Energy Law and Policy – Professor Stein Fall 2016
I. Introduction: Themes in Energy Law (Ch. 1)
A. Importance of Energy
1. Energy Resources and Demand
a. We can only transform energy; we cannot create it.
b. Peak oil: production of any nonrenewable resource faces finite limits and will eventually decline -> major concern
c. Distributed generation: small-scale, decentralized, customer-based production of electricity -> challenges the utility industry
d. Price, population growth, geographic distribution of populations, level of industrialized growth, and efficiency of production tie in to future demand.
e. Demand for energy resources is elastic -> demand decreases as price increases
2. The Eras of Energy Law
(1) a pre-regulatory phase, during which private property and common law principles order the use of energy resources;
(2) a demand growth era that followed WW2 and continued into the early 1970s;
(3) a rise in environmental and risk regulation, focusing primarily on pollution impacts, beginning in the 1960s;
(4) increasing competition in energy markets beginning in the middle 1970s; and
(5) attention to global pollution impacts and climate change, ~2000 to present.
B. Recurring Themes in Energy Law
1. Ownership of Energy Resources
a. Fugacious: flows across properties w/o regards to ownership (wind)
2. Monopoly v. Competition (Pricing and Allocation)
a. Transportation of gas through pipelines is a natural monopoly.
3. Managing Energy Externalities and Risks
a. Externalities: when an entity engaged in an activity produces a cost or benefit that is transferred to others
i. Pigovian tax: internalizes negative externalities by requiring the generator of the externality to pay a tax equal to the externality's cost.
ii. Regulation, private remedies, market-based mechanisms and technology development are most common ways to correcting them.
b. The Role of Risk and Uncertainty: refers to mathematical or engineering approaches of quantifying the likelihood that a particular hazard will cause harm.
i. Risk management: deciding whether and how to address particular risk.
4. Public Governance of Energy Resources
a. Federal Agencies (DOE, FERC, DOI, EPA, NRC, etc.)
b. State and Local Agencies
c. Federalism Challenges
d. The Rise of Regional and International Governance of Energy
C. Towards a Portfolio of Energy Strategies
II. Public Utility Principles and an Overview of the Electric Power Industry (Ch. 2)
A. Historical Development of the Electric Utility
1. Early Electric Technology
2. Why Treat Electric Power as a “Public Utility”?
a. The Role of Exclusive Monopoly
b. Monopoly and Innovation
Proprietors of Charles River Bridge v. Proprietors of Warren Bridge: Old gov't. charter did not explicitly give monopoly rights to Charles, only right to toll. Warren was allowed to build a bridge (toll-free) near Charles to compete.
Munn v. Illinois: Upheld the Granger laws, establishing that the principle of public regulation of private businesses was involved in serving the public interest. Main goal of Grange Laws was to regulate rising fare prices of railroad and grain elevator companies after Civil War.
c. A Brief Economic Perspective on Monopoly
B. An Overview of the Electric Power Industry
1. Electric Power Basics
a. Generation (power plants)
i. When customers turn power on/off, the generating load must be increased/decreased almost instantaneously to avoid affecting voltage
b. Transmission (long lines) aka “the grid”
i. Ancillary services: voltage control equipment and authorized operator
ii. 3 main systems: Western, Texas, and Eastern Interconnections
c. Distribution (transformers): get power to the end-users
i. Includes billing customers, reading meters, customer service, etc.
2. The Modern Electric Energy System
a. Investor-Owned Utilities (IOU): private sector companies ranging in size from small local operations serving a customer based of a few thousand to giant multistate corporations serving millions of customers.
b. Public Power: power that customers buy from publicly owned facilities
i. Many are only involved in retail power distribution
c. New Entrants
i. Independent power producers aka “non-utility” generators; PURPA allowed for their success because it required utilities to buy from defined qualified facilities (QFs)
ii. Marketers and brokers buy and sell electricity on the open market; they do not own or operate any electric facilities
d. The Grid
e. Demand for Electric Power
i. Annual consumption peaks during summer due to cooling needs.
f. Supply: The Electric Power Generation Mix
C. The Rise of Electric Power Regulation
1. The Role of State Regulation
a. Regulate distribution utilities and the sale of electricity to retail customers
b. Public utility regulation-imposed requirements: (1) Certificate of Convenience and Necessity (2) Monopoly Franchise (3) Duty to Serve (4) Price Regulation
2. The Rise of National Regulation of Electric Power
Public Utilities Comm. of Rhode Island v. Attleboro Steam and Electric Co.: Test of validity of a state regulation is not the character of the general business of the company, but whether the particular business which is regulated is essentially local or nation in character; and if the regulation places a direct burden upon its interstate business it is none the less beyond the power of the state because this may be the smaller part of its general business.
III. Rate Regulation Principles (Ch. 8)
A. An Overview of Rates Based on Cost-of-Service
1. The monopolist who doesn't face competition had incentives to charge a price above the competitive level, produce less output, and transfer wealth from consumers to itself
a. Regulators set price at level that would approximate a competitive market
2. Revenue requirements: the costs a firm needs to recover in order to stay in business into the foreseeable future
a. R = B*r + O (R = utility's revenue requirement–total amount the firm needs to recover from its customers to cover its costs; B = utility's base rate, representing its capital investment in plant and other assets; r = the rate of return regulators allow the utility to earn on its rate base to compensate its investors; and O = utility's operating expenses, or expenses such as fuel and labor that vary w/ the level of production)
B. Common Legal Issues in Cost-of-Service Regulation
1. A Hypothetical Ratemaking Problem
2. Cost-of-Service Regulation Principles
a. The “End Results” Test
Smyth v. Ames: Nebraska capped rates so railroads could not exceed certain rates and railroads believed it was a Takings case. Just compensation looks at property's fair value– (1) original cost of construction (2) amount and market value of bonds and stock (3) present as compares to the original costs of construction (4) probable earning capacity under statutory rates.; take into consideration the interests of the public and the owner of the property (fairness)
i. Fair value: (1) original cost of construction (2) the amount and market values of [the utility's] bonds and stocks (3) the present as compared w/ the original cost of construction (4) the probable earning capacity of the property under particular rates prescribed
for the purchase from such cogenerator or small power producer, such utility would generate or purchase from another source
i. States calculate by administrative proceedings and/or competitive solicitation (bidding)
b. PURPA provided that the rate at which utilities purchased power from QFs: (1) would be just and reasonable in public interest (2) shall not discriminate against cogenerators or small power producers
2. Price Competition
a. Market-Based Rates: whatever rate the market will bear
C. Open Access Transmission
1. Order No. 888: requires all public utilities that own, control, or operate facilities used for transmitting electric energy in interstate commerce to file open access non- discriminatory transmission tariffs w/ FERC
a. Reforms: (1) open access transmission (2) functional unbundling (3) stranded cost recovery
i. Stranded costs: when there are lots of investments, but they shouldn't be divided among ratepayers
b. ISOs became RTOs -> operate, but do not own transmission lines
c. Tariff: schedule of charges or a tax -> sets price RTOs may charge generators for use of transmission lines
i. Jurisdictional utilities must file w/ FERC and FERC is to approve open access tariff
d. Order No. 889: requires that public utilities and non-public utilities with reciprocal open access transmission service establish, maintain, and operate a real-time info network on which available transmission capacity will be posted and on which capacity reservations may be made (OASIS)
i. Allows customers to have same access to all info in real-time
ii. Prevent utilities from unfairly denying access to their competitors
New York v. FERC: (1) Whether FERC had jurisdiction over unbundled retail transmissions (2) Whether FERC was right in not asserting jurisdiction over bundled retail transmissions. Hard to determine if costs are just and reasonable if there is one bundled rate. FERC relied upon sections 205 and 206 to remedy wholesale discrimination. FERC jurisdiction upheld for both issues.
2. The Rise of Regional Governance of Transmission
a. FERC Order 2000: requires that each public utility that owns, operates, or controls facilities for the transmission of electric energy in interstate commerce make certain filings w/ respect to forming/participating in a RTO
i. Codified min. characteristics/standards needed for transmission entity to satisfy in order to be considered a RTO
ii. (1) improve efficiencies in transmission grid management (2) improve grid reliability (3) remove remaining opportunities for discriminatory transmission practices (4) improve market performance (5) facilitate lighter handed regulations
