• 2003 Blackout's Impact on Energy Legislation
  • September 29, 2003
  • Law Firm: Orrick, Herrington & Sutcliffe LLP - San Francisco Office
  • Prior to the August 2003 blackout, comprehensive energy legislation was winding its way through Congress. The House of Representatives in April passed comprehensive legislation, The Energy Policy Act of 2003, which addressed major energy issues, including an expansion of FERC's jurisdiction, and incentives to upgrade the transmission grid (see Energy Regulatory Update, April 15, 2003). The Senate, though, failed to pass new legislation this year, and instead agreed just before the August recess to pass last year's Democratic-sponsored legislation. The recent blackout has added a sense of urgency for Congress to pass energy legislation; however it is unclear if consensus will be reached when the debate returns to the Capitol during the fall legislative session.

    Renewed Focus on Transmission

    The August 2003 power outage raised questions about how to ensure electric reliability and upgrade the nation's transmission system. In recent years, although the number of transactions on the transmission grid has steadily increased to accommodate the growing demand for power, investments in transmission have not increased proportionally. The Department of Energy recently projected that electricity demand will grow by 20 percent over the next decade, while transmission investment will grow only by 6 percent.

    Even though the House and Senate each passed energy bills prior to the blackout, it likely will impact the upcoming House-Senate conference over comprehensive energy legislation. Most of the key issues related to improving transmission and ensuring reliability are already contained in provisions of the pending legislation. The question is what new light the blackout will shed on the issues and how those provisions will be assessed and debated in the wake of the blackout.

    Key Electricity Provisions

    The electricity title of the Senate and House bills both contain provisions to create an electric reliability organization with Federal Energy Regulatory Commission oversight. The electric reliability organization would develop and enforce mandatory reliability rules and standards that would be binding on all electric companies and market participants. The North American Electric Reliability Council (NERC), which is the existing reliability organization, is a voluntary organization and compliance with its guidelines and standards for transmission system reliability is not subject to government oversight.

    The House legislation addresses FERC's pending Standard Market Design (SMD) initiative. This initiative was proposed by FERC to form a limited number of large regional transmission organizations (RTOs) to ensure that all independent transmission organizations have sound wholesale market rules and to vary implementation schedules depending on regional needs and regional differences. Many in the electricity industry believe, however, that the way to improve the reliability of the grid is to make the grid simpler by dividing it back into smaller regional pieces that are only loosely connected.

    Any legislation passed this fall will likely include transmission investment provisions. In both the House and Senate bills, electric companies that sell or dispose of their transmission assets into a FERC-approved RTO or independent transmission company will not be subject to tax penalties. The House bill goes further than the Senate bill by amending the U.S. tax code to include enhanced accelerated depreciation for electric transmission assets. In an effort to increase transmission investment, the House bill also proposes innovative transmission pricing incentives, such as higher rates of return.

    Another key area involves transmission construction, which is hampered because states have sole jurisdiction over where to build new transmission lines. The House bill contains transmission siting provisions that would grant FERC backstop transmission siting authority to assist stalemated states in siting transmission lines in interstate congestion areas, as designated by the DOE. The House bill also reforms the transmission permitting process on federal lands and designates the DOE as the primary agency to coordinate such permitting.

    As a result of the blackout, it seems likely that any energy legislation that emerges from the House-Senate conference will include an electricity reliability subtitle, some type of emergency FERC siting authority and increased penalties for misconduct under the Federal Power Act.

    Other Key Provisions

    Beyond the blackout's effect on transmission related provisions of the pending legislation, it seems likely that any legislation passed will repeal the Public Utility Holding Company Act (PUHCA). Not only do both the House and Senate bills include provisions that would repeal PUHCA, PUHCA's effectiveness is further being questioned after the blackout because utility companies that appear to have been involved in the blackout were registered holding companies under PUHCA. Others argue, on the other hand, that PUHCA repeal would accelerate the move towards deregulation and thereby exacerbate the burden on the transmission grid. The Public Utility Regulatory Policies Act of 1978 (PURPA) probably also will be reformed, specifically by eliminating prospectively the obligation of electric utilities to purchase the electric output of qualifying facilities, as well as the ownership limitation applicable to electric utility investments in QFs.

    Prospects for Passage

    On the eve of the fall recess, the prospects for passage of comprehensive legislation addressing these significant issues remain far from certain. Members of Congress are split not only on partisan, but regional differences, which adds additional complexity to reaching a workable consensus. For example, many proponents of SMD represent areas of the country that already have functioning RTOs, including the Northeast, Midwest and California. At the same time, other areas of the country, including the Southeast, Texas and the Northwest, are opposed to increasing FERC's jurisdiction over their transmission systems. There are also significant differences on other key areas including oil and gas exploration in Alaska's Artic National Wildlife Refuge, and incentives for oil, gas and nuclear energy production. As a result, it remains to be seen whether the August blackout will provide the impetus necessary to finally achieve passage of comprehensive energy legislation.