APPLICABILITY OF NEPA TO FEDERAL ENERGY MARKET RESTRUCTURING

Boston College Environmental Affairs Law Review, 2005 by O'Neil, Allen

Abstract:

In furtherance of its goal of creating a more competitive electricity market, the Federal Energy Regulatory Commission (FERC) has proposed the creation of a Standard Market Design. While the proposal has been hotly debated, the focus has largely been on the economics rather than on environmental issues. FERC should fully study potential environmental impacts resulting from the implementation of such a proposal. Specifically, FERC should conduct a full environmental impact statement rather than rely on an environmental assessment and previous environmental impact statements prepared for earlier orders. This Note discusses when an environmental impact statement is required and argues that the Standard Market Design proposal is the type of agency action requiring such a study.

INTRODUCTION

The National Environmental Policy Act (NEPA) reflected a new national sensitivity to the effect of human activity on the environment and the responsibility of the federal government to protect the environment.1 NEPA directs that federal agencies assess the environmental impact of agency actions that could have a significant effect on the environment before those actions take effect.2 If an agency action will have a significant effect on the environment, the agency must prepare an Environmental Impact Statement (EIS) that addresses why the action is necessary, describes the affected environment, and lists a comparison of alternatives.3 Preparation of an EIS is a burdensome process and agencies frequently rely on the less formal Environmental Assessment (EA) process to determine whether a proposed action will have a significant impact.4

Currently, the Federal Energy Regulatory Commission (FERC) is actively seeking to restructure the electric energy markets in the United States.5 A cornerstone of FERC's emerging regulatory policy is the implementation of a proposed Standard Market Design (SMD).6 FERC hopes to avoid preparation of an EIS in connection with this policy initiative,7 but the nature and scope of the SMD policy initiative should qualify as a "major Federal action" having a significant effect on the environment and, as such, it meets NEPA's criteria requiring a full EIS.8 FERC should, therefore, be required to conduct a complete EIS prior to implementing its SMD proposal.

FERC believes that regulatory action is necessary to address concerns that 'Just and reasonable prices" cannot be reliably achieved without short-term, wholesale markets consisting of transparent prices and market structures.9 FERC seeks to create a competitive energy market while preventing potential market disasters such as those that have occurred in California.10 Problems stemming from "poorly designed markets and inadequate generation, transmission and demand response," which sent the California electricity market spiraling out of control, are the conditions that FERC now seeks to prevent.11 FERC recognizes that wholesale markets do not naturally facilitate and support a level playing field for all participants, mitigate the influence of market power, or establish fair rules to govern market behavior.12 In addition, absent regulation, existing markets do not prevent unlawful prices, nor do they tend automatically to remedy problems when the system fails.13 For example, those wishing to enter the electricity market may be blocked by existing transmission operators who favor their own supplies of energy.14 This favoritism applies both to the ability to interconnect new generation resources to the grid and to the allocation of the costs associated with those interconnections.15 According to FERC, this results in higher costs to the customer.16 FERC concluded that to address and resolve these problems on a case-by-case basis would be time-consuming for both the Commission and market participants.17

The Commission believes that solving these problems is a key element in restoring the public's faith in competitive power markets.18 It also believes that a competitive power market will save consumers billions of dollars annually.19 FERC's goals are to create "reliable, reasonably priced electric service for all customers; sufficient electric infrastructure; transparent markets with fair rules for all market participants; stability and regulatory certainty for customers, the electric power industry, and investors; technological innovation; and efficient use of the nation's resources."20 FERC has fashioned the SMD and proposed new implementing regulations to meet these goals and to remedy the problems facing wholesale markets.21

The SMD would complete a trinity of FERC initiatives that began in 1996 to foster competitive wholesale markets.22 In that year, based on a mandate imposed by Congress as part of the 1992 Energy Policy Act, FERC finalized rules to open the transmission grid to those providing wholesale power.23 These rules tackled the issue of vertically integrated utilities that were using control of transmission lines for the benefit of their own generation output, thereby frustrating the development of a competitive market.24 FERC found that nondiscriminatory access to transmission services was critical in establishing a competitive market.25 Orders 888 and 889 required investorowned utilities to allow competing power providers access to their transmission systems and imposed rules of conduct to prevent discrimination and create transparency.26