Pushing the Envelope: Development of Federal Electric Transmission Access Policy

American University Law Review, Sep 2018

By Joseph T. Kelliher, Published on 01/01/93

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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 INTRODUCTION 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 generation costs). 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 competitive market). 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 3 market.' 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 nonutility). 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 1989). 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 facilities). 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: ( 1 ) 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 ( 2 ) coordination 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 FERC. 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 "wheeling"). 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 [wheeling]."24 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 1993] it found that such order: ( 1 ) was in the public interest; ( 2 ) would 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: ( 1 ) was not likely to result in a reasonably ascertainable uncompensated economic loss for any affected utility;29 ( 2 ) 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 approved by the House contained provisions that would have granted FERC sweeping authority to order wheeling. 31 Yet 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 II. 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 access policy. FERC Has Imposed TransmissionAccess Through Its Discretionary Authority to Approve Mergers FERC enjoys broad discretion to impose conditions under its section 203 merger-approvalauthority 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)( 1 ) 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). 41. Id. 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 authority 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( 2 )(A), 5 U.S.C. § 706( 2 )(A) (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." Id. 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. Cir. 1991). 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 capacity 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 to 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 reliability). 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 service."). 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 wheeling 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 6 5 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 for long-term firm wheeling, as well as its own needs." 66 The 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 ( 1 ) The affected wheeling customers must commit in advance to contribute to the costs associated with such construction...; ( 2 ) 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 62,022-24. 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. 61,089 (1992). 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 request). 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 factors). 68. TRANSMISSION TASK FORCE, FEDERAL ENERGY REGULATORY CoMM'N, THE TRANsMIs 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 212. 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). 72. Id. 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 public interest"). 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 statutory test. 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. Id. 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 anticompetitive effects 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 merger. 80 FERC found that the merger posed a threat to competition because "the merged company could give preference to its own generation over that of competitors . . . (even when the latter is cheaper)." 8 1 Rather than 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 systems). 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 SO"). 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 desire to protect native load customers, however. FERC only 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 The desire to promote its transmission access policy may also have persuaded FERC to dissemble on whether it would cap recovery of op20 2 portunity costs. 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 FERC's 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 systems. 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( 1 ), 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 wheeling). 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 rates."). 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 the FPA. strictions on FERC's wheeling authority in sections 211 and 212 of 22 3 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 ( 1 ) permits the wheeling utility to recover all costs incurred in connection with the transmission service;2 24 ( 2 ) 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 Although the 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)( 1 )-(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( 2 ), 722( 1 ), 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 ( 1 ) be in the public interest; ( 2 ) either conserve energy, promote efficiency, or improve reliability; and (3) comply with § 212. 16 U.S.C. § 824j(a)( 1 )-(3) (1988). Section 212(a) prevented issuance of a wheeling order unless FERC found that it ( 1 ) would not be likely to result in a reasonably ascertainable uncompensated economic loss to the transmitting utility; ( 2 ) would 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)( 1 ), 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)( 1 ) of FPA prevented FERC from issuing wheeling orders). 224. See Energy Policy Act of 1992, § 721( 2 ), 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( 1 ), 106 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( 2 ), 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 services). 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( 1 ), 106 Stat. at 2916 (establishing new § 212(a)). 232. Id. 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 61,089 (1992). 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( 1 ), 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 Energy Policy 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 appears to be undisturbed. The legislative history indicates that 237. Id. 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( 1 ) 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 provisions: 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( 1 ) would 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( 1 ) 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 conference report. 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 transmission system?" 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 conference reports). 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 discussion: 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 FERC decision. 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)( 2 )-the 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. § 723(b)( 1 ) (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)( 1 ) (1992) (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( 1 ), 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 principles. 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 Senator's understanding? 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 transmission services? JOHNSTON: I agree. The conference report neither endorses nor rejects these decisions. 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 Johnston). 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 245 rates. 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 to consumers. 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 reasonableness. 138 CONG. REC. S17,622 (daily ed. Oct. 8, 1992) (statement of Sen. Wallop) (emphasis added). 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 24 7 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 its meaning: 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 im 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 transactions). 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( 1 ), 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 transmitting utilities. 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). 257. Id. 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 transmission systems). 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 ca 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 customers harmless. Id. 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( 1 ), 106 Stat. 2776, 2916 (to be codified at 16 U.S.C. § 824k) (amending § 212 of FPA). 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, 5253. 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 re 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( 1 ), 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( 2 ) (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 CONCLUSION 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 wheeling utility. 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). 81. l 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.


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Joseph T. Kelliher. Pushing the Envelope: Development of Federal Electric Transmission Access Policy, American University Law Review, 2018,