In the absence of “Cooperative
Federalism” the development of so-called “Green Infrastructure,” as
contemplated both by the Stimulus Package and by the forthcoming
initiatives from the President and Congress in the areas of energy,
security, and climate change regulation, will be thwarted.
We are heading toward an impasse in practical legislation
unless this fact is addressed directly in the formation of the new
laws--and indeed, in the implementation of the Stimulus Package in an
effective way as well.
The absence of Cooperative Federalism is the insistent legal theme
embedded in the swirling policy and economic debate of how national
policy objectives should be achieved.
Issues of Federalism are often dismissed by proponents of policy
change as vestigial legacies of constitutional tradeoffs made long ago,
or as a smokescreen of arguments designed to conserve the political or
economic status quo.
Conversely, sometimes they are ennobled as the protectors of the
intended liberty and rights of the individual and private enterprise.
In the energy/environment area, though, I would suggest that
there is one underlying pragmatic issue with which we all are wrestling:
how can the profile and
technical operations of the electrical utility industry be adapted to
the energy challenges of the 21st Century within our Federal legal
framework of governance?
The legislative flashpoints are the
debates over Renewable Portfolio Standards, carbon cap and trade
legislation, and transmission reform.
In each case, the question is framed as Federal vs. state
governance. The issue
ultimately is evolutionary:
one of adaptation of the rules of governance so that our national engine
of private enterprise (in this case utilities) can operate in a manner
aligned with national needs.
Since the days of Thomas Edison and
Samuel Insull, utilities have been regulated, and they’ve operated on
the principle of minimized system cost (whether termed “locational,”
“marginal pricing,” “economic dispatch,” or simply “free market
economics”). Much of this
regulation has been done at the state level and, while transmission and
some activities of some utilities have been Federalized over time, the
basic governing principle of minimized system cost has been embodied
there as well, save for a few special incentive-rate-type programs.
Come now certain interrelated developments which challenge the
adaptability of the first principle or regulation:
Concern with
greenhouse gases can only
be dealt with at significant cost, which euphemistically we now call
upon to be “internalized.”
Similarly, “energy security”
intrinsically has a cost, which will surely be increased if
grid-based electricity becomes a significant basis for automobile power.
At the present time (putting aside the nuclear debate, which itself
has Federal-state ramifications), the means to reduce GHG and increase
security appear to be
(and the Stimulus Plan has thrust them forward through incentives and
raw cash): (a) renewables,
and (b) associated transmission requirements--energy-efficient
“smart grids,” notably though not exclusively, in their distributed
generation form.
Unfortunately for utilities, these solutions
have a drawback more or less in common and, unless something is changed,
their marginal costs and state oversight impacts on utilities are both
negative. Neither electrons
nor carbon molecules respect borders.
Consequently, if external costs are to be internalized
principally through targeted energy and emission legislation--as opposed
to blanket taxation--electric utilities will likely bear a significant
burden of these costs.
The matter is further complicated when new
Federal rules are proposed to overlay state regulation, because of the
rise of regionalism. As
with most energy matters, effort to address cost internalization has
taken on a regional character;
the fuels, uses, and topography which utilities confront
obviously vary. Moreover,
as a result of the last wave of reform,
this regional character is overlaid by the fact that, while some
utilities operate on a fully-integrated basis, other have been subject
to more-or-less deregulation.
Since there has been an approximate vacuum
in Federal regulation focused on the proposed
energy/environmental fixes, we have seen the emergence of various types
of regional responses, notably in the environmental field, but in the
transmission field as well.
In the absence of Federal regulation
in some areas, states have taken action
individually, e.g.,
Resource Portfolio Standards.
In some cases,
through, regional organizations have propounded their own solutions,
e.g., carbon regulation and,
in some cases, in a partial relationship
with Federal regulators,
e.g., transmission. In
still other cases,
through, what has emerged are strategies for Federal delegation,
e.g., energy
efficiency, with advisory Federal guidelines.
Consequently, the Federalism issue is not one of
writing on a blank slate, either in practice or in legal theory.
Consequently, the need for “Cooperative Federalism”
is even greater than would naturally be assumed to be the case.
That said, for the 21st Century utility and its state regulators, what
will this “Cooperative Federalism” look like?
I would suggest
that reference to the emerging “Smart Grid”
case might be one starting point to illustrate creative new
approaches. The potential
of the Smart Grid is clear:
it ranges from
traditional possibilities such as monitor and control of
intermittently-generated renewable resources, like wind and solar, to
those notably associated with efficiency,
e.g., scheduling the charging
and discharging of distributed storage.
The theoretical means
by which the Smart Grid could operate is clear, too:
some kind of integration of one or more “platforms” through which
signals or integration can allow the information received from
individual control applications to run, charge, or discharge utility
response.
However,
there are not only technical but political constraints to be overcome.
Above all, the utility must receive, from regulators, market
signals which definitely reward it for its appropriate behavior.
As the Stimulus Package implicitly recognizes, investments must be made.
Regulated utilities cannot themselves, within the parameters of
their framework of operation and regulations, afford to make these
investments.
The NARUC/FERC Smart Grid Collaborative Proposed
Funding for the “Stimulus Package” Smart Grid Matching Grant and
Demonstration Program general criteria, addresses the issues of how
cooperative Federalism and utility contribution to national energy goals
can be reconciled, including:
(a)
Funding--how has the project minimized the possibility of
stranded investment by designing for the ability to be upgraded?
(b)
Overarching criteria--including regional diversity and
representation of urban, rural, and suburban settings
(c)
Technology criteria--including an open architecture that can
become the basis for interoperability with multiple applications
(d)
Rate design--compatibility
of existing or proposed rate designs with the purposes for which a
project is designed
(e)
Regulatory--coordination
of the project with the RTO and/or system operator
(f)
Information/data requirements
designed to measure performance and also to measure receptivity
of customer response
This type of guideline points the way to two
basic conclusions:
(1)
The 21st Century utility must be one which delivers new “smart”
technologies, which is to say, it is adaptive to Federal policies and
regional requirements.
(2)
The Cooperative Federalism necessary to develop green
infrastructure suitable to our changing society not only must be
oriented toward ongoing receptivity to new technology, but also adaptive
to regional differences without adopting a one size fits all model.
In sum, the answer to modern national energy infrastructure needs
will not be found in the Supremacy or the Commerce Clause, or
preservation of state regulators’ cost allocation and siting powers.
The keys will be:
•
Flexible technology criteria;
•
Regional adaptivity;
and
•
Focus on on-going financial sustainability.
ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.
