While the federal government has some authority to regulate electricity flowing across state lines under the commerce clause, the federal government has seized much more power than it was legitimately delegated.

As I reported earlier, on Sept. 28, 2017, Secretary of Energy Rick Perry proposed a new rulemaking to the Federal Energy Regulatory Commission (FERC). Under the authority granted to the Secretary under the Department of Energy Organization Act, Perry proposed that the FERC should use authorities claimed under the Federal Power Act (FPA) sections 205 and 206 to assure that “reliability and resilience of the electric generation resources are fully valued.” The proposal is called RM18-1-000; the date by which Secretary Perry wants FERC to resolve his proposal was recently put off until early January.

Secretary Perry claims the FERC has the power to regulate the rates of electricity in interstate commerce. He bases this claim on sections of the FPA, noted above, which assert that FERC has that authority, and cites specific Supreme Court decisions which also highlight the law in that regard. But when the Constitutional Convention was held, the delegates explicitly considered and decided against delegating Congress any such power on licenses or rates. (The details of the Constitutional Convention discussion, including the possible Congressional powers enumerated, considered, and specifically rejected which could have allowed those powers to Congress, are listed in the reference at the end of this discussion.)

How did FERC get an invalid power to regulate rates?

When it approved the FPA, Congress said electricity industry was “affected with a public interest”. The Supreme Court first used the phrase “affected with a public interest” in Munn v Illinois in 1877. At issue was whether a state could engage in such regulation of commerce. To regulate a business “affected with a public interest” described the power of the British Parliament; the Supreme Court said that a U.S. state could exercise any powers of the British Parliament at the of time of the drafting of the Constitution. Because the British Parliament could then license and regulate “businesses affected with a public interest,” so too could a state, if its own constitution allowed it.

But there is nothing in the U.S. Constitution that says Congress can regulate something “affected with a public interest.” In fact, the phrase “affected with a public interest” even limits what a state can and cannot regulate. Not all commerce is affected with a public interest; it was understood to apply only to objects like bridges that went across rivers with limited access, or similar unique events. That Supreme Court affirmed “affected with a public interest” only applies permissible regulation by states, was affirmed in numerous cases (as also discussed in the Reference at the end of this note). Thus, the fact that Congress in adopting the FPA said the electricity industry is affected by a public interest does not allow Congress to regulate interstate rates of electricity. Congress has no such power, as it was specifically prohibited by the Constitutional Convention.

Since the Constitutional Convention specifically and clearly avoided any congressional powers to regulate rates or certificates of commerce, how could Congress regulate electricity in interstate commerce, without using authorities on rates or licenses? One of the issues facing the Constitutional Convention was that certain states were favoring industries within their borders against competitors outside their borders. Thus, the interstate commerce section of the U.S. Constitution was included to prevent states from favoring certain industries over others. In simple summary, the interstate powers of Congress are primarily to prevent states from creating monopolies or relative monopolies in commerce.

How does that affect this discussion?

Electricity in alternating-current (AC) systems consists of transmitting a commodity, electrons, across state lines. In FPC v. Florida Power & Light Co., 404 U.S. 453 (1972) the Supreme Court found that “The … conclusion that FP&L … [electricity] was transmitted in interstate commerce, was substantially supported by expert opinion that is in accord with the known facts of electricity, and is sufficient to support its [federal] jurisdiction.” Thus, electricity, when transmitted in AC-systems across a state line, are objects in commerce, and could thus be regulated by Congress. (This only applies to AC-systems. Direct current (DC) systems do not transmit electricity across state boundaries by movement of electricity across borders. This is why much of Texas’ electricity, which uses AC systems but crosses state boundaries only after using DC-interties with locations all within Texas borders, is not subject to FERC control.

A principal purpose of long-distance transmission of energy – including therefore when it moves across state lines – is to access places of generation or storage, with the least total cost. For example, assume each of two states needs 20 percent reserve margin based on good engineering criteria, to assure adequate supply when peak demands occur. If each state did that itself, then each state needs an extra 20 percent of capacity. But if those states could share resources through transmission, and their peak-demands are different, then they could also share the same additional 20 percent reserve between them. The interstate transmission of AC-systems thus could thus save each state the cost of about 10 percent of their total generation or storage – a significant saving.

Secretary Perry says that many states have imposed intrastate rules that favor one form of energy (usually renewable energy in some form). Those restrictions may therefore have removed or restricted other forms of energy generation or storage, thus, because of the operations of the favored forms of generation, they limit the ability of the entire interconnected AC-systems to maintain adequate reliability. That reliability is maintained by transmission of electrons crossing state lines in interstate commerce. Without such state restrictions on sources, the more widespread are the resources of an electricity system, the more likely that system will have available interstate connected sources of supply or storage. But of one or several states restrict the form of generation or storage, or impose generation or storage devices that do not allow adequate sharing of their output, then the kinds of availability of generation or storage is restricted by those resources, across all connected AC-transmission-intertied states.

Secretary Perry claims that limiting certain kinds of generation in certain states causes all states (except Texas!) to have much more limited means of meeting peak demand, and/or much higher cost of doing so – a typical effect of imposing a relative monopoly. Existing state restrictions on the possible form of generation in some states thus makes the entire interstate AC-system potentially unstable, and/or unduly expensive, especially when measured on meeting reliability requirements, and therefore are subject to potential interruptions due to lack of reserve generation or storage. One can currently easily find articles that describe how present electricity systems are already finding that such interruptions exist or will soon occur.

In FERC’s proceedings on the RM18-1-000, a group calling themselves the State Commenters list many existing state actions that restrict which forms of generation can be used in certain states. The State Commenters apparently believe that by opposing the Secretary’s RM18-1-000 proposal, they can also protect those state laws or regulations. But they have done the opposite. While the FERC can’t impose specific tariffs on interstate transmission, as RM18-1-000 proposes, if FERC finds that such state laws restrict commerce by relative imposition of monopolies, then under the Constitution’s interstate commerce provision, the Congress could prohibit the same state regulations specified by those intervenors.

So, while FERC can’t set rates, it can discuss if state actions, and for example, find if some state laws and regulations interfere with interstate commerce (which Secretary Perry says they do). If so, then while FERC cannot carry out RM18-1-000 as proposed, FERC can invalidate those state actions that create undue monopolies, such as by FERC’s authority on interstate reliability via transmission of electrons, or point out that Congress needs to do so.

 

References: Paul Ballonoff, 2016, Limiting Federal Power, Amazon.

Paul Ballonoff, a member of the DC and California bars, and a long-time expert on problems of regulation. His most recent book is Limiting Federal Regulation, available on Amazon.

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