The contrasting policies of the FCC and FERC regarding the importance of open transmission networks in downstream competitive markets.

• Author: Reiter, Harvey
• Position: Federal Energy Regulatory Commission

1. BACKGROUND A. FERC's Historical Resistance to Competition and Court Mandates B. Origins and Evolution of FERC's Policies Regarding Access to Gas Pipelines and Electric Transmission 1. The Convergence of Consumer and Supplier Interests in Opening Networks a. Gas Pipelines i. Minimum Commodity Bill Regulation ii. Special Marketing Programs iii. Order No. 436 iv. Order No. 636 b. Electric Utilities i. Market-Based Rate Authorizations ii. Merger Conditions iii. FERC's "Golden Rule" iv. Order No. 888 v. Order No. 2000 C. The FCC's Open Access Policies 1. Carterfone 2. MCI 3. Computer I, II, and III a. Computer I b. Computer II c. Computer III 4. Leased Access Rules for Cable D. Role Reversal 1. "Hands Off the Internet" Policy: Conflating Regulation of Information Services and Broadband Platform a. Cable Modem NOI and Declaratory Ruling b. Wireline Broadband NPRM II. ANALYSIS A. Neither the Differing Natures of the Industries Regulated by FERC and the FCC nor the Regulatory Frameworks under which They Operate Explain Their Different Policy Approaches 1. There Are Insufficient Differences in the Nature of Intermodal and Intramodal Competition between the Communications and Energy Industries to Explain the Different Approaches to the Issue of Open Network Access a. The Limits of Intermodal Competition between Broadband Platforms as a Guarantor of Competition in Information Services b. Broadband Delivery Markets, Like Gas Pipeline and Electric Transmission Networks, are Highly Concentrated c. Intramodal Competition between Broadband Providers Might Help, but It too Is Limited and Inadequately Encouraged d. Do Industry Differences between the Communications and Energy Industries Diminish the Importance of Downstream Competition? 2. Differences in the Regulatory Regimes Administered by FERC and the FCC Do Not Explain Their Different Approaches to Network Access Issues a. Statutory Mechanisms for Encouraging Infrastructure Deployment and the FCC's Faith Based Reliance on Deregulation as an Incentive for Broadband Deployment b. The FCC's "Bundling" Rationale for Deregulation III. CONCLUSION AND RECOMMENDATIONS The Federal Energy Regulatory Commission ("FERC"), formerly the Federal Power Commission ("FPC"), and the Federal Communications Commission ("FCC"), charged, respectively, with regulating key segments of the energy and communications industries, have undergone a remarkable role reversal. After years of resistance to the very notion of competition in the electric and gas industries, FERC has, with considerable vigor and consistency spanning nearly two decades, promoted policies to open access both to gas pipeline and high voltage electric transmission networks to downstream competitors of the network owners, i.e., to those who compete with pipelines and utilities in the sale of natural gas or electric power. FERC has stated plainly and repeatedly that the underpinning of these policies is that open access is essential to the protection of competition in the sale of the largely deregulated services reliant upon those networks.

   By contrast, the FCC has done an about-face, reversing nearly forty years of policymaking to pry open cable and telecom networks and substituting a near total reliance on unregulated intermodal competition (1) among a handful of broadband providers to protect the public. The FCC's purpose, stated plainly and repeatedly, is to ensure that regulatory burdens do not discourage investment in broadband technologies or deter its deployment.

   This Article examines the forces that led to the development of FERC's open access policies and explores the FCC's policy shift and its philosophical underpinnings. (2) It concludes by questioning whether differences in either industry structure or the regulatory schemes governing the energy and communications industries justify the FCC's hands-off policy, and offering suggestions for a different approach.

1. BACKGROUND

   1. FERC's Historical Resistance to Competition and Court Mandates

      The landmark 1934 Federal Communications Act ("1934 Communications Act") (3) granted the FCC jurisdiction to regulate interstate telecommunications activities and companies. Among other powers, the FCC was given authority to control entry, to establish reasonable rates and terms of interconnection between telephone companies, (4) and to grant applications upon a finding that "the public interest, convenience, and necessity will be served by the granting of such application." (5) As with other similar regulatory statutes, it also prohibits undue discrimination in the rates, terms, and conditions of service. (6) Its stated central purpose is to make available an efficient communications service at a reasonable cost, consistent with the public interest, convenience, and necessity. (7) These basic regulatory features remain in place under the 1996 Telecommunications Act ("1996 Act"), (8) but that Act goes a step further. "It attempts 'to eliminate the monopolies enjoyed by the inheritors of AT&T's local franchises.'" (9) As the FCC has put it, "the Telecommunications Act of 1996 introduced a mandate that the Commission promote competition, deregulation and innovation wherever possible in the communications market." (10)

      Enacted during the same era as the 1934 Communications Act, the 1935 Federal Power Act ("FPA") and 1938 Natural Gas Act ("NGA") grant FERC the power to regulate wholesale sales and transmission of, respectively, electricity and natural gas in interstate commerce, (11) in a manner similar to the power granted the FCC by the 1934 Communications Act. (12) Sellers of regulated services, as in the communications industry, must offer service without undue discrimination and under rates, terms, and conditions that are just and reasonable. (13) Mergers and licenses or certificates subject to FERC's jurisdiction must likewise satisfy a "public interest" or "public convenience and necessity" standard. (14) For much of the FPC's history, natural gas service was marked by stable, relatively low prices and electric service was characterized by steadily declining prices. Thus, although it has long been settled that the FPC, like the FCC and other regulatory agencies, had a duty to consider anticompetitive impacts of utility proposals in its public interest deliberations, (15) FERC (and its predecessor, the FPC) took few steps to protect, much less promote, the limited competition extant in those industries. (16) Indeed, even when pressed, "[i]t apparently took several trips to court, including two to the Supreme Court, to fully convince the FPC of its statutory mandate to consider antitrust policy in the public interest equation." (17)

   2. Origins and Evolution of FERC's Policies Regarding Access to Gas Pipelines and Electric Transmission

      1. The Convergence of Consumer and Supplier Interests in Opening Networks

      FERC's historical reluctance notwithstanding, changing industry conditions in both the electric and natural gas industries forced it to reexamine its regulatory approach. Beginning in the early 1980s, partial deregulation of natural gas prices under the Natural Gas Policy Act of 1978, (18) intended to spur gas production and alleviate gas supply curtailments, led to ill-advised over-purchases of expensive gas supplies by interstate pipeline companies and dramatic increases in the cost of gas to industry and consumers. (19) This combination of huge gas surpluses at a time of rising prices, coupled with pipeline refusals to transport lower-priced gas supplies to willing buyers, brought increasing pressure to bear on FERC by an unusual coalition of state utility commissions, consumer groups, independent gas producers, gas distributors, industrial consumers, and intrastate pipelines. (20) All of these groups had coalesced around the view that access to transportation service by interstate pipelines was essential to limit what they saw as the excessive economic power of those companies. (21) These pressures led FERC, over the remainder of the Twentieth Century, to engage in a series of far-reaching rulemaking proceedings that have dramatically altered the structure of the natural gas industry.

      At nearly the same time, but at a somewhat slower pace, the dynamics of the electric industry were also creating pressure for change. Municipal utilities and rural electric cooperatives were geographically surrounded by their private utility counterparts and typically reliant on them for most of their power supplies. Municipal utilities had pushed for years for the right to purchase the transmission service needed to secure alternative power supplies. (22) Although they met with some success in the late 1960s and into the 1970s, (23) including one notable Supreme Court victory, (24) there was little overall change in an industry structure where most energy was purchased from utilities that produced their own electricity. As with the natural gas industry, it was a convergence of consumer and supplier interests that precipitated more dramatic changes.

      The same energy crises of the 1970s that led to the passage of the 1978 Natural Gas Policy Act ("NGPA") (25) also led, that year, to passage of the Public Utility Regulatory Policies Act ("PURPA"). (26) The most significant feature of PURPA was a provision obligating utilities to purchase the output of independently owned power plants that either relied on renewable energy sources (e.g., water, biomass, or solar energy) or produced electric energy and a commercially-viable thermal output (e.g., steam for heating) as part of a combined "cogeneration" process. (27) At the same time, changes in technology created the new possibility of efficient power production with much smaller units, while expansion of the transmission network had made transmission over long distances more economical. (28) Creating the perfect storm, utilities were already under pressure as a result of overconstruction of large-scale power plants, major cost...