Shaping American Power: Federal Preemption and Technological Change
By Steven J. Ferrey
INTRODUCTION
A technologically complex society blurs the distinction between interstate and intrastate commerce. For more than half a century, the Federal Power Act (FPA) created a demilitarized zone between competing federal and state jurisdiction over electric power regulation. Despite this legislation, chronic legal friction between federal and state regulatory authority erupted virulently over the construction of costly and unnecessary power plants during the 1980s. This construction resulted in frequent utility cost overruns. Although federal regulators generally approved these overruns, state utility regulatory commissions resisted the pass-through of these costs to local consumers. For America's most capital intensive industry, a single regulatory decision can have a multi-billion dollar effect.
In 1988 a divided United States Supreme Court expansively underscored the preemptive power of federal regulatory agencies. The Court's landmark decision, Mississippi Power & Light Co. v. Mississippi, conscripted state regulators to follow contemporaneous federal regulatory decisions. This article develops the thesis that Mississippi Power had and will continue to have, several profound, unanticipated impacts on the future of power in America. These impacts will endure because of the interaction of law, technology and regulation. Specifically, new technological alternatives will serve to subvert the preemption of state regulation that Mississippi Power dictates. State regulators will use these alternatives in order to reassert their currently preempted authority and these forces will transform the American power industry.
Mississippi Power will have three principal, unintended impacts. First, the decision will promote a technological shift to independent power generation. Two Supreme Court decisions in the early 1980s sanctioned independent power generation. Accelerated by the decision in Mississippi Power, hundreds of independent power projects will replace conventional electric utility plants by the year 2000. Second, Demand-Side Management (DSM) options, which conserve existing power resources, will increase at the expense of conventional power plants. Because DSM options do not involve a sale transaction, they are not subject to federal preemption under Mississippi Power. Third, Mississippi Power leaves open the possibility of coextensive state and federal regulatory jurisdiction. To retain authority, states will attempt to prevent utilities from establishing affiliated, or sister, entities to whom “paper” interstate power sales can be made. In so restricting their regulated utilities, states will encourage the growth of unregulated, independent nonutility companies. These companies will come to dominate the independent power and DSM sectors of the industry, thus fundamentally altering the future of electric power.
Rather than preemptively working to shape the future, the law often responds to technological and institutional change. On its face, Mississippi Power addresses yesterday's electric power industry. At the same time, however, this decision has sown the seeds of radical change in a traditional, highly regulated industry. In ways unanticipated by the Supreme Court majority, Mississippi Power will speed the transition to a more independent and decentralized future. This decision reorients fifty otherwise preempted state utility regulatory authorities toward alternative means to meet future power requirements. From a purely technological standpoint, independent power and DSM alternatives already provide viable alternatives. Rather than definitively resolving a regulatory debate, Mississippi Power may accelerate a voluntary transition to a decentralized new order. In so doing, the Supreme Court decision will promote a least-cost and environmentally more benign power supply. This Article forecasts Mississippi Power's long-term impact on technical and regulatory growth by analyzing, in separate sections, the effect of the decision on 1) traditional state utility regulation, 2) the emerging independent power and qualifying facility sectors of the industry and 3) DSM strategies now implemented in many states.
Specifically, Section II charts the evolution of Supremacy Clause precedent and the culmination of one line of cases in the Mississippi Power filed rate doctrine. Section II also maps the contradictory development of a state court jurisprudence that reserves regulatory authority to the states. The Pike County doctrine best exemplifies this position. Although Mississippi Power and Pike County seem contradictory, Section II concludes that they are not wholly inconsistent. Because the Supreme Court has never explicitly overruled Pike County despite the very broad arc of the Mississippi Power holding, parallel state regulation may not be wholly preempted. Finally, Section II examines the background against which the Court decided Mississippi Power and concludes that the scenario at issue did not represent the typical utility power sale. This decision—so clear and resolute on its face—actually creates a black hole of uncertainty in a regulatory system begging for stabilization.
The interstate wholesale power sale is the element of a utility's operations that triggers federal, rather than state, regulatory jurisdiction. Section III analyzes the emergence of alternatives to interstate wholesale power sales, alternatives which circumvent the preemptive effect of Mississippi Power. Independent power producers and Qualifying Facilities (QFs) benefit from the 1988 decision. Analyzed under the Mississippi Power doctrine and other relevant federal law, these types of entities fall under an umbrella of state jurisdiction that federal law cannot penetrate.
Section IV tracks the phenomena of Least-Cost Utility Planning (LCUP) and DSM. These conservation-based strategies and techniques displace, typically at less cost, the need to construct additional power facilities. They offer environmental benefits and are thus useful alternatives to traditional power supply choices. Regulatory commissions in about one-third of the states now vigorously implement LCUP. Because LCUP and DSM involve no interstate sales of power, these strategies do not fall prey to federal regulation or preemption.
Section V quantifies the environmental impact of the shift to DSM and independent power supply sources and compares this to the traditional order.
Section VI concludes that to the degree Mississippi Power speeds the transition to LCUP/DSM and independent power resources, the decision will profoundly reorient the power industry in America. Because the decision will preempt state regulation of a significant segment of traditional electric power, states will develop and promote the use of independent power and LCUP/DSM. This will have the effect of significantly decreasing the need for traditional utility power generation. Given the presence of viable technological alternatives, states logically will move away from federally regulated conventional power generation.
A technologically complex society blurs the distinction between interstate and intrastate commerce. For more than half a century, the Federal Power Act (FPA) created a demilitarized zone between competing federal and state jurisdiction over electric power regulation. Despite this legislation, chronic legal friction between federal and state regulatory authority erupted virulently over the construction of costly and unnecessary power plants during the 1980s. This construction resulted in frequent utility cost overruns. Although federal regulators generally approved these overruns, state utility regulatory commissions resisted the pass-through of these costs to local consumers. For America's most capital intensive industry, a single regulatory decision can have a multi-billion dollar effect.
In 1988 a divided United States Supreme Court expansively underscored the preemptive power of federal regulatory agencies. The Court's landmark decision, Mississippi Power & Light Co. v. Mississippi, conscripted state regulators to follow contemporaneous federal regulatory decisions. This article develops the thesis that Mississippi Power had and will continue to have, several profound, unanticipated impacts on the future of power in America. These impacts will endure because of the interaction of law, technology and regulation. Specifically, new technological alternatives will serve to subvert the preemption of state regulation that Mississippi Power dictates. State regulators will use these alternatives in order to reassert their currently preempted authority and these forces will transform the American power industry.
Mississippi Power will have three principal, unintended impacts. First, the decision will promote a technological shift to independent power generation. Two Supreme Court decisions in the early 1980s sanctioned independent power generation. Accelerated by the decision in Mississippi Power, hundreds of independent power projects will replace conventional electric utility plants by the year 2000. Second, Demand-Side Management (DSM) options, which conserve existing power resources, will increase at the expense of conventional power plants. Because DSM options do not involve a sale transaction, they are not subject to federal preemption under Mississippi Power. Third, Mississippi Power leaves open the possibility of coextensive state and federal regulatory jurisdiction. To retain authority, states will attempt to prevent utilities from establishing affiliated, or sister, entities to whom “paper” interstate power sales can be made. In so restricting their regulated utilities, states will encourage the growth of unregulated, independent nonutility companies. These companies will come to dominate the independent power and DSM sectors of the industry, thus fundamentally altering the future of electric power.
Rather than preemptively working to shape the future, the law often responds to technological and institutional change. On its face, Mississippi Power addresses yesterday's electric power industry. At the same time, however, this decision has sown the seeds of radical change in a traditional, highly regulated industry. In ways unanticipated by the Supreme Court majority, Mississippi Power will speed the transition to a more independent and decentralized future. This decision reorients fifty otherwise preempted state utility regulatory authorities toward alternative means to meet future power requirements. From a purely technological standpoint, independent power and DSM alternatives already provide viable alternatives. Rather than definitively resolving a regulatory debate, Mississippi Power may accelerate a voluntary transition to a decentralized new order. In so doing, the Supreme Court decision will promote a least-cost and environmentally more benign power supply. This Article forecasts Mississippi Power's long-term impact on technical and regulatory growth by analyzing, in separate sections, the effect of the decision on 1) traditional state utility regulation, 2) the emerging independent power and qualifying facility sectors of the industry and 3) DSM strategies now implemented in many states.
Specifically, Section II charts the evolution of Supremacy Clause precedent and the culmination of one line of cases in the Mississippi Power filed rate doctrine. Section II also maps the contradictory development of a state court jurisprudence that reserves regulatory authority to the states. The Pike County doctrine best exemplifies this position. Although Mississippi Power and Pike County seem contradictory, Section II concludes that they are not wholly inconsistent. Because the Supreme Court has never explicitly overruled Pike County despite the very broad arc of the Mississippi Power holding, parallel state regulation may not be wholly preempted. Finally, Section II examines the background against which the Court decided Mississippi Power and concludes that the scenario at issue did not represent the typical utility power sale. This decision—so clear and resolute on its face—actually creates a black hole of uncertainty in a regulatory system begging for stabilization.
The interstate wholesale power sale is the element of a utility's operations that triggers federal, rather than state, regulatory jurisdiction. Section III analyzes the emergence of alternatives to interstate wholesale power sales, alternatives which circumvent the preemptive effect of Mississippi Power. Independent power producers and Qualifying Facilities (QFs) benefit from the 1988 decision. Analyzed under the Mississippi Power doctrine and other relevant federal law, these types of entities fall under an umbrella of state jurisdiction that federal law cannot penetrate.
Section IV tracks the phenomena of Least-Cost Utility Planning (LCUP) and DSM. These conservation-based strategies and techniques displace, typically at less cost, the need to construct additional power facilities. They offer environmental benefits and are thus useful alternatives to traditional power supply choices. Regulatory commissions in about one-third of the states now vigorously implement LCUP. Because LCUP and DSM involve no interstate sales of power, these strategies do not fall prey to federal regulation or preemption.
Section V quantifies the environmental impact of the shift to DSM and independent power supply sources and compares this to the traditional order.
Section VI concludes that to the degree Mississippi Power speeds the transition to LCUP/DSM and independent power resources, the decision will profoundly reorient the power industry in America. Because the decision will preempt state regulation of a significant segment of traditional electric power, states will develop and promote the use of independent power and LCUP/DSM. This will have the effect of significantly decreasing the need for traditional utility power generation. Given the presence of viable technological alternatives, states logically will move away from federally regulated conventional power generation.
