Academic journal article Texas International Law Journal

North American Deregulation of Electricity: Sharing Regulatory Sovereignty

Academic journal article Texas International Law Journal

North American Deregulation of Electricity: Sharing Regulatory Sovereignty

Article excerpt

The deregulation-or more accurately re-regulation-of the North American energy sector over the past fifteen years has brought with it an increase in both the number of energy sector actors and the volume of trade across jurisdictional borders associated with the markets of traditional vertically integrated monopolies in electricity and natural gas. Energy regulatory tribunals have played a crucial role in facilitating and driving this move to a greater role for market forces in energy trade. This has meant that tribunals whose historical role had been largely devoted to regulating natural monopolies have increasingly been asked to serve as bodies for regulating trade, including international trade. This evolution from utility regulator to trade regulator has not generated a great deal of comment, but it is one that has important implications for the structure of North American energy markets. This is evident when one looks at the recent developments in the regulation of electricity trade between Canada and the United States.

Although my focus is on the deregulation of electricity in North America, the genesis of electricity deregulation can be found in the deregulation of natural gas in the United States-and indeed in North America-beginning in the mid-1980s. The first significant step in this respect was the release in February 1984 of new policy guidelines on the regulation of natural gas imports.1 The essence of the approach in the guidelines was thatin the words of the guidelines-"[t]he market, not the government, should determine the price and contract terms of imported gas. U.S. buyers should have full freedom... along with the responsibility... for negotiating the terms of trade arrangements with foreign sellers."2 In line with the new Department of Energy guidelines, the Federal Energy Regulatory Commission (FERC) issued a number of decisions in the mid-1980s that were directed at improving the competitive climate for natural gas sales.

Canadian energy policy in the mid-1980s was evolving along lines similar to those in the United States for at least two reasons: the first was the election of a new Progressive Conservative government federally in 1984; the second was the collapse in world oil prices in the early 1980s and the consequent undermining of the rationale that had supported Canadian energy policy since the Organization of Arba Petroleum Exporting Country (OAPEC) embargo of 1973-a highly interventionist and nationalist policy that was predicated on the assumption of continuously increasing world oil prices into the future.

One might think that the general agreement that existed between Canada and the United States in the mid-1980s as to the direction of energy policy-that is, towards a greater reliance on market forces-might suggest a similar concordance on energy regulatory policy. To a large extent this was true; however, the transition to a freer energy market was also the source of some friction on individual points. For example, a particular irritant in Canada-United States energy relations was the issuance of FERC Opinion No. 256 in 1986.3

A key issue addressed by the FERC in Opinion No. 256 was how to treat certain transportation charges imposed by Canadian gas exporters pursuant to their previous approval by Canada's National Energy Board. The fundamental question was whether the FERC would inquire into the reasonableness of these charges, according to the FERC's ratemaking principles, or allow them to be passed on as billed. In the end, the FERC concluded that it could review such charges and require that they conform to FERC's principles. The rationale for this was that such an approach only ensured equality of treatment for Canadian and domestic suppliers, despite the fact that past practice had been to accept the charges as billed. This decision resulted in some concern in Canada insofar as it affected the ability of Canadian energy tribunals to regulate the terms of trade in natural gas. …

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