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Empowering Federal Regulation for a Changing Electricity Sector

Joel B. Eisen, FERC’s Expansive Authority to Transform the Electric Grid, 49 U.C. Davis L. Rev. 1783 (2016).

Today’s electricity sector has little in common with the industry’s humble origins in the late 1800s, when small power plants located every ten blocks or so served nearby customers through a local grid. Nor does it share many commonalities with the heavily regulated, largely monopolized electricity sector of the 1930s, whose interstate grid prompted passage of the 1935 Federal Power Act. And yet, this more than eighty-year-old statute continues to define the requirements and scope of federal and, indirectly, state regulatory authority over today’s electricity sector. As deregulation and competitive markets, the rise of renewable energy, smart metering, and demand response transform the way electricity is generated, traded, transmitted, and used, regulators and courts are struggling to apply the Federal Power Act to a changing industry.

Earlier this year, the Supreme Court offered its views when, in Federal Energy Regulatory Commission v. Electric Power Supply Association, the Court recognized federal authority to regulate wholesale market operators’ compensation of demand response—temporary reductions in electricity consumption by end-users at times of peak demand. In his thoughtful article FERC’s Expansive Authority to Transform the Electric Grid, Professor Joel B. Eisen places FERC v. EPSA in historical context, proposes a set of principles to guide FERC’s regulation of rules and practices that affect rates in wholesale power markets, and applies these principles to a hypothetical carbon price added to fossil-fueled electricity.

In FERC v. EPSA, a 6-2 majority of the Supreme Court reversed the D.C. Circuit’s vacatur of FERC’s Order No. 745 regarding demand response compensation in wholesale power markets, holding that the order was within FERC’s authority under the Federal Power Act to ensure that rules and practices directly affecting wholesale rates are just and reasonable. EPSA and other critics had previously argued that the Federal Power Act could not be stretched to apply to wholesale market compensation for demand response—a concept clearly not contemplated during the Act’s drafting over eighty years ago.

Professor Eisen’s article offers an in-depth historical analysis that contextualizes and, ultimately, supports the Supreme Court’s expansive reading of FERC’s authority under the Federal Power Act. Starting with railroad regulation in the early 1900s—the origin of the Federal Power Act’s “practices affecting rates” language—continuing with regulation of the electric utility industry from the Act’s 1935 passage to the beginning of deregulation in the 1980s, and culminating with regulation of today’s increasingly market-based electricity sector, Eisen examines the regulatory regime’s evolution across two industries and one century. In the process, he identifies “a distinctive arc, featuring flexibility about conduct being regulated” that FERC v. EPSA continues.

But Professor Eisen’s article offers more than historical context and validation for the Supreme Court’s interpretation of the Federal Power Act. Policymakers, regulators, courts, and practitioners will appreciate the four-factor framework that Eisen proposes to guide future application of the Act’s “practices affecting rates” standard for FERC authority. First, to be jurisdictional an activity must involve “FERC regulation of market rules or other aspects of direct participation by jurisdictional entities.” Second, FERC may offer incentives to adjust inputs to markets under its supervision in order to maintain system reliability—even if these input adjustments impact the states. Third, the notion of practices under the Federal Power Act has evolved from firm-specific to market-wide practices, allowing (and, possibly, requiring) FERC to regulate the structure and operation of wholesale electricity markets. Fourth and finally, the activity in question must have “direct and significant impacts on wholesale rates,” that is, “without the actions of an intervening decision maker.” To illustrate the import of his proposed framework, Professor Eisen applies the above factors to a hypothetical FERC-mandated carbon adder for fossil-fueled electricity traded on wholesale power markets, which he suggests could be reconciled with FERC v. EPSA, assuming a proper finding of discrimination.

With FERC’s Expansive Authority to Transform the Electric Grid, Professor Eisen adds to the growing literature on (clean) energy federalism an unprecedented historical analysis of FERC’s authority under the 1935 Federal Power Act and a practical guide for its application to today’s electricity industry. Demand response is but one of many drivers of the grid’s ongoing transformation, with others, such as electricity storage, already waiting in the wings. FERC v. EPSA and Professor Eisen’s fine article suggest that the Federal Power Act is still very much alive and up to the task of guiding the transition to a bright energy future.

Cite as: Felix Mormann, Empowering Federal Regulation for a Changing Electricity Sector, JOTWELL (July 4, 2016) (reviewing Joel B. Eisen, FERC’s Expansive Authority to Transform the Electric Grid, 49 U.C. Davis L. Rev. 1783 (2016)), https://lex.jotwell.com/empowering-federal-regulation-for-a-changing-electricity-sector/.

A Dormant Commerce Clause Approach to Interstate Electricity Transmission

Alexandra B. Klass & Jim Rossi, Revitalizing Dormant Commerce Clause Review for Interstate Coordination, 100 Minn. L. Rev. 129 (2015).

In a 2013 report, the American Society of Civil Engineers awarded the U.S. electricity grid the grade “D+” noting that aging components and limited maintenance contribute to a growing number of brownouts and blackouts. Indeed, the 450,000 miles of high-voltage transmission lines that connect America’s nearly 7,000 power plants with some 6 million miles of lower-voltage distribution networks are based on a grid architecture that dates back to the 1880s. The average transformer in the national power grid is 42 years old and, hence, two years past its projected useful life. Every year power outages cost the economy billions of dollars in lost output and wages, spoiled inventory, production delays, among others. Meanwhile, successful mitigation of global climate change urges the transition to a low-carbon energy economy fueled by solar, wind, and other renewables. But the best renewable resources are often located far from population centers, such as wind resources in the upper Midwest and Plains states or solar resources in the desert southwest. As a result, the U.S. electricity grid requires both modernization and expansion calling for $1 trillion of investment to maintain even current levels of grid reliability. In Revitalizing Dormant Commerce Clause Review for Interstate Coordination, professors Alexandra B. Klass and Jim Rossi take stock of the regulatory impediments to upgrading and expanding the electricity grid, and propose a fresh take on dormant Commerce Clause review to incentivize greater interstate coordination on long-distance transmission projects.

Notwithstanding the vast macroeconomic benefits of an upgraded and expanded electric grid, transmission lines remain highly unpopular and subject to strong “not-in-my-backyard” reactions – at the individual and institutional level alike. Drawing on a series of precedents, professors Klass and Rossi illustrate how states use their virtually exclusive authority over electric transmission line siting and eminent domain to block and, ultimately, defeat interstate transmission projects. “In the context of multi-jurisdictional energy infrastructure projects, a single state or local holdout can keep an infrastructure project from going forward.” Such regulatory holdouts are especially popular among “pass-through” states that often struggle to identify benefits to local constituents from transmission lines that originate and end out-of-state. In the words of Klass and Rossi, “interest group dynamic[s] along with many existing siting and eminent domain laws enable, and may even encourage, these kinds of state and local government holdouts.”

The article identifies three different patterns by which state regulation and, in some cases, legislation facilitate regulatory hold-outs. First, regulators may refuse to issue the required certificate of convenience and necessity based on a narrow assessment of the benefits associated with a proposed interstate transmission project. Second, regulators may refuse to grant eminent domain authority based on post-Kelo legislation or by requiring local need in order to establish “public use.” Third, regulation and/or legislation may limit the procedural rights of out-of-state applicants if not expressly ban them from transmission line siting permits or eminent domain authority in the state.

Professors Klass and Rossi make a compelling case for dormant Commerce Clause review as a doctrinal opening for courts to resolve state regulatory hold-outs – in electricity transmission and beyond. Building on the rich history of related jurisprudence, the article adds to the literature in at least two important ways. First, it revives the dormant Commerce Clause’s role as a catalyst not only for inter-state competition but, critically, also for coordination among states. Klass and Rossi draw on Rocky Mountain Farmers v. Corey to argue that coordination among state policies, as reflected in energy market initiatives that take into account out-of-state benefits, is allowed under dormant Commerce Clause doctrine and, in fact, “ought to be encouraged and, in some instances, required.” Second, the article calls on disfavored out-of-state applicants for electricity transmission siting and eminent domain to harness dormant Commerce Clause doctrine to challenge state legislation and regulation not only on substantive but also on procedural grounds.

In Revitalizing Dormant Commerce Clause Review for Interstate Coordination, professors Klass and Rossi offer a roadmap for states to better coordinate on multi-jurisdictional transmission projects and, where such coordination fails, devise an enticing litigation strategy for disfavored applicants based on a reinvigorated interpretation of dormant Commerce Clause doctrine. I, for one, look forward to seeing both in action.

Cite as: Felix Mormann, A Dormant Commerce Clause Approach to Interstate Electricity Transmission, JOTWELL (December 18, 2015) (reviewing Alexandra B. Klass & Jim Rossi, Revitalizing Dormant Commerce Clause Review for Interstate Coordination, 100 Minn. L. Rev. 129 (2015)), https://lex.jotwell.com/a-dormant-commerce-clause-approach-to-interstate-electricity-transmission/.

A Story Well Told

Oliver A. Houck, The Reckoning: Oil and Gas Development in the Louisiana Coastal Zone, 28 Tul. Envtl. L.J. 185 (2015).

Professor Oliver Houck’s recent article, The Reckoning: Oil and Gas Development in the Louisiana Coastal Zone, is easily one of the best articles that I have read in the last ten years and should be required reading regardless of one’s specialty. I should admit that I am not an environmental law professor and the environmental law articles I ordinarily read are those that intersect with one of my primary research areas: Indian law. So I initially downloaded The Reckoning expecting that I would skim it quickly. But it is a remarkable article. Although on its face, the article tells a story of oil and gas development in the fragile wetlands of Louisiana’s coast, it also has lessons about political corruption and short-sightedness that extend far beyond the environmental destruction at the heart of the article.

Professor Houck convincingly argues that the state government and oil and gas interests are seen as essentially the same, so much so that Houck refers to them collectively simply as “the company.” Louisiana actively courted oil and natural gas development to such an extent that the very state entities tasked with protecting the coastal zone participated in the promotion of development above all else, even above reason. As the article shows, it would be inaccurate to say that the state became the puppet of corporate interests or that it rubber-stamped the web of canals that destroyed the wetlands because nearly every Louisiana institution was and is invested in the rush to please big energy. Problematically, the list of those involved in opening up the wetlands, in denying the connection between development and destruction, and in attempting to shift the restoration costs away from oil and gas companies and unto the American taxpayer includes not only the ironically named Louisiana Department of Natural Resources, which time and again saw itself as an industry partner, but also parish governments, state-university academics and centers, politicians at the federal, state, and local levels, and even major environmental groups. As Professor Houck shows, no part of the Louisiana coast has been spared from devastation caused by “the company,” yet “the company” is unwilling to take responsibility and has largely succeeded in avoiding the costs associated with such destruction.

The article tells a remarkable and painful story and it does so in a way that is itself unflinching and remarkable. Professor Houck ends his 112 page article by noting that the work of parsing through the legal arguments in the Levee Board’s case against the oil and gas industries was the work of another article. The Reckoning is entirely dedicated to providing a rich and well-crafted history of the relationship between oil and gas companies, the state of Louisiana, and the coastal environment. And that singular focus is part of why this is a tremendous contribution. Many, and I would argue too many, articles consist of a small dose of observation and a large dose of theory or interpretation. Indeed, I remember vividly being admonished as a pre-tenured professor that my article about immigrant remittances was not sexy enough because I hadn’t dressed it up in theory. It was a mistake I corrected on a future property law article that I thought would be treated as my last article for tenure. But while the push for theory and for interpretation in the legal academy has its place, I think Professor Houck’s careful and thoroughly researched history will do far more to begin correcting course in Louisiana and holding the contributors to the problems there to account than will the many interpretive articles sure to follow. They will surely build off of and cite to The Reckoning but Professor Houck’s narrative of how “the company” operates in Louisiana is incredibly compelling and damning in its own right. The article will likely be widely read by environmental law professors but it is well worth reading regardless of one’s specialty.

Cite as: Ezra Rosser, A Story Well Told, JOTWELL (October 9, 2015) (reviewing Oliver A. Houck, The Reckoning: Oil and Gas Development in the Louisiana Coastal Zone, 28 Tul. Envtl. L.J. 185 (2015)), https://lex.jotwell.com/a-story-well-told/.

Green Go! – The Military’s Sustainability Mission

­­Sarah E. Light, The Military-Environmental Complex, 55 B.C. L. Rev. 879 (2014).

“Green Go!” The U.S. battle cry in the Mexican-American War that, according to some etymologists, earned Americans their nickname as “gringos” offers a fitting description of the Department of Defense’s growing interest in sustainable energy generation and use. In The Military-Environmental Complex, Sarah E. Light takes stock of the military’s complicated, often conflicted relationship with environmental objectives and explores the drivers behind the armed forces’ recent promotion of sustainable energy. Building on the military-industrial complex’s history of fostering technology innovation while also enabling abusive rent-seeking, Light offers recommendations to ensure that the emerging military-environmental complex strikes a socially beneficial balance between mission objectives and broader environmental goals.

From an environmentalist perspective, the military’s many statutory and regulatory exemptions from environmental laws that conflict with its national security mission raise concerns that military and sustainability objectives are inherently at odds with one another. But Light makes a convincing case that both types of objectives may, in fact, be more aligned than is commonly recognized.

As the nation’s single largest consumer of energy, the Department of Defense has a natural interest in enhancing the efficiency of its energy use. The case for more efficient and, hence, more sustainable energy technologies and practices is even more compelling for forward operating bases whose fuel costs are orders of magnitude higher than at our local gas station, not to mention the risks to soldiers who must escort fuel convoys through the theater of war. In Light’s words, “[e]nergy costs – both economic and political – are high, and … the DoD’s costs can be measured not in dollars, but in lives.” Accordingly, the armed forces characterize climate change as a “threat multiplier” and energy efficiency as a “force multiplier.” Energy efficiency and on-site renewable energy generation, among others, have the potential to unleash the military from the “tether of fuel.”

Just in case such intrinsic motivation may prove insufficient, a suite of congressional and presidential mandates both require and enable the military to bolster its sustainability efforts. Of particular interest to Light’s analysis are military-specific statutory authorities that allow the Department of Defense to serve as financier, testbed, and customer of innovative energy technologies. The article notes the Pentagon’s long-term contracting authority for energy procurement for up to 30-year terms, enhanced-use leases with in-kind remuneration such as power from a privately owned and operated solar facility on military land, and energy-savings performance contracts.

Viewed through the lens of technology innovation, the military’s recent interest in sustainable energy builds on the military-industrial complex’s track record as a catalyst for novel technologies that have since become fixtures of civilian life, including GPS navigation, transistors, semiconductors, and the internet. Once more, Light tells us, the Department of Defense is stepping in to provide critical funding and technological validation, and to create markets bridging the notorious valley of death between successful demonstration and first commercialization of new technology, this time for the benefit of solar panels, battery storage, and other emerging energy technologies. These striking parallels raise the question of what exactly it is that distinguishes Light’s military-environmental complex from the traditional military-industrial complex. Is it the (ancillary) environmental benefits that energy-optimizing technologies deliver in addition to enhancing the military’s mission objectives? And what is the relationship between the two complexes?

If there’s a critique of Light’s insightful piece it is that she remains somewhat vague on this pivotal point. Her closing recommendations suggest a vision for the military-environmental complex that battles as much against the undue influence and pork barrel politics marring the military-industrial complex as it combats climate change and other environmental problems. In the process, the article lays out the framework for a more equitable, more efficient, and more environmentally oriented version of the traditional military-industrial complex. One can see why Light chose to hone in on the environmental or, rather, energy aspects of the military complex. A broader framing, however, could help ensure that her thoughtful recommendations regarding the political process, innovative procurement authorities, and agency coordination, among others, will be considered beyond the environmental aspects of the military-industrial complex. Light’s proposed research agenda to further investigate the impact of military R&D funding and procurement on the development and diffusion of emerging clean energy technologies gives cause for hope that her follow-up work will more closely engage with and seek to answer these critical questions. I, for one, look forward to learning what she finds.

Cite as: Felix Mormann, Green Go! – The Military’s Sustainability Mission, JOTWELL (October 20, 2014) (reviewing ­­Sarah E. Light, The Military-Environmental Complex, 55 B.C. L. Rev. 879 (2014)), https://lex.jotwell.com/green-go-the-militarys-sustainability-mission/.