Introduction

In the wake of the Federal Energy Regulatory Commission’s (FERC or the Commission) Order No. 888, the Commission adopted a policy of allowing electricity generators selling power at wholesale to avoid paying retail transmission and distribution charges to local utilities for "station power" used for heating, air conditioning, lighting and powering office equipment at generation facilities. This policy has been effectuated by FERC’s approval of monthly "netting," whereby a generator is permitted to net its station power use against its power output on a monthly basis. If the monthly output exceeds monthly station power use, no retail sale is deemed to have taken place, and the generator is not subject to retail transmission and distribution charges.

On May 4, 2010, the United States Court of Appeals for the D.C. Circuit issued an opinion, Southern California Edison Co. v. FERC,1 vacating and remanding a decision by FERC requiring the California Independent System Operator (CAISO), which administers the transmission grid and associated wholesale electricity markets covering much of California, to allow for monthly netting, finding that FERC’s netting policy as applied to the CAISO may have exceeded its jurisdiction over interstate transmission and wholesale sales of electricity in interstate commerce as provided by Section 201(b)(1) of the Federal Power Act (FPA).2 Depending on FERC’s resolution of this issue on remand (or through judicial review), wholesale generators may have to pay retail charges for their use of station power.

The D.C. Circuit held that FERC had not adequately asserted its basis for jurisdiction over transmission in approving a tariff that applied the same netting methodology to a generator’s use of station power as is applied to determine transmission charges for power delivered to and taken from the transmission grid by generators. The court affirmed that FERC has clear jurisdiction over the charges for transmission services, but found that FERC may have exceeded its jurisdiction in setting a netting period for station power use because such use may constitute a retail sale that falls outside of FERC’s jurisdiction.

It is important to note that in Southern California Edison, the D.C. Circuit did not affirmatively rule on the issue of whether FERC has jurisdiction over use of station power by wholesale electricity generators. Rather, the court held that FERC had not adequately supported its assertion of jurisdiction with respect to setting the netting period for station power use and remanded the matter to the Commission for further proceedings. On remand, FERC may seek to justify its assertion of jurisdiction sufficient to sustain its netting policy, or it may pursue further judicial review and seek an order upholding its exercise of jurisdiction. Regardless, this decision calls into question the continued viability of FERC’s netting policy.

Background

Prior to the unbundling of electricity generation, transmission and distribution services as a result of FERC Order No. 888,3 it was not necessary to consider whether a retail charge should be assessed for a generator’s use of station power. At that time, a single vertically-integrated utility owned all related services and it would simply subtract its station power use from its gross output. Order No. 888 changed this by requiring the separation of generation, transmission and distribution services and adopting a policy of open access to the transmission grid.4

As a result of Order No. 888, electricity is now supplied at wholesale both by vertically-integrated utilities and by independent power producers. In many regions in the United States, the transmission grid and associated wholesale power markets are administered by an independent system operator or regional transmission organization which acts to ensure nondiscriminatory open access to the transmission grid and associated markets. At the same time, local distribution and retail sales to end-users, which are generally not FERC-jurisdictional, are provided by local utilities. Local utilities impose retail charges for distribution services, and thus FERC’s netting policy — which enables wholesale generators to avoid such charges for use of station power — prevents utilities from collecting revenue for this use.

The parameters of state and federal authority to regulate electricity are governed by Section 201(b)(1) of the FPA, which provides FERC jurisdiction over the interstate transmission of electricity and the wholesale sale of electricity in interstate commerce. Section 201 of the FPA also specifies that states retain jurisdiction over retail sales of electricity and over local power distribution. Thus, FERC has jurisdiction over the transmission of power from the generator to and across the transmission grid, but once electricity is stepped-down and supplied to retail users over local distribution lines, state authority applies. Order No. 888 affirms state jurisdiction over local distribution services and emphasizes that this jurisdiction applies to the provision of any electricity service, whether or not state facilities are involved in the transaction.5

FERC formulated its netting policy for use of station power in a series of orders regarding regional transmission grids and markets in the Midatlantic and the Northeast administered by the PJM Interconnection, L.L.C. (PJM)6 and the New York Independent System Operator, Inc. (NYISO),7 and approved a one-month netting period for the calculation of station power use in each market. Under such a policy, when a generator’s output of power delivered to the grid is net positive for the month, no retail sale has taken place. FERC’s order approving a monthly netting period in the NYISO market was challenged in a case brought to the D.C. Circuit — Niagara Mohawk Power Corp. v. FERC.8 There, the court rejected petitioner’s jurisdictional challenge of FERC’s order because petitioners conceded that a one-hour netting period (as opposed to the one-month netting period) would be acceptable. The court stated that, "[i]fthe Federal Power Act, as petitioners contend, prevents NYISO from exerting authority over state-jurisdictional transactions by netting them out, then any such exertion must be a violation."9

The D.C. Circuit Decision

The D.C. Circuit’s decision in Southern California Edison addresses FERC’s approval of a tariff filed by the CAISO that applied a one-month netting period in the calculation of station power use. CASIO adopted the one-month netting policy in response to a FERC order (addressing a complaint filed by an independent power producer) that a one-month netting period reflected FERC policy and that CAISO must revise its tariff to comply.10 Petitioner-Southern California Edison (SCE) sought rehearing and subsequent D.C. Circuit review of this order. SCE’s initial challenge was held in abeyance pending FERC approval of the revised tariff.

Upon FERC’s approval of the revised CAISO tariff, SCE renewed its request for rehearing. Relying on its asserted jurisdiction over the transmission of station power, and the D.C. Circuit’s decision in Niagara Mohawk, FERC denied the request for rehearing and an alternate argument asserted by SCE that SCE could assess retail stranded cost or consumption charges, even when FERC determines that no retail sale has taken place. The D.C. Circuit consolidated SCE’s two appeals in this case.

On appeal to the D.C. Circuit, SCE argued, and the court agreed, that FERC exceeded its jurisdiction over transmission by requiring that the netting period approved to calculate transmission charges must also govern the determination of retail charges utilities seek to impose for a generator’s use of station power. SCE also argued, and the court again agreed, that unlike the petitioner in the Niagara Mohawk case, SCE had never conceded that FERC had jurisdiction to "set any netting period to determine whether a retail sale occurs or to determine whether the utilities are otherwise permitted to impose consumption charges."11 At the same time, the court rejected FERC’s argument that it did not exceed its jurisdiction because no retail sale has taken place if, in a month, a generator delivers more power to the grid than it takes.12 Indeed, the court found this argument ironic in light of Niagara Mohawk as it appeared to be a concession by FERC that whether a retail sale occurs depends on the length of the netting period. The court also reasoned that FERC’s assertion that the state lacks jurisdiction because no retail sale has occurred begs the jurisdictional question and concluded that "unless a transaction falls within FERC’s wholesale or transmission authority, it doesn’t matter how FERC characterizes it."13

The court also rejected FERC’s argument that if it were to recognize the utilities’ right to determine the netting period for generators’ use of station power, this would conflict with, and thus be preempted by, FERC’s application of a different netting period for transmission. The court pointed out that, as a result of Order No. 888, FERC has successfully created separate markets for wholesale sales, transmission, and retail sales and distribution and questioned why different pricing techniques cause a conflict.14

At the same time, the court acknowledged, but did not substantively address, the merits of an argument (asserted by a group of independent generators who intervened in support of FERC) that inconsistent methods of netting would result in retail charges for station power use being "trapped" (i.e., not recoverable in the wholesale power markets), thereby undermining FERC’s wholesale rate regulation. The court found that this argument had not been relied on by FERC in its orders below and thus, under SEC v. Chenery Corp.,15 could not provide a basis for affirming FERC’s orders.

In its disposition of the case, the court acknowledged that because of the Commission’s concern about the competitive position of independent generators as compared to utility generators, there "appears to be the underlying policy reason that drives FERC’s opinions."16 However, having rejected FERC’s arguments for jurisdiction, the D.C. Circuit vacated and remanded the matter to FERC.

Impacts of the Decision

On remand or on further judicial review, FERC must adequately justify its assertion of jurisdiction to address the issue of what retail charges may be imposed for a generator’s use of station power. The court indicated that the Niagara Mohawk precedent does not apply in this instance. Additionally, it rejected FERC’s assertions of jurisdiction on the basis of a retail sale not having occurred and a conflict with FERC’s exclusive jurisdiction over wholesale ratemaking related to different charges being assessed within the generation, transmission and distribution markets.

While the court questioned the jurisdictional conflict raised by generator-intervenors, it did not explicitly reject the argument that a conflict occurs because different pricing for netting of transmission power and netting of station power results in trapped costs. This may be an argument for FERC to pursue when it considers the case on remand. Additionally, the court’s recognition that FERC may have a policy basis for its findings suggests that if FERC can connect its basis for jurisdiction on this issue to its open-access policy, the FERC station power netting policy may survive additional review.

If FERC is unable to justify its jurisdiction to address the netting period used in determining retail charges for use of station power, generators across the country (not just those in the CAISO) may potentially be subject to paying retail charges for all station power.