Letter to Patrick H. Wood, III, Chair of the Federal Energy Regulatory Commission

July 20, 2004

The Honorable Patrick H. Wood, III
Chairman
Federal Energy Regulatory Commission
888 First Street, NE
Washington, D.C. 20426

Dear Chairman Wood:

We write to once again express our frustration with the direction the Federal Energy Regulatory Commission (Commission) appears to be headed. It is our view that the Commission, despite numerous meetings with Senators from both parties, correspondence, and even legislative action, continues to pursue a policy that would dramatically restructure the nation's electric industry at the expense of many constituents that we represent. To that end, we strongly urge you to allow competitive wholesale markets to continue to evolve in a manner that complements the reliable, low-cost electric service that is provided under strict State supervision and regulation in our regions of the country.

While it appears that the Commission has slowed its pursuit of the Standard Market Design (SMD) rulemaking, we are very troubled by recent policy initiatives and actions that seem focused on using different means to accomplish the same goal. It is essential that the Commission understand fully that we are no more supportive of a piecemeal approach to implementing the proposed SMD than we were of seeing a final rule. It is our view that the language used in these recent orders, much like SMD, will require consumers, our constituents, to foot the bill for significant restructuring of their electric power systems, pre-empt State laws and policies designed to protect them, and abolish the current structure of the utilities that have provided them low-cost, reliable power for so many years.

On numerous occasions (including in Conference Report 108-375 - which passed the House and received well over 50 votes in the Senate) Congress has clearly communicated its concern with the Commission's attempts to "mandate" participation in regional transmission organizations (RTOs) and its preference for a voluntary approach. Yet, we get the sense from the Commission's recent actions that national mandatory participation in RTOs will be expected by the agency. Many State regulators have determined that the costs and risks of joining such organizations outweigh the benefits and, in fact, have publicly announced that the Commission's requirements are not in the interests of their citizens.

Similarly, the Commission's final rule regarding market-based rate authority, issued on July 8, 2004, will result in increased costs for native load customers. We fully support the Commission's goal to preclude bad actors the benefits of market based rates and we agree that customers should not be gouged due to the exercise of market power. However, we disagree with a test, as the Commission emphasized repeatedly in its Rehearing Order, which grants undue advantage to utilities that participate in an RTO. FERC cannot claim that RTO participation is voluntary if rules are promulgated that disadvantage non-RTO participating utilities. It is particularly troubling to us that the Commission would penalize many of our constituents with higher rates simply because our states and regions have determined that RTOs are not prudent.

Finally, we are extremely troubled by the Commission's most recent foray in matters traditionally reserved for state regulators. Specifically, we refer to the Commission's Oklahoma Gas and Electric decision to condition the purchase of a bankrupt plant by a utility on expensive mitigation by the utility, which will ultimately again be paid for by native load customers. Despite the transaction being predicated on customer needs and having the support of the state commission, this decision, much like many others that the Commission has denied or conditioned recently, signals the Commission's interest in preempting state regulatory authority. While the Commission in its Oklahoma Gas and Electric decision acknowledged that it has no jurisdiction over acquisition of generating plants, it bootstrapped on the fact that the transaction also involved transmission facilities (using a narrow technicality - the switches that connect the plant to the transmission network) to declare a transaction within the Commission's purview - a disturbing Commission practice. But in this case, the Commission went one further. Once the Commission snared jurisdiction it proceeded to second guess the State by delving into supply procurement for native load - an area far removed from the Commission's business and squarely within the States' responsibility.

We have outlined a few examples of where we believe that the Commission has overreached its authority. We note that the U.S. Court of Appeals for the D.C. Circuit in several recent cases has also taken the Commission to task for going well beyond the authority granted by the Federal Power Act. The opinions, such as the recent D.C. Circuit decision in California ISO v. FERC, are taking the Commission to task in stronger and stronger language. We note also that earlier in Atlantic City Electric v. FERC, the D.C. Circuit overturned a FERC opinion exercising jurisdiction over ISO membership. On remand, FERC again purported to exercise jurisdiction under the same provision that the D.C. Circuit held it couldn't. As a result, the D.C. Circuit went so far as to declare summarily that the Commission violated the court's mandate to renounce that particular form of FERC jurisdiction over review of ISO membership. We cannot recall the court ever having to go so far to put the brakes on the Commission's runaway train. In addition, the use of traditional ratemaking procedures, such as section 206 of the Federal Power Act, should not be used to implement policy changes such as forcing RTO membership.

There was a time, not long ago, when the legal sufficiency of Commission orders appeared to be of paramount concern to the Commission. For many years, remands were a rarity for the Commission, except in instances that the orders had not spoken clearly. It is unsettling to see the number of court remands recently, especially when the opinions reject the legal underpinnings of the Commission's actions. Those cases increase our level of anxiety as well as erode our confidence in your leadership on electricity issues. The Commission's single-minded pursuit of redesigning the electricity markets at any cost will not be accepted when our constituents bear the brunt of all the costs with no proven benefits. This market manipulation will only serve to move regulation further from consumers and their locally elected officials and send it to Washington, D.C., into the hands of an unelected and apparently unresponsive body of regulators.

The electric markets in our regions are serving consumers well and we can see no justification for replacing them with an untested, federally coerced structure that will result in higher prices for consumers, inefficient and unnecessary siting of generation and transmission, and questionable reliability.

Time and again, the Commission has demonstrated that neither comment nor action from Congress can deter it from this ill-advised path. It appears that the Commission is showing similar disregard for the courts. Clearly, the Commission's obligation to ensure that wholesale rates are just and reasonable does not, and should not result in policies that increase costs to retail customers.

Sincerely,

Senator Richard Shelby
Senator Jon Kyl
Senator Larry Craig
Senator Gordon Smith
Senator Mary Landrieu
Senator John Breaux
Senator Jim Bunning
Senator Saxby Chambliss
Senator Trent Lott
Senator Jeff Sessions
Senator Zell Miller
Senator Fritz Hollings
Senator Wayne Allard
Senator Mike Crapo
Senator Conrad Burns
Senator Thad Cochran
Senator Elizabeth Dole
Senator Lindsey Graham
Senator Ben Nighthorse Campbell
Senator John McCain