Court Rules in Favor of Federal Power Regulators in NE; Preview of Jurisdiction Fight Over Electrical Grid?

Who will control the US power grid as modernization begins? (image: denmatic via flickr.com)

A U.S. Appeals Court ruled that New England states cannot determine the pricing their own citizens pay for electricity, Forbes reported last week. The electrical rates for Connecticut, New Hampshire, Vermont, Massachusetts, Rhode Island, and Maine are set according to estimates of their near-future power needs—the higher the estimated need, the greater the price, in a classic case of supply and demand. The estimates are compiled by the operator of the region’s power grid, ISO New England, Inc. State energy regulators have been disputing these estimates, claiming that they’re too high—much too high. For example, Connecticut Attorney General Richard Blumenthal believes that Connecticut ratepayers have been overpaying by $1 billion a year.

Blumenthal and other state officials believe it’s their duty to look out for the interests of their citizens. As a result, they sought to have power or discretion over the rate-setting estimates, saying “State officials acting in the public interest should determine the state’s electricity needs, not unaccountable federal regulators controlled by Big Energy.” The Court of Appeals disagreed, saying that it is those federal regulators, the Federal Energy Regulatory Commission, who have the authority to approve and, if necessary, modify, the annual estimates of New England states’ power needs.

The power grid operator hailed the decision, saying that “If you allow the states to individually set and maintain their own requirements, it could create inconsistent results and lead to reliability problems.”

Who has the better of the argument?  As is the case with many issues, there is no clear-cut right answer.

The state argument: federalism. The United States is a federal republic—each state has its own government with considerable power over its citizen’s lives. This system grew partially out of a distrust of big, distant, centralized government—the Framers of the Constitution had just fought a war for independence against Britain, after all—but also came out of an abiding belief that it is best for people to run their own affairs, and to be governed by those who share their interests, culture, history, and needs. The idea is that what works for the tiny tropical island state of Hawaii might not work for landlocked heartland state Kansas; what works for frozen, sparsely populated, and resource-rich Alaska might not work for densely packed, financial- and pharmaceutical-industry-driven New Jersey.
Not only then do local officials have the power to regulate many aspects of their constituents’ lives, but they have the moral duty to do so—to act in the interest of those they represent. As Connecticut’s Blumenthal points out, there are significant problems with having distant regulators making decisions with local impacts. Sometimes, federal programs act as wealth transfers from one part of the nation to another. For example, agricultural subsidies have resulted in farm households having a 26 percent higher average income than non-farm households, which means that money is taken from non-agricultural states and transferred to farming states.  There are some good reasons for supporting farms—the nation’s strategic interest in having a strong agricultural base, for instance—but the fact remains that this federal program hurts citizens in some parts of the country to help citizens in another.

Even when that’s not the case, federal regulators often become “captives” of their industries and put industry needs ahead of the needs of the industries’ customers. Anyone who has followed the controversies over how the FDA regulates the introduction of new drugs, the Fed regulates banks, the SEC regulates the stock market, or the FTA oversees the airline industry, knows this to be true. The fear of state officials is that federal regulation will hurt the people they serve in order to provide benefits to people elsewhere, or to support business at the expense of consumers.

The industry’s argument: efficiency. Unfortunately, some things have to be regulated on a regional or national basis to run well. For example, also in the news this year and last are the problems caused by each state regulating health insurance within its borders, creating a thicket of impenetrable, often contradictory requirements that drive up health care and insurance prices. The electrical grid may be another thing that requires cross-state-border regulation.

The U.S. power grid is 100 years old and this turn-of-the-20th-Century grid is faced with electrical demand growing twice as fast as the nation’s population. (Think about how many more electrical devices you have now than 10 or 15 years ago.) The grid is badly in need of an update, and all the more so because of the emphasis on green or alternative energy—whether it’s moving wind or solar power from where it’s generated to population centers or being able to quickly switch in power from areas with wind or sun to those experiencing cloudy, still conditions green energy is more dependent on a smart, efficient grid than fossil fuel power.

To build that grid, the key is interoperability—it must work efficiently with diverse generation and monitoring technology.  A grid without interoperability would be like the Internet without common protocols; it would work, sort of, but efficiency would plummet while cost soars. Centralized federal regulation of the grid may be that the only way to ensure the necessary interoperability. (And, in fact, two federal bodies, one of them the FERC, are currently compiling smart grid standards.)

Also, grid modernization is a huge investment: Boulder, Colorado, a city of only 100,000, spent $100 million to modernize and computerize its grid. Doing a simple extrapolation from that, New York State would require $1.9 billion for the same upgrade. And that’s just one state (albeit one of the largest). With that sort of money at stake, doing anything other than your level best to ensure the maximum return on investment seems irresponsible.

If last week’s court ruling is any indication of what will come in future jurisdiction battles over the US electrical grid, we can expect to see increasingly powerful federal agencies and more frustrated state and local governments as the upgrade products move forward.