Protecting States in the New World of Energy Federalism

• Publication year: 2018

Protecting States in the New World of Energy Federalism

Daniel A. Lyons

PROTECTING STATES IN THE NEW WORLD OF ENERGY FEDERALISM

Daniel A. Lyons^*

Abstract

In a trilogy of recent cases, the Supreme Court has launched a quiet revolution in energy federalism. With little fanfare, it has abandoned its decades-long effort to divide electricity regulation into mutually exclusive spheres of federal and state authority. Instead it has embraced a more sophisticated concurrent jurisdiction model—against the wishes of Justice Scalia, who opposed this transformation in his final published dissent.

This Article explores the ramifications of this revolution, particularly for state energy regulators. The shift to concurrent jurisdiction is long overdue. The historic model of the local vertically integrated utility has long been replaced by regional, complex, innovative electricity markets. Concurrent jurisdiction allows regulators to adapt more nimbly to changing market dynamics, unrestrained by the outdated formalism of the old dual federalism model.

But this shift raises important questions regarding how states can remain relevant in an increasingly complex regulatory environment without the judicial safeguards that the dual federalism model once provided. States remain vital sources of local knowledge, experimentation, and expertise. But in this brave new world of concurrent jurisdiction, federalism-related disputes are more likely to be settled in the political arena than in the courtroom—an arena where federal authorities have the advantage. Drawing upon recent scholarship in negotiation theory and dynamic federalism, this Article discusses ways that state officials can, and do, negotiate with their federal counterparts to maintain influence over energy policy decisions. It also highlights procedural reforms that would improve the robustness and effectiveness of negotiations between state and federal officials in the

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policymaking sphere and therefore improve the likelihood that policy decisions will be sensitive to federalism concerns.

Introduction..............................................................................................924

I. The Rise and Fall of Dual Federalism in Energy Law............927

A. Dual Federalism by Design: The Structure of New Deal Statutes ...................................................................................... 928
B. The Statutory Shift Toward Cooperative Federalism................ 931

1. Public Utility Regulatory Policies Act of1978 .................... 931
2. Energy Policy Act of1992 ................................................... 935

C. Order 888 and the Administrative Push Toward Concurrent Jurisdiction ................................................................................ 937

II. Defining and Defending Concurrent Jurisdiction..................942

A. Defining Concurrent Jurisdiction .............................................. 942

1. The Precursor: ONEOK, Inc. v. Learjet, Inc...................... 942
2. Recognizing Concurrent Jurisdiction Over Electricity Markets: FERC v. Electric Power Supply Ass'n................. 945
3. Limits on Concurrent Jurisdiction: Hughes v. Talen Energy Marketing................................................................ 947
4. From Hemispheres to a Venn Diagram............................... 949

B. Defending Concurrent Jurisdiction ........................................... 952
C. Concurrent Jurisdiction's Threat to Energy Federalism .......... 954

III. Negotiating Energy Federalism in a World of Concurrent Jurisdiction..............................................................956

A. The Ongoing Importance of Energy Federalism ....................... 957

1. Diversity and Local Knowledge .......................................... 958
2. Experimentation .................................................................. 960
3. Capacity and Expertise........................................................ 961

B. Negotiating Federalism: A Taxonomy of Options for States to Bargain with FERC ................................................................... 961

1. Litigation ............................................................................. 962
2. Exercising Independent Regulatory Authority ..................... 964
3. Participating in FERC Decision Making ............................ 965
4. Lobbying Congress .............................................................. 966
5. Participating in Regional Cooperative Structures .............. 968

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C. Efforts to Improve Opportunities for Federalism Bargaining ... 970

1. Creating Procedural Reforms to Foster Federalism Values .................................................................................. 970
2. Establishing Forums for Federal-State Bargaining to Occur................................................................................... 972

Conclusion.................................................................................................. 972

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Introduction

In the last two terms, the Supreme Court has quietly signaled a significant shift in the law of energy federalism. The Court has traditionally employed a dual federalism paradigm to settle jurisdictional disputes. Under this model, New Deal-era statutes such as the Federal Power Act¹ and the Natural Gas Act² divided the energy industry neatly into two mutually exclusive spheres: federal agencies regulated interstate or wholesale operations, while intrastate or retail operations, which historically comprised the bulk of industry activity, remained the exclusive prerogative of state regulators.³ In the event of a jurisdictional dispute, the Court would typically engage in a formalistic inquiry to determine whether a particular initiative is better placed on the federal or state side of that jurisdictional "bright line."⁴

But the Court has struggled at times to police this line,⁵ and as Professor Jim Rossi has argued,⁶ a recent trilogy of cases has signaled a shift toward concurrent jurisdiction over some facets of energy markets. In early 2016, the Court allowed the Federal Energy Regulatory Commission (FERC) to regulate transactions in which energy providers pay consumers to reduce electricity consumption during peak demand—over the dissent of Justice Scalia, who argued (in what turned out to be his final opinion) that the agency had crossed into the state's regulatory sphere.⁷ Shortly thereafter, the Court invalidated

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Maryland's attempt to guarantee new power plants a fixed price in federally administered wholesale markets, but carefully explained that states may regulate within their sphere even when their efforts incidentally affect areas within FERC's domain.⁸ These electricity cases followed a similar decision during the preceding term that permitted the overlap of state and FERC authority in the related field of natural gas regulation, which prompted the late Justice Scalia to accuse the Court of "smudg[ing]" the line between federal and state authority over energy markets.⁹

The Court's seeming willingness to embrace a more sophisticated model of energy federalism follows a decades-long effort by Congress and FERC to restructure electricity markets. Traditionally, consumers purchased electricity from vertically integrated electric utilities that were regulated primarily at the state level, subject to rate regulation and nondiscrimination duties in exchange for protection from "destructive" competition.¹⁰ But beginning in the 1970s, Congress began to stimulate competition among electricity providers, prompting a lengthy realignment period wherein local vertically integrated utilities were dissected, restructured, and subjected to new forms of competition. This competitive dynamism, in turn, promoted greater economies of scale, leading traditionally fragmented markets to become regional in scope and more complex than they were in the monopoly era.¹¹ This realignment was part of a broader movement that Joseph Kearney and Thomas Merrill dubbed the "Great Transformation of Regulated Industries Law,"¹² through which several traditionally rate-regulated infrastructure industries were subjected to experiments in managed competition and increased consumer choice.¹³

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In electricity, as elsewhere, this "great transformation"¹⁴ in regulatory philosophy prompted an equally seismic shift in regulatory-utility federalism.¹⁵ To accomplish their goals of jumpstarting competition and eliminating pockets of market power that could impede consumer choice, federal authorities needed to reach into intrastate markets that had traditionally been within the states' portfolio.¹⁶ This practice spawned conflicts with state regulators eager to protect their jurisdiction and thwart federal initiatives that they viewed as inconsistent with state regulatory objectives.¹⁷ These disputes increased as the growing regionalization and complexity of electricity markets multiplied the planes of potential conflict between federal and state officials.

By embracing concurrent jurisdiction, the Supreme Court appears to have found a new equilibrium between federal and state regulatory claims, one that relies on functionalist analysis of particular regulatory programs instead of formalistic emphasis on historic statutory silos. Rather than strictly enforcing mutually exclusive zones of authority as in years past, the Court seems comfortable allowing federal and state regulators to act even if initiatives at one level of government intrude somewhat into the other's sphere. This is a positive development overall, as it aligns federalism doctrine more closely to the realities of the modern electricity market.¹⁸ The effect—indeed, the goal—of the great transformation was to make static, unchanging electricity markets more nimble, disruptive, and competitive. Today's increasingly fluid and innovative energy providers require a more fluid and innovative...