07.06.09Roger Feldman, Counsel, Andrews Kurth LLP

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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:

• Funding--how has the project minimized the possibility of stranded investment by designing for the ability to be upgraded?
• Overarching criteria--including regional diversity and representation of urban, rural, and suburban settings
• Technology criteria--including an open architecture that can become the basis for interoperability with multiple applications
• Rate design--compatibility of existing or proposed rate designs with the purposes for which a project is designed
• Regulatory--coordination of the project with the RTO and/or system operator
• 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:

• 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.
• 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.

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Reader's Comments

Date	Comment
Ferdinand E. Banks 7.6.09	Please oh please forgive me for saying this, but as an American and a Democrat I have a bad feeling about the energy program of the new American government. I don't think about that program very often, but when I do I can't help concluding that it doesn't make any sense at all. Of course, I could be very wrong, but I suspect that - to use a beautiful expression of Dean Acheson - somebody has been led down the garden path. And listen, this is different from the macro and financial market imbroglio, because working with those issues are some very brainy people. As far as energy is concerned, the waterboys and cheerleaders are being sent in.
Len Gould 7.6.09	(re Smart Grid) "Above all, the utility must receive, from regulators, market signals which definitely reward it for its appropriate behavior." -- It's tempting to view that situation as one wherein the utilities have accidentally and through no fault of their own, fallen into the position of gatekeeper and are prepared to drag out the implementation until paid off.
Bob Amorosi 7.6.09	"As far as energy is concerned, the waterboys and cheerleaders are being sent in." It certainly appears that the US government doesn't want to send in the professional players on the playing field. Perhaps one should ask oneself why not, and I would suggest it's because the government, and the voters, don't believe in playing the same game anymore. The status quo regarding traditional electrical energy sources and the grid infrastructure is no longer acceptable, rightly or wrongly. And I would bet it has something to do with the traditional ways of expanding the grid's capacities being too costly to swallow in the current regulatory framework, and fraught with too many problems. This article is right on though, throwing money handouts for Smart Grid development is not enough in itself to enable the new players and implement new ways of managing the grid. Len is correct (again) in that our utility companies are prepared to drag out its implementation until THEY benefit from it as much, if not more, than consumers are expected and intended to benefit from it. It should be a very interesting future for the utility industry in the US, and in Canada, even if it takes many years to unfold.
Ferdinand E. Banks 7.7.09	There is an article on this site called "Wind, backup power and emissions". People who are interested in this issue should read the comments to that article, because as far as I am concerned they are invaluable. By people who are interested in this issue I include people who think about this issue only a few minutes a day - or maybe a week. I especially hope that President Obama's environmental team - note, 'environmental' team and not energy team ( because he doesn't have an energy team yet) - looks at those comments and tries to learn something from them. It would also be nice if the individuals who think that they know something about all this would consider the macroeconomic side, because ladies and gentlemen, when the present macroeconomic meltdown or partial meltdown blows over, the Chinese are going to try to transfer a large slice of the industrial capacity of North America and Europe to the empty spaces in China. In order to avoid having to use some non-academic language, I won't attempt to explain what that could mean because mostly I don't know myself, but I suspect that it won't be nothin' nice.
Len Gould 7.7.09	Agreed about Chinese, Fred. My only hope is that they can rapidly develop into a fairly wealthy consumer society fast enough to not cause a REAL economic collapse worldwide outside of China.
Bob Amorosi 7.7.09	I must also agree with Fred and Len about China, and indeed they have already captured a big chunk of America's (and Canada's) manufacturing capacity. While I don't have a comprehensive list, I can name whole industries that have disappeared from Canada's manufacturing sectors over the last several decades, where they have been replaced by companies in the far east including China. For example the last Levis jeans sewing plant in North America, located in southern Ontario, shut its doors about 5 years ago in favor of newer Levis plants in Asia that are rife with cheap labor, and have no environmental laws to comply with as we have here. Other clothing and shoe companies there are known to use child laborers too. Even in my industry of electronics manufacturing, there has been stiff competition from China and other far-east countries for years now, and it's getting tougher. Some predict our automotive industries will be next to go the way of the dodo bird. China is well known for NOT really wanting to buy our products, but they crave acquiring our manufacturing technologies to manufacture their own. I suppose Canada and US think the emerging energy technologies for Smart Grid and distributed generation can be sold to the Chinese if we develop them first, but you can bet they will surely copy them AFTER WE swallow all the R&D expense and effort to develop them first.
James Carson 7.11.09	Ferdinand & Bob, I, for one, am not afraid of competition from the Chinese. As to the extreme laws that restrict industry in the US and Canada, perhaps you should look at who in Congress & Parliament made those laws, and then vote accordingly.
Len Gould 7.13.09	James: I do hope that "the extreme laws that restrict industry in the US and Canada" are not those same ones responsible for a decent life for labourers here, as opposed to Chinese laws which provide for 50 cents a day for anyone old enough to stand and pitch asbestos by the handful with a paper mask; or which explicitly equate "productivity" with "reduced wages" (just try the substitution the next time you're listening to a talking ___head on CNBC). Our grandparents fought a bloody war here to have that fixed, though "modern" history books conveniently ignore it. Flirting with revolution (again). When your head rolls, don't say you wern't warned.
James Carson 7.14.09	No, Len, I am thinking more about the foolish environmental laws that have driven responsible industry out of business or to the far east where they can pollute to their heart's content.
Len Gould 7.14.09	"foolish environmental laws" -- I will agree if you mean that they're foolish because they were implemented without also covering the far east etc. to the same standard at the same time.

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