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«THE HAZY “BRIGHT LINE”: DEFINING FEDERAL AND STATE REGULATION OF TODAY’S ELECTRIC GRID Robert R. Nordhaus* Synopsis: In the 1935 Federal Power ...»

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NORDHAUS - FINAL - 11.16.15 © COPYRIGHT 2015 BY THE ENERGY BAR ASSOCIATION

THE HAZY “BRIGHT LINE”: DEFINING

FEDERAL AND STATE REGULATION OF TODAY’S

ELECTRIC GRID

Robert R. Nordhaus*

Synopsis: In the 1935 Federal Power Act, Congress drew what the Supreme Court

later described as a “Bright Line” between federal and state regulation of the

electric power grid, giving federal regulators exclusive authority over wholesale electric sales in interstate commerce, and relegating retail sales to state regulators.

This division of labor between state and federal regulators is still in effect today with only minor changes. However the grid they regulate has changed, and will change even more in the future. This article describes the current “Bright Line” between state and federal regulation. It then looks at whether this regulatory division of labor continues to be a workable model for the electric power industry in light of market developments and changes in the use of the grid (such as distributed generation and demand response). Finally, it reviews a number of options for needed changes in the regulatory model.

I. Overview

The “Bright Line”

II.

A. Original Packages and Attleboro

B. The Federal Power Act

C. Colton and the Bright Line

Applying the Bright Line to Today’s Grid

III.

A. Application of the Bright Line to Distributed Generation.......207 B. Application of the Bright Line to Organized Markets............209

1. Demand Response

2. Capacity Markets

C. Policy Implications

IV. Options for Changing the Regulatory Division of Labor...............213 A. Regional Regulation

1. Interstate Compacts

2. Federal Regional Regulatory Agency

B. Adjusting Regulatory Jurisdiction as the Need Arises............214

1. Jurisdictional Agreements

2. Federal/State Joint Boards

C. Muddling Through

V. Conclusion

* Partner, Van Ness Feldman, LLP. The author wishes to thank Peter Fox-Penner, Charles Curtis, Douglas W. Smith, David P. Yaffe, and Sam Kalen for their invaluable review and comments, and Haley Mittler for her research and editorial assistance. Views expressed in the article are the author’s and do not necessarily reflect the positions of Van Ness Feldman, its clients or the reviewers.

–  –  –

I. OVERVIEW The division of labor between federal and state regulation of the electric power grid was established by the Federal Power Act (FPA) in 1935. With only minor changes, it is still in effect today. However, the grid that is regulated today is much different and will change even more as we go forward. This article reviews the current “Bright Line” between federal and state regulation, looks at whether that division of labor continues to be a workable model for regulation of the electric power industry, and reviews a number of options for changing the regulatory model.

II. THE “BRIGHT LINE”

A. Original Packages and Attleboro In 1827, Chief Justice John Marshall in Brown v. Maryland1 articulated what became known as the “Original Package” doctrine, which held that foreign goods imported into a state were not subject to taxation by the state if they remained in their original package and were not intermingled with the general mass of property in the state.2 Over the course of the 19th century, the courts expanded the scope of this doctrine from a relatively narrow rule on state taxation of foreign imports to a much more general rule under the Dormant Commerce Clause3 that encompassed state regulatory measures as well state taxation, and that applied to both interstate and foreign commerce. 4 As the courts struggled to apply the Dormant Commerce Clause to the rapidly industrializing American economy, they adapted the Original Package doctrine to new technologies and emerging commercial practices—using tests such as whether the goods had been sold after import into the state and whether they had been removed from the original package and sold in smaller lots. 5 In the early 20th century, as interstate transmission of natural gas and electricity began, the courts were faced with commerce of goods that did not come in packages at all.

They nonetheless attempted to apply the rules derived from the Original Package doctrine, as it developed in the 19th century, to these industries. In a series of cases

1. Brown v. Maryland, 25 U.S. 419, 441-43 (1827).

2. Goods brought into a state “while remaining the property of the importer, in his warehouse, in the original form or package in which it was imported” are not subject to taxation by the state until intermingled with the mass of property in the state. Id. at 441-42.

3. The Dormant Commerce Clause is the Constitution’s implicit limitation on state regulation of, or discrimination against, interstate commerce. U.S. CONST. art. I, § 8, cl. 3; See generally Pike v. Bruce Church, 397 U.S. 137 (1970).

4. Brown’s principal ruling dealt with the Constitution’s bar on state taxation of imports and exports under Article 1, Clause 2 of Section 1. Brown, 25 U.S. at 441-49. Later Original Package cases focused on whether state taxation or regulation of goods brought in from other states violated the Dormant Commerce Clause.





5. In Leisy v. Harden, 135 U.S. 100 (1890), for example, the Court held that an Iowa statute, which prohibited, inter alia, the sale of beer, wine, and liquor imported from other states in their original casks and sold in the quantities in which they were imported, violated the Dormant Commerce Clause. The Court noted that the state had no authority to regulate the goods until they “[became] mingled in the common property within the state[,]” and the plaintiffs thus had the right to import beer into the state and sell it. Id. at 124. Once sold, it would become mingled in the common property in the state and would be subject to state regulation. Id. at 134.

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THE HAZY “BRIGHT LINE”2015] 205

dealing with interstate sales of electricity and natural gas, the Court laid out the limits on state authority to regulate these industries. In the key case of Missouri v. Kansas Natural Gas Co.,6 the Supreme Court held that Missouri could not regulate wholesale sales of interstate natural gas that was transported by pipeline into Missouri to independent distributors. The Court reasoned that the gas transported into the state did not become part of the general mass of property in the state until after a sale at wholesale by the interstate pipeline and delivery to the mains of local distribution systems (analogous to Brown’s bar on state taxation of imported property in its original package and before its sale by the importer).

The natural gas and electricity cases culminated in Public Utilities Commission of Rhode Island v. Attleboro Steam & Electric Co.7 in which the Supreme Court held that the Dormant Commerce Clause barred states from regulating interstate wholesale sales of interstate electric power and that only Congress could regulate these sales. This case created what became known as the Attleboro gap: states could regulate retail sales and intrastate sales, but—unless Congress acted—no agency had authority to regulate interstate wholesale electric sales.

B. The Federal Power Act In 1935, Congress enacted the FPA8 to fill the Attleboro gap. Under the FPA, the Federal Power Commission (FPC)9 was directed to regulate sales for resale and transmission in interstate commerce of electric energy. 10 Generation, local distribution, and wholly-intrastate sales and transmission were exempted from federal regulation,11 and federal regulation was to extend “only to those matters which are not subject to regulation by the states.”12 Over the next thirty years, the FPC proceeded to impose comprehensive utility regulation over public utilities involved in interstate transmission and wholesale sales. At the same time, the Supreme Court’s Dormant Commerce Clause jurisprudence continued to evolve away from the mechanical 19th century concepts to the current balancing test. 13

6. Mo. ex rel. Barrett v. Kan. Natural Gas Co., 265 U.S. 298 (1924).

7. Public Utils. Comm’n v. Attleboro Steam & Elec. Co., 273 U.S. 83, 90 (1927).

8. Federal Power Act (FPA), 16 U.S.C. §§ 791-828c (2011).

9. The Federal Energy Regulatory Commission (FERC) succeeded in 1977 to almost all of the FPC’s functions. Dep’t of Energy Organization Act, Pub. L. No. 95-91, § 204, 402; 91 Stat. 565, 571-72, 583-585 (1977) (codified as 42 U.S.C. §§ 7134, 7172 and 16 U.S.C. §§ 792, 824, 824a).

10. FPA § 201(b)(1), 16 U.S.C. § 824(b)(1).

11. Id.

12. FPA § 201(a), 16 U.S.C. § 824(a).

13. In Baldwin v. G.A.F. Seelig, 294 U.S. 511 (1935), the Court abandoned the Original Package doctrine and in Pike the Court rejected the last remnants of 19th century Dormant Commerce Clause jurisprudence. In Ark. Elec. Coop. v. Ark. Pub. Serv. Comm’n, 461 U.S. 375 (1983), the Court held that a state could regulate wholesale sales in interstate commerce by an electric cooperative not subject to FERC jurisdiction, essentially upending Attleboro. See generally Sam Kalen, Dormancy Versus Innovation: A Next Generation Dormant Commerce Clause, 65 OKLA. L. REV. 381 (2013).

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206 ENERGY LAW JOURNAL [Vol. 36:203

C. Colton and the Bright Line In 1964, the Supreme Court decided FPC v. Southern California Edison Co.14 (known as the “Colton” case) which involved a wholesale sale of out-of-state power by a public utility, Southern California Edison Company (SCE), to a municipal utility in the same state (the City of Colton). SCE and the state of California argued that under the policy rationale for the Attleboro holding, SCE’s wholesale sale would be “subject to regulation by the [state],”15 and thus not subject to the FPA. The Court, however, held that the language of Section 201(a) of the FPA stating that “such federal regulation [under the FPA] however, to extend only to those matters which are not subject to regulation by the states” 16 was merely a “policy declaration... of great generality. It cannot nullify a clear and specific grant of jurisdiction, even if the particular grant seems inconsistent with the broadly expressed purpose.”17 Rather, Congress had drawn “a bright line easily ascertained, between state and federal jurisdiction,” making federal jurisdiction “plenary and extending it to all wholesale sales in interstate commerce.”18 While Congress has made occasional adjustments to Colton’s Bright Line over the years,19 it remains the fundamental federal/state division of labor for electric regulation in the United States.20 Colton’s interpretation of the FPA in effect froze the 1927 division of labor between federal and state utility regulation articulated in Attleboro, which in turn relied on concepts articulated a century earlier in Brown. John Marshall indeed casts a long shadow.

III. APPLYING THE BRIGHT LINE TO TODAY’S GRID

The FPA’s division of labor between state and federal regulation has, for decades, engendered controversy. The controversy has largely centered on states’ exercise of their long-standing state jurisdiction over local distribution, facility siting, and generation adequacy. Utilities and federal policymakers have complained that state generation and transmission siting decisions and state retail rate policies have frustrated federal energy policies, and Congress has enacted

14. Federal Power Comm’n v. S. Cal. Edison Co. (Colton), 376 U.S. 205, 206-07 (1964).

15. Attleboro, 273 U.S. at 88.

16. FPA § 201(a), 16 U.S.C. § 824(a).

17. Colton, 376 U.S. at 215 (citing Conn. Light & Power Co. v. FPC, 324 U.S. 515, 527 (1945)).

18. Id. at 215-216 (emphasis added).

19. See, e.g., Public Utility Regulatory Policies Act of 1978 (PURPA) § 210, 16 U.S.C. § 824a-3 (2011);

see also FPA §§ 210-11, 215, 221-22, 16 U.S.C. §§ 824i, 824j, 824o, 824u, 824v (2011) (amended by the Energy Policy Act of 1992 and Energy Policy Act of 2005).

20. Under subsequent case law relating to the “interstate commerce” requirement under the FPA, wholesale sales or transmission that use the interstate grid are generally considered to be in interstate commerce.

In Conn. Light & Power Co. v. Fed. Power Comm’n, 324 U.S. 515, 529 (1945), the Court held that federal jurisdiction followed “the flow of electric energy, an engineering and scientific, rather than a legalistic or governmental test.” 324 U.S. at 529. Later cases adopted a comingling test under which a utility was jurisdictional if the FPC could show that any portion of the electricity transmitted by the utility went to another state. FPC v. Fla. Power & Light Co., 404 U.S. 453 (1972), reh’g denied, 405 U.S. 948 (1972). As Justice Douglas’ dissent presciently stated, “the comingling method will now mean that every privately owned interconnected facility [outside of Texas] is within the FPC’s jurisdiction”. Id. at 471 (Douglas, J., dissenting).

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THE HAZY “BRIGHT LINE”2015] 207

several modifications to the FPA in response to these complaints. 21 State regulators have complained of FERC encroachment on states’ ability to regulate local distribution companies and transmission services associated with serving retail load.22 However, the Bright Line’s wholesale/retail division of labor remained basically workable for many years. Utilities were largely vertically integrated. Power flowed from large central-station generating facilities through high-voltage transmission systems either for sale at wholesale to other utilities or for delivery through local distribution facilities to end-users. It was clear which sales were at wholesale and which at retail, and the FERC was fairly readily able to distinguish transmission from distribution.



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