POWER July 2011 - 61

REGULATORY ISSUES
FERC Surrenders Jurisdiction over
Station Power in California
In a surprising decision, a federal agency surrendered some of its regulatory
authority-and parts of the industry don't approve. The Federal Energy
Regulatory Commission declined to defend its jurisdiction over station
power in the California power market, potentially giving an economic advantage
to utility generators nationwide and putting merchant generators
at a disadvantage.
By Mark R. Robeck and Emil J. Barth, Baker Botts LLP
I
n a remarkable turn of events, the Federal
Energy Regulatory Commission
(FERC), in a set of orders affecting
the territory controlled by the California
Independent System Operator (CAISO),
reversed its longstanding policy permitting
generators to net against their positive
electricity output their station power
requirements-the electricity required by
a generation station to start up its turbines,
operate its machinery, and keep lighting,
heating, air conditioning, and other equipment
operating.
FERC's Abrupt About-Face
Since 2001, FERC has regulated how
station power is supplied to electric generators,
ensuring that all generators, both
utility-owned and merchant-owned, can
net their positive output against their
power requirements. FERC's netting policy
put utility and merchant generators
on the same footing, ending the utilities'
attempts to bill merchant generators for
station power at retail rates following the
utilities' divestiture of those very same facilities.
Last year, however, a U.S. Court
of Appeals rejected FERC's authority over
interstate transmission as a valid basis
for FERC's regulation of station power in
CAISO. In the proceeding following the
court's order, FERC stated, without analysis,
that the remaining jurisdicitonal scope
conferred upon it by the Federal Power
Act (FPA) did not extend to the regulation
of station power, but instead that station
power was subject to the states' jurisdiction
over retail sales.
FERC's decision threatens to impair
competition in wholesale power markets.
Instead of netting their station power requirements
against their positive output,
merchant generators may now have to buy
station power from local utilities, exposJuly
2011 | POWER
ing them to high retail rates for the very
product they produce. At the same time,
FERC's abandonment of its longstanding
netting policy leaves unaffected the practice
of vertically integrated utilities supplying
station power " in-house, " for their
own generation facilities, a cost-free practice
that traditionally has not been treated
and accounted for as a retail sale.
Needlessly Surrendering
Authority
FERC's reasoning makes clear its belief
that it has no jurisdiction to require that
netting be used to determine the amount
or pricing for station power. However,
FERC's conclusion was neither inevitable
nor necessary, as it ignored the full scope
of its authority to regulate the wholesale
sales market, including station power.
FERC's regulation of station power
falls squarely within its wholesale energy
market jurisdiction; it is not only a matter
of incidental regulation of a practice affecting
the wholesale markets. Allowing a
generating facility to net its station power
requirements against its gross electric output
is nothing more than allowing that facility
to engage in a reverse or exchange
wholesale energy transaction, which takes
place entirely within the bounds of the
wholesale energy market.
The direct and substantial relationship
between station power and FERC's
wholesale market jurisdiction also extends
beyond the character of the netting transaction.
Permitting one set of generators to
self-supply station power while leaving
another set open to high retail charges is
both discriminatory and will lead to overall
higher electricity costs and attendant
price distortions in the wholesale power
market. For these reasons too, FERC has
the authority to regulate station power to
www.powermag.com
Find the Legal
Details Online
For a more detailed look at the issue,
see the online supplement to
this article, " A Level Playing Field
No More, " associated with the July
issue at www.powermag.com.
rectify discriminatory or preferential practices
and ensure the efficiency and integrity
of the wholesale market.
Re-Level the Playing Field
As a result of FERC's reluctance to confront
the question of the extent of its
wholesale sales jurisdiction, the promotion
of competition in the wholesale power
markets may face a serious setback. Independent
merchant generators across the
country may be deprived in the future of
netting their station power requirements
and instead could be billed millions of
dollars for electricity at retail rates. However,
merchant generators with an interest
in preserving the longstanding practice of
netting station power have solid arguments
for any future proceedings in the courts or
before FERC. ■
-Mark R. Robeck (mark.robeck@
bakerbotts.com) is a partner in the
Houston office of Baker Botts LLP. Emil
J. Barth (emil.barth@bakerbotts.com)
is an associate in the Washington,
D.C., office of Baker Botts LLP. Robeck
and Barth have advised generators
on FERC's station power policies.
The views expressed in this article
are those of the authors and do not
necessarily reflect the views of
the firm or its clients.
61
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POWER July 2011

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