The U.S. Supreme Court heard oral argument on Wednesday, October 3 in the appeals of a D.C. Circuit decision in Transmission Access Policy Study Group v. FERC (TAPS v. FERC). In TAPS, the D.C. Circuit upheld a 1996 order of the Federal Energy Regulatory Commission (FERC Order No. 888). Order No. 888 required vertically-integrated electric utilities (who own both generation and transmission facilities) to provide "open access" to their interstate transmission lines to third-party "independent" generators, for the purpose of enhancing competition in wholesale power markets.

Under the Federal Power Act, FERC is required to ensure that rates, terms, and conditions for wholesale power sales and interstate transmission are "just and reasonable" and "not unduly discriminatory or preferential." The FPA provides that FERC's transmission jurisdiction does not extend to matters "subject to regulation by the states" and does not include regulation of any sale other than a wholesale sale (i.e., a retail sale). In States that do not have retail electric competition ("closed" States), retail customers pay for the transmission component of their electric bills as part of a single "bundled" rate set by State regulators. In Order No. 888, FERC expressly declined to extend open access requirements to bundled retail transmission. FERC said it can regulate transmission for retail sales if a utility offers the service "unbundled" from it other costs - i.e., if transmission is separate from generation and other power costs on a consumer's bill. It left utilities that still charged 'bundled' rates under state regulation.

The case stems from two challenges to Order 888. Led by New York, nine states filed suit, arguing the commission had overreached in attempting to regulate unbundled retail transmission access. The States contend the FPA only gives FERC jurisdiction over wholesale sales and interstate transmission, leaving any retail issues up to the state utility commissions. The other challenge came from Enron Corporation, which argued that FERC clearly has jurisdiction over all transmission, whether bundled or unbundled. The company, which would benefit from maximum access to the grid, said FERC had an obligation to prevent any transmission owner from discriminating against others seeking to use its lines. FERC, Enron argued, had not gone far enough to exercise its authority.

The questions treated the case as a matter of statutory interpretation of the jurisdictional provisions of the Federal Power Act. Justice O'Connor began the questioning with the assertion that transmission takes place in interstate commerce and no one questioned that premise. Despite the obvious interests of the States in protecting their own jurisdiction, no Tenth Amendment or other constitutional issues were raised, either in the briefs or in oral argument.

No Justice appeared to accept New York's argument that States continue to regulate transmission after it is unbundled. While many justices appeared more sympathetic to Enron's argument that the Federal Power Act gives FERC plenary jurisdiction over all transmission (bundled and unbundled), no Justice explored in depth the implications of Enron's claim that FERC was required to exercise such jurisdiction.

Most of the questions to FERC's lawyer addressed the basis for FERC's decision to exclude bundled transmission. The government lawyer avoided definitive answers to many of these questions. Justice Scalia questioned the three lawyers regarding whether retail transmission is FERC-jurisdictional interstate transmission, or simply a component of a retail sale. Questioning Enron's counsel, Scalia said: "[y]our argument assumes the power to regulate transmission includes the power to regulate sales."" Scalia said to Enron's attorney. Enron in response emphasized FERC's FPA obligation to ensure that rates, terms and conditions are not unduly discriminatory, while New York argued that FERC's jurisdiction over interstate transmission does not extend to retail sales.

Significantly, as FERC Chairman Wood has acknowledged, FERC has already effectively moved to the Enron position by aggressively moving to require all transmitting utilities to unbundle their retail transmission and place their transmission assets under the control of third-party "regional transmission organizations" (RTOs) that do not own generation. Accordingl to Wood, "[W]e want one form of transmission across the country. And it will be administered by an RTO." If the Court decides in favor of the States, which is regarded as unlikely, FERC's plans to place all retail transmission under RTOs would be seriously hampered. If the Court decides in favor of Enron, FERC's push towards RTOs will be bolstered, providing FERC additional protection from litigation arising from its efforts to require unbundling. If the Court upholds the D.C. Circuit's decision (which upheld FERC's original position), the decision would leave FERC's current authority unchanged. A decision by the Court is expected by July or possibly earlier.

A decision in favor of FERC or Enron would not necessarily innoculate FERC from a challenge to its increasingly aggressive policy of forcing transmitting utilities to relinquish control of their assets to RTOs. While Order No. 888 was regarded in 1996 as an far-reaching expansion of the FERC's jurisdiction, the order was limited to regulation of behavior within existing structures. By contrast, the RTO Order released in 2000 (Order No. 2000), as now interpreted by the FERC, goes beyond behavioral regulation into the uncharted jurisdictional waters of requiring a radical restructuring of operational control of billions of dollars worth of transmission assets. Future ligitation will likely determine whether FERC's RTO policy is warranted under its statutory mandate to ensure that transmission rates, terms, and conditions are "not unduly discriminatory or preferential."