Yet another industry on the taxpayer-subsidized dole: why section 8093 of the Continuing Authorization Act of 1988 (40 U.S.C. section 591) should be repealed.
I. INTRODUCTION II. SECTION 8093 AND FEDERAL POLICY A. Status Quo Ante B. The Black Hills Case C. The Passage of Section 8093 of the Continuing Authorization Act of 1988 D. Federal Legislation and Rulemaking After Section 8093's Passage 1. The Energy Policy Act of 1992 2. FERC Orders Numbered 888 and 889 3. FERC Order Number 2000 4. The Energy Policy Act of 2005 III. INTERMEZZO: A REALITY AND FACT CHECK IV. DOES THE HOBGOBLIN OF STRANDED COSTS REALLY EXIST? A. The Justification For Section 8093 Does Not Reflect Current Reality 1. Right to Stranded Costs and Fifth Amendment Takings Arguments 2. The Regulatory Compact and the Takings Argument 3. The U.S. Supreme Court and Stranded Cost Arguments 4. Synthesis: Changes Mean a Needed Shift in Expectations for Stranded Costs B. Stranded Costs Do Not Justify Arguments Against Consumer Choice 1. Stranded Costs Were Invented in Aid of Consumers, Not Utilities Over Consumers 2. Stranded Costs Are Imprecise, Prospective and Do Not Justify Refusal to Change to Benefit the Consumer 3. Stranded Costs Are Already a Part of Doing Business C. The Stranded Cost Argument Ignores the Obligation to Mitigate Stranded Costs D. Stranded Costs Argument Ignores States Already Dealing With Stranded Costs 1. FERC Order No. 888 Requirements for Dealing With Stranded Costs 2. The Number of Ways Ahead for Dealing With Stranded Costs in Deregulation E. Recap: What All of This Discussion of Stranded Costs Means V. THE OBLIGATION OF RESPONSIBLE STEWARDSHIP VI. CONCLUSION
The current economic strategy is right out of "Atlas Shrugged": The more incompetent you are in business, the more handouts the politicians will bestow on you.... With each successive bailout, to "calm the markets," another trillion of national wealth is subsequently lost. Yet, as "Atlas" grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate "windfalls." (1)
Stephen Moore, in his Wall Street Journal article "'Atlas Shrugged': From Fiction to Fact in 52 Years," (2) notes a set of circumstances eerily similar to both the roots of the current national economic crisis and the sentiment behind opposing the repeal of Section 8093 of the Continuing Authorization Act of 1988 (Section 8093). (3) In Atlas Shrugged, an enterprising business owner, with an idea to benefit the public, is "continuously badgered, cajoled, taxed, ruled and regulated--always in the public interest--into bankruptcy." (4) Instead of blocking the development of a revolutionary rail delivery system (5), electric utilities have sought to block repeal of Section 8093, citing a regulatory compact (6) and stranded costs. (7) Under this guise of protecting the consumers' interests, Congress actually elected to penalize all federal taxpayers by passing the provisions of Section 8093, which subjects federal agencies to state-sanctioned monopolies in electric utility purchases. Subjecting federal agencies to these state-sanctioned utility monopolies saddles the federal taxpayer with the additional expense caused by the inability of federal agencies to shop around for the best deal in electric utility services. The provisions of Section 8093 remain on the books despite serious questions about the justification presented to Congress at the time of passage. The law is also out of step with federal energy and procurement policy as it existed at the time of passage and as it exists now. Congress should repeal the provisions of Section 8093 because they run counter to federal energy and acquisition policies, because the premise that its repeal would unfairly and necessarily burden other customers and investors with stranded costs is unfounded, and because good stewardship of federal taxpayers' money demands circumstances that allow for better deals in electric utility purchases.
This case for repeal of Section 8093 includes three main arguments. First, Sections II and III of this article trace the historical development of energy market regulation to demonstrate that, while proponents of Section 8093 claimed that the passage of Section 8093 was consistent with federal energy policy, this was not and is not the unvarnished truth. Instead, the continued existence of Section 8093 on the books represents a significant inconsistency in federal energy and procurement policy. Second, Section IV of this article examines the proponents' principal argument--that the threat of stranded costs posed by deregulation in general and the participation of federal agencies in a competitive market in particular--and demonstrates stranded costs are not as automatic, significant, or unusual as the electric utility industry claims. Third, in light of these factors, Sections V and VI of this article argue the concept of stewardship of federal taxpayers' money, and the sheer size of the federal agencies' share of the market, call for repeal of Section 8093.
II. SECTION 8093 AND FEDERAL POLICY
A. Status Quo Ante
Before the passage of Section 8093 in December 1987, federal agencies were able to purchase electric utility power, unfettered by state law. (8) During this status quo ante, the Supremacy Clause of the Constitution prevented states from forcing federal agencies to contract with a specific utility. (9) States lack jurisdiction over exclusive federal enclaves under most circumstances. (10) The outer boundaries of the interplay between state and federal legislative jurisdiction are simply that states have some power to legislate over property that is not a federal enclave--such as lands subject to concurrent or proprietary jurisdiction. However, absent some specific congressional approval, the state has no power over enclaves. (11) In addition to this general premise of federal sovereignty, the Public Utility Regulatory Policies Act of 1978 (PURPA passed as an amendment to the Federal Power Act of 1935) (12) and the Competition in Contracting Act of 1984 (passed prior to 1988) (13) are based on notions very different from the basis of Section 8093.
The Federal Power Act of 1935 (especially as amended by PURPA) does not support any assertion that federal agencies were before 1987 somehow subject to utility monopolies under state law, (14) especially where the utility industry felt it necessary to have a provision passed to make the federal government subject to state rule in these cases. (15) Further, the Federal Power Act, as amended by PURPA, reveals that the federal government was not subject to state laws before the passage of Section 8093 in 1988. (16) Significantly, the provisions of PURPA actually required utilities to purchase power from outside sources at a lower (or avoided) cost than they would have otherwise incurred by producing the power themselves. (17) PURPA stands for the notion that electric utility generation will be improved by more-efficiently-produced electricity, with equitable rates for electric consumers. (18) To that end, PURPA provided for small power production facilities and qualifying small power production facilities, which would augment or serve as adjuncts to traditional public utilities. (19) PURPA provides for interconnection and wheeling (movement of power between power grids), which facilitate interconnection and movement of power between individual grids, service territories, and even across state lines. (20) The final arbiter of these processes is the Federal Energy Regulatory Commission (FERC), not state utility or public service commissions. (21) These provisions of PURPA actually cut against state-sanctioned utility monopolies, because they provide for the sale and importation of power from other states and locations, effectively providing an entry for competitors into the market.
The fact that the Federal Power Act of 1935 did not subject federal agencies or instrumentalities to the rule of state law, (22) and PURPA actually facilitated and encouraged practices that would transcend state franchise boundaries and territories, evidences that federal policy contradicts the congressional rationale for Section 8093. Section 8093 subjects the federal government to the constraints posed by purchase of electric utility service subject to state-regulated monopolies. (23) At the time of implementation, other federal laws contradicted the policy of Section 8093 as well.
The authority to purchase utility services, as delegated from the General Services Administration, is subject to the provisions of the Competition in Contracting Act of 1984. (24) The Competition in Contracting Act, as reflected by the provisions of 10 U.S.C. [section] 2304, provide for a rule in favor of full and open competition, with limited exceptions. (25) Purchase of utility services, as subject to state law under the provisions of Section 8093, is not one of the enumerated exceptions to full and open competition under the provisions of 10 U.S.C. [section] 2304. (26) Section 8093 falls under the catch-all exception to the broad full and open competition policy behind the Competition in Contracting Act (CICA), and it has not been properly squared with the over-arching policy for full and open competition in federal procurement. This catchall simply provides for an exception to CICA where "another statute expressly authorizes or requires that the procurement be made through another agency or from a specified source." (27) The provisions of Section 8093, later 40 U.S.C. [section] 591, provide this statutory exemption or authorization, as distilled into the provisions of FAR 41.201 (d)(1).
Given the provisions of PURPA and the Competition in Contracting Act of 1984, it is difficult to see how the provisions of Section 8093 have ever been regarded as consistent with the status quo ante, much less passed into law on that basis. The rest of the discussion in this section outlines both the circumstances behind Section 8093's passage and its growing inconsistency with federal law and energy policies.
B. The Black Hills Case
The Black Hills Power & Light Co. v. Weinberger case is the seminal event in the passage of Section 8093 and its subsequent codification into the provisions of 40 U.S.C. [section] 591. (28) The Black Hills case challenged the U.S. Air Force's attempt to competitively purchase electric utility services after the change in an established arrangement with two electric utilities in the area. (29) The Air Force, at Ellsworth Air Force Base, South Dakota, attempted to avoid returning to the service arrangement with Black Hills Power and Light Co., by contracting with a local competitor at a better price and under better terms. (30) The stepping-off point for the District Court of South Dakota, Western Division, was the Supremacy Clause of the Constitution of the United States. (31) Accordingly, the court found for the Air Force and Department of Defense, noting that the Air Force could make utility service purchase not subject to state law, and Black Hills Power and Light appealed to the Eighth Circuit. (32) The Eighth Circuit, affirming the District Court's decision, noted that the Supremacy Clause prevented the State of South Dakota from forcing the U.S. Air Force to contract with a specified electric utility; in addition, the court found that the State of South Dakota lacked jurisdiction over an exclusive federal enclave. (33) This decision spurred the electric utility industry into action. (34)
C. The Passage of Section 8093 of the Continuing Authorization Act of 1988
The utilities claimed to Congress that the provisions of Section 8093 were consistent with long standing federal policy. (35) However, the remarks as read on the floor of the House also point out a subtle difference between the state of the law before the passage of Section 8093 and the argument made that Section 8093 was consistent with previous laws. (36) The remarks on the House floor in support of Section 8093 note that states regulate retail sale and distribution of electricity within their borders. (37) This observation of state regulatory power does not rise to the level of a claim that the federal government, prior to the passage of Section 8093, waived federal sovereignty in favor of state regulation of federal agency choice in electric utility service. (38) This gulf in logic between the consistency of law and policy justification for Section 8093 and the circumstances of federal supremacy, raises the question of how Section 8093 ever came to be.
The Energy Economist, in a 1 November 1996 article entitled "Can the Pentagon Wheel and Deal With the Best?" describes the manner in which Section 8093 was "quietly slipped" into the Continuing Authorization Act of 1988. (39) The provision was sponsored almost exclusively by the special utility interests. (40) The justification for the provisions that would become Section 8093 even more starkly indicates the pro-utility bent behind the proposal and passage of the provisions in question. (41) It characterizes the process of subjecting federal agencies to state laws governing utility franchise as fair-minded, because it does not allow the federal government "to ignore state established utility service territories." (42)
Further, the statements in support of Section 8093 assert that the proposed law only "requires the Federal Government to abide by restrictions in the Federal Power Act ... when it buys electricity." (43) But the Federal Power Act of 1935 does not subject federal agencies to state law before the passage of Section 8093. (44) The references made to the relationship between state governments and any federal agency, instrumentality, etc., are limited to the separation between the power of the states over intrastate utility matters and the power of the federal government to regulate matters that affect interstate commerce. (45) This is different from dealing with how to treat federal agencies as electric utility customers. Further, the comments read on the floor of Congress on 15 July 1987 point out the key utility interest argument for Section 8093: the prevention of stranded costs that would automatically pass on to rank and file consumers. (46) This is contrary to the basic principle of utility ratemaking that rate increases are subject to an adversarial administrative process, (47) and the basic notion that, in utility rate-making, the cost causer is the cost payer. (48) Simply put, other consumers do not automatically shoulder stranded costs. (49) The process of dealing with stranded costs is subject to an adversarial administrative process, part and parcel of which is the determination as to whether the payer of the costs is the causer of the costs. (50)
The statement, as read into the Congressional Record, does not take into account the then current legal and policy realities, where it asserts that the federal government's attempts in the 1980s to purchase utility services on a competitive basis is a first, dangerous step towards "dismantling [the] long-established regulatory system" and "administratively alter the long-established Federal-state relationship in this area of energy policy." (51) While compelling, the statement is not true as of this date, and it was not true at the time it was read onto the record. The statement ignored the previous major steps in altering the relationship between the federal government and state governments under the provisions of PURPA, passed into federal law in 1978. (52)
The cumulative, practical effect of Section 8093's requirement that federal agencies "purchase electricity in a manner consistent with state law" is that Department of Defense installations in non-deregulated states, must purchase electric utility services from state-sanctioned monopolies. (53) Only in instances when states are deregulated may federal agencies or installations exercise choice in electric utility purchase. (54) Deregulation for the purposes of this article occurs where states stop issuing franchises or allocating specific territories to specific utilities to operate as regulated monopolies under state law. (55) This process of deregulation is, at best, piecemeal, and states can return to regulated monopolies. (56) The effect of Section 8093 on the purchase of electric utility service has become so ingrained in the practice of electric utility acquisition by federal agencies and instrumentalities that it is described as a bar from buying electric utility services competitively (57) and represents a prevalent justification for why the Department of Defense essentially buys electric utility services on a sole source basis. (58)
Congress later codified its provisions at 40 U.S.C. [section] 591. (59) Despite this, as noted in the next section, federal energy policy and the laws putting that policy into effect have diverged farther and farther from the premises behind Section 8093. Therefore, the whole notion that Section 8093 comports with established federal policy and is a legitimate limitation on federal procurement is suspect.
D. Federal Legislation and Rulemaking After Section 8093's Passage
In line with the policy established by PURPA, both Congress and the Federal Energy Regulatory Commission have passed a body of statutes, rules, and regulations that created an environment for a more competitive retail electric utility market and an environment that substantially undercuts any preference for state-sanctioned regulated monopolies. Congress first set the scene with the Energy Policy Act of 1992, with which it removed regulatory barriers to allow for wholesale generators to participate in an interstate wholesale market. (60) The provisions of the Energy Policy Act of 1992 were reflected in the rules promulgated by the Federal Energy Regulatory Commission in FERC Orders 888 and 889. (61) These rules further refined the means of allowing wholesale generators to participate in an interstate competitive market, by removing many of the impediments to transmitting electricity between electrical grids in an interstate market. (62) The provisions of FERC Order 2000 bolstered previous statutes and rules because it established entities and mechanisms to further ensure the ability for wholesale generators to wheel power between grids in order to give consumers a choice. The capstone to this effort is the repeal of the Public Utility Holding Company Act (PUHCA) of 1935 (63) under the provisions of the Energy Policy Act of 2005 to make the process of producing, selling, and transmitting wholesale power a more viable business. All of these measures add up to the end-state in which competition is favored over regulated monopolies.
1. The Energy Policy Act of 1992 (64)
The provisions of PURPA are far from the last provisions passed by Congress over the past three decades. Despite this trend to open the electric utility market, the provisions of Section 8093 have remained. (65) The Energy Policy Act (EP Act) of 1992 took a significant step toward opening the market, when it removed pre-existing regulatory barriers for entities interested in electricity generation to increase competition in the electric utility industry. (66) The EP Act of 1992 provides for the creation of entities called exempt wholesale generators (EWGs) that can generate and sell electricity at wholesale without being regulated as utilities under the provisions of PUHCA. (67) The EP Act of 1992 also provides the mechanism to ensure transmission of wholesale power to wholesale purchasers. (68) The Congressional Research Service (CRS) Report for Congress entitled "Electric Utility Regulatory Reform: Issues for the 109th Congress" best states the practical result of the EP Act of 1992.
EPACT allowed for a robust wholesale market in electricity. The transmission is now used extensively for bulk-power transfers between utilities, even though the physical system was designed to handle primarily intrautility transfers. Utilities now depend on a combination of self-generation, merchant generators, and other utilities to meet their retail electricity demand. (69)
This system, under which utilities receive electricity from a number of sources that are subject to FERC jurisdiction is a far cry from the regime represented to Congress during the argument for Section 8093's passage in 1987. The status quo that the utility interests argued to support Section 8093's passage presupposed vertically-integrated utilities. (70)
That is, the utilities owned the generation, transmission, and distribution pieces of the puzzle. (71) This is a far cry from the policy direction initiated by the provisions of PURPA and the EP Act of 1992, carried through to the present day. The FERC, in furthering the goals of the EP Act of 1992, passed the provisions of FERC Orders 888 and 889. (72)
2. FERC Orders Numbered 888 and 889
Order Number 888, issued by the FERC on 24 April 1996, contained three final interrelated rules "to remove impediments to competition in the wholesale bulk power marketplace": rules on open access to transmission lines, rules on the recovery of stranded costs, and an accompanying rule on the Open Access Same-Time Information System (OASIS). (73) The desired effect articulated by FERC was increased competition and lower cost power for consumers. (74) The first rule regarding open access to transmission lines under FERC Order 888 requires public utilities to file a single open access tariff for transmission of electricity. (75) This rule, under Order 888, required that all public utilities subject to the jurisdiction of the Federal Energy Regulatory Commission meet the new standards for filing and conditions of non-discriminatory transmission. (76) The second rule, in order to further the goal of transiting from a regulated monopoly regime to a more price-competitive regime, promulgated procedures to allow for recovery of stranded costs, under certain circumstances. (77) The final rule permits recovery of stranded costs outside wholesale requirements contracts (via FERC) and provides that FERC will be the primary forum for utilities to seek recovery of stranded costs associated with both wholesale-turned-retail and retail-turned-wholesale transmission customers." (78) This rule only permits recovery for retail stranded costs because the state does not have the authority to address these stranded costs at the time of transition from retail power to transmission customer. (79) Retail stranded costs are those costs that were previously incurred to provide service to a retail customer that subsequently becomes a transmission customer, with the electricity commodity coming from another source. (80) The provisions for the recovery of wholesale stranded costs are more detailed and robust, because interstate commerce is the exclusive jurisdiction of FERC. (81) As noted above, these three general rules under FERC Order 888 provide for FERC Order 888's desired end-state.
The CRS Report for Congress, entitled "Electric Utility Regulatory Reform: Issues for the 109th Congress" provides a good overview of the end-state of FERC Order 888.
Under Order 888, the Open Access Rule, transmission line owners are required to offer point-to-point and network transmission services under comparable terms and conditions that they provide for themselves. The rule provides a single tariff providing minimum conditions for both network and point-to-point services and non-price terms and conditions for providing these services and ancillary services. This rule also allows for so-called stranded costs, with these costs being paid by the wholesale customers wishing to leave their current supply arrangements. The rule encourages but does not require creation of independent system operators (ISOs) to coordinate intercompany transmission of electricity. (82)
While FERC Order 888 goes a long way towards paving the way for an open market for electric utility service, it lacked controls over a crucial part of the puzzle: information. FERC Order 889 addressed this part of the puzzle.
Under FERC Order 889, the Commission establishes the Open Access Same-Time Information System (OASIS) and prescribes standards of conduct to ensure a level playing field for all market participants through access to information. (83) Under FERC Order 889, the Commission provides that each public utility that owns, controls, or operates facilities used for the transmission of electric energy in interstate commerce will be required to create or participate in an OASIS. (84) This provides open access transmission customers with information about available transmission capacity, prices, and other information that will enable them to obtain open access nondiscriminatory transmission service. (85) The rule under Order 889 was issued in tandem with the provisions of Order 888 in order to satisfy the requirement that open access non-discriminatory transmission service makes information about the transmission system available to all customers to further the goal of transparency. (86) As FERC Orders No. 888 and 889 provided substance furthering the goals of the EP Act of 1992, they also take federal policy further away from the notion that it somehow stands to protect utilities as regulated monopolies. Despite the best of intentions, the Commission noted that the progress realized after the passage of Orders 888 and 889 left inadequacies to be addressed with management of transmission grids and continued problems with "discrimination in the provision of transmission services by vertically integrated utilities." (87) This led to the passage of FERC Order 2000. (88)
3. FERC Order Number 2000
In order to address the previous inadequacies, the Commission proposed that the establishment of Regional Transmission Organizations (RTOs) would "(1) improve the efficiencies in transmission grid management; (2) improve grid reliability; (3) remove remaining opportunities for discriminatory transmission practices; (4) improve market performance; and (5) facilitate lighter handed regulation." (89) The provisions of Order 2000 also provide for the consideration of "innovative transmission rate treatments for RTOs." (90) These innovative rate treatments serve to incentivize participation in these RTOs. (91) Order 2000 also requires that participation in an RTO by a utility requires a transfer of operational control over the utility's transmission facilities to the RTO. (92) This can, but does not necessarily, include transfer of ownership of the facilities in addition to the transfer of operational control. (93) When utilities do not file a proposal to participate in an RTO, they must: describe efforts made to participate in an RTO; give a detailed explanation of the economic, operational, commercial, regulatory or other reasons the utility has not filed a proposal to participate; and a specific plan, with timetables, the utility will follow in order to participate in an RTO at some future time. (94) Order 2000 addresses the potential for capture, abuse, and discrimination in RTO arrangements. (95) These provisions include: independence of the RTO as an entity, scope and regional configuration of the RTO, the operational authority of the RTO over all of the transmission facilities under its control, and the required functions of the RTO. (96) As with the provisions of FERC Orders 888 and 889, the passage of FERC Order 2000 works to bring the electric utility industry even further from the notion of protecting regulated electric utility monopolies, which are best served by the provisions of Section 8093. While the goal of increased competition through regionalization and unbundling of utility services has made tremendous strides, there is a problem with assurance of adequate transmission capacity and adequate management of the overall system to move power. (97)
The current growth of generation capacity has outstripped transmission capacity and additions to that capacity. (98) According to transmission utilities, a significant factor attributed to this imbalance is the current transmission pricing mechanism, which discourages investment. (99) One means of remedying the lackluster investment in transmission infrastructure was the repeal of the provisions of the Public Utility Holding Company Act (PUHCA) of 1935, which placed significant limitations on utility holding companies' portfolios. (100) Such a repeal of PUHCA would "significantly expand the ability of utilities to diversify their investment options." (101) The Energy Policy Act (EP Act) of 2005, in pertinent part, dealt with this issue. (102)
4. The Energy Policy Act of 2005
Section 1263 of the EP Act of 2005 (103) repealed PUHCA. (104) With the repeal of PUHCA, electric utilities are freer to further diversify assets, thereby improving economic efficiency and providing for economies of scale. (105) The repeal of PUHCA and the allowance for diversification of assets by electric utilities "[also] improve[d] the risk profile of electric utilities in much the same way as in other businesses." (106) Because "[t]he risk of any one investment is diluted by the risk associated with all investments," (107) diversification leads to better use of otherwise underutilized resources, due to seasonal demand. (108) Yet another attractive aspect of PUHCA's repeal is the alignment of utilities with other business interests that have innately higher growth potential than the traditional utilities themselves. (109) The results of the repeal of PUHCA have yet to bear definitive results as of this date. (110) However, for the purposes of this paper the end state is less important than the fact that the current state of affairs represents a dramatic departure from the electric utility industry of the late-1980s. The direction of policies concerning the regulation of electric utilities points away from regulated monopolies and towards a competitive retail market. Simply put, the state of law and policy neither supported the passage of Section 8093 in 1987, nor justify its continued existence to this date.
III. INTERMEZZO: A REALITY AND FACT CHECK
Every step taken by the federal government since 1978 represents a significant advance in federal policy towards promoting competition in the electric utility industry. Each step has brought the overall utility system to more successfully competitive states. This indicates two things: (1) federal policy in 1987 was not inclined toward protection of traditional vertically-integrated utilities, and (2) federal policy is now even more at odds with a policy that would protect the traditional vertically-integrated utilities.
Given the pace of change in federal electric utility policy over the past two decades the question becomes whether the industry's defense of Section 8093 has changed too. The answer is simple: no. (111) In 2008, the electric utility industry sent a letter to the Senate Armed Services Committee in defense of Section 8093. (112) The letter penned in opposition to the repeal of the Section 8093 provisions states that "[t]his proposal is inconsistent with longstanding federal and state electricity policies and would preempt the ability of states to oversee and define how electric service is provided to DOD facilities." (113) This letter still distills the rationale of the electric utility industry in favor of Section 8093 into the same reasoning given in 1987: the hobgoblin of stranded rates and the passing of costs to consumers. (114) The justification given by the utility group ignores the well-settled legal principle of the cost causer as the cost payer, under the adversarial rate-making process. (115) Another, almost incredible argument posited by the letter is that the repeal of Section 8093 would exempt the federal government from the fundamental principle of states regulating intrastate transactions by creating a special exemption for federal facilities to take advantage of potential choices in electric utility service providers. (116) This argument ignores the U.S. Constitution's Supremacy Clause, (117) which makes federal law the supreme law of the land. (118) The argument also ignores that the market has changed in a way that already puts the same pressure on utilities via the policies and legislation discussed above in Section II. The hysteria over the possibility of federal agencies purchasing electricity on a competitive basis mirrors that which fueled the passage of the "Anti Dog-Eat-Dog Rule" in Atlas Shrugged. (119) The proposition that Section 8093's repeal somehow puts a unique pressure via stranded costs on utilities continues to exist at the heart of the utilities' argument. Therefore, it is appropriate to address this issue of stranded costs.
IV. DOES THE HOBGOBLIN OF STRANDED COSTS REALLY EXIST?
As noted above, the utility industry repeatedly uses the logic that if federal agencies are allowed to shop around for more economical utility solutions, stranded costs are inevitable, and those costs will be passed to other consumers. (120) The argument is convenient for the electric utility industry, as it is both simple and powerful. However, the more nuanced truth includes four factors that the electric utility industry rarely, if ever, takes into account as they make use of the stranded cost argument. First, the dogged justification for Section 8093, via the stranded cost argument, does not reflect the legal and regulatory reality. Second, stranded costs, in and of themselves, do not justify arguments against consumer choice. Third, the electric utility industry's stranded cost argument ignores their own obligation to mitigate stranded costs. Fourth, the electric utility industry ignores the development of a retail market in some states, which undercuts the stranded costs argument through cases proving that markets can effectively account for stranded costs. These factors seriously undercut the magnitude, effect, and legitimacy of the utilities' argument.
A. The Justification for Section 8093 Does Not Reflect Current Reality
The realities of the electric utility industry and the regulations governing it have outpaced the traditional stranded cost argument proffered by the electric utility industry as justification for Section 8093. This section of the article will discuss four aspects of the current environment that weigh against Section 8093. First, the electric utility industry does not possess a right to recover stranded costs under the Fifth Amendment of the U.S. Constitution). (121) Second, industry claims a regulatory compact justifies a right to stranded costs, but this argument relies on the now outmoded regulatory monopoly concept. Third, the U.S. Supreme Court does not and has not provided a right or guarantee to recovery of stranded costs, especially in today's changing environment. Fourth, the lack of right or guarantee for stranded cost recovery with the current changes in the electric utility industry and its regulation necessitates a shift in expectations regarding stranded cost recovery. This shift in expectation is simply that the outmoded concept of guaranteed recovery of stranded costs under the assumption of a regulated monopoly should not hinder a market that benefits customers, including the federal government.
1. Right to Stranded Costs and Fifth Amendment Takings Arguments
Stranded costs occur under circumstances when "the market fails to compensate utilities, via the price for power, in a way which allows the utility a fair rate of return." (122) Rate of return is the gain or loss of an investment over a specified period of time, expressed as a percentage of increase over initial investment cost. (123) The key question is whether utilities, as a matter of right, are allowed to recover stranded costs in the process of deregulation and movement toward a retail market. As in any move toward a competitive market, deregulation poses "a risky undertaking for both utility shareholders and ratepayers." (124) Resolving the key question of stranded costs requires balancing the economic benefits of deregulation with impermissible takings under the Fifth Amendment. (125)
Historically, rate regulation creates claims and litigation over unlawful confiscations contrary to the Fifth Amendment. (126) The question of unconstitutional takings of utility property, via rate of return on investment, is not new. (127) The electric utility industry's claim of right to these stranded costs is based largely on their reliance on a supposed "regulatory compact." (128) The process of deregulation and movement of regulatory emphasis to a competitive retail market has simply shifted the concern over potential unconstitutional takings into a new context. (129)
2. The Regulatory Compact and the Takings Argument
The regulatory compact is "the relationship created by a government-regulated monopoly: the government grants a utility a captive market in return for the ability to regulate the utility's price and requires the utility to serve all customers reliably." (130) To the industry's credit, the compact has been the basis for their ability to rely on a constant customer base as a basis for incurring "significant infrastructure costs such as building power plants and transmission lines and entering into long-term contracts in order to meet future electricity demand." (131) The move towards deregulation potentially leaves at least some players in the electric utility industry without an opportunity to fully recover on some of their investments. The electric utility industry, in formulating its stranded cost arguments, ignores some current realities that serve to mitigate the damages they claim from the process of deregulation and movement toward a retail market.
Changes in technology have caused a significant decline in the cost of building new generation units. (132) Newer gas-fired combustion turbines are smaller, more efficient, and can be built more quickly than units built in the past. (133) The passage of the statutes and regulations concerning improvements in transmission and distribution, discussed above, has resulted in the ability for electric utilities to participate in long-distance power sales.
While means of mitigating stranded costs do exist, some potential for stranded costs in deregulation remain. (134) This potential is posed by the competition with new market entrants that are not saddled with paying debts incurred in the building of larger, more cost-intensive nuclear and coal plants. (135) Established utilities also "labor under inefficient long-term contracts based upon planning assumptions that failed to account for the changing market." (136) Even the passage of the statutes and regulations, such as EP Act of 1992, accounts for some risk for established utilities. The purchase of power from Qualified Facilities (QFs) (137) established under PURPA at an avoided cost rate was more often than not based on long-term fuel forecasts that have proven to be extremely high. (138) A common thread runs through each of these risks: they result from business decisions based on an assumption that the utilities are part of a regulatory compact. (139)
This regulatory compact is not a signed agreement. It is a concept that largely exists to protect the interests of utilities. (140) As such, the stranded costs argument is a claim that a proposed course of action impairs rights, which are not established by contract. That is, the argument relies on the authority of the Takings Clause of the Fifth Amendment. The U.S. Supreme Court articulated a test specifically for determining unconstitutional takings in the context of regulatory action. (141)
3. The U.S. Supreme Court and Stranded Cost Arguments
The U.S. Supreme Court articulated two principal factors in Duquesne Light Co. v. Barasch to consider when evaluating whether a taking has occurred. (142) First, the court should determine whether the slightly reduced rates jeopardize the financial integrity of the companies, either by leaving them insufficient operating capital or by impeding their ability to raise future capital. (143) Second, the court should consider whether the rates are inadequate to compensate current equity holders for the risk associated with their investments under a modified prudent investment scheme. (144) The second prong of the test specifically takes into account "whether the shareholder's investment expectations have been protected, [and] compares the rate of return allowed by the state [as regulator] to the return on investments with a commensurate level of risk." (145) The Duquesne Light Court further noted that a regulator may regulate an industry in a manner which has a detrimental economic effect on a business without causing a taking of property that requires compensation. (146) In addition, the U.S. Supreme Court has considered the interest of the public as a factor in the determination as to whether a regulatory action is confiscatory. (147) Commentators have observed that the open-ended treatment of the matter by the U.S. Supreme Court potentially gives lower courts and state power commissions "license to sacrifice the financial viability of utilities in the interest of economic efficiency." (148)
Federal Power Comm 'n v. Hope Natural Gas, a seminal case in the jurisprudence of rate-making, even lends support to the "idea that a strong public interest can justify an unlimited amount of utility property loss." (149) The Hope Natural Gas decision can be "interpreted as allowing a strong public interest to justify destruction of a utility's financial integrity." (150) Further, the current trend toward deregulation and movement toward a retail electric utility market changes the basic assumption and underpinnings of utilities' stranded cost and unconstitutional takings arguments. (151) When electric utilities can no longer claim captive markets and guaranteed customers, they also cannot hold the expectation that their takings claims should be analyzed within the framework developed for regulated monopolies. (152) Under the emerging framework for analysis, the interests of the shareholders and the public will certainly change. (153) Absent the existence of the same rate of return expectations for investors under the regulated monopoly scheme, the application of the same analysis under a deregulated, retail market is inappropriate and makes no sense. (154)
These shareholder expectations should be viewed in relation to the actual deregulation process and its product, rather than the appropriate rate of return analysis under the traditional model of a regulated monopoly. (155) Courts have consistently noted that investor interests are only one factor that the Commission should consider in setting just and reasonable rates. (156) However, the floor for investor interests is the observation by the Ohio State Supreme Court that the "Constitution no longer provides any special protection for the utility investor." (157) Utilities are not guaranteed net revenues. Utilities and their investors bear the risks of unprofitability and diminished financial integrity. (158)
On the other hand, consumers' interests, absent a regulatory monopoly, are not tied to a particular utility. (159) Under a deregulated retail market customers have a number of choices if their local utility becomes insolvent. (160) Along the same vein, customers who believe that their utility can no longer reliably provide electric utility service can find another provider. (161) While the customers' new interests in an emerging retail market may not be sufficient to unconstitutionally take from utilities under the Fifth Amendment via stranded costs, the interests of utilities and consumers are sufficiently different to force a new way of looking at stranded costs and unconstitutional takings. (162) That is, the potential for stranded costs and loss to the utility and investor is no longer a barrier to changes that benefit the consumer. (163)
4. Synthesis: Changes Mean a Needed Shift in Expectations for Stranded Costs
In light of the deregulation and movement toward a retail market, the electric utility industry's bare argument for stranded costs, whether recovered from customers, or passed on to investors, or decried as an unconstitutional taking, does not justify a claim of entitlement. As noted above, determination of stranded costs first requires a determination by the adjudicator that there is a wrongful taking, not simply an unpalatable decision. Second, the interests of the utilities and their investors are weighed against the interests of the party they exist to serve: the customer. The basis of the relationship under both case law and state statute and regulation is that the party with primacy is the customer, with the utility obligated to provide reliable service. (164) Under the current circumstances, because the utilities' and customers' interests are becoming widely divergent, there is no longer room for the assumption that stranded costs are a matter of entitlement and can block development of a more beneficial market for the customer. Further, aspects of the concept of stranded costs itself cut against its use as a talisman against consumer choice.
B. Stranded Costs Do Not Justify Arguments against Consumer Choice
The concept of stranded costs and realities that undergird that concept do not justify their use as a means to argue against government action to benefit consumers by offering choice. As the electric utility industry makes its standard costs argument it ignores three basic aspects of the concept. First, stranded costs as a potentially recoverable cost exist as an artifact of regulated monopolies. The notion that utilities may recover such costs, as opposed to absorbing them as a cost of doing business, exists to make more palatable the uneconomical investments in infrastructure that are necessary to reliably serve all customers. Second, quantification of stranded costs, by its very nature, is prospective and imprecise and does not justify use of the concept as a complete defense to deregulation in favor of consumer benefit. Third, the fact that stranded costs are already a cost of doing business in the electric utility industry undermines the concept as a complete defense to the Federal Government competitively obtaining electricity.
1. Stranded Costs Were Invented in Aid of Consumers, Not Utilities Over Consumers
Stranded cost recovery potentially creates conditions for inefficiency in both production and allocation. (165) Productive inefficiency is the result of utilities using more resources than really required to deliver services. (166) Allocative inefficiency is the result of the utility setting the price of the service above the marginal cost to provide the service. (167) The root of this argument is that, if utilities are allowed to recover any and all costs incurred, however imprudently, then the process of regulation rewards inefficiency. (168) Laura Starling provides a poignant hypothetical example: should utilities be allowed to recover the stranded costs, say for a nuclear power plant, built in the face of signals that suggested the utility should have cut back on production? (169) To allow such costs as a matter of entitlement and without holding utilities responsible for business risk, results in a burden that will inevitably fall on the consumers, because the utility will not choose to burden its investors, despite their risk in investing. (170) Further, the very formulation of stranded costs casts doubt at least as to the amount of the stranded costs claimed. (171)
2. Stranded Costs Are Imprecise, Prospective and Do Not Justify Refusal to Change to Benefit the Consumer
The concept of stranded costs is often simply couched as fixed costs of a generating plant, for example, that have been expended with little or no ability to recover the stranded costs via future sales. (172) In an example provided by Gregory Basheda, et al., in "The FERC, Stranded Cost Recovery, and Municipalization", a utility expends $50 million in anticipation of complete recovery of their investment in a regulated environment. However, after deregulation the forecasted earnings drop to $40 million, resulting in $10 million of stranded costs. (173)
This basic formula for determining stranded costs is not as difficult and fraught with uncertainty as the real-world determination that requires prospective measurement and forecast of stranded costs before they can be known. (174) Even if one can assume that the prospective measurements and costs can be forecast accurately, the true or actual stranded costs are determined based on the difference between what present and future regulators would have allowed. (175) In a best case scenario, regulators control one-half of this equation. (176) The other half of the equation is determined later, in the actual marketplace. (177) Basheda, goes so far as to conclude that the FERC model for stranded cost recovery poses significant threat of inaccuracy and misuse, contains inherent inaccuracies, and requires exceptional care in its application to avoid miscalculation. (178) The cure posed by the process of recovering stranded costs contains enough peril and uncertainty to make preferable the malady of foregoing the costs in favor of the customer's interest. Since stranded cost recovery presupposes that regulation should protect the utility's interest over the consumer's, little incentive remains for smart economic behavior by utilities. (179) The stranded cost argument also ignores the fact that utilities already operate with stranded costs as a part of business. (180)
3. Stranded Costs Are Already a Part of Doing Business
Electric utilities, as regulated entities, base investment decisions on factors that are significantly different than entities operating in a competitive market. (181) Regulated electric utilities may make investment decisions "based on requirements imposed by the state, for political reasons, or other factors." (182) Scott B. Finlinson, in his article "The Pains of Extinction: Stranded Costs in the Deregulation of the Utah Electric Industry," discusses such situations that already would result in stranded costs for utilities.
This process generates two types of situations that can result in stranded costs. In the first instance, an electric utility may undertake an economically unfeasible, yet necessary, project.... In the second instance, noneconomic factors may induce an electric utility to undertake an economically unsound project.... The project, or the assets built by the project, become stranded when the electric utility cannot recover its fixed costs in running the asset out of the market price of electricity. (183)
Other sources for potential stranded costs, aside from those potentially posed by deregulation of the electric utility market include:
(1) investments in generation assets whose market values may have declined below book values; (2) long-term agreements to purchase fuel or deliver electricity at prices that may no longer be competitive; (3) 'regulatory assets' that represent previously incurred expenditures whose collection has been deferred by regulators; and (4) state-mandated participation in 'energy welfare' programs, such as subsidies to renewable energy providers and low income consumers. (184)
As a matter of fact, Ajay Gupta, in his article "Tracking Stranded Costs," notes that significant stranded costs existed within the electric utility industry before deregulation was introduced in any state:
[Baxter and Hirst estimated] stranded costs ... before deregulation was introduced in any state. Baxter and Hirst examined 160 investor-owned utilities in the United States and concluded that 153 of them would face some stranded costs under competition. Of these, 17 have stranded costs that exceed 100% of their equity, and another 120 have stranded costs between 10 percent and 100 percent of their equity. Baxter and Hirst estimated the utilities total stranded costs at $68.8 billion, a figure that represented 38% of their combined equity. (185)
Baxter and Hirst's observation in early-1995, fourteen years ago--and two years after the Energy Policy Act of 1992 largely opened the door to deregulation and the development of a retail market--indicates that the issue of stranded costs is a long-standing issue that utilities have continued to ignore, despite deregulation. If anything, Gupta's observations show that stranded costs are a problem that often occurs independently of deregulation. (186) Moreover, as discussed in Section III, it shows that the electric utility industry, in the face of significant deregulation, gambled foolishly by failing to adapt beyond old arguments and assumptions. The industry's reliance on stranded costs to ward off any attempts at deregulation, or even repeal of Section 8093, is misplaced and illegitimate.
C. The Stranded Cost Argument Ignores the Obligation to Mitigate Stranded Costs
When arguing in support of Section 8093, the industry also fails to address mitigation of stranded costs, as noted in Section II. The legal regime and overall energy policy that has unfolded over the past 30 years provides a means for mitigating stranded costs, which utilities are obligated to use. (187) A unifying theme, noted by Gregory Basheda, among industry stranded cost policies is the notion that "utilities should pursue all reasonable measures available to reduce or 'mitigate' stranded costs." (188) One means of mitigation occurs through sale of now unused capacity on the market. (189) When a customer group leaves a utility, the most direct way of recouping stranded costs is to put the excess capacity on the market at the highest possible price. (190) To assume that selling electricity as a commodity is not a viable option is tantamount to assuming that utilities will be unable to sell a valuable commodity in a market facing a shortage in supply. (191) The Federal Energy Regulatory Commission's own formula concerning stranded costs illustrates this reasoning. (192) The formula used by FERC stands for the proposition that: "lost revenues are to be mitigated by the revenues received from the sale of the stranded capacity and/or power generated by the stranded capacity, so the [Stranded Cost Obligation] is reduced by [Competitive Market Value Estimate], the revenues gained from mitigation via sale of power." (193)
Another means by which stranded costs are mitigated, though not by the utility's affirmative action, is displacement. (194) Basheda describes the concept of displacement:
If the customer group leaves, the utility sells 500,000 MWh less power to its remaining customers and receives $15 million per year less in revenue. However, the utility also eliminates the power purchase, reducing its costs by $10 million. Since the utility has lost $15 million, but has to pay $10 million less in power costs, it would seem that its stranded cost is $5 million. (195)
The above example is not proffered to be a one-size-fits-all explanation or solution to the problem posed by stranded costs. It also does not illustrate that there will be no cost to utilities. However, it does illustrate an instance where utilities overstate stranded costs and their effects. It also calls into question whether the problem of stranded costs is as dire, simplistic, or automatic as the electric utility industry would have policymakers believe. While this article does not attempt to encourage ignorance of the concept of stranded costs and their effect on utilities, policy makers must also focus on the fact that mitigation is not only a possibility, but an obligation on the part of utilities. (196)
A basic premise of American contract law states that the party entitled to compensation for damages is obligated to mitigate those damages. (197) Accordingly, contract case law also includes an obligation for parties in a position to mitigate loss to do so. (198) The Federal Energy Regulatory Commission's 1994 Notice of Proposed Rulemaking on the subject of stranded costs addresses this obligation. (199) Baumol and Sidak highlight the commission's observation that "the problem of distribution of loss among departing customers, remaining customers, and shareholders of the utility only arises '[i]f the utility does not have an alternate buyer for the power previously sold to the departing wholesale requirements customer, or some other means of mitigating the stranded costs....'" (200) In a market facing a supply shortage, a utility should only be unable to mitigate stranded costs if it chooses to not sell power to alternate buyers. (201) While there is a legal and regulatory obligation to mitigate stranded costs, obligations to customers and legal obligations to the business entity, itself, also require mitigation of stranded costs. (202)
As previously discussed, the utility is obligated to mitigate stranded costs regarding customers, because the legal test in Hope Natural Gas requires that the cost causer be the cost payer. (203) Despite assertions to the contrary in the comments made at the initial passage of Section 8093 and the letter opposing its repeal, the stranded costs are not simply automatically passed to other customers. (204) As discussed above in Section IV.A.3, the utility is loath to simply pass the purported loss represented by stranded costs to investors, because it would diminish the utility's ability to raise capital. (205) This occurs where utilities diminish the rate of return to investors on their investment by passing losses via stranded costs to investors, instead of consumers. (206) The utilities, by their own argument, cannot simply absorb the stranded costs. These conditions lead to the conclusion that utilities ignore: mitigation is a business necessity. Utilities also ignore that it is in their interest to mitigate stranded costs. (207)
As illustrated by Baumol and Sidak, in their article "Stranded Costs":
Though it is clear the utility's duty to mitigate stranded costs serves the interests of consumers, on closer inspection it is also clear that mitigation serves the utility's best interest as well. This is so because the utility's customers do not have contracts that terminate simultaneously. As customers with early expiration dates depart, they leave the as-yet-unrecovered portion of stranded costs to be borne by a dwindling number of remaining customers. But the overwhelming number of those remaining (commercial and industrial) customers can be presumed to operate in competitive market for their own goods and services. A firm in a competitive market that is made to pay a higher price than its rivals for an essential input such as energy, particularly for the extended term envisioned in the typical supply contract, will suffer losses and eventually will cease operations. Companies that cease operations do not buy any electricity, even if they remain contractually obligated to do so. Knowing that it cannot bankrupt its remaining customers in this manner, the utility has a strong incentive to find new customers for its excess capacity. The obligation illustrates that the interests of the utility and consumers are indeed often entirely compatible, despite appearances to the contrary. (208)
The power of the above example does not just stem from what it says, but also from what it does not say. (209) It does not presume that passing stranded costs on to other consumers is inevitable. (210) In addition, it does not expend time addressing the obvious obligation of corporate officers to make decisions in the best interests of the utility as a business entity. (211) If the example is taken to its logical conclusion, the utility that fails or refuses to mitigate will place itself in a position of progressively suffering increasing unrecoverable stranded costs, until it becomes financially unviable. (212) If one couples the above example with the fact that the utility is constrained from automatically passing the costs of departing customers to remaining customer by operation of law, as noted above, and is obligated to take steps in the interests of the survival of the corporate entity, the motivation of the utility to mitigate is very powerful.
The discussion above concerning the existence, nature, and possible mitigation of stranded costs, as an impediment to the repeal of Section 8093, has been based, admittedly, on academic discussion and what the electric utility industry may call conjecture. However, the body of law and emerging policy of the United States concerning the nature of the electric utility industry have not occurred in a vacuum and have had an impact on the way the electric utility industry does business. The experience of the industry and its regulators under the new and emerging policy and legal regime provides another part of the answer to the electric utility industry's cries of stranded costs both in the face of deregulation and repeal of Section 8093. This experience has provided a number of examples of states and the federal government providing a means for dealing with stranded costs in the face of deregulation.
D. Stranded Costs Argument Ignores States Already Dealing With Stranded Costs
The electric utility industry ignores the facts that policy has worked against Section 8093 over the past three decades, that stranded costs are not as monolithic as they claim, and that there are ways around the stranded cost problem. The electric utility industry is also slow to acknowledge that many states either have or are developing means to deal with stranded costs in the face of deregulation. As before, these do not purport to be a one-size-fits-all solution to the problem, but the examples point out what utilities are loath to admit: there are ways to survive deregulation and the repeal of Section 8093. Each of the examples below provides one of a myriad of ways of coping with the challenge and excuse of stranded costs as an impediment to useful deregulation of the industry.
1. FERC Order No. 888 Requirements for Dealing With Stranded Costs
When it established requirements for dealing with wholesale stranded costs, FERC's stated purpose was to embody: "FERC's belief that utilities that made large capital expenditures or long-term commitments to buy power many years ago should not now be held responsible for failing to foresee the fundamental changes in the industry that are now being imposed." (213) Based on this premise, FERC determined that its stranded cost policy should allow utilities "to recover legitimate and verifiable stranded costs associated with the development of competitive wholesale markets." (214) Based on the above premises, FERC promulgated Order 888 with two general principles in mind. (215) First, FERC proffers the opportunity for the departing customers to pay stranded costs via an exit fee. (216) As above, the exit fee to be paid must be based on legitimate and verifiable stranded costs. (217) The concept of the exit fee is to allow for a balance between allowing the utility to recover some stranded costs from the customer, while allowing the customer the right to change. (218) Second, FERC Order 888, as noted by Scott Finlinson, provides that the "recovery of retail stranded costs through FERC-jurisdictional rates is available only if the state regulatory body lacks, or expressly declines to assert, authority under state law to address stranded costs when retail wheeling is required." (219) In other words, the FERC means of addressing stranded costs under its jurisdiction is only available if the states, who exercise primary jurisdiction in the matter, do not or cannot address these costs. (220) As noted below, a number of states have addressed the issue of stranded costs in the process of deregulating the electric utility industry and market.
2. The Number of Ways Ahead for Dealing With Stranded Costs in Deregulation
Since 1995 a number of states, including California, New Hampshire, Rhode Island, Massachusetts, Maine, and Pennsylvania, have dealt with stranded costs as a part of deregulation and movement from deregulated monopolies. The State of California's plan to deal with stranded costs include recovery through a Competitive Transition Charge (CTC) assessed to all customers, along with an initial rate reduction and later price freeze under which it would allow recovery of stranded costs. (221) California's plan also provides for "a special class of bonds to finance and buy out utilities' stranded costs," (222) and subsidization of the process by taxpayers.
The State of New Hampshire, in its plan, provides for a balancing of interests as a part of the ratemaking process before the utility commission. (223) The balance "lies in the interests of the ratepayers and utilities against the public interest." (224) The New Hampshire plan focuses on determining (1) the legitimacy of net stranded costs and (2) ensuring fair application of the burden of stranded costs, along with required mitigation of costs. (225)
The State of Rhode Island's plan authorizes a transition charge for wholesale electricity suppliers as a means to recover stranded costs. (226) Rhode Island's plan seeks to roughly spread the burden of stranded costs across the customer base, while using a performance-based rate system to "prevent residential customers from paying higher rates as a result of higher competition." (227)
The plan utilized by Massachusetts generally follows the FERC Order No. 888 framework, because it creates a new deregulated industry with an Independent System Operator (ISO) and power exchange system with divested generation and transmission services. (228) The Massachusetts stranded cost recovery plan centers around phased incentives to break down utilities into separate generation, distribution, and transmission entities. (229) Recovery of proven, mitigated stranded costs would then occur through the sales of electricity and transmission services. (230)
The plan proffered by the State of Maine is very similar to the Massachusetts plan, but Maine requires divestiture of assets during the conversion to a retail market. (231) The plan proffered by the State of Pennsylvania calls for a fair and accurate determination of what the stranded costs are, the proper apportionment of the pro rata costs among customers leaving the incumbent electric utility service, and an assessment of a transition charge to help defray the stranded costs. (232)
As noted in the subheading title, the number of ways of dealing with stranded costs is as significant, if not more so, than the methods of dealing with stranded costs, themselves. The bite of the stranded cost argument loses its potency when stranded costs have already been an issue necessarily dealt with in the deregulation plans. Whether the utilities like the movement from the relative safety of regulated monopolies or not, the fact is that the movement is occurring and the issue of stranded costs is being addressed.
E. Recap: What All of This Discussion of Stranded Costs Means
What good does the above discussion of stranded costs do for the case for repealing Section 8093? The above discussion distills into four, simple propositions:
(1) Stranded costs did not and do not represent a viable reason for keeping Section 8093.
(2) The electric utility industry ignores that the stranded costs they claim, in the event of the repeal of Section 8093, are subject to analysis for viability, determination of correct assessment to customers, and mitigation required under law.
(3) Stranded costs already exist in the normal way of doing business in the electric utility industry, and utilities and regulatory bodies already deal with them on a fairly regular basis.
(4) Recent regulatory history is replete with examples of states---only some of which are noted above--that either have or are already dealing with the stranded cost issues within the context of deregulation.
The unchanged industry rationale, in the face of decades of changes in laws, regulations, and policy, does not justify a refusal to repeal Section 8093. Further, the impact of electric utility service purchase on the federal budget and the obligation to practice responsible stewardship provide even more justification for the repeal of Section 8093.
V. THE OBLIGATION OF RESPONSIBLE STEWARDSHIP
As noted above, the federal government literally spends billions of dollars per year on electric utility services and is the largest single consumer of electricity in the United States. (233) Untold millions of dollars are lost each year Section 8093 prevents the federal government from purchasing electric utility services on a competitive basis. (234) One estimate, as of 1996, put the figure at "up to $400 million." (235) For the Department of Defense, this money comes from Operations and Maintenance budgets. (236) The money that finances the Department of Defense comes from federal taxpayers' money. (237) As the predecessor to the Competition in Contracting Act of 1984 states, the goal of the procurement system is to "[ensure that] the procurement will be made to the best advantage of the Government." (238) Because the hand of federal agencies is fettered by a statute that forces them to purchase from state-sanctioned monopolies, the government loses untold millions of dollars per year. (239) The Competition in Contracting Act requires full and open competition to get the best value for the government, and the provisions of Section 8093 call for the opposite in the name of utilities' financial security, in the face of a utility market that has steadily changed over the past three decades to make retail competition more commonplace. Simply put, despite a general rule that requires it to use full and open competition, the Department of Defense is one of the last hold-outs to take advantage of the competitive electric utility market, with the untold millions of dollars belonging to the Operations and Maintenance budgets of the Department of Defense--and the federal taxpayers--hanging in the balance.
Francisco d'Anconia, in his moment of denouement in Atlas Shrugged, provides the best explanation for the existence of Section 8093. (240) As d'Anconia ponders the ruins of the work of his and his family's lives, he recalls the government regulations passed to cripple the successful businessman and aid competitors, "because they were loafing failures." (241) John Gait, in his climactic speech in Atlas Shrugged, lays bare the substance of the book's plot, and the theme that mirrors the basis of arguments against Section 8093:
The symbol of all relationships among such men, the moral symbol of respect for human beings is the trader. We, who live by values, not by loot, are traders, both in matter and in spirit. A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures, nor does he ask to be loved for his flaws.... The mystic parasites who have, throughout the ages, reviled the traders and held them in contempt, while honoring the beggars and looters, have known the secret motive of their sneers: a trader is an entity they dread--a man of justice. (242)
Why does the electric utility industry seek the preservation of Section 8093 in the face of an industry and market changing in favor of consumer choice over the past three decades? Where is the justification for an anti-competitive statute, under which the federal government is subject to the laws of the states and local monopolies? The answer to both questions is simple: the utilities would have the federal government reward protectionist regulatory practices that soak both the federal government and its taxpayers.
The provisions of Section 8093 are not grounded in existing or even viable federal policy. They exist only to protect the interests of an industry attempting to resist change in the face of a changed reality, and they waste millions of dollars of taxpayers' money. The law, ill-founded as it is, continues to be at odds with the emerging electric utility industry and the laws and policy governing it. The use of stranded costs as a talisman against change that is inconvenient, but consistent with prevailing laws and policy, makes little sense. Furthermore, the anticipated impacts are exaggerated and fail to account for the fact that stranded costs are already a part of doing business. The longer the law remains in effect, the longer the federal government and the federal taxpayers pay for the convenience of the utilities. In this same vein, the "Atlas Shrugged" conclusion finds the Constitution being amended to prohibit laws fettering free trade. (243) Similarly, our means of unfettering free trade and relieving unfair burdens from federal taxpayers' shoulders is to recognize that Section 8093 is a non-competitive law enacted solely for industry's convenience, and repeal Section 8093.
(1) Stephen Moore, 'Atlas Shrugged': From Fiction to Fact in 52 Years, WALL ST. J., Jan. 9, 2009, at W11.
(3) The provisions of Section 8093 were originally passed as a part of the Continuing Authorization Act of 1988. See Pub. L. No. 100-202, 101 Stat. 1329-79. These provisions were later codified at 40 U.S.C. [section] 490, as a note under the statute, in the 104th Congress. See Pub. L. No. 104-208, 110 Stat. 3009 (1996). However, practitioners continue to refer to the provisions as Section 8093. See, e.g., infra notes 65 and 120 and accompanying text; see also GENERAL SERVS. ADMIN., ET AL. FEDERAL ACQUISITION REG. pt. 41.201(d)(1) (Jan. 2009) [hereinafter FAR]. The final version of these provisions were codified at 40 U.S.C. [section] 591. See Pub. L. No. 107-217, 116 Stat. 1062 (2002). The provisions of 40 U.S.C. [section] 591, which substantially mirror the provisions of previous legislation, are as follows:
[section] 591. Purchase of Electricity
(a) General limitation on use of amounts. A department, agency, or instrumentality of the Federal Government may not use amounts appropriated or made available by any law to purchase electricity in a manner inconsistent with state law governing the provision of electric utility service, including--
(1) state utility commission rulings; and
(2) electric utility franchises or service territories established under state statute, state regulation, or state-approved territorial agreements.
(1) Energy savings. This section does not preclude the head of a federal agency from entering into a contract under section 801 of the National Energy Conservation Policy Act (42 U.S.C. 8287).
(2) Energy savings for military installations. This section does not preclude the secretary of a military department from--
(A) entering into a contract under section 2394 of title 10; or purchasing electricity from any provider if the Secretary finds that the utility having the applicable state-approved franchise (or other service authorization) is unwilling or unable to meet the unusual standards of service reliability that are necessary for the purposes of national defense.
40 U.S.C. [section] 591 (2006).
(4) AYN RAND, ATLAS SHRUGGED (Penguin Group 1999) (1957). Significant among the pieces of legislation in the novel is the "Anti Dog-Eat-Dog Act," which curbed "destructive" competition in favor of "large, established railroad systems ... essential to the public welfare." Id.
(6) Adam Thierer, Electricity Deregulation: Separating Fact From Fiction in the Debate Over Stranded Cost Recovery, HERITAGE FOUNDATION (1997). As to "regulatory compact," Thierer's report notes:
The notion of a regulatory compact ... was largely invented by utilities to justify a regulatory system that is biased against the interests of consumers and in favor of utilities. "Because regulatory commission across the United States gradually came to an unstated conclusion that it was more important to protect the health of companies they regulated than the interests of customers, an entitlement mentality was born and nurtured among utilities."... [This] entitlement mentality led to a rate-of-return mindset ... which in turn "leads utilities to the unsupportable conclusion that they own their current customers; that these customers have always been their clientele; that they have served them throughout their corporate life; and, therefore, that these customers are obliged to pay for their losses in the future."
(7) Leigh H. Martin, Deregulatory Takings: Stranded Investments and the Regulatory Compact in a Deregulated Electric Utility Industry, 31 GA. L. REV. 1183 (1997). "Stranded costs" occur under circumstances where the market (including demand represented by customers) fails to compensate utilities, via the price for power, which allows the utility a "fair rate of return." Id. at 1183. "Rate of return" is the gain or loss of an investment over a specified period of time, expressed as a percentage of increase over initial investment cost. Id.; see also discussion infra Section IV.A.1.
(8) See Pub. L. No. 100-202, 101 Stat. 1329-79.
(9) Black Hills Power & Light Co. v. Weinberger, 808 F.2d 665 (8th Cir. 1987). "Congress has the power 'to exercise exclusive Legislation ... over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings." Id. at 668 (citing U.S. CONST. art I, [section] 8, cl. 17). "The grant of 'exclusive' legislative power to Congress over federal enclaves, by its own weight, bars state regulation without specific congressional approval." Id. at 668 (emphasis added).
(11) Id. The Black Hills court noted an important distinction between jurisdiction over state-owned land and that over a Federal enclave, as articulated by the U.S. Supreme Court in Penn Dairies, Inc. v. Milk Control Comm'n of Pa., 318 U.S. 261 (1943). The Penn Dairies decision was predicated on a situation where an Army post was established on Pennsylvania state lands (not a Federal enclave). In this instance, the Court noted:
We have recognized that the Constitution presupposes the continued existence of the states functioning in coordination with the national government, with authority in the states to lay taxes and to regulate their internal affairs and policy, and that state regulation like state taxation inevitably imposes some burdens on the national government of the same kind as those imposed on citizens of the United States within the state's borders.... Since the Constitution has left Congress free to set aside local taxation and regulation of government contractors which burden the national government, we see no basis for implying from the Constitution alone a restriction upon such regulations which Congress has not seen fit to impose, unless the regulations are shown to be inconsistent with Congressional policy.
Id. at 270-1 (citation omitted); see also U.S. DEP'T OF AIR FORCE, INSTR. 32-9001, ACQUISITION OF REAL PROPERTY attach. 2 (27 July 1994) (descriptions of jurisdictional types). The Black Hills court noted another aspect of the limits of exclusive federal jurisdiction over federal property. The court cited to the Pacific Coast Dairy, Inc. v. CA Dept. of Agric., 318 U.S. 285 (1943), where the Court stated:
When the federal government acquired the tract, local law not inconsistent with federal policy remained in force until altered by national legislation. The state statute involved was adopted long after the transfer of sovereignty and was without force on the enclave. It follows that contracts to sell and sales consummated within the enclave cannot be regulated by California law. To hold otherwise would affirm that California may ignore the Constitutional provision that "This Constitution, and the laws of the United States which shall be made in pursuance thereof; shall be the supreme Law of the Land."
Id. at 294 (footnotes omitted).
(12) Public Utility Regulatory Policies Act of 1978, Pub. L. No. 95-617, 92 Stat. 3117 (1984).
(13) Competition in Contracting Act of 1984, Pub. L. No 98-369, Title VII, [section] 2701, 98 Stat. 1175 (1984) (codified in part as amended at 10 U.S.C. [section] 2304 (2006)).
(14) See generally Federal Power Act of 1935, Pub. L. No. 74-838, 49 Stat. 863; supra note 11 and accompanying text.
(15) 133 CONG. REC. H. 6320 (July 15, 1987). Specifically, Section 8093 was justified as a means of preventing the federal agencies from "disregard[ing]" the "long-established regulatory system," where the states regulate retail sale and distribution of electricity" within the states. Id. The need to pass a provision to prevent federal agencies from buying utility service outside of state regulation does not agree with the assertion that federal law somehow prevented them from doing so in the first place.
(16) See generally Public Utility Regulatory Policies Act of 1978, Pub. L. No. 95-617.
(17) AMY ABEL, SPECIALIST IN ENERGY POLICY RES., SCI., &. INDUS. DIV., CONG. RES. SERV., ELECTRIC UTILITY REGULATORY REFORM: ISSUES FOR THE 109TH CONGRESS (2005), available at http://ncesonline.org/NLE/CRS/abstract.cfm?NLEid=1416. The historical background provided in FERC Order No. 888 provides a good overview of PURPA and its impact on the electric utility industry.
In enacting PURPA, Congress recognized that the rising costs and decreasing efficiencies of utility-owned generating facilities were increasing rates and harming the economy as a whole. To lessen the dependence on expensive foreign oil, avoid repetition of the 1977 natural gas shortage, and control consumer costs, Congress sought to encourage electric utilities to conserve oil and natural gas. In particular, Congress sanctioned the development of alternative generation sources designated as "qualifying facilities" (QFs) as a means of reducing the demand for traditional fossil fuels. PURPA required utilities to purchase power from QFs at a price not to exceed the utility's avoided costs and to sell backup power to QFs.
Fed. Energy Regulatory Comm'n (FERC) Order No. 888, 21-22 (Apr. 24, 1996).
(19) Public Utility Regulatory Policies Act of 1978, Pub. L. No. 95-617, 92 Stat. 3134-35 (1984).
(20) Id. at 3135-38.
(21) Id. at 3119, 3135-38.
(22) See sources cited supra note 14.
(23) See supra notes 16-22 and accompanying text.
(24) FAR, supra note 3, pt. 41.103 (a).
(25) See 10 U.S.C. [section] 2304 (2006).
(27) See 10 U.S.C. [section]2304(c)(5) (2006).
(28) See Black Hills Power & Light Co. v. Weinberger, 808 F.2d 665 (8th Cir. 1987).
(31) Black Hills Power & Light Co. v. Weinberger, 1985 U.S. Dist. LEXIS 14879, at *6-7 (D.S.D. Oct. 16, 1985); see also U.S. CONST. art. VI, [paragraph] 2 ("The Supremacy Clause").
(32) Id.; see also Black Hills, 808 F.2d 665.
(33) Id. at 668.
(34) Can the Pentagon Wheel and Deal With the Best?, ENERGY ECON., Nov. 1, 1996.
(35) See 133 CONG. REC. H. 6320 (July 15, 1987). The record states:
I consider it unwise and inappropriate for Federal agencies to administratively alter the long-established Federal-State relationship in this area of energy policy. Since 1935, the authority to regulate the retail sale and distribution of electricity has been expressly reserved to the States. For decades, state autonomy in this area has been steadfastly preserved by Federal statute. Without [Section 8093], we will take the first step towards dismantling this long-established regulatory system. We will then permit the Federal Government--the nation's largest single electricity consumer--to disregard the rules which govern all other participants in the heavily-regulated market for retail electric service.
(38) See supra notes 8-13 and accompanying text.
(39) Can the Pentagon Wheel and Deal With the Best?, supra note 34. The process of including Section 8093 in the Continuing Authorization Act of 1988 is described as follows:
The soft-spoken but effective [Mel] Hall-Crawford did what a good lobbyist should do. Skillfully by-passing the Energy Committee and assisted by Senator J. Bennett Johnston (D-Louisiana), via some jiggery-pokery in the Rules Committee, where her husband George was a staffer, she quietly slipped into the 1988 Defense Authorization Act, Section 8093, an amendment that forbade the military from competitively bidding for electricity, even though the military nowadays puts out to competitive bidding every other supply, from paper clips to natural gas to jet fighters. Section 8093 mandated that the military buy its electricity from the state-franchised IOU.
(41) See 133 CONG. REC. H. 6320 (July 15, 1987).
(43) Id (emphasis added).
(44) See discussion supra Section II.A.
(45) See generally Federal Power Act of 1935, Pub. L. No. 74-838 (1935) (codified at 16 U.S.C. [section][section] 791a-828c (2006)).
(46) 133 CONG. REC. H.6320. The statement relays, in pertinent part: "If we allow this to happen--if nonutilities are allowed to bid for the Federal Government's electricity needs--then utility rates will inevitably rise for consumers who reside in areas where there is a military base or other large Federal establishment." Id.
(47) Id. The assertion that any stranded costs will automatically be shouldered by customers, other than Federal customers in their absence, is disingenuous, given that the following is also a part of the same statement. "Under the present system, the Federal Government is not being charged too much for its electricity. Utilities are highly regulated industries and state public utility commissions are effective in preventing all utility customers--including the Federal Government--from being charged excessive utility rates." Id.
(48) See KN Energy, Inc. v. FERC, 968 F.2d 1295 (D.C. Cir, 1992). The D.C. Circuit noted:
Section 4 of the [Natural Gas Act] is the touchstone in any legal analysis of FERC-approved rate schemes. Its Spartan language requires only that rates be "just and reasonable." Significantly, however, FERC and the courts have added flesh to these bare statutory bones, establishing what has become known in Commission parlance as the "cost-causation" principle. Simply put, it has been traditionally required that all approved rates reflect to some degree the costs actually caused by the customer who must pay them.
Id. at 1300-01. The D.C. Circuit previously stated:
While neither statutes nor decisions of this court require that the Commission utilize a particular formula or a combination of formulae to determine whether rates are just and reasonable, it has come to be well established that ... rates should be based on the costs of providing service to the utility's customers plus a just and fair return on equity. FERC itself has stated that "it has been this Commission's long standing policy that rates must be cost supported. Properly designed rates should produce revenues from each class of customers which match, as closely as practicable, the costs to serve each class or individual customer."
Alabama Electric Coop., Inc. v. FERC, 684 F.2d 20, 27 (D.C. Cir. 1982) (emphasis in original) (citation and footnote omitted).
(51) 133 CONG. REG. H. 6320 (July 15, 1987).
(52) See supra notes 16-21 and accompanying text.
(53) Major Jeffrey A. Renshaw, Utility Privatization in the Military Services: Issues, Problems, and Potential Solutions, 53 A.F.L. REV. 55, 61 (2002).
(57) FED. FACILITIES COUNCIL, COMPETITION IN THE ELECTRIC INDUSTRY: EMERGING ISSUES, OPPORTUNITIES, AND RISKS FOR FACILITY OPERATORS 1 (Nat'l Acad. Press 1996), available at http://www.nap.edu/openbook/0309056810/html/1.html.
The federal government is the largest consumer of electricity in the United States, spending several billion dollars per year to power its military installations, office buildings, and other facilities. Potentially, the federal government could save millions of dollars per year through competitive procurement of electricity. However, federal agencies, which are classified as retail, not wholesale, consumers of electricity, are currently barred from buying electricity competitively by section 8093 of the 1988 Defense Appropriations Act.
(58) Robert Kittel, Acquisition of Utilities Services: Some Legal Considerations, in FED. FACILITIES COUNCIL, supra note 57. "If asked why they buy electric power on a sole source basis, most people who buy power for the Department of Defense (DoD) would say that the reason is section 8093 of the 1988 Department of Defense Appropriations Act." Id.
(59) See 40 U.S.C. [section] 591 (2006).
(60) FERC Orders No. 888, 889 (Apr. 24, 1996) (codified in various sections at 18 C.F.R., Parts 35-37).
(62) FERC Order No. 2000 (Mar. 8, 2000) (codified in various sections at 18 C.F.R., Part 34).
(63) Public Utility Holding Company Act of 1935, 15 U.S.C. 79, repealed by The Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594 (codified as amended in scattered sections of 42 U.S.C.).
(64) Energy Policy Act of 1992, Pub. L. No. 102-486, 106 Stat. 2776 (codified as amended in scattered section of 42 U.S.C.).
(65) See supra note 3 and accompanying text.
(66) ABEL, supra note 17, at CRS-3; see also FERC Order No. 888, supra note 17 (provides a good placement of EP Act of 1992 in the path toward the current regulatory scheme).
(67) Id.; see also Energy Policy Act of 1992, [section] 711. The "eligible facility" referred to under this section of the EP Act of 1992 is either "(A) used for the generation of electric energy exclusively for sale at wholesale, or (B) used for the generation of electric energy and leased to one or more public utilities...." Energy Policy Act of 1992, [section] 711.
(68) ABEL, supra note 17, at CRS-3; see also Energy Policy Act of 1992, [section] 722. Section 722 provides:
An order under section 211 shall require the transmitting utility subject to the order to provide wholesale transmission services.... Such rates, charges, terms, and conditions shall promote the economically efficient transmission and generation of electricity and shall be just and reasonable, and not unduly discriminatory or preferential.
Energy Policy Act of 1992, [section] 722.
(69) ABEL, supra note 17, at CRS-3.
(70) 133 CONG. REC. H. 6320 (July 15, 1987). The statement read onto the record permits inference of the presumption (at least on the part of the lawmakers) that utilities were "vertically integrated" entities. Id. The statement refers to non-utility sources vying for federal contracts (a creature of PURPA). Id. The statement also makes reference to the cost of "powerplant" and "other equipment" being spread to other customers. Id. Further, a subsequent statement on the matter, read during the same session stated that "[a]n electric utility is required to make its long-term decisions about powerplant construction and capacity needs based upon the needs of all the customers in its service territory. Id. When a major electricity customer is permitted to leave the system, the considerable costs of that system must then be redistributed among the ratepayers who are unable to leave the system. Id.
(71) Id.; see also FERC Order No. 888, supra note 17, at 13-14. The "Background" to FERC Order No. 888 provides an excellent overview of this contrast and transition:
The Federal Power Act was enacted in an age of mostly self-sufficient, vertically-integrated electric utilities, in which generation, transmission, and distribution facilities were owned by a single entity and sold as a part of a bundled service (delivered electric energy) to wholesale and retail customers. Most electric utilities built their own power plants and transmission systems, entered into interconnection and coordination agreements with neighboring utilities, and entered into long-term contracts to make wholesale requirements sales (bundled sales of generation and transmission) to municipal, cooperative, and other investor-owned utilities (IOUs) connected to each utility's transmission system .... In the late 1960s and throughout the 1970s, a number of significant events occurred in the electric industry that changed the perceptions of utilities and began to shift to a more competitive marketplace for wholesale power.
FERC Order No. 888, supra note 17, at 13-14.
(72) See generally id.; Fed. Energy Regulatory Comm'n (FERC) Order No. 889 (Apr. 24, 1996) (codified at 18 C.F.R. [section] 37 (2009)).
(73) FERC Order No. 888, supra note 17, at 1.
(74) Id. In its "Introduction/Summary," FERC states:
Today the Commission issues three final, interrelated rules designed to remove impediments to competition in the wholesale bulk marketplace and to bring more efficient, lower cost power to the Nation's electricity consumers. The legal and policy cornerstone of these rules is to remedy undue discrimination in access to the monopoly owned transmission wires that control whether and to
whom electricity can be transported in interstate commerce. A second critical aspect of the rules is to address recovery of the transition costs of moving from a monopoly-regulated regime to one in which all sellers can compete on a fair basis and in which electricity is more competitively priced.
Id. at 1-2.
(75) Id. at 5.
(77) Id. at 1-2.
(78) Id. at 8; see also 18 C.F.R. [section] 35.26(a), (c), (d) (2009).
(79) FERC Order No. 888, supra note 17, at 8-9; see also 18 C.F.R. [section] 35.26(a), (d) (2009).
(80) See 18 C.F.R [section] 35.26(b)(5) (2009).
(81) 18 C.F.R. [section] 35.26(a), (c).
(82) ABEL, supra note 17, at CRS-4.
(83) FERC Order No. 889, supra note 72, at i; see also ABEL, supra note 17, at CRS-4.
(84) FERC Order No. 889, supra note 72, at i.
(86) Id. at 1; see also ABEL, supra note 17, at CRS-4, 11.
(88) Fed. Energy Regulatory Comm'n (FERC) Order No. 2000, 2-3 (Dec. 20, 1999) (codified at 18 C.F.R. [section] 35 (2009)). The Commission noted: "Competition in wholesale electricity markets is the best way to protect the public interest and ensure that electricity consumers pay the lowest price possible for relative service." Id.
(89) Id. at 3.
(90) 18 C.F.R. [section] 35.34(e) (2009).
(91) Id. The provisions at 18 C.F.R. [section] 35.34(e) include the following as "innovative rate treatments" to induce participation in RTOs: transmission rate moratoriums; rates of return that are formulary, consider risk premiums and account for demonstrated adjustments in risk, or do not vary with capital structure; non-traditional depreciation schedules for new transmission investment; transmission rates based on "levelized" recovery of capital costs; transmission rates that combine elements of incremental cost pricing for new transmission facilities with an embedded-cost access fee for existing transmission facilities; or performance-based transmission rates. Id.
(92) Id. at [section] 35.34(0.
(94) Id. at [section] 35.34(c)(2), (g).
(95) Id. at [section] 35.340).
(96) Id. Required RTO functions include: tariff administration and design, congestion management, parallel path flow, ancillary services, OASIS and Total Transmission Capability (TTC) and Available Transmission Capacity (ATC), market monitoring and auditing, planning and expansion, and interregional coordination. Id.
(97) ABEL, supra note 17, at CRS-8.
(99) Id. at CRS-9.
(100) Id. at CRS-10.
(102) Id. at CRS-11.
(103) The Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594 (codified as amended in scattered sections of 42 U.S.C.).
(104) Id. at [section]1263.
(105) ABEL, supra note 17, at CRS-11.
(106) Id.; see also GAO: FERC Should be Tougher on Utility Mergers, GAS DAILY, Mar. 11, 2008, at 1. The article notes: "Congressional repeal of the Public Utility Company Holding Act of 1935 removed limitations on companies' ability to merge with utilities or invest in them.... The utilities supported the repeal, saying it would remove heavy regulatory burdens and allow more flexibility and needed investment." Id.
(107) See ABEL, supra note 17, at CRS-11.
(109) A New Wave of Consolidation in the Utility Industry, ELECTRIC LIGHT & POWER, July 1, 2006, at 36(3). The article notes:
With PUHCA behind us and its myriad of obstacles removed, the question that many analysts have asked is, will this result in a new consolidation wave? At first blush, PUHCA's repeal appears to have opened the door to future consolidation with other parts of the energy industry, as well as private equity funds and other financial players expanding utility industry investments .... One reason utilities might consider a merger is that capital markets have priced earnings growth assumptions of 5 to 10 percent into stocks. These long-term earnings growth rates are significantly greater than the utility industry's historical low single-digit organic growth rates. If interest rates begin to rise, investors will expect these higher growth rates, and companies that can deliver the growth will be rewarded. Those cannot be penalized. For the utility looking to achieve such growth, few options exist. Investing in higher growth businesses outside of the utility's core strength is highly unlikely since it was non-core ventures in the 1990s that created the problems from which the industry has just emerged. The back-to-basics strategy will not yield to high growth either. It was an effective strategy for restoring investor confidence and bringing the industry back on solid ground, but did not significantly impact earnings growth. To meet Wall Street's expectations, all signs point to mergers of complimentary utilities that can achieve synergies in excess of the amount paid for acquisition premiums. And with at least one regulatory hurdle removed, we have begun to see several large transactions.
(110) Merger Review Strikes Appropriate Balance for Investors and Consumers, Kelliher Says, INSIDE FERC, Feb. 4, 2008, at 4. The article notes: "The chairman and his colleagues have taken some heat for past merger approvals. But when 'we have asked critics to identify completed mergers approved by the commission that have resulted in harm to consumers or competitive markets, the answer has been silence,' Kelliher asserted." Id.
(111) See generally, Letter from Am. Pub. Power Ass'n, et al., to Chairmen for the Committee on Armed Services, subject: Proposed Language in FY 2009 Defense Authorization Bill That Would Repeal 40 U.S.C. [section] 591 (Apr. 25, 2008) (on file with author) [hereinafter Letter to Senate Armed Services Committee]; see also "Utilities, NARUC Take Aim at Pentagon Power Play," Defense Daily, May 1, 2008, available at http://www.defensedaily.com/publications/dd/2539.html.
(112) Id. The signatories of the letter include: the American Public Power Association, the Edison Electric Institute, the National Association of Regulatory Utility Commissioners, and the National Rural Electric Cooperative Association. Id.
(113) Id. (emphasis added).
(114) Id. The letter states: "In states with traditional utility regulation, because military facilities typically are such large customers, their departure from the host utility's system could result in significant cost-shifting onto remaining customers." Id.
(115) See supra note 48 and accompanying text.
(116) Letter to Senate Armed Services Committee, supra note 111. The letter states: "in every state, regardless of whether it has restructured its electricity markets, retail electricity customers continue to purchase electricity in a manner consistent with that state's electricity laws. DoD is proposing to exempt itself from this fundamental principle by creating a special exemption for military and other federal facilities." Id. (emphasis added).
(117) U.S. CONST. art. VI, cl. 2 (the Supremacy Clause).
(119) See supra note 4 and accompanying text.
(120) See supra notes 46-47 and accompanying text.
(121) The Fifth Amendment provides: "No person shall be ... deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation." U.S. CONST. amend. V.
(122) Martin, supra note 7, at 1183.
(128) Id. at 1185-6.
(129) Id. at 1183.
(130) Martin, supra note 7, at 1185.
(131) Id.; see also Marilyn Hattie David, Competition in the Electricity Industry and Its Legal and Policy Implications, 56-57 (Sept. 30, 1996) (unpublished LL.M. thesis George Washington University), available at http://dspace.wrlc.org/bitstream/1961/5027/1/Daviddisplay.pdf.
(132) Martin, supra note 7, at 1189.
(134) Id. at 1189-90; see also David, supra note 131, at 62-63.
(135) Martin, supra note 7, at 1189.
(137) See supra notes 18-20 and accompanying text.
(138) Martin, supra note 7, at 1190.
(139) See supra note 6 and accompanying text.
(140) Martin, supra note 7, at 1185, 1215-17.
(141) See generally Martin, supra note 7, at 1197-1200; see also Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989).
(142) Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989).
(143) Id. at 310-12.
(144) Id. at 314-15.
(146) Id. at 310.
(147) Martin, supra note 7, at 1200.
(148) Id.; see also David, supra note 131, at 66.
(149) Martin, supra note 7, at 1200-01 (citing Federal Power Comm'n v. Hope Natural Gas, 320 U.S. 591 (1944)).
(150) Id. at 1201 (citing Hope Natural Gas, 320 U.S. at 603 (stating that conditions that might deprive a utility of its financial viability and still be constitutional "[while they may exist] are not important here")).
(151) Id. at 1205.
(152) Martin, supra note 7, at 1205.
(153) See generally id. at 1208-11.
(154) See id. at 1210.
(156) Id. at 1202.
(157) Id. (citing Ohio Edison Co. v. Public Util. Comm'n, 589 N.E.2d 1292, 1300 n.8 (Ohio 1992)).
(158) I d. at 1202.; see also William J. Baumol & J. Gregory Sidak, Stranded Costs, 18 HARV. J. L. & PUB. POL'Y 835, 839-40 (1995).
(159) Martin, supra note 7, at 1210.
(162) Id. at 1210-11.
(163) See generally id. at 1209-11.
(164) See Federal Power Comm'n v. Hope Natural Gas, 320 U.S. 591, 610 (1944).
(165) Laura R. Starling, Don't Be Shockedt. Electric Utility Deregulation CAN Benefit Low-Cost States, 74 TUL. L. REV. 1519, 1526 (1999-2000) (citing John Burritt MacArthur, Cost Responsibility or Regulatory Indulgence for Electricity's Stranded Costs?, 47 AM. U. L. REV. 775,849 (1998)).
(168) Id. at 1528.
(171) Gregory N. Basheda, et al., The FERC, Stranded Cost Recovery, and Municipalization, 19 ENERGY L. J. 351, 360-61 (1998).
(172) Id. at 359-60.
(173) Id. at 360.
(175) Id. at 360-61.
(176) Id. at 361.
(178) See generally id. at 375-76 (conclusion).
(179) Scott B. Finlinson, The Pains of Extinction: Stranded Costs in the Deregulation of the Utah Electric Industry, 1998 UTAH L. REV. 173, 189-90 (1998).
(181) Id. at 189.
(183) Id. at 189-90.
(184) Ajay Gupta, Tracking Stranded Costs, 21 ENERGY L. J. 113, 113 (2000).
(185) Id.; (citing LESTER BAXTER & ERIC HIRST, ESTIMATING POTENTIAL STRANDED COMMITMENTS FOR US INVESTOR-OWNED ELECTRIC UTILITIES, ORNL/CON-406 (Jan. 1995), available at http://www.osti.gov/bridge/index.jsp (search for report title)).
(186) Ajay Gupta, Tracking Stranded Costs, 21 ENERGY L. J. 113, 113 (2000).
(188) Basheda, supra note 171, at 371.
(189) Id. at 370-71.
(190) Id. at 372.
(191) AEP CEO: U.S. Needs New Electric Authority, UNITED PRESS INT'L, May 5, 2008, available at http://www.upi.com/ (search "U.S. Needs New Electric Authority").
(192) Basheda, supra note 171, at 372.
(196) Baumol & Sidak, supra note 158, at 848.
(197) RESTATEMENT (SECOND) OF CONTRACTS [section] 350 (1981).
(198) Baumol & Sidak, supra note 158, at 848.
(199) Id. (citing Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Notice of Proposed Rulemaking, 59 Fed. Reg. 34, 274, 35,277 (proposed June 29, 1994)) (codified at 18 C.F.R. [section] 35.26 (2009)).
(201) Baumol & Sidak, supra note 158, at 848.
(203) See supra notes 48-50 and accompanying text; see also Federal Power Comm'n v. Hope Natural Gas, 320 U.S. 591,617-18 (1944).
(204) See supra notes 46-48 and accompanying text.
(205) See discussion supra Section IV.A.3.
(206) Martin at 1206-8.
(207) Baumol & Sidak, supra note 158, at 848.
(209) See id.
(210) See id.
(211) WILLIAM E. KNEPPER, LIABILITY OF CORPORATE OFFICERS AND DIRECTORS [section] 1.05 (7th ed. 2002).
(212) Baumol & Sidak, supra note 158, at 848.
(213) Finlinson, supra note 179, at 203.
(214) Id. at 203-04.
(215) Id. at 204.
(221) Finlinson, supra note 179, at 204-05.
(222) Id. at 205.
(223) Kenneth Wilson, Electric Utility Deregulation: The Recovery of Stranded Costs, 33 NEW ENG. L. REV. 557, 577-78 (1999).
(224) Id. at 578.
(225) Id. (citing N.H. Rev. Stat. Ann. [section] 374-F:3(d) (LEXIS through 2009)).
(226) Wilson, supra note 223, at 579 (citing Rhode Island General Laws, [section] 39-1- 27.4(a) (LEXIS through 2009)).
(227) Id. (citing Rhode Island General Laws, [section] 39-1-27.5(a) (LEXIS through 2009)).
(228) Id. at 580.
(229) Id. at 580-81.
(231) Id. at 582-83.
(232) Id. at 586 (citing 15 PA. CONS. STAT. ANN., [section][section] 7407(b), (c) (Westlaw through 2009)).
(233) See supra note 57 and accompanying text.
(234) See supra note 57 and accompanying text.
(235) David, supra note 131, at 86. An estimated loss to utilities, attributed to a proposed change allowing for competitive purchase of electric utility service under the FAR, was set at $2.4 billion by the Edison Electric Institute in 1986. The article further states that the utility industry was marshalling a legal response in the form of a provision in the FY 1987 appropriations bill. The response to the potential upset of a "regulatory balance" by the proposed FAR provision was Section 8093. Utilities Stand to Lose $2.4 Billion in Federal Load Under FAR Scheme, ELECTRIC UTIL. WKLY., Sept. 8, 1986, available at http://www.platts.com.
(236) U.S. GOV'T ACCOUNTABILITY OFFICE, GAO-07-631, DEFENSE BUDGET: TRENDS IN OPERATION AND/MAINTENANCE COSTS AND SUPPORT SERVICES CONTRACTORS 1-3 (May 2007).
(238) See The Armed Services Procurement Act of 1947, Pub. L. No. 80-413, 61 Stat. 21 (1947), amended by The Competition in Contracting Act of 1984, Pub. L. No. 93-369, tit. VII, [section] 2701, 98 Stat. 1175 (codified as amended at 10 U.S.C. [section][section] 2304-2305 (2006)).
(239) See supra notes 3, 57 and accompanying text.
(240) ATLAS SHRUGGED, supra note 4, at 765-67.
(241) Id. at 767.
(242) Id. at 1022.
(243) ATLAS SHRUGGED, supra note 4, at 1167-8.
Major Frank D. Hollifield (B.A., University of Alabama (1994); M.P.A., University of Alabama (1997); J.D., University of Alabama (2000); LL.M.. The Judge Advocate General's Legal Center and School (2009)) is currently a contract law attorney assigned to the Electronic Systems Command Law Office, Hanscom Air Force Base, Massachusetts. He previously served as a utility litigation and negotiation attorney for the Air Force Utility Litigation Team, Tyndall Air Force Base, Florida. He is a member of the Alabama Bar.
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|Author:||Hollifield, Frank D.|
|Publication:||Air Force Law Review|
|Date:||Mar 22, 2010|
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