anecdotal evidence of transmission construction
problems), According to the report, the time needed to complete a transmission project
ranges widely from 8 months to 16 years. Id. at 42. Moreover, because the report noted that
only half the projects are completed within two to four years, FERC was well aware that many
transmission system expansion projects would take longer than five years to construct. Id.
69. See supra notes 25-37 and accompanying text (describing limits of FERC's authority
to order wheeling under § 211).
70. See Union Elec. Co., 25 F.E.R.C. 61,394, at 61,875 (1983) (rejecting request by
municipal agencies that proposed merger be conditioned on acceptance of general wheeling
tariff on grounds that FERC possessed adequate authority under §§ 211 and 212 of FPA to
order utility to accept wheeling tariff), aff'd sub nom. City of Malden v. Union Elec. Co., 887
F.2d 157 (8th Cir. 1989).
71. See Union Elec. Co., 26 F.E.R.C. 61,184, at 61,442, aff'd sub nom. City of Malden v.
Union Elec. Co., 887 F.2d 157 (8th Cir. 1989) (stating that FERC could remedy future
anticompetitive practices through its authority to order wheeling).
73. 16 U.S.C. § 824b (1988); see also supra notes 42-43 (discussing FERC authority in
§ 203 of FPA to condition mergers).
74. See Northeast Utils. Serv. Co., 56 F.E.R.C. 61,269, at 62,012 (acknowledging FERC
§ 203 power to condition mergers is limited because conditions must be consistent with
public interest and remedy anticompetitive effects of merger), reh g granted, 57 F.E.R.C. 61,340
Despite FERC's acknowledgment that its conditioning power under
section 203 is limited in this fashion, 7 5 the agency has not permitted
this limitation to hamper its pursuit of open access. In Utah Power &
Light, Commissioner Trabandt cautioned against FERC's
overreaching the proper bounds of its section 203 authority. 76 Later, in
Northeast Utilities, he expressed his belief that FERC had, in fact, exceeded
those bounds. 7 7 Commissioner Trabandt also voiced suspicion that
FERC's true goal in imposing transmission access in merger cases
was not the mitigation of anticompetitive effects, but the promotion
(1991), modified, 58 F.E.R.C. 61,070, reh'gdismissed as moot, 59 F.E.R.C. 161,089 (1992); Utah
Power & Light Co., 45 F.E.R.C. 61,095, at 61,282 (recognizing limitations on FERC
authority to impose common-carrier conditions in merger cases), clarified,45 F.E.R.C. 61,132, reh'g
granted,45 F.E.R.C. 61,500 (1988), reh'ggrantedin part,47 F.E.R.C. 61,209 (1989), enforced,
51 F.E.R.C. 61,295 (1990), remandedon othergrounds sub nom. Environmental Action, Inc. v.
FERC, 939 F.2d 1057 (D.C. Cir. 1991).
75. Northeast Utils. Ser. Co., 56 F.E.R.C. at 62,012 (stating that "[t]he Commission may
impose conditions only to the extent needed to make a proposed merger consistent with the
76. Utah Power & Light Co., 47 F.E.R.C. at 61,756-59 (Trabandt, Comm'r, dissenting).
Commissioner Trabandt warned FERC against improperly using its power to condition
mergers as a mechanism by which to impose open access transmission service obligations on
utilities, as follows:
We must not make merger cases platforms from which to launch probes in generic
transmission policy. Nor must we use these adjudications as opportunities to
restructure the electric utility industry along more competitive lines, as by weakening
the franchise monopoly, say, in the interests of efficiency. Rather, we must inquire
whether the merger will bring about anti-competitive effects and we must apply
remedies limited to lessening, if not altogether eradicating, those effects.
... [A]ny conditioning pursuant to section 203(b) intended to mitigate any future
adverse effect of the proposed merger on the existing competitive situation must be
directly and rationally related to such a specific adverse effect. There must be a direct
nexus between the form and substance of the condition imposed by the Commission
and the prospective adverse effect on the existing competitive situation found by the
Commission and sought to be mitigated. The Commission, in my judgment, clearly
exceeds its statutory conditioning authority under section 203(b) to the extent that
any specific condition does not have such a direct nexus to a specific prospective
adverse effect. As a result, the form and substance of the condition must
demonstrably be designed to mitigate that adverse effect and nothing more. A 'close' nexus, an
indirect relationship or a partially rational relationship would all fail to meet the
That conclusion is supremely important in the area of transmission access and
wheeling, because, but for the merger application, the Commission would not
otherwise have the requisite legal authority to impose these conditions. Thus, as a matter
of law, the direct nexus of the specific condition to a specific adverse effect is the
absolutely mandatory legal predicate for the Commission's authority to impose a
transmission access condition of any kind, and conversely, the absence of such a
direct nexus would be a totally fatal legal flaw in the Commission's order. And, again,
all of the analysis of any alleged adverse effect on the existing competitive situation,
and the statutorily required direct nexus to any resulting condition must be
established with substantial evidence on the record of that case.
77. See Northeast Utils. Serv. Co., 56 F.E.R.C. at 62,054, 62,058 (Trabandt, Comm'r,
dissenting) (stating that FERC exceeded its § 203 authority by imposing wheeling conditions
beyond those necessary to mitigate potential anticompetitive effects of proposed merger).
ELECTRIC TRANsMISSION ACCESS POLICY
of competitive forces.78
Narrower transmission conditions would mitigate any likely
In both Utah Power & Light and Northeast Utilities, FERC held that
the transmission access conditions imposed were "minimum
necessary" concessions to alleviate the proposed mergers' likely
anticompetitive effects.7 9 In Utah Power & Light, however, equally effective,
albeit narrower, transmission conditions existed that would have
mitigated the only anticompetitive effects identified by FERC that
actually arose from the proposed
FERC found that the
merger posed a threat to competition because "the
company could give preference to its own generation over that of
competitors . . . (even when the latter is cheaper)." 8 1
prescribing a narrow remedy requiring the
merged company to
wheel for any lower-cost rival supplier, FERC required the company
to open its entire transmission system to access by competitors.8 2
Similarly, the transmission access conditions imposed in Northeast
Utilities were broader than necessary to alleviate the anticompetitive
effects of that merger. Although FERC acknowledged that its
examination of the anticompetitive effects of the merger focused on
certain "strategic or key transmission facilities," 8 3 FERC required the
merged company to open its entire transmission system to
competitor access, and not merely these strategic facilities. 84
that could potentially be used to isolate other electrical generators).
84. Id at 62,021-22, 62,024.
Rjection of "due diligence" standardis unrelated to mitigation of
market power over transmission
FERC's rejection of a due diligence standard for evaluating utility
refusals to satisfy wheeling requests8 5 is at odds with court decisions
recognizing that it is not anticompetitive for utilities to refuse to
surrender facility use for the benefit of third parties if such use would
result in economic harm to their customers. 8 6 Similarly, with
respect to electric transmission facilities, the courts have held that it is
not anticompetitive for a utility to prefer to use its transmission
capacity for the benefit of its customers.8 7
It is axiomatic that a due diligence standard is sufficient to prevent
the exercise of market power in transmission because
nonsatisfaction of a wheeling request would only be excepted if it resulted from
the influence of external forces such as the denial of necessary
permits and approvals by state and local agencies, 88 delays due to
litigation,8 9 or the requirements of state or federal environmental and
public lands laws. 90 In short, a due diligence standard assures that
85. See supra notes 62-65 and accompanying text (describing FERC's rejection of due
diligence standard in Northeast Utilities).
86. See, e.g., Illinois v. Panhandle E. Pipe Line Co., 935 F.2d 1469, 1484, 1486 (7th Cir.
1991) (approving company's refusal to employ open access gas transportation policy that
would have exposed customers to take-or-pay liability because "[m]onopolists needn't
acquiesce to every demand placed upon them by competitors ...[because] a monopolist's duties
are negative-to refrain from anticompetitive conduct-rather than affirmative-to promote
competition"), cert. denied, 112 S. Ct. 1169 (1992); Oahu Gas Serv., Inc. v. Pacific Resources
Inc., 838 F.2d 360, 368-69 (9th Cir.) (accepting economic inefficiency as sufficient justification
for utility to refuse to expand refinery), cert. denied, 488 U.S. 870 (1988); Olympia Equip.
Leasing Co. v. Western Union Tel. Co., 797 F.2d 370, 375 (7th Cir. 1986) (stating that "it is clear
that a firm with lawful monopoly power has no general duty to help its competitors"), cert.
denied, 480 U.S. 934 (1987); MCI Communications Corp. v. AT&T, 708 F.2d 1081, 1133, 1138
(7th Cir.) (noting that access to "essential facilities" may be denied when such access is not
economically feasible or is not in public interest), cert. denied, 464 U.S. 891 (1983).
87. See City of Vernon v. Southern Cal. Edison Co., 1991-1 Trade Cas. (CCH) 69,336,
at 65,342 (C.D. Cal. 1990) (rejecting antitrust complaint based on lack of transmission access,
because monopolist has no unqualified duty to cooperate with business rival.), aft'd in part and
rev'd in part, 955 F.2d 1361 (9th Cir, 1992); Cities of Anaheim v. Southern Cal. Edison Co.,
1990-2 Trade Cas. (CCH) 69,246, at 64,910 (C.D. Cal. 1990) (dismissing claim by
municipalities that denial of transmission access violated antitrust law as "lacking in substance"),
aff'd, 955 F.2d 1373 (9th Cir. 1992).
88. See OTA, WHEELING AND DEALING, supra note 14, at 201-06 (describing difficulty of
obtaining transmission siting permits from state and local agencies).
89. See NERC, RELIABILrrY ASSESSMENT, supra note 67, at 24 (noting that judicial
challenges have resulted in delays and cancellations of planned expansions of transmission
90. See OTA, WHEELING AND DEALING, supra note 14, at 206-08 (discussing requirements
for permitting transmission across federal, state, and tribal lands). A number of federal
statutes contain requirements that may prevent or make impractical the expansion of
transmission capacity. See, e.g., National Historic Preservation Act, 16 U.S.C. §§ 461-470 (1988)
(authorizing Interior Secretary to acquire, manage, and operate property deemed to have
historic or archaeological significance); Wilderness Act, 16 U.S.C. §§ 1131-1136 (1988)
(designating "wilderness areas" that must remain undeveloped); Wild and Scenic Rivers Act,
16 U.S.C. §§ 1271-1287 (1988 & Supp. 1 1989) (restricting development of designated rivers
FERC has stated that it will reject transmission rates that are based
solely on the principle of holding native load customers harmless
for the cost of providing third-party wheeling. 19 6
For this reason, it
follows that the only native load interest expressly protected by
FERC is reliability, not cost.
FERC recognizes that denial of full recovery of opportunity costs
where transmission systems are constrained
provides utilities an
economic incentive to expand their systems. The staff pricing
proposal relied on incomplete recovery of forgone benefits incurred
through third-party wheeling to provide utilities an economic
incentive to expand their transmission systems. 197 This objective also led
FERC to cap recovery of forgone benefits subsequent to Northeast
Utilities.198 In effect, FERC is using the threat of shifting the cost of
providing third-party wheeling onto native load customers as a club
to encourage expansion of transmission systems.' 99
To be sure, FERC's decision to permit any recovery of
opportunity costs incurred through third-party wheeling marks a major
departure from previous policy. 20 0
This policy reversal may have more
196. See Northeast Utils. Serv. Co., 59 F.E.R.C. 61,089, at 61,162 (1992) (rejecting
request for rehearing of opportunity cost pricing policy because transmission rates "will be
approved only if they properly reflect all three transmission pricing goals, not just the
principle of holding native load customers harmless").
197. See Northeast Utils. Serv. Co., 57 F.E.R.C. 61,340, at 62,104 (1991) (noting that cap
on recovery of opportunity costs at incremental cost of system expansion provides "an
economic incentive for the utility to expand its transmission system to recover additional
revenue"), modified, 58 F.E.R.C. $ 61,070, reh'g dismissed as moot, 58 F.E.R.C. 1 61,089 (1992).
FERC supported such a cap despite the fact that the pricing proposal acknowledged that
"[lIegitimate opportunity costs occur only when ...there is insufficient transmission capacity
to accommodate" both native load and third-party wheeling. Id. at 62,103. Interestingly,
FERC masked its views on capping recovery of opportunity costs but hinted that this was an
issue that would be raised during consideration of future filings by Northeast Utilities. See
Northeast Utils. Serv. Co., 58 F.E.R.C. at 61,203 (specifying issues Northeast Utilities should
address if it files proposal to recover opportunity costs, including whether opportunity costs
should be capped by incremental expansion costs, whether current wheeling customers
should be treated differently from future customers, and how third parties can be protected
from fluctuations in opportunity costs).
198. See Pennsylvania Elec. Co., 58 F.E.R.C. at 61,874 (capping recovery of opportunity
costs at estimated or actual expansion costs and explaining that "we find the cap appropriate
.,.because it provides an incentive for the utility to expand its system when it is efficient to do
199. See Pennsylvania Elec. Co., 58 F.E.R.C. $ 61,278, at 61,874 (1982) (warning that
failure to build additional transmission capacity will lead to inability to recover opportunity costs
and will subject native load customers to harm).
200. See Utah Power & Light Co., 45 F.E.R.C. $ 61,095, at 61,290 (finding opportunity
cost recovery proposal proffered by applicants to be "overly vague and possibly unworkable"
in that it could allow merged company to "collect monopoly rents associated with a scarce or
constrained resource"), clarified, 45 F.E.R.C. $ 61,132, reh'g granted, 45 F.E.R.C. $ 61,500
(1988), reh'ggrantedinpart,47 F.E.R.C. $ 61,209 (1989), enforced, 51 F.E.R.C. $ 61,295 (1990),
remanded on other grounds sub nom. Environmental Action, Inc. v. FERC, 939 F.2d 1057 (D.C.
Cir. 1991). Although the administrative law judge in Northeast Utilities had indicated support
for recovery of forgone benefits, Northeast Utils. Serv. Co., 53 F.E.R.C. 63,020, at 65,221
(rejecting intervenor requests that recovery of"lost opportunity charges" be precluded),
modto do with the agency's zeal to promote transmission access than a
protect native load customers,
changed its policy on recovery of opportunity costs after it became
apparent that state regulators would disapprove the Northeast
Utilities proposed merger, which would have denied the agency a
prominent vehicle for development
of its open access policy. 20 1
desire to promote its transmission access policy may also have
persuaded FERC to dissemble on whether it would cap recovery of
FERC's true purpose in denying or capping opportunity cost
recovery seems to lie in a desire to spur state public utility
commissions to approve expansions of transmission systems.2 0 3
imposition of an absolute duty to provide transmission service,
combined with its refusal to permit full recovery of forgone benefits
from third-party wheeling, provides a powerful incentive for state
public utility commissions to approve expansions of transmission
Otherwise, significant economic costs will accrue to the
customers of a transmitting utility. State regulators recognized this
as an intrusion into their realm of transmission siting and
construcjfied, 56 F.E.R.C. 61,269, reh'ggranted,57 F.E.R.C. 61,340 (1991), modified, 58 F.E.R.C. 1
61,070, reh'g dismissed as moot, 59 F.E.R.C. 61,089 (1992), FERC deferred its decision on
whether to allow recovery of opportunity costs partly because there was no specific proposal
submitted by the applicant in the case. Northeast Utils. Serv. Co., 56 F.E.R.C. at 62,028.
201. See Request of the Connecticut Department of Public Utility Control for Rehearing at
3, Northeast Utils. Serv. Co., 56 F.E.R.C. 61,269 (1991) (threatening to disapprove pending
merger because failure to permit recovery of forgone benefits would expose native load
customers to "undue economic disadvantage"). One of the demands made by the state
regulators was that Northeast Utilities be permitted to recover forgone benefits. Id at 4-5.
202. See Northeast Utils. Serv. Co., 58 F.E.R.C. 61,070, at 61,203 (promising to
reconsider capping recovery of opportunity costs at incremental expansion costs upon refiling by
Northeast Utilities), reh'g dismissed as moot, 59 F.E.R.C. 61,089 (1992). The FERO Staff's
Proposed Transmission Pricing Proposal explicitly provided for capping recovery of
opportunity costs, however. See Northeast Utils. Serv. Co., 57 F.E.R.C. 61,340, at 62,105 (1991)
(noting that capping recovery of opportunity costs at incremental costs of expanding system
"provides an incentive to add capacity when it is economically efficient to do so"), modified, 58
F.E.R.C. 161,070, reh'g dismissed as moot, 59 F.E.R.C. 61,089 (1992).
203. FERC had earlier rejected recovery of opportunity costs for wheeling out of concern
that recovery of these costs by the transmitting utility would eliminate the incentive to expand
transmission capacity. See Northeast Util. Serv. Co., 56 F.E.R.C. at 62,027 (observing that
recovery of forgone benefits would provide no incentive to Northeast Utilities to upgrade its
transmission system); Utah Power & Light Co., 45 F.E.R.C. at 61,290 (conceding that
opportunity cost pricing for transmission services may "provide a useful measure of the value of
scarce transmission resources," but would provide transmitting utility "no incentive to
alleviate the congestion"). FERC's denial of recovery of forgone benefits would encourage state
regulators to approve expansion of transmission siting where utilities could otherwise recover
these costs from state regulators under cost-of-service rate regulation.
tion,204 an area where FERC has no authority, 20 5 and accordingly
sought rehearing of the Northeast Utilities order.2 0 6
Transmission Access Conditions Will Impair Reliability
Under the FPA, FERC cannot issue a wheeling order that would
impair the reliability of the utility systems affected by the order.20 7
Yet, the transmission access conditions imposed by FERC are
intended to increase the use of existing transmission capacity to the
point of full loading, 20 8 which raises serious concerns about the
impact of open access policies on electric system reliability. 20 9
The CDPUC submits that the entire immutable constraints mechanism, and its
attendant subordination of economic transactions for the benefit of native load, is an
undue intrusion into the jurisdiction over transmission siting reserved exclusively to
the states under § 201 of the FPA.... Application of the Utah Hammer in New
England thus overrides legitimate state interests in land use and environmental
protection in order to promote interstate bulk power transactions. It thereby
encroaches upon authority Congress reserved to the states.
Id. at 23-24.
205. FERC has authority over transmission pricing, but not siting. See 16 U.S.C. §§
824d824e (1988) (discussing setting of rates and charges for transmission service and wholesale
power sales). Furthermore, federal regulation under the FPA "extend[s] only to those
matters which are not subject to regulation by the States." Id. § 824(a).
206. See Request of the Connecticut Department of Public Utility Control for Rehearing at
1-2, Northeast Utils. Serv. Co., 56 F.E.R.C. 61,269 (1991) (seeking rehearing of Northeast
Utilitiesorder because of concerns of impact on electric ratepayers).
207. See 16 U.S.C. § 824k(a)(3) (1988) (precluding issuance of wheeling order absent
FERC determination that order "will not unreasonably impair the reliability of any electric
utility affected by the order"). Although this subsection was deleted by the Energy Policy Act,
Energy Policy Act of 1992, Pub. L. No. 102-486, § 722(
), 106 Stat. 2776, 2916 (to be
codified at 16 U.S.C. § 824k) (amending § 212 of FPA), the new law includes comparable
protection for system reliability. See id. § 721(3), 106 Stat. at 2915 (to be codified at 16 U.S.C.
§ 824j) (barring issuance of wheeling order if FERC finds that "such order would
unreasonably impair the continued reliability of electric systems affected by the order.").
208. This is plain in Utah Power & Light, where FERC required the merged company to
calculate its "remaining existing capacity," or transmission capacity not needed to serve its
native load and firm contract customers, and offer all of that capacity to other utilities. See
Utah Power & Light Co., 45 F.E.R.C. 61,095, at 61,291 (describing customer access to
existing transfer capacity during transition period), clarified, 45 F.E.R.C. 61,132, reh'g granted,
45 F.E.R.C. 61,500 (1988), reh'g granted in part, 47 F.E.R.C. 61,209 (1989), enforced, 51
F.E.R.C. 61,295 (1990), remanded on other grounds sub nom. Environmental Action, Inc. v.
FERC, 939 F.2d 1057 (D.C. Cir. 1991). This procedure could well result in loading of a
merged company's transmission capacity to its full-rated capability. After a merger transition
period, a merged company is required to meet allrequests for firm service, displacing its own
economy transactions with firm wheeling on behalf of third parties as necessary. See Northeast
Utils. Serv. Co., 56 F.E.R.C. 61,269, at 62,020-24 (holding that company may not give
higher priority to its own use than to requests by third parties when allocating transmission
capacity), reh'g granted, 57 F.E.R.C. 61,340 (1991), modified, 58 F.E.R.C. 61,070, reh'g
dismissed as moot, 59 F.E.R.C. 61,089 (1992); Utah Power & Light Co., 45 F.E.R.C. at 61,294-95
(requiring that merged company reduce its own transactions as necessary to meet electric
utilities' requests for transmission service).
209. See NERC, RELIABILrrY AsSESSMENT, supra note 67, at 21 (stating that it is more
difficult to maintain reliability as transmission loadings increase); KELLY ET AL., supra note 54, at
Although FERC insists that reliability will not suffer as a result of
the obligations it has placed on transmitting utilities, 1"Ono analysis
appeared in Utah Power & Light, Northeast Utilities, or Public Service Co.
of Indiana regarding the impact of open access on reliability. 21 1
These assurances ring rather hollow in any case because they
suggest that FERC can distinguish between reliability and economy
transactions, although the agency concedes that no such bright line
exists. 21 2 Indeed, because many transactions are performed for
both economy and reliability purposes, the distinction is altogether
artificial, and the subordination of economy transactions will likely
impair reliability of service.
FERC's AUTHORITY TO ORDER WHEELING HAS BEEN
AUGMENTED BY AMENDMENTS TO THE FEDERAL
In February 1991, the Bush administration proposed a "National
Energy Strategy" (NES) designed in part to promote efficiency in
electric generation by encouraging greater competition in the utility
industry. 21 3 One of the legislative and regulatory reform proposals
50, 58 (indicating that operating transmission lines at or near their theoretical maximum
power transfer capability threatens stability, whereas unused transmission capacity furthers
reliability by backing up other transmission lines as well as generation units). In order to
maintain reliability under normal operating conditions when small unplanned additional
current or voltage drops disturb the balance of the system, loading should not exceed 85-957o of
the theoretical limit. KELLY ET AL., supra note 54, at 50-51.
210. See Northeast Utils. Seru. Co., 56 F.E.R.C. at 62,021, 62,024 (holding that Northeast
Utilities will not be required to provide firm transmission service to third parties when
immutable constraints prevent expansion of transmission facilities and wheeling would impair
service to native load customers); Utah Power&Light Co., 45 F.E.R.C. at 61,291, 61,294 (affirming
that merged company may refuse wheeling service if satisfaction of wheeling request would
impair reliability of service to native load customers).
211. See Northeast Utils. Serv. Co., 58 F.E.R.C. at 61,200 (failing to analyze how utilities will
maintain reliability when required to use all existing transmission capacity); Public Serv. Co.
of Ind., 51 F.E.R.C. 61,367, at 62,212 (concluding that reliability problems will not be
enhanced by open access and may be addressed by current engineering and institutional
framework), modified sub nom. PSI Energy, Inc., 52 F.E.R.C. V61,260, clarfied,53 F.E.R.C. 1 61,131
(1990), petition dismissedsub nom. Northern Ind. Pub. Serv. Co. v. FERC, 954 F.2d 736 (D.C.
Cir. 1992); Utah Power &Light Co., 45 F.E.R.C. at 61,294 (failing to examine consequences of
open access on reliability when merged company must reduce its own off-system transactions
to meet electric utilities' requests for transmission service).
212. See Northeast Utils. Serv. Co., 58 F.E.R.C. at 61,200 (noting that "[w]e... recognize the
difficulty in demarcating transmission needed for 'reliability' purposes from transmission
needed for 'economic' purposes"). Significantly, FERC ignored the requests by Northeast
Utilities and intervenors for a definition of "reliability" to clarify the meaning of this
exception. Id at 61,197, 61,199.
213. See U.S. DEP'T OF ENERGY, NATIONAL ENERGY STRATEGY 31-32 (1991) [hereinafter
NATIONAL ENERGY STRATEGY] (stating that NES proposals will allow greater competition in
electric power industry, which will "ensure economic efficiency and provide the flexibility
necessary to manage uncertainty").
recommended by the Bush administration was the expansion of
open access for wholesale buyers and sellers and the pricing of
wheeling to assure increased efficiency. 2 14 The NES offered no
specific legislation with respect to transmission access, 215 but rather
proposed that FERC fully utilize its existing statutory authority to
expand transmission access and properly price transmission
service.21 6 During congressional consideration of energy legislation,
however, administration officials expressed increased support for
legislative expansion of FERC's authority to order wheeling. 2 17
Energy Policy Act of 1992
Congress enacted broad energy legislation in 1992218 that sharply
214. See id. at 7-8, 32, 35 (explaining policy of using existing FERC and Department of
Energy authority to expand access to transmission facilities and to properly price transmission
services). Greater access also would increase competition in wholesale markets, thus
guaranteeing access to electricity at the lowest reasonable cost. Id. at 35.
215. See H.R. 1301, 102d Cong., 1st Sess. (1991); S. 570, 102d Cong., Ist Sess. (1991)
(failing to include amendments of §§ 211 and 212 of FPA in NES implementing legislation
sent to Congress by Bush administration).
216. See NATONAL ENERGY STRAEGY, supra note 213, at 32, 35. The NES recommended
enhanced transmission access, but reserved judgment on whether legislation was needed:
Under the National Energy Strategy, the Administration supports fall utilization of
Department of Energy and FERC authorities to encourage more open access to
electric transmission facilities for traditional utility and other suppliers of electric power,
while maintaining reliability standards. The Administration also supports efforts by
FERC to promote efficient pricing of transmission services. These actions will help
to develop a competitive generation sector and to increase the flexibility of providers
of electricity. Under the Federal Power Act, FERC can establish policies that
promote these objectives. The Strategy recommends that FERC review its existing
policies and programs and reexamine its authority under the Federal Power Act to
ensure that transmission services and facilities are adequate for the emerging
competitive generation market. If experience shows that FERC'sauthority is inadequate,then the
Strategy recommends legislative expansion of FERC's authority.
Id. at 35 (emphasis added).
217. Before markup of energy legislation in the Subcommittee on Energy and Power,
Secretary of EnergyJames Watkins expressed administration support for transmission legislation
that was consistent with certain principles. Letter from James D. Watkins, Secretary, U.S.
Department of Energy, to Rep. Carlos Moorhead, Ranking Minority Member, Subcommittee
on Energy and Power, U.S. House of Representatives (Sept. 27, 1991) (on file with The
American University Law Review) (discussing support of Bush administration for transmission
legislation that incorporates certain principles and stating opposition to Committee Print of
"Electricity Policy Act," draft legislation prepared by Subcommittee Chairman Phil Sharp, (on
file with The American University Law Review). One of the principles advocated by the
Department of Energy is that transmission access legislation "[e]ncourages the emerging
competitive market in generation by creating an affirmative obligation for utilities to provide
transmission service." Id. Later in the legislative consideration of H.R. 776, the "Energy
Policy Act of 1992," Secretary Watkins reaffirmed administration support for transmission
legislation that incorporated certain principles. Letter from James D. Watkins, Secretary, U.S.
Department of Energy, to Rep. John D. Dingell, Chairman, Committee on Energy and
Commerce, U.S. House of Representatives 12-13 (Sept. 8,1992) (stating preferences on
transmission access provisions of H.R. 776) (on file with The American University Law Review).
218. President Bush signed H.R. 776, the "Energy Policy Act of 1992," into law on
October 24, 1992. President's Statement on Signing the Energy Policy Act of 1992, 28 WEEKLY
COMP. PRES. Doc. 2094-95 (Oct. 24, 1992) [hereinafter President's Statement]. The
legislaexpands FERC's power to order wheeling. The electricity reform
provisions of the "Energy Policy Act of 1992"' 219 are intended to
promote greater competitiveness in bulk power markets 220 in order
to lower rates for consumers. 22 1 The bill's sponsors shared FERC's
view that transmission access may be a barrier to enhanced
competition in wholesale power markets 222 and removed many of the
retion had been approved by the sweeping margin of 363 to 60 in the House, 138 CoNG. REC.
HI 1,450-51 (daily ed. Oct. 5, 1992) (roll call vote no. 474), and by voice vote in the Senate.
138 CONG. REC. S17,658 (daily ed. Oct. 8, 1992).
219. See Energy Policy Act of 1992, Pub. L. No. 102-486, §§ 721-722, 106 Stat. 2776,
2915-19 (to be codified at 16 U.S.C. §§ 824j-824k) (expanding FERC authority to order
220. See President's Statement, supra note 218, at 2095 ("There is much that is good for
America in this new law. It contains a landmark provision furthering competition in the way
electricity is generated and sold, thus lowering prices while ensuring adequate supplies."); see
also 138 CONG. REC. H 1,428 (daily ed. Oct. 5, 1992) (statement of Rep. Dingell)
("Ultimately, as a result of [Title VII] we should see a more competitive industry, lower costs and
reliable service to electricity customers."); 138 CONG. REC. H11,380 (daily ed. Oct. 5, 1992)
(statement of Rep. Bliley) ("Transmission lines are the highways of commerce in the electric
utility industry. Fair and open access to these lines is essential to fulfill the purposes of the
electricity title of this legislation: The promotion of competition and the lowering of electric
Representative Sharp echoed these thoughts in the House debate:
H.R. 776 will also introduce historic changes to the electricity industry-increasing
competition among suppliers and providing protections for consumer
pocketbooks.... The final product, a true compromise, is a stronger statement than either
the House or Senate bill of the Congress' desire to see competition in the generation
of electricity and the availability of access to the Nation's transmission grid for all
comers without regard to monopoly or market power.
138 CONG. REC. HI 1,400 (daily ed. Oct. 5, 1992) (statement of Rep. Sharp). Senator Dole
also praised the bill:
We are entering a brave new world of new competition that will be stimulated by the
provisions of this bill. This new age of independent power producers that will now
be able to build, own, and operate power plants and sell electricity on a wholesale
basis to utilities and municipalities anywhere in the United States, will certainly
change the electricity generation business in the future.
138 CONG. REC. S17,632 (daily ed. Oct. 8, 1992) (statement of Sen. Dole).
221. See 138 CONG. REC. S17,649 (daily ed. Oct. 8, 1992) (statement of Sen. Conrad)
("The increased competition that will result from these changes [in the Energy Policy Act] will
lead to reduced utility costs, and the Department of Energy estimates that it will save $1.8
billion per year"); 138 CONG. REC. S17,638 (daily ed. Oct. 8, 1992) (statement of Sen.
Cochran) ("Under the conference agreement, consumers will benefit from the competition in
the electric utility industry that will result from the deregulation of powerplant construction
and power distribution."); 138 CONG. REC. S17,628 (daily ed. Oct. 8, 1992) (statement of Sen.
Riegle) ("Title 7 is intended to accomplish a restructuring of the utility industry to promote
greater competition for the benefit of energy customers."); 138 CONG. REC. HI 1,436 (daily
ed. Oct. 5, 1992) (statement of Rep. Tauzin) ("We have opened the door today to
competition.... We have opened the door in effect to consumers getting cheaper electrical power
and having a better supply of electrical energy for America."); 138 CONG. REc. HI 1,408 (daily
ed. Oct. 5, 1992) (statement of Rep. Moorhead) ("[iTihis legislation would reform the
regulation of electric utilities to ensure competition in both the generation and transmission of
wholesale electric supplies.... Under this legislation, we enter into a new era of competition
in wholesale electricity supplies."); 138 CONG. REC. HI 1,380 (daily ed. Oct. 5, 1992)
(statement of Rep. Bliley) ("[Tihere are great benefits to allowing competition into the wholesale
electric generating industry. The Department of Energy estimates that full-fledged
competition will bring savings of nearly $3 billion per year.").
222. See National Energy Strategy (Part4): HearingsBefore the Subcomm. on Energy and Powerof
strictions on FERC's wheeling authority in sections 211 and 212 of
Protectionof native load customers
The Energy Policy Act includes provisions that are intended to
protect the native load customers of affected utilities against undue
harm from the provision of transmission services.
Under the stat
ute, no wheeling order can issue unless FERC finds that it (
permits the wheeling utility to recover all costs incurred in connection
with the transmission service;2 24 (
) is otherwise in the public
interest;22 5 and (3) does not "unreasonably impair the continued
reliability of electric systems affected by the order." 2 26
Energy Policy Act removed many of the native load protections that
existed under sections 211 and 2 12,227 these new provisions provide
assurance of native load protection. 2 28
the House Comm. on Energy and Commerce on H.R. 1301, H.R. 1543, and H.R. 2224: Bills on
ElectricityRegulation and TransmissionAccess, 102d Cong., 1st Sess. 621-22 (1991) (statement of Rep.
Sharp) (stating that FERC must have power to assure that monopoly control of transmission
lines does not stifle competition); id at 636 (statement of Rep. Moorhead) (contending that
bill encourages optimal use of transmission access so that competition is increased in
wholesale power market); id at 636-37 (statement ofRep. Markey) (noting that debate has not been
whether to provide greater access, but how to do so without economically harming utilities'
customers or sacrificing reliability). According to Subcommittee Chairman Sharp,
"[t]ransmission access is a critical tool for increasing bulk power competition. Our challenge
is to determine when [sic] the Congress must do and what powers FERC must have to assure
the monopoly control of transmission lines is not used to stifle competition .... That is why I
believe that opening up the transmission system is a natural complement to ... our overall
goal of encouraging a more competitive and efficient electric [industry]." Id at 621-22.
223. The Energy Policy Act deleted §§ 211(a)(
)-(3) and 212(a) of the FPA, which had
limited FERC power to mandate transmission service under the FPA. Energy Policy Act of
1992, §§ 721(
), 106 Stat. at 2915-16 (amending §§ 211 and 212 of FPA). Section
21 l(a)(l)-(3) had required FERC to make findings that a proposed wheeling order would (
be in the public interest; (
) either conserve energy, promote efficiency, or improve reliability;
and (3) comply with § 212. 16 U.S.C. § 824j(a)(
)-(3) (1988). Section 212(a) prevented
issuance of a wheeling order unless FERC found that it (
) would not be likely to result in a
reasonably ascertainable uncompensated economic loss to the transmitting utility; (
not place an undue burden on the utility; (3) would not unreasonably impair reliability; and
(4) would not impair the ability of affected utilities to render adequate service to their
customers. Id. § 824k(a). Notably, the new law also deleted § 21 l(c)(
), which had proved an
effective bar to the exercise of FERC wheeling authority. Energy Policy Act of 1992, § 721(4), 106
Stat. at 2915; see also supra notes 33-35 and accompanying text (concluding that § 21 l(c)(
FPA prevented FERC from issuing wheeling orders).
224. See Energy Policy Act of 1992, § 721(
), 106 Stat. at 2915 (barring wheeling order
that fails to comply with § 212 of FPA). The new law amends § 212, striking existing
subsections (a) and (b) and inserting a new subsection (a) on transmission rates. Id. § 722(
Stat. at 2916. Under the new subsection (a), a wheeling order will "permit the recovery by
[the wheeling] utility of all the costs incurred in connection with the transmission services and
necessary associated services .... "d
225. Id § 721(
), 106 Stat. at 2915.
226. Id. § 721(3).
227. See supra notes 28-30, 33 and accompanying text (describing limits on FERC
wheeling authority under §§ 211 and 212 before enactment of Energy Policy Act).
228. See infra notes 231-49 and accompanying text (describing provisions of Energy Policy
a. Recovery of the cost ofproviding transmissionservice
The Energy Policy Act attempts to ensure that a transmitting
utility will recover the cost of providing wheeling for third parties.2 29
Other legislative proposals would only have permitted the recovery
of the direct costs of providing transmission service, not both direct
and indirect costs associated with the service. 2 0 By contrast, the
Energy Policy Act permits the transmitting utility to recover forgone
benefits from displaced economy transactions by requiring FERC to
set rates that are designed to
permit the recovery by [the wheeling utility] of all the costs
incurred in connection with the transmission services and necessary
associated services, including, but not limited to, an appropriate
share, if any, of the legitimate, verifiable and economic cost,
including taking into account any benefits to the transmission
system of providing the transmission services, and the costs of any
enlargement of transmission facilities. 23 '
Full recovery of all forgone benefits is not assured, however,
because FERC is required to assure that transmission rates "shall
promote the economically efficient transmission and generation of
electricity .... "232 Because the promotion of transmission is best
achieved through low rates, the impact of the new law on Northeast
Utilities233 and Pennsylvania Electric Co.2 34 is unclear. In future
proceedings before FERC, a wheeling utility could argue that the new
law permits recovery of both opportunity cost and the costs of any
enlargement of the utility's transmission facilities. First, FERC
recognizes that opportunity costs are legitimate costs incurred by
wheeling utilities, 2 3 5 and the new law permits recovery of "all costs
incurred in connection with the transmission services" by the
wheeling utility.2 36 Second, the new law explicitly identifies the cost of
Act intended to recover costs of providing transmission service and protect system reliability);
see also supra note 155 (reviewing public interest standard under FPA).
229. See infra text accompanying note 231 (discussing provision of Energy Policy Act that
permits transmitting utilities to recover all costs incurred in connection with transmission
230. See, e.g., H.R. 2224, 102d Cong., 1st Sess. § 5 (1991) (allowing recovery only of
prudently incurred direct costs, as determined by FERC).
231. Energy Policy Act of 1992, § 722(
), 106 Stat. at 2916 (establishing new § 212(a)).
233. See Northeast Utils. Serv. Co., 58 F.E.R.C. 61,070, at 61,203 (establishing
transmission pricing goals that balance principle of holding native load customers harmless against
goal of setting "lowest reasonable cost-based rates"), reh'g dismissed as moot, 59 F.E.RC. 1
234. 58 F.E.R.C. 61,278, at 61,873 (1992) (capping opportunity cost recovery at
incremental cost of system expansion).
235. See supra note 186-90 and accompanying text (explaining FERC's allowance of
opportunity cost recovery by transmitting utilities).
236. Energy Policy Act of 1992, § 722(
), 106 Stat. at 2916.
any enlargement of transmission facilities as a cost that may be
recovered by transmitting utilities. 23 7 It could be argued that the
Act permits recovery
of both opportunity costs and
enlargement cost, while PennsylvaniaElectric capped recovery of
opportunity costs at the cost of enlargement. 238
Since the pricing provisions in the Energy Policy Act are hardly a
model of clarity, FERC interpretation of these provisions is likely to
be highly contentious.
Despite the efforts by some to put flesh on
the bones of the legislative history of the electricity title of the
Energy Policy Act,23 9 FERC discretion to set transmission pricing
history indicates that
238. See Pennsylvania Elec. Co., 58 F.E.R.C. 61,278, at 61,873 (1992) (capping
opportunity cost recovery at incremental cost of system expansion).
239. Significantly, the conference report was silent on interpretation of the transmission
pricing provisions in § 722(
) of the Energy Policy Act. Other legislative history is at best
inconsistent; at worst contradictory. During House floor debate on the conference report on
H.R. 776, Representative Moorhead offered his view of the "legitimate, verifiable and
economic costs" that may be recovered by a wheeling utility under the transmission pricing
Congress did not intend to overturn the pricing formula established
by FERC in Northeast Utilities and PennsylvaniaElectric Co. 240 Yet, the
138 CONG. REc. S17,613 (daily ed. Oct. 8, 1992) (statement of Sen.Johnston). Senator
Wallop commented further on the effect that wheeling orders will have:
A [wheeling] order shall allow the recovery of reasonably projected future costs,
particularly opportunity costs, based either upon the historical experience or existing
and planned arrangements of the transmitting utility, so long as an evidentiary basis
exists. Actual benefits to the transmission system of providing the service may be
taken into account, such as documented operational cost savings. Speculative
benefits to the transmission system, such as the mere existence of facilities that would not
have been constructed but for a mandatory wheeling order, are not to be credited
against the costs incurred in connection with the transmission services.... In order
to promote the economically efficient use of transmission and generation systems,
rates, charges, terms and conditions and transmission services must include all costs
associated with performing a transaction, including the costs of foregone alternative
uses for the facilities. In cases where the relevant market for delivered bulk power is
competitive, the market price will best reflect the true value of the use of facilities
and promote the economically efficient allocation of resources.
Id. at S17,618 (statement of Sen. Wallop). Senator Wallop argued that § 722(
encourage negotiated rates:
The purpose of this language is to encourage negotiated rates, where appropriate.
In cases where the relevant market-the market for delivered power-is competitive,
the negotiated or market price will reflect the true value of the use of facilities and
promote the economically efficient allocation of resources. In such cases, a
marketbased rate shall be deemed to meet all the requirements of section 212(a).
Id at S17,647 (statement of Sen. Wallop).
The legislative history of the meaning in § 722(
) of "benefits to the transmission system"
that offset recovery of costs is also very narrow. The interpretation of this language was
addressed in a colloquy between Senators Wallop and Lott during floor debate on the
LOTT: [Tihe conference agreement says the rates, charges, terms and conditions of
wholesale transmission services pursuant to a section 211 order shall permit the
recovery of costs "including taking into account any benefits to the transmission
system of providing the transmission service." What are such "benefits to the
WALLOP: The purpose of this language is to recognize that the electrical system of
a transmitting utility is a dynamic system which must handle numerous transfers of
electricity simultaneously. This phrase requires that where an order under section
211 causes benefits from reduced line losses on parts of the transmission system, the
reduced losses must be taken into account in the recovery of other costs, including
the costs of any increased losses in other portions of the transmission system.
138 CONG. REC. S17,647 (daily ed. Oct. 8, 1992) (colloquy between Sens. Lott and Wallop);
see also 2A NORMANJ. SINGER, STATUTES AND STATUTORY CONSTRUCTION § 48.8 (5th ed. 1992)
(stating that colloquy between two House or Senate members may be useful in interpreting
240. Representatives Sharp and Moorhead engaged in a colloquy on the House floor
during debate on the conference report on H.R. 776. Following is an excerpt from that floor
SHARP: Is it also the gentlemen's view that the bill does not affect-and specifically
does not contradict or overturn-any prior FERC decision, policy, or determination
with respect to the pricing of transmission services?
MOORHEAD: Indeed it is. I would have been very concerned had Congress
unwisely gone down the road of attempting to micromanage the normal development
of agency policy. That language was replaced not because of a rejection of the
balancing principle, but because of a recognition that transmission pricing is a very
complex matter. Rather than establish a pricing prescription with roots in a single
FERC decision, we chose to establish parameters and defer to the Commission's
discretion to work within these parameters.
SHARP: I couldn't agree more with the gentlemen. I have to admit that personally
legislative history also suggests that Congress did not codify FERC's
approach on transmission pricing. 241 The conclusion must be
drawn that Congress determined to defer to the discretion of FERC
I am very much in favor of recent FERC transmission pricing policy, particularly the
delicate balance it achieved in the Northeast Utilities decision. As the gentlemen
know[ ], the House bill endorsed the analytical framework FERC laid out in that case,
balancing the need to compensate native load, the goal of promoting the lowest
reasonable transmission rates, and preventing the collection of monopoly rents.
MOORHEAD: I couldn't agree more with the gentlemen on the merits of FERC's
approach in the Northeast Utilities case. I am especially sensitive to the challenge
FERC faces in protecting consumers when it is asked to decide whether to allow
compensation for so-called opportunity costs. I would have liked to have seen the
House provision on this balancing test included in the bill approved by the
conferees. However, I am willing to support this bill without it because I am comfortable
that dropping the balancing test in no way affects, compromises, or overrules any
138 CONG. REc. H1 1,413 (daily ed. Oct. 5, 1992) (colloquy between Reps. Sharp and
Moorhead); see also 2A SINGER, supra note 239, § 48.8 (stating that colloquy between two House or
Senate members may be useful in interpreting conference reports). Representative
Moorhead then commented further on the bill's language:
[A] negative inference should not be drawn from the fact that the final version of the
bill omits the language from H.R. 776 proposing FPA section 212(B)(
socalled Northeast Utilities language. The conferees do not intend for revised section
212 of the FPA to affect in any way existing Commission precedent applying the just
and reasonable ratemaking standard to transmission pricing determinations.
138 CONG. REc. HI 1,438 (daily ed. Oct. 5, 1992) (statement of Rep. Moorhead). Although
the statement by Rep. Moorhead merits some weight in determining congressional intent with
respect to transmission pricing, it is certainly not dispositive. See 2A SiNGER, supra note 239,
§ 48.13 (noting that statements by individual legislators should only be given effect if
consistent with statutory language).
An earlier version of H.R. 776 approved by the House had included provisions intended
largely to codify the pricing principles in Northeast Utilities. See H.R. 776, 102d Cong., 2d Sess.
) (1992). Under the House language, transmission rates "shall be designed to-(A)
compensate native load customers for legitimate and verifiable economic costs of providing
the transmission service, (B) provide the lowest reasonable transmission rates for the
transmission service, and (C) prevent the collection of monopoly rents by the transmitting utility
and promote the efficient transmission and generation of electricity." Id. The House pricing
formula for transmission services was very similar to the pricing principles established by
FERC in Northeast Utilities. Compare H.R. 776, 102d Cong., 2d Sess. § 723(b)(
(mandating criteria for pricing transmission service) with Northeast Utils. Serv. Co., 58 F.E.R.C.
61,070, at 61,203 (establishing pricing principles for setting wheeling rates), reh'g dismissedas
moot, 59 F.E.R.C. 61,089 (1992). Significantly, these provisions were dropped from the final
version of H.R. 776 that was enacted into law. See Energy Policy Act of 1992, Pub. L. No.
102486, § 722(
), 106 Stat. 2776, 2916 (to be codified at 16 U.S.C. § 824k).
241. During Senate floor debate on the conference report on H.R. 776, Senators
Johnston and Wallop engaged in a colloquy on the meaning of the transmission pricing provisions
of the new law that clarifies that Congress did not intend to codify the Northeast Utilities pricing
WALLOP: It is my understanding that the conferees reject codifying existing or past
FERC decisions regarding the pricing of electric transmission services. Is that the
JOHNSTON: Yes; that is the case. The language in the conference report does not
endorse or reject present or past FERC decisions. It sets forth a new set of pricing
principles-within the just and reasonable standard of the Federal Power Act-to
guide the FERC in future pricing decisions.
WALLOP: In several recent decisions, including the Northeast Utilities case and the
Penelec decision, the Federal Energy Regulatory Commission applied a very narrow
approach to the costs which a transmitting utility can recover from a transmission
to continue to set transmission
pricing policy. 242
rates set by FERC must continue to be consistent with the "just and
customer. I believe this approach causes native load customers to subsidize
transmission services provided to others.
Does the chairman agree that this act does not endorse the Northeast Utilities
decisions or other recent Commission decisions regarding pricing policies for
JOHNSTON: I agree. The conference report neither endorses nor rejects these
138 CONG. REc. S17,612-13 (daily ed. Oct. 8,1992) (colloquy between Sens. Wallop and
Johnston); see also 2A SINGER, supra note 239, § 48.8 (stating that colloquy between two House
or Senate members may be useful in interpreting conference reports). The interpretation of
the transmission pricing provisions put forward by the Senate conferees appears to be on
sounder ground. Under the rules of statutory construction, the fact that the earlier
codification of the Northeast Utilities pricing principles was deleted from the final version enacted into
law creates a presumption that Congress did not intend to embrace these principles. See 2A
SINGER, supra note 239, § 48.04 ("[W]here the language under question was rejected by the
legislature and thus not contained in the statute it provides an indication that the legislature
did not want the issue considered."). This was clearly the understanding of the Senate
conferees, as reflected by the colloquy between Senators Wallop and Johnston.
WALLOP: [W]ould you also not agree that the pricing provisions in the original
House-passed bill, and the associated legislative history, cannot be invoked to
interpret pricing provisions of the conference report?
JOHNSTON: I agree. Subsection 212(a) is a complete substitute for the
Housepassed transmission pricing provisions and, as a matter of law, has the full force and
effect of its plain meaning.
138 CONG. REC. S 17,613 (daily ed. Oct. 8, 1992) (colloquy between Sens. Wallop and
The Senate conferees also interpreted the transmission pricing provisions of the Energy
Policy Act as protecting native load customers by assuring wheeling utilities recover the full
cost of providing transmission service. This issue was also raised during the colloquy between
Senators Wallop and Johnston.
reasonable" standard governing ratemaking for wholesale power
sales and transmission rates, a point noted during floor
discussion.2 43 Although rates must fall within the "zone of
reasonableness" under the Energy Policy Act, FERC retains broad discretion
to set rates within this zone. 244 There is a suggestion in the
legislative history, however, that the pricing provisions of the Energy
Policy Act were intended to limit FERC discretion to set wheeling
results in every circumstance. But all circumstances are not alike, and it would be
inappropriate for Congress to straitjacket the FERC.
Others had wanted us to endorse or condemn various pricing methodologies:
opportunity cost pricing, marginal cost pricing, embedded cost pricing. We did not
take this approach. Indeed, the pricing language in the legislation establishes a
single guiding principle: A reaffirmation of the just-and-reasonable pricing standard
that has governed electric rate setting for years....
Mr. Speaker, in my view, the FERC has an affirmative responsibility under this
legislation to ensure that transmission rates are set in a manner that will encourage,
not stifle, competition. We are not regulators and cannot legislate pricing formulas
that would be appropriate to all types of transactions. For that reason, the conferees
established more general pricing guidance ....
Id HI 1,380-81 (statement of Rep. Bliley). Representative Moorhead also commented on the
effect of the pricing language:
The pricing language in existing section 212(a) allows the Commission to continue
traditional embedded-cost pricing, but also gives the Commission flexibility to
depart from traditional pricing and to allow recovery of opportunity costs or
incremental costs-including enlargement of facilities-if the Commission determines it
would result in just, reasonable, and not unduly discriminatory or preferential rates.
New section 723 [sic] continues this practice. The section allows the Commission
sufficient pricing flexibility to promote economically efficient transmission and
generation of electricity, at the same time that it ensures that pricing does not result in
the collection of monopoly rents. The conferees also intend to allow the
Commission flexibility to determine the circumstances under which the costs of enlargement
of transmission facilities may be recovered.
Id at Hi 1, 438 (statement of Rep. Moorhead).
243. Senator Wallop discussed the "just and reasonable standard" in Senate debate:
The "just and reasonable" standard referenced in section 212(a) has been well
articulated by the U.S. Court of Appeals for the D.C. Circuit in itsJersey CentralPower &
Light decision. Here the Court noted that rates are bounded by a "zone of
reasonableness," which is defined at the lower end by a prohibition against confiscatory rates
as to the electric utility and at the upper end by a prohibition against exorbitant rates
138 CONG. REC. S17,618 (daily ed. Oct. 8, 1992) (statement of Sen. Wallop).
244. See supra note 105 and accompanying text (discussing FERC discretion to set rates
within "zone of reasonableness").
245. Senator Wallop commented on the parameters of FERC discretion in setting
wheeling rates in Senate debate:
Th[e] formulation of the relationship between the traditional "just and reasonable"
standard and the specific pricing directions or [sic] the FERC contained in section
212(a) is critical because, in the absence of the specific pricing directions, FERC
would have somewhat greater discretion in setting the rates within the zone of
reasonableness under otherwise applicable law. That discretionis intentionallyconstrainedby
the specificpricing directionsprovided by Congress, with the resulting rate being in the zone of
138 CONG. REC. S17,622 (daily ed. Oct. 8, 1992) (statement of Sen. Wallop) (emphasis
Reection of the "Utah Hammer"
Significantly, the new law rejects the "Utah Hammer," or the
absolute obligation imposed by FERC on utilities to provide
transmission service within five years of a request by an eligible utility. That
is, the Energy Policy Act requires FERC to terminate or modify a
wheeling order if "the ordered transmission services require
enlargement of transmission capacity and the transmitting utility
subject to the order has failed, after making a good faith effort, to
obtain the necessary approvals or property rights under applicable
Federal, State, and local laws." 24 6 By requiring that a wheeling
order be voided if the transmitting utility is unable to obtain the
approvals to expand transmission capacity necessary in order to satisfy
a third party wheeling request, after making a good faith effort to do
FERC's "Utah Hammer."
so, the new law adopts a due diligence standard and thereby rejects
Maintenance of transmission system reliability
The new law attempts to assure that increased wheeling will not
impair system reliability by barring issuance of a wheeling order that
would "unreasonably impair the continued reliability of electric
systems affected by the order." 248 It was the intent of Congress that
246. Energy Policy Act of 1992, Pub. L. No. 102-486, § 721(5)(D), 106 Stat. 2776, 2916
(to be codified at 16 U.S.C. § 824j). The legislative history of the meaning of this language is
extremely slender. Representative Moorhead was one Representative who did comment on
This section has raised the question of what is good faith? specifically [sic), the
concern is that a reluctant utility might make a half-hearted attempt at compliance, and
then evade the requirement to enlarge capacity by pleading that they could not
comply with the Commission's order. Under common law, a good-faith obligation
247. The legislative history on the Energy Policy Act suggests that the conferees realized
they were repealing the "Utah Hammer." See 138 CONG. REC. S 17,617 (daily ed. Oct. 8,1992)
(statement of Sen. Wallop) (interpreting "good faith effort" exemption from wheeling order
and stating that "[u]nder the provisions of the Conference Report, the FERC cannot legally
reinstitute the so-called 'hammer clause' of the Utah Power & Light-PacifiCorp merger").
248. Energy Policy Act of 1992, § 721(3), 106 Stat. at 2915.
reliability be maintained under the new regulatory regime. 24 9 Given
the difficulty of distinguishing between economy and reliability
transactions, 250 the effectiveness of this protection may prove of
PROMOTING COMPETITION AND EFFICIENCY: RECOMMENDED
REGULATORY AND LEGISLATIVE INITIATIVES
Native Load Customers Are Not Held Harmless Under Federal
Although FERC has declared that its transmission access policy is
designed to hold native load customers harmless from increased
utility costs resulting from
wheeling, 25 ' closer scrutiny reveals that
the policy falls short of this mark. Although the agency permits
utilities to recover some forgone benefits from displaced economy
transactions, full recovery is denied and native load customers are
thus not held harmless. 2 52 The new law may provide greater
assurance of cost recovery, because it permits wheeling utilities to
recover "all the cost incurred in connection with the transmission
services." 25 3 Transmission rates that do not fully reflect costs
incurred by a wheeling utility send price signals that encourage
overuse of capacity. 2 54 Although it is the intention of both FERC
and Congress to promote increased wheeling and bulk power
trades, and discounting wheeling costs serves this objective, overuse
of transmission capacity poses reliability concerns when a system is
249. Senator Wallop addressed concerns of reliability in Senate debate:
FERC must assure that reliability is measured in terms of continued conformance with
regional and national reliability standards. Reliability is of paramount importance,
and is 'unreasonably impaired' under the statute when these standards are not
met.... [I]f reliability concerns are raised the FERC as a practical matter should not
issue an order under section 210 or section 211 unless it affirmatively finds that such
an order would preserve the reliability of affected electric systems. Anything less
than full reliability would constitute an unreasonable impairment, and would be
inconsistent with the clear statutory mandate of the FPA as amended by this Act.
138 CONG. REC. S17,617-18 (daily ed. Oct. 8,1992) (statement of Sen. Wallop).
250. See supra note 212 (discussing difficulty in distinguishing reliability and economy
251. See Northeast Utils. Serv. Co., 58 F.E.R.C. 61,070, at 61,203 (stating that holding
native load customers harmless is appropriate goal in deciding pricing of transmission
services), reh'g dismissed as moot, 59 F.E.R.C. 61,089 (1992).
252. See supra notes 191-96 and accompanying text (describing limits placed on recovery
of opportunity costs in Northeast Utilities and PennsylvaniaElectric Co.).
253. Energy Policy Act of 1992, Pub. L. No. 102-486, § 722(
), 106 Stat. 2776, 2916 (to
be codified at 16 U.S.C. § 824k); see also supra notes 233-38 and accompanying text (discussing
cost recovery by wheeling utilities under new law).
254. See KELLY ET AL., supra note 54, at 163 (noting that when prices do not accurately
reflect costs, decisions regarding costs of overusing system may be distorted).
constrained. 2 55 Efficient use of existing capacity would be promoted
by full recovery of opportunity costs, because the economic value of
wheeling would be more accurately reflected in transmission rates.
In order to promote efficiency in wheeling, FERC should expressly
provide for full recovery of opportunity costs incurred by
FERC Should Rely on PricingIncentives to Encourage Expansion of
Transmission Capacity 1.
FERC transmissionaccess policy fails where capacity is constrained
FERC recognizes that lack of transmission capacity prevents full
development of competitive bulk power markets. 25 6 Where a
transmission system is inadequate to satisfy the needs of both the
transmitting utility and third parties, efficiencies are lost and competition
is forestalled. FERC recognizes that transmission system expansion
in constrained areas is necessary to achieve its goal of creating
competitive bulk power markets,2 57 and as a result, the agency has
resorted to the "Utah Hammer" and denial of full recovery of forgone
benefits to encourage utilities to expand transmission capacity.
Pricingincentives encourageexpansion in transmissioncapacity
Utilities' full recovery of forgone benefits encourages efficient
allocation of the existing transmission system to its most valued uses.
Because opportunity cost pricing is designed only to hold harmless
the native load customers of a transmitting utility, however, such a
pricing system does not provide incentives to expand existing
transmission systems to permit expanded wholesale bulk power
trading.2 58 This concern, in fact, initially led FERC to oppose recovery
of opportunity costs. 25 9 Later, FERC resorted to capping recovery
255. See KELLY ET AL., supra note 54, at 163 (explaining that "[rielatively low wheeling
prices may stimulate more demand for wheeling than the transmission system can handle").
256. In PublicService Co. ofNew Mexico, FERC stated that:
We recognize that in some sections of the country the principal impediment is
probably physical rather than regulatory. Existing transmission lines are unable to carry
more electricity because they are being operated at or near their maximum secure
loading levels a high percentage of the time. In these areas, further exchanges
cannot occur unless additional transmission lines are built.
Public Serv. Co. of N.M., 25 F.E.R.C. 61,469, at 62,036 (1983).
258. See Northeast Utils. Serv. Co., 56 F.E.R.C. 61,269, at 62,027 (noting that full
recovery of forgone benefits would provide no incentive to utility companies to upgrade
transmission systems), reh'g granted,57 F.E.R.C. 61,340 (1991), modified, 58 F.E.R.C. V 61,070, reh'g
dismissed as moot, 59 F.E.R.C. 61,089 (1992).
259. See supra notes 200, 203 and accompanying text (noting that FERC originally held
that recovery of forgone benefits would provide utilities no incentive to upgrade their
pacity voluntarily.2 6 '
of forgone benefits at the incremental cost of system expansion to
provide utilities with economic incentives to expand their
transmission systems. 260 In cases where forgone benefits exceed the
incremental costs of expansion, FERC hoped that utilities would act in an
"economically rational manner" and expand their transmission
In the past, FERC depended on pricing incentives to spur utilities
to do voluntarily that which the agency could not order them to
do. 26 2 Because FERC's broad discretion on ratemaking extends to
transmission rates, 263 the agency can use pricing incentives to
encourage utilities to expand transmission and remove system
constraints. In fact, FERC has embraced flexible pricing for
260. See Pennsylvania Elec. Co., 58 F.E.R.C. 61,278, at 61,874 (1992) (explaining that
when transmitting utility modifies its system use to provide service to third-party wheeling
requests, opportunity costs may be incurred through forgone revenues). FERC has limited
full recovery of opportunity costs for the purpose of encouraging system expansion. In
Pennsylvania Electric Co., the agency explained that:
Specifically, the cap at estimated or actual expansion costs gives [the utility] an
economic incentive to build additional transmission capacity if opportunity costs exceed
expansion costs. If [the utility] does not build, it will be unable to recover all of its
opportunity costs, and, therefore, to satisfy its stated goal of keeping its native load
261. See Northeast Utils. Serv. Co., 57 F.E.R.C. 61,340, at 62,104-05 (1991) (proposing
cap on recovery of opportunity costs at incremental cost of system expansion as spur to utility
to act in "economically rational manner" by expanding its transmission capacity), modified, 58
F.E.R.C. 61,070, reh'g dismissed as moot, 59 F.E.R.C. 61,089 (1992).
262. See Pacific Gas & Elec. Co., 38 F.E.R.C. 61,242, at 61,794-95 (1987) (relying on
pricing flexibility to encourage utilities to provide voluntary transmission access), modified, 47
F.E.R.C. 61,121 (1989), modified, 50 F.E.R.C. 1 61,339 (1990), modified sub nom. Western Sys.
Power Pool, 55 F.E.R.C. 61,099, at 61,319-21 (refusing to extend flexible pricing for
economy transactions and transmission service due to concerns about market power), grantingstay,
55 F.E.R.C. 61,154, reh'ggrantedinpart, 55 F.E.R.C. 61,495, appealfiled,No. 91-1404 (D.C.
Cir. Aug. 26, 1991), modified, 59 F.E.R.C. 61,249 (1992); Public Serv. Co. of N.M., 25
F.E.R.C. 61,469, at 62,029 (1983) (permitting pricing flexibility for power sales as quid pro
quo for commitment to wheel, "something we have limited authority to require").
263. FERC has the same discretion to set transmission rates as it does wholesale power
rates, because ratemaking for each type of transaction is governed by identical provisions in
the FPA, §§ 205-206. See 16 U.S.C. §§ 824d-824e (1988) (authorizing FERC to set and
regulate rates and charges for transmission and sale of electric energy under its jurisdiction).
wheeling, 264 including auctioning of transmission capacity, 26 5 and
three-way shared savings 26 6 to promote efficiency through the
encouragement of economy transactions. 2 6 7 A pricing scheme based
on shared savings would not encourage overconstruction because
264. See Entergy Servs. Inc., 58 F.E.R.C. 61,234, at 61,768 (1992) (approving shared
savings rate for non-firm transmission service); Pacific Gas & Elec. Co., 53 F.E.R.C. ] 61,145,
at 61,503 (1990) (agreeing to approve market-based rates for coordination sales and
transmission services upon acceptance of open access conditions); Baltimore Gas & Elec. Co., 40
F.E.R.C. 61,170, at 61,538-39 (1987) (affirming flexible pricing proposal for transmission
capacity based on competitive sealed-bid auction where all potential buyers have access to
same markets); Pacific Gas & Elec. Co., 38 F.E.R.C. at 61,782, 61,796-98 (approving zone of
reasonableness in flexible pricing for transmission services with three-way split savings
ceiling); Southern Co. Servs., Inc., 37 F.E.R.C. 61,190, at 61,452 (1986) (holding that
splitsavings rates are reasonable alternative and extending concept of equal sharing to three-party
transactions to allow all utility participants to benefit).
Pricing flexibility represents a departure from cost-of-service rates, which is justified where
"a legitimate policy objective would be served." Public Serv. Co. of N.M., 25 F.E.R.C.
61,469, at 62,049 (1983) (approving experiment in pricing flexibility for bulk power trades).
FERC has approved departures from cost-of-service ratemaking where an industry is
experiencing "contrasting or changing characteristics ...... Entergy Servs. Inc., 58 F.E.R.C. at
61,753 (quoting Farmers Union Cent. Exch., Inc. v. FERC, 734 F.2d 1486, 1503 (D.C. Cir.),
cert. denied, 469 U.S. 1034 (1984)).
265. See Baltimore Gas &Elec. Co., 40 F.E.R.C. at 61,539 (concluding that auctioning
transmission capacity would improve efficiency and result in lower electricity costs for consumers).
266. See Entergy Servs. Inc., 58 F.E.R.C. at 61,768 (accepting three-way split savings rate for
nonfirm transmission customers as reasonable); Pacific Gas & Elec. Co., 38 F.E.R.C. 9 61,242,
at 61,782, 61,796-98 (1987) (approving zone of reasonableness in pricing for transmission
services with ceiling set at 33% of shared savings), modified, 47 F.E.R.C. 1 61,121 (1989),
modified, 50 F.E.R.C. 61,339 (1990), modified sub nom. Western Sys. Power Pool, 55 F.E.R.C.
6 1 ,099, grantingstay, 55 F.E.R.C. 61,154, reh'ggranted in part, 55 F.E.R.C. 61,495, appeal
filed, No. 91-1404 (D.C. Cir. Aug. 26, 1991), modified, 59 F.E.R.C. 61,249 (1992); Southern Co.
Servs., Inc., 37 F.E.R.C. at 61,451-52 (accepting three-way split savings rates as just and
reasonable because it is logical extension of more typical two-way split savings rate method).
Split savings rates are set by dividing the difference between the seller's cost of production
and the cost the buyer saves by not producing the electricity on its own system. Public Serv. Co.
of N.M., 25 F.E.R.C. at 62,049 (defining split savings rates pricing method). Under three-way
wheeling rates, the savings are divided equally among the buyer, seller, and transmitting
utility. Southern Co. Servs., Inc., 37 F.E.R.C. at 61,451. FERC declared that, "[s]haring of savings
from economy transactions . . . is consistent with the Commission's policy of encouraging
such transactions by giving sellers an incentive to make economy energy available while
providing for an equitable distribution of benefits." Id. at 61,453.
267. See Pacific Gas & Elec. Co., 53 F.E.R.C. at 61,503 (accepting market-based rates for
transmission services in order to promote efficiency through increased reliance on
coordination services); Baltimore Gas & Elec. Co., 40 F.E.R.C. at 61,539 (affirming that auction process
for transmission service serves statutory objective of "improv[ing] economic efficiency by
encouraging the lowest cost production of power... [which] should result in lower consumer
costs for electric energy"); Pacific Gas &Elec. Co., 38 F.E.R.C. at 61,796-98 (approving market
rates for transmission because they are more likely to result in efficient allocation of
transmission capacity); Southern Co. Servs., Inc., 37 F.E.R.C. at 61,453 (accepting economical three-way
split savings rates for transmission service in name of efficiency).
FERC later rejected flexible pricing for wheeling in Pacific Gas & Elec. Co., 38 F.E.R.C.
61,242 (1987), out of concern about the utility's potentially anticompetitive exercise of market
power. See Western Sys. Power Pool, 55 F.E.R.C. 61,099, at 61,319 (refusing to extend
flexible pricing for coordination and transmission services because applicant had "failed to
demonstrate the lack or mitigation of the transmission market power that admittedly exists in
certain segments of the WSPP region"), grantingstay, 55 F.E.R.C. 61,154, reh'ggrantedin part,
55 F.E.R.C. 61,495, appealfiled,No. 91-1404 (D.C. Cir. Aug. 26, 1991), modified, 59 F.E.R.C.
T 61,249 (1992).
revenue is tied to use of the system. A wheeling utility may choose
to set aside a fixed share of its total transmission capacity to provide
service for third parties, or establish a transmission subsidiary that
would wheel on behalf of third parties and expand its system as
needed to satisfy their demands.
C. Necessary Changes to Federal TransmissionAccess Policy
The transmission access policy developed by FERC achieved
indirectly what the agency was prohibited from ordering directly.
Before enactment of the Energy Policy Act, the grant of wheeling
power in section 211 of the FPA was very limited, but FERC
circumvented those limits by ordering wheeling through its merger and
ratemaking authority. 268 Congress had required through the FPA
that any wheeling order must be consistent with the restrictive terms
of sections 211 and 212,269 but FERC's oblique approach defied this.
congressional mandate. FERC manipulated the FPA to implement
its own policy goals to the extent that even Commission members
warned that the agency exceeded its authority and made decisions
properly reserved for Congress. 2 70 FERC was able to pursue its
electric transmission policy aggressively in large measure because it
268. See supra notes 46-50, 96 and accompanying text (explaining FERC's use of its
merger and ratemaking authority to expand transmission access).
269. See 16 U.S.C. § 824k(a)(l)-(4) (1988) (limiting FERC's power to order wheeling when
utility may suffer uncompensated economic loss or undue burden, reliability will be impaired,
and utility's ability to render adequate service to its customers will be impaired). This section
was deleted from the FPA by the Energy Policy Act. Energy Policy Act of 1992, Pub. L. No.
102-486, § 722(
), 106 Stat. 2776, 2916 (to be codified at 16 U.S.C. § 824k) (amending § 212
270. See Northeast Utils. Serv. Co., 56 F.E.R.C. 61,269, at 62,056 (Trabandt, Comm'r,
dissenting), reh'g granted, 57 F.E.R.C. 61,340 (1991), modified, 58 F.E.R.C. 61,070, reh'g
dismissed as moot, 59 F.E.R.C. 61,089 (1992). Commissioner Trabandt charged that the
agency was straying into an area properly reserved to Congress:
This case comes down to transmission: how to allocate the existing system, how to
expand it (including who pays for additions) and, in general, who runs the grid. The
current and soon-to-resume debates in Congress about reforming the structure of
the electric utility industry must come to grips with these same issues. This order
throws FERC's hat in the ring for the job of arbiter of the Nation's transmission grid.
Based on this order, I would throw the hat right back out.
suffered little interference from the President, 27 1 Congress, 2 72 or
the courts. 2 73 Congress, however, has now reentered the field of
271. See Peter L. Strauss, The Place of Agencies in Government: Separation of Powers and the
Fourth Branch, 84 COLUM. L. REv. 573, 589 (1984) (describing existence of lesser presidential
control over independent agencies such as FERC than over executive agencies). Presidential
control over FERC is limited, due to its status as an independent regulatory commission. Id.
The powers and duties of the FPC were transferred to FERC by the Energy Act of 1980, Pub.
L. No. 95-91, § 402, 91 Stat. 565, 583 (codified at 42 U.S.C. § 7172 (1988)). Although FERC
was established nominally "within" the Department of Energy, it was created as an
"independent regulatory commission." 42 U.S.C. § 7171 (1988). Significantly, beyond the
preparation of annual budget requests, § 7171 (j), the Department of Energy appears to lack
any means of control over FERC. This limited form of control has been weakened by the
congressional directive to FERC to recover its entire budget through user fees. See Omnibus
Budget Reconciliation Act of 1986, Pub. L. No. 99-509, § 3401, 100 Stat. 1874, 1890 (codified
at 42 U.S.C. § 7178(a) (1988)) (directing FERC to "assess and collect fees and annual charges
in any fiscal year in amounts equal to all of the costs incurred by the Commission in that fiscal
year"). As a testament to this limited degree of control, President Bush proposed legislation
early in 1991 to restructure FERC as a regulatory agency wholly within the executive branch.
S.570, 102d Cong., 1st Sess., § 221 (1991); H.R. 1301, 102d Cong., 1st Sess., § 221 (1991).
272. Before the Energy Policy Act, Congress had not enacted any significant electric
regulatory legislation in the past 10 years and has essentially left the field to FERC. Congress did
repeal a number of sections of the Powerplant and Industrial Fuel Use Act of 1978 (Fuel Use
Act), Pub. L. No. 95-620, §§ 101-902, 92 Stat. 3289, 3289-3349 (codified as amended at 42
U.S.C. § 8301-8484 (1988)) in 1987. Pub. L. No. 100-42, § 1, 101 Stat. 310, 310-14 (1987).
The Fuel Use Act proscribed the use of natural gas to generate electricity in new electric
powerplants. Fuel Use Act, § 201, 92 Stat. at 3298 (codified as amended at 42 U.S.C.
§ 8311(a) (1988)). Repeal of the Fuel Use Act was hardly a significant action, because the
Department of Energy had never denied a petition for exemption from these restrictions.
H.R. REP. No. 78, 100th Cong., 1st Sess. 5 (1987), reprintedin 1987 U.S.C.C.A.N. 270, 274.
The only other electricity statute of note enacted during the 1980s was the National Appliance
Energy Conservation Act of 1987, Pub. L. No. 100-12, §§ 2-11, 101 Stat. 103, 103-26
(codified as amended at 42 U.S.C. §§ 6291-6309 (1988)). This relatively unimportant legislation is
limited to establishing national energy conservation standards for 12 major residential
appliances. S. REP. No. 6, 100th Cong., 1st Sess. 1-2 (1987), reprintedin 1987 U.S.C.C.A.N. 52,
273. The main constraint on judicial review of FERC orders and rulemakings in the field
of electric regulation is the breadth of authority granted to FERC by the FPA, See 16 U.S.C.
§§ 824a-824k (1988) (granting FERC authority to regulate all electric utility companies
engaged in interstate commerce). Like many of the New Deal statutes, the FPA affords FERC
wide discretion and authorizes the agency to act based on a finding that such action serves the
"public interest" or is 'just and reasonable." See Vermont Dep't of Pub. Serv. v. FERC, 817
F.2d 127, 135 (D.C. Cir. 1987) (upholding FERC interpretation of electric wholesale sales
contract because FPA granted agency broad discretion to oversee "just and reasonable"
electric rates); National Fuel Gas Supply Corp. v. FERC, 811 F.2d 1563, 1570-71 (D.C. Cir.)
(noting that terms "just and reasonable" in statute signify great degree of discretion accorded
FERC by Congress), cert. denied, 484 U.S. 869 (1987);Jerome Nelson, The ChevronDeference Rule
andJudicial Review of FERC Orders, 9 ENERGY LJ.59, 70 (1991) (noting that courts are more
likely to defer to agencies in construction of statutes with ambiguous terms such as "just and
reasonable" and "public interest"). As a result, courts have shown great deference to FERC
orders and rulemakings issued under the FPA. See Boston Edison Co. v. FERC, 885 F.2d 962,
964 (1st Cir. 1989) (affirming FERC orders setting wholesale electric rates because agency has
discretion under FPA regarding ratemaking); Clark-CowlitzJoint Operating Agency v. FERC,
826 F.2d 1074, 1087-89 (D.C. Cir. 1987) (affirming FERC order construing municipal
relicensing provision of FPA because interpretation of statute was reasonable), cert, denied, 485
U.S. 913 (1988); Greensboro Lumber Co. v. FERC, 825 F.2d 518, 522-23 (D.C. Cir. 1987)
(affirming cogeneration rule because Congress clearly assigned administration of PURPA to
FERC and construction by agency was reasonable); Vermont Dep't of Pub. Sert., 817 F.2d at 135
(upholding FERC interpretation of electric transmission contract because FPA granted
agency "broad discretion to oversee energy rate regulation"); Southern Cal. Edison Co. v.
electric regulatory policy, approving legislation that mitigates native
load impact by providing for recovery of forgone benefits, 274
Hammer" in favor of a due diligence test,2 76 and adopts a
public interest standard that is intended to assure that wheeling
orders will not have an undue impact on native load customers. 27 7
The transmission access policy established by FERC and mirrored
to some degree by Congress' actions2 78 must be changed to bring it
in line with the FPA. First, full recovery of forgone benefits must be
allowed in order to hold native load customers harmless, and the
proposed cap on recovery of opportunity costs based on the
incremental cost of system expansion
must be abandoned. 2 79 Second,
the "Utah Hammer" should be replaced by a due diligence standard
for use in FERC's review of nonsatisfaction of third-party wheeling
requests. 2 80 Third, some form of incentive pricing should be
established to encourage utilities to expand their transmission systems,
FERC, 805 F.2d 1068, 1071-72 (D.C. Cir. 1986) (denying challenge to FERC interpretation of
fuel adjustment clause because FPA "endows the Commission with broad latitude"); Aliceville
Hydro Assocs. v. FERC, 800 F.2d 1147, 1150 (D.C. Cir. 1986) (affirming FERC interpretation
because deference is owed agency in interpretation of hydropower licensing regulations);
Idaho Power Co. v. FERC, 767 F.2d 1359, 1363 (9th Cir. 1985) (sustaining FERC decision
because agency's construction of FPA hydroelectric licensing standard was "reasonable and
not contrary to the Act"); Papago Tribal Util. Auth. v. FERC, 723 F.2d 950, 953 (D.C. Cir.
1983) (denying petition for review of wholesale electric rate order because no abuse of FERC
discretion was shown), cert. denied, 467 U.S. 1241 (1984). But see Gulf States Utils. Co. v.
FERC, 872 F.2d 487, 490 (D.C. Cir. 1989) (remanding FERC order requiring utility to
provide backup power to cogeneration facility for want of coherent explanation of FERC's
determination that order was required by PURPA); American Mun. Power-Ohio, Inc. v. FERC, 863
F.2d 70, 73 (D.C. Cir. 1988) (suspending order setting wholesale electric rate because FERC
had not supplied reasoned basis for order); Public Serv. Co. of N.M. v. FERC, 832 F.2d 1201,
1225 (10th Cir. 1987) (remanding electric rate orders because FERC erred in ordering rates
effective on date FERC issued opinions rather than on date agency accepted utility's
compliance filings); Jersey Cent. Power & Light Co. v. FERC, 810 F.2d 1168, 1187-88 (D.C. Cir.
1987) (vacating rate order because no evidence refuted petitioner's assertion that scheduled
rate was confiscatory); Middle S. Energy, Inc. v. FERC, 747 F.2d 763, 772 (D.C. Cir. 1984)
(overturning order suspending electric rates because FERC lacked authority under FPA to
suspend rates), cert. denied, 473 U.S. 930 (1985).
274. Energy Policy Act of 1992, Pub. L. No. 102-486, § 722(
), 106 Stat. 2776, 2916 (to
be codified at 16 U.S.C. § 824k) (permitting utility to recover "all the costs incurred in
connection with the transmission services").
275. See id § 721(3) (barring FERC order for electric energy wheeling if such order would
unreasonably impair reliability of utility system).
276. See id § 721(5)(D) (vacating wheeling order where transmitting utility fails to obtain
necessary approvals or property rights after making good faith effort).
277. See id § 721(
) (including public interest requirement for FERC to weigh in issuance
of electric transmission orders).
278. See supra notes 218-34 and accompanying text (explaining new law designed to
expand FERC's wheeling authority and promote competition in wholesale power markets).
279. See supranotes 184-99, 251-55 and accompanying text (asserting that partial recovery
of forgone benefits permitted by FERC does not hold native load customers harmless).
280. See supra notes 86-91, 246-47 and accompanying text (reviewing objections to "Utah
Hammer" and comparing it to "good faith" standard in H.R. 776).
because opportunity cost pricing only provides for the most efficient
allocation of existing capacity. 28 1 Fourth, the separate market
power tests for generation and transmission should be abandoned
in favor of a unitary test measuring whether adequate alternative
sources of electric supply exist. 28 2
In its ardor to promote competition in bulk power markets, FERC
has reinterpreted the FPA and established the enhancement of
transmission system access as an overriding statutory responsibility,
even though no such duty is assigned to the agency by the express
terms of the FPA. Frustrated in its efforts to order wheeling directly
through the limited grant of authority in PURPA, FERC indirectly
pursued transmission access through its merger and ratemaking
authority. In the process, FERC ignored other statutory
responsibilities that it is obliged to meet, namely its duties to encourage
conservation and efficiency, prevent harm to native load customers,
promote system coordination services, and assure reliability of
service. Given the importance of the transmission system to reliable
electric service in the United States, these deficiencies should be
corrected in an expeditious manner through rulemakings on
transmission access policy. There will be an opportunity to revisit
transmission access policy during implementation of the Energy Policy
Act because FERC has indicated that between three and five
rulemakings are needed to implement the new law.2 8 3 Finally, it is
entirely possible that FERC may take a different path under the
Clinton administration and place less trust in the potential
macroeconomic benefits from discounting the cost of transmission
services. To the extent that a greater primacy is placed on
protecting native load customers, FERC in a Clinton administration may
raise transmission pricing to guarantee full cost recovery by the
load customers .................................. 583
Reliability .......................................... 587 IV. FERC's Authority to Order Wheeling Has Been
Augmented by Amendments to the Federal Power Act .. 588
A. National Energy Strategy ........................... 588
B. Energy Policy Act of 1992 .......................... 589
1. Protection of native load customers ............. 591
transmission service ......................... 592
b. Rejection of the "Utah Hammer". ........... 598
2. Maintenance of transmission system reliability ... 598 V. Promoting Competition and Efficiency: Recommended
Regulatory and Legislative Initiatives ................... 599
Under Federal Transmission Access Policy .......... 599
Encourage Expansion of Transmission Capacity ..... 600
1. FERC transmission access policy fails where
capacity is constrained .......................... 600
2. Pricing incentives encourage expansion in
transmission capacity ............................ 600
Policy .............................................. 603 Conclusion ......................................... 606
20. S. 1725 , 74th Cong., 1st Sess. § 213 ( 1935 ); H.R. 5423 , 74th Cong., 1st Sess. § 213 ( 1935 ).
21. S. 1725 , 74th Cong., 1st Sess. § 213 ( 1935 ); H.R. 5423 , 74th Cong., 1st Sess. § 213 ( 1935 ).
22. S. REP . No. 621 , 74th Cong., 1st Sess . 19 ( 1935 ) ; H.R. REP . No. 1318 , 74th Cong., 1st Sess . 8 ( 1935 ).
23. 410 U.S. 366 ( 1973 ) (rejecting effort by federal agency to order wheeling under FPA) .
24. Otter Tail Power Co. v. United States , 410 U.S. 366 , 375 ( 1973 ).
25. Pub . L. No. 95 - 617 , 92 Stat. 3117 (codified as amended at 16 U.S.C. §§ 824a-1 to a3, 824i- k, 2601 - 2645 , and scattered sections of 16 and 42 U.S.C. ( 1988 )).
26. Public Utility Regulatory Policies Act of 1978 , Pub. L. No. 95 - 617 , §§ 203 - 204 , 92 Stat. 3117 , 3136 - 3140 (codified at 16 U.S.C. §§ 824j - 824k ( 1988 )).
27. Energy Policy Act of 1992 , Pub. L. No. 102 - 486 , § 721 , 106 Stat. 2776 , 2915 - 16 (to be codified at 16 U.S.C. § 824j) ; see infra note 223 (describing broad grant of wheeling authority under § 721 of Energy Policy Act). The Energy Policy Act drastically revised § 212 of the FPA as well . Energy Policy Act of 1992 , § 722 , 106 Stat. at 2916- 19 (to be codified at 16 U.S.C. § 824k).
28. 16 U.S.C. § 824j(a) ( 1988 ). This subsection was deleted in lieu of substitute language in the Energy Policy Act . Energy Policy Act of 1992 , § 721 ( 2 ), 106 Stat. at 2915; see infra note 223 and accompanying text (discussing amendments to § 211 of FPA ).
29. An "affected utility" is either one of the parties to a wholesale transaction, or the transmitting utility . H.R. REP . No. 1750 , 95th Cong., 2d Sess . 91 ( 1978 ), reprinted in 1978 U.S. C.C. A .N. 7659 , 7825 .
30. 16 U.S.C. § 824k(a) ( 1988 ). This subsection was deleted by the Energy Policy Act . Energy Policy Act of 1992 , § 722 ( 1 ), 106 Stat. at 2915 (amending § 212 of FPA).
31. See H.R. 8444 , 95th Cong., Ist Sess. § 541(b)(1) ( 1977 ) (authorizing FPC to order wheeling whenever agency deems such action "necessary or appropriate in the public interest"). This unenacted legislation would only have precluded the FPC from issuing a wheeling order if the order would not benefit consumers by reducing electric energy supply costs or otherwise provide public benefits by ensuring that economical, environmentally sensitive supplies of electric energy were made generally available, or if the order would impose economic hardship on the transmitting utility or its customers . Id. § 541(b) ( 2 ).
32. See 16 U.S.C. §§ 824j - 824k ( 1988 ) (failing to grant broad power to FERC to order wheeling transactions).
33. 16 U.S.C. § 824j(c)(1) ( 1988 ). This subsection was deleted by the Energy Policy Act . Energy Policy Act of 1992 , § 721 ( 4 )(A), 106 Stat. at 2915 (amending § 211 of FPA).
34. See , e.g., Southeastern Power Admin . v. Kentucky Utils. Co., 25 F.E.R.C. 61 , 204 , at 61 , 530 - 39 ( 1983 ) (rejecting power company's application for wheeling order because § 21 1(c)(l) of PURPA prohibited issuance of any wheeling order that does not "reasonably preserve existing competitive relationships" of transmitting utility).
35. See Florida Power & Light Co . v. FERC , 660 F.2d 668 , 676 ( 5th Cir . 1981 ) (concluding that FPA did not authorize FERC to issue wheeling orders that impose common carrier duties on utilities), cert . denied, 459 U.S. 1156 ( 1983 ); New York State Elec. & Gas Corp. v. FERC , 638 F.2d 388 , 400 - 03 ( 2d Cir . 1980 ) (rejecting wheeling order because order had effect of expanding utility's voluntary commitment to provide transmission service), cert . denied,
78. See Utah Power & Light Co ., 47 F.E.R.C. at 61 ,758 (Trabandt, Comm'r, dissenting) (arguing that "[t]he merger application ... does not constitute a regulatory 'blank check' whereby the Commission has carte blanche to impose any and all conditions deemed appropriate as a matter of general policy with regard to competition in the electric utility industry" ).
79. See Northeast Utils. Serv. Co., 56 F.E.R.C. 61 , 269 , at 62 , 012 (holding that FERC may impose only conditions necessary to make proposed merger compatible with public interest) , reh'ggranted , 57 F.E.R.C. 61 , 340 ( 1991 ), modified, 58 F.E.R.C. 61 , 070 , reh'g dismissed as moot, 59 F.E.R.C. 61 , 089 ( 1992 ) ; Utah Power & Light Co ., 45 F.E.R.C. 61 , 095 , at 61 , 289 - 95 ( asserting that short-term obligation to provide, upon request, access to remaining existing capacity and long-term obligation to provide, upon request, firm wholesale transmission service at cost-based rates are minimum necessary conditions to prohibit merged company from foreclosing transmission access to competitors), clarified ,45 F.E.R.C. 61 , 132 , reh'gganted,45 F.E.R.C. 61 , 500 ( 1988 ), reh'g granted in part, 47 F.E.R.C. 61 , 209 ( 1989 ), enforced, 51 F.E.R.C. 61 , 295 ( 1990 ), remanded on other grounds sub nom . Environmental Action , Inc. v. FERC , 939 F. 2d 1057 (D.C. Cir . 1991 ).
80. See Utah Power & Light Co ., 45 F.E.R.C. at 61,288 (identifying extraction of monopoly profits through refusal to wheel low-cost power and giving of preference to utility's own generation over that of competitors as anticompetitive harms).
82. See id at 61 , 291 (compelling merged company to provide nondiscriminatory access to transmission facilities).
83. See Northeast Utils. Serv. Co., 56 F.E.R.C. at 62,005 (scrutinizing use of key transmission facilities that controlled flow of power between northern and southern New England and
204. See Request of the Connecticut Department of Public Utility Control for Rehearing at 23, Northeast Utils . Serv. Co., 56 F.E.R.C. 61 , 269 ( 1991 ). The Connecticut Department of Public Utility Control (CDPUC) leveled the following charge against the "Utah Hammer": 1.