Originally Published: 5/7/2008
THE ENERGY POLICY ACT of 2005
By The Issue Wonk
The Energy Policy Act of 2005 (EPAct 2005) repeals the Public Utility Holding Company Act (PUHCA) of 1935, ushering in the total deregulation of public utilities. It “will prove to have profound impacts on the future of not only the fiscal health of public utilities but the oversight of their maintenance and the future construction of transmission lines.”1 EPAct 2005 is described in various ways, but is most commonly defined by its proponents who say that it is an attempt to combat the growing energy problems of the U.S. In order to do this it provides tax incentives and loan guarantees for energy production of various types, which Grunwald and Eilperin, call a “broad collection of subsidies for United States energy companies; in particular, the nuclear and oil industries.”2 (Wikipedia has a good list of what is included in this extensive law.)
However, there are several provisions which are causing concern. Some of these concerns stem from Section 1221. There are also the issues of eminent domain, the siting authority, and the reconfiguration of the power grid. Most disconcerting is the lack of oversight.
There is a section in EPAct 2005 that has had little discussion and is not fully understood by the American people. “Yet, this complex and important body of law represents but an ad hoc and unilateral takeover of not only the direction of energy policy but the very delivery system which Americans rely upon in order to live.”1 Section 1221 updates Section 216 of the Federal Power Act (FPA) and provides for, among other things, the requirement of a National Electric Transmission Congestion Study (NETCS). The first study was completed in August 2006, a year after enactment of EPAct 2005. The Congestion Study is supposed to be updated every 3 years thereafter.
National Interest Electric Transmission Corridors
The first NETCS paved the way for mandated National Interest Electric Transmission Corridors (NIETC). According to Section 1221(a) (16 U.S.C. § 824p), the Secretary of Energy may designate “any geographic area experiencing electric energy transmission capacity constraints or congestion that adversely affects consumers as a national interest electric transmission corridor.” As a direct result of the study, the Department of Energy (DOE) proposed 2 transmission corridors -- the Mid-Atlantic Area National Corridor and the Southwest Area National Corridor.
Most Americans are not aware of the new transmission corridors and their purpose because the public was given little or no notice, few opportunities to weigh in and attend very limited public hearings. The hearings were announced in May 2007 by the DOE and they took place in the very same month. “That gave little time for proper public notice for participation by residents, lawmakers, ratepayers and consumer advocates, to name but a few.”1 DOE claims that EPAct 2005 does not require it to hold any public hearings regarding the NIETC. “And in spite of over 2000 written comments and reports submitted to the DOE by state governors, U.S. state and federal elected representatives, consumer advocacy organizations, and environmental and historic preservation organizations, which all protested such corridors because of the lack of public input, the DOE would have none of it. It instead made no changes or acted upon any of the recommendations it received on its draft proposal by finalizing the NIETC in October 2007, as originally drafted.”1 (See report.)
There now exists, at least on paper, a list of the states and counties in the Mid-Atlantic Area National Corridor. (See map.) They are:1
22 of the 24 counties in Maryland and all of Baltimore City
47 of 62 counties in New York
7 of 88 counties in Ohio
52 of 67 counties in Pennsylvania
15 of 95 counties and 7 of 39 independent cities in Virginia
42 of 55 counties of West Virginia
The Southwest Area National Corridor includes the most heavily populated areas of California and Arizona:1 (See map.)
7 of 58 counties in California
3 of 15 counties in Arizona
“In its effort to modernize the transmission lines infrastructure, EPAct 2005 provides for the DOE to assign the Federal Energy Regulatory Commission (FERC) siting authority. . . FERC is central to the regulation of energy policy both fiscally as well has [sic] been given oversight authority on the applications of new construction of transmission line sites.”1 [Emphasis added.]
Under Section 216(b) of EPAct 2005 – Back-Stop Siting Authority – FERC is given authority to issue permits for the construction or modification of transmission facilities in a National Interest Electric Transmission Corridor if FERC finds that:
(1)(A) a state in which the facilities are to be constructed is without authority to approve the siting of the facilities or to consider the interstate benefits expected to be achieved by the project; (B) the applicant for a permit is a transmitting utility that does qualify for a permit federally but does not qualify for a permit under state law because it does not serve end-use customers; or (C) the state has siting authority but (i) it has withheld approval for the later of one year after the filing of an application; or (ii) conditioned approval in such a way that the proposed construction will not significantly reduce transmission congestion or is not economically feasible.1 [Emphasis added.]
In other words, EPAct 2005 enables eminent domain law over the states by the federal government. Section 1221 states that if a developer of a proposed transmission line in a national interest corridor does not receive approval of the line from the state in which it lies within one year of its application, FERC may preempt the state and allow the project developer to condemn the land, other than federal and state land, for the project.
This is not the only way that eminent domain may be exercised. Section 216(e) of EPAct 2005 on Rights-of-Way states that, “If a permit holder cannot obtain the necessary rights-of-way for the project, the permit holder can acquire the rights-of-way through an eminent domain proceeding in the federal district court where the property is located.”1 Also, in Section 216(f), “A right-of-way acquired in an eminent domain proceeding is a taking of private property for which the landowner must receive just compensation, which is the fair market value on the date of exercise of eminent domain.”1 It must be noted that the fair market value is fixed at the beginning of the process. If litigation ensues, and takes years, the locked-in fair market value could be thousands of dollars less than the actual value of the property at that time of its taking.
Historically, federal jurisdiction on the siting of transmission lines in states has been reserved for federal lands. It has been the state utility commissions which have been the regulators of siting permits and applications. You can easily see why states are concerned that “FERC has been granted a new breadth of authority that many believe is counter-productive to the best interests of their respective states and citizens which they believe they know best.”1
The first such disagreement has already occurred, “in what could be the first official challenge to back-stop transmission authority given FERC.” A Southern California Edison (SCE) application to the Arizona Corporation Commission (ACC), the public utility commission of Arizona, was rejected in May 2007 by ACC. SCE merely wanted to run a 230-mile transmission line from Arizona to California at a cost of $242 million to Arizona ratepayers. And the benefit to Arizona? “None, as it would specifically be to serve Californians and their growing energy needs.” The ACC described SCE’s project as ‘a 230-mile extension cord’ into Arizona’s generation supply.”1
In Pennsylvania, Governor Ed Rendell is also concerned. He wrote a letter to DOE Secretary Samuel Bodman in November 2007, after the NIETC was finalized. He wrote, “transmission lines will be on our land and depreciate our property values, but they may not offer any benefit to Pennsylvania consumers. This designation and action by the federal government is a blatant abuse of states’ rights.’”1
The Power Grid
Nearly all of the U.S. power grid uses high voltage, alternative current (HVAC) transmission lines. Only 2% of all electrical transmission line miles in the U.S. are presently high voltage, direct current (HVDC). HVAC lines allow the current to automatically reverse direction at regular intervals if necessary. Also, HVAC lines, which are built for short distances over a wide expanse of area, are cheaper to build and maintain. However, DOE insists that all lines be high voltage, direct current (HVDC) technology which, they say, will result in lower costs over long distances. So, the NIETC “lays the groundwork” for site approval to construct high voltage, direct current (HVDC) transmission lines, all above ground, throughout all the designated states and counties “whether or not that particular state in fact has an electricity congestion problem.”1
According to the General Accountability Office,3 there will be “higher costs for short-distance lines due to the cost of equipment needed to convert DC into AC electricity used by residents and a lack of electricity benefits to consumers living along these lines – unless converter stations are installed at intermediate locations – because such lines are generally not connected to local electricity lines.”
With the repeal of the PUHCA, “holding companies both foreign and domestic will now be the applicants for siting permits in both the Mid-Atlantic Area and the Southwest Area National Corridors for aboveground HVDC transmission lines which will range from 150-160 feet high. That is roughly 3 times the height of our present HVAC lines throughout the U.S. And they will cover thousands of total miles throughout NIETC, or these 10 states and Washington, D.C.”1 So, in order to correct problems, some of which may not exist at all, FERC will require a complete re-building of the electrical grid in the designated corridors, at a cost to the residents of the states, whether or not the residents of each state are recipients of any benefits.
As a result of the repeal of PUHCA 1935, the Securities and Exchange Commission (SEC) relinquished its regulatory authority over multi-state utility ownership by holding companies and now only retains the ability to protect investors, not utility consumers, or to prevent mega-mergers from consolidating. Now FERC has assumed merger authority over generating plants and holding companies.4
The repeal of PUHCA 1935 will not only allow multi-state transactions but also mergers of distribution facilities, utilities merging with non-utility corporations, and including foreign ownership over domestic utilities. Furthermore, oil companies may now own electricity and natural gas utilities, paving the way, yet again, for the formation of cartels. In addition, construction and infrastructure companies, especially those from abroad, are eager to partake in being afforded carte blanche in the acquisition of U.S. public utility operations.4
No individual state or federal agency will have the jurisdictional teeth to effectively regulate the finances of the U.S. public utility assets totaling more than one trillion U.S. dollars. Nor will there be required oversight of such holding or parent companies such as investment banks from speculating and investing in far riskier businesses, with utility rate-payer revenues. “We have already seen evidence of such with the current sub-prime mortgage loan crisis.”4
According to the GAO, EPAct 2005 removed “some limitations on the companies that could merge with or invest in utilities” and left FERC “with primary federal responsibility for regulating them.” The GAO said, “Because of the potential for new mergers or acquisitions between utilities and companies previously restricted from investing in utilities, there has been considerable interest in whether cross-subsidization – unfairly passing on to consumers the cost of transactions between utility companies and their ‘affiliates’ – could occur.”5 [Emphasis added.]
The GAO report states:
In its February 2008 report, GAO reported that FERC had made few substantive changes to either its merger review process or its post merger oversight since EPAct and, as a result, does not have a strong basis for ensuring that harmful cross-subsidization does not occur. FERC officials told GAO that they plan to require merging companies to disclose any cross-subsidization and to certify in writing that they will not engage in unapproved cross-subsidization. After mergers have taken place, FERC intends to rely on its existing enforcement mechanisms – primarily companies’ self-reporting noncompli-ance and a limited number of compliance audits – to detect potential cross-subsidization. FERC officials told us that they believe the threat of the large fines allowed under EPAct will encourage companies to investigate and self-report noncompliance.5 [Emphasis added.]
So, after more than 70 years, the U.S. is back in the same situation with its public utilities that it was in the 1920s which led to so many problems (See The Public Utility Holding Company Act of 1935) with the additional problems sited above. This will put the reliability of U.S. public utilities at risk, “which could have grave ramifications on U.S. national security, the U.S. economy, and the well-being and safety of the American people; all with the blessings of the U.S. Department of Energy, the U.S. Congress and the global stock market.”4 “It will essentially be a power grab for power both literally and figuratively, the sights of which the U.S. has never seen.”1
1 Grassi, Diane M. Fallout From the Energy Policy Act of 2005, Part II. Michnews.com, March 26, 2008
2 Grunwald, Michael and Juliet Eilperin. Energy Bill Raises Fears About Pollution, Fraud Critics Point to Perks for Industry. Washington Post, 7/30/05.
3 General Accountability Office. Transmission Lines: Issues Associated with High-Voltage Direct-Current Transmission Lines along Transportation Rights of Way. Report #GAO-08-347R, February, 2008.
4 Grassi, Diane M. Fallout From the Energy Policy Act of 2005, Part l. Michnews.com, February 28, 2008
5 General Accountability Office. Utility Regulation: Opportunities Exist to Improve Oversight. Report #GAO-08-752T. May 1, 2007.
© The Issue Wonk, 2008