Friday, January 26, 2018

FERC Rejects Rick Perry’s Directive to Subsidize Uneconomical Power Plants—and Presents Diverging Visions for the Future of the U.S. Energy System

By Amelia Schlusser, Staff Attorney

Last October, Secretary of Energy Rick Perry submitted a Proposed Rule on Grid Reliability and Resilience Pricing to the Federal Energy Regulatory Commission (FERC). The Proposed Rule directed FERC to impose new rules on the organizations responsible for managing the nation’s competitive wholesale power markets. These new rules were required ensure that certain coal and nuclear power plants received premium rates for the electricity they sold and ensure that the plants’ owners fully recovered their costs and earned a guaranteed profit on their capital investments. In late October, GEI submitted comments to FERC, urging the Commission to reject Secretary Perry’s proposal. GEI argued that the Proposed Rule violated section 206 of the Federal Power Act (16 U.S.C. § 824e(a)), which mandates that all wholesale electricity rates must be “just and reasonable” and prohibits FERC from approving rates that are unduly preferential or discriminatory. On January 8, FERC officially rejected the Secretary’s directive and terminated the rulemaking proceeding it had initiated in response to the Proposed Rule. In its Order, FERC agreed that the Proposed Rule would establish rates that were not “just and reasonable” and would grant preferential treatment to eligible coal and nuclear generators while unduly discriminating against other resources, such as wind power, that also provide reliability benefits to the grid.

FERC’s five commissioners all voted to reject the Proposed Rule. While FERC’s legal obligations and internal policies strongly supported this outcome, the unanimous decision was still a notable accomplishment given that four of the five commissioners were appointed by President Trump. Commissioners LaFleur, Chatterjee, and Glick each issued concurring opinions that provided additional insight into the commissioners’ individual views and motivations for rejecting the proposal. More significantly, the concurrences revealed a fundamental divide between the concurring commissioners’ visions for the future of the U.S. energy system.

Perry's Proposal: Bail Out Uneconomical Power Plants

 Secretary Perry’s proposed rule directed FERC to issue new rules for the Regional Transmission Organizations and Independent System Operators (RTOs/ISOs) that oversee the competitive wholesale energy markets operating in certain regions of the United States. Under these new rules, RTOs/ISOs would be required to adopt new rates for electricity produced by coal and nuclear power plants that maintain a 90-day supply of fuel on-site. These rates were required to ensure that eligible coal and nuclear plants fully recovered all of their costs and earned an additional profit on their capital investments. Secretary Perry argued that these artificially inflated rates were necessary to prevent coal and nuclear plants from retiring prematurely. The preamble to the proposed rule asserted that such anti-competitive intervention was necessary because market rates fail to adequately compensate coal and nuclear plants for the reliability benefits they provide.

The Green Energy Institute’s Comments

In our comments opposing the proposed rule, GEI argued that Secretary Perry’s directive violated the Federal Power Act’s (FPA) mandate that all wholesale electricity rates must be “just and reasonable” and not unduly discriminatory or preferential. GEI argued that the proposed rule would give a limited pool of market participants—eligible coal and nuclear power plants—a competitive advantage over other market participants and would discriminate against other types of generating resources selling power into the market. GEI also argued that the Proposed Rule awarded preferential treatment to coal and nuclear power plants due to arbitrary reliability and resiliency attributes, yet refused to grant the same treatment to other resources, such as wind energy and demand response, that have been shown to support grid reliability and resiliency.

FERC’s Order Rejecting the Proposed Rule

FERC’s Order rejecting the Proposed Rule presented many of the same arguments that GEI had raised in our comments. Notably, FERC asserted that Secretary Perry had failed to show that existing market rates were not “just and reasonable” under the FPA and had failed to demonstrate that the proposed rate structure would comply with the FPA’s legal standards. FERC also argued that the proposed rule would grant undue preference to eligible coal and nuclear resources while denying the same rates to other resources with demonstrated reliability and resilience attributes.

In addition to identifying the Proposed Rule’s legal deficiencies under the FPA, FERC’s Order discussed some of the broader policy implications associated with the Secretary’s proposal. The Commission explained that the electricity sector has evolved significantly over the past fifty years, during which time many regions have shifted away from the traditional regulated monopoly structure of the early twentieth century in favor of competitive electricity markets. FERC emphasized its long-standing support for the creation and expansion of regional electricity markets and its “pro-market” approach to regulating electricity producers participating in competitive wholesale markets. The Commission acknowledged that competitive market pressures may force some uneconomical generating resources to retire earlier than anticipated, but it also recognized that emerging energy technologies, such as renewable energy and demand response resources, have a roll to play in the modern and evolving energy system of the twenty-first century.

While FERC’s Order expressly declined to comply with Secretary Perry’s rulemaking directive, it also stated that maintaining grid resiliency in the midst of the energy transition is one of its key priorities. To further this objective, FERC announced that it was initiating a new proceeding to evaluate grid resilience in competitive wholesale markets operated by RTOs/ISOs.

FERC’s Order carefully laid out the legal and policy justifications for refusing to comply with Secretary Perry’s Proposed Rule. While the Commission’s decision was unanimous, three commissioners chose to issue concurring opinions to emphasize their personal justifications for denying the Secretary’s request. These strongly worded concurrences provided additional insight into the commissioners’ diverse political views and motivations.

Commissioner LaFleur: FERC should “focus its efforts not on slowing the transition from the past but on easing the transition to the future.”

Commissioner Cheryl LaFleur issued a concurring opinion to reflect her view that FERC should focus on mitigating challenges associated with the energy transition, rather than impeding the evolution of the energy sector. LaFleur acknowledged that technological advancements within the energy sector are transforming the composition of the nation’s energy mix, but noted that this is not an unprecedented transition. The nation’s energy system has been evolving for more than a century, and markets and regulatory frameworks have continuously adapted to maintain reliability within the system. In contrast to Secretary Perry’s tenuous assertions in the Proposed Rule, LaFleur argued that competitive market forces should enable newer, more efficient technologies to replace older, outdated technologies; competition encourages the electricity system to adapt and weed out uneconomical resources that no longer provide a benefit to consumers. If aging coal and nuclear plants are unable to compete against new resources, FERC must accept that the older plants are no longer the most efficient, cost-effective generating resources. The Commission should not attempt to intervene and prop up these facilities by imposing anti-competitive mechanisms.

LaFleur recognized that rapid shifts in the resource mix could potentially impact grid reliability at some point and acknowledged that future resilience impacts could necessitate regulatory intervention. However, LaFleur argued that if this occurs, FERC should employ its traditional approach to addressing reliability challenges. The Commission’s tried-and-true approach focuses on identifying an objective need for action and developing an evidence-based solution to satisfy that need. LaFleur criticized the Secretary’s Proposed Rule for failing to conduct such an analysis. Instead, the Secretary “presumed a resilience need and proposed a far-reaching out-of-market approach to ‘solve’ it.” In doing so, Secretary Perry “sought to freeze yesterday’s resources in place indefinitely,” rather than identify an adaptable strategy to maintain reliability and resilience as the energy mix continues to evolve. In other words, the Proposed Rule fabricated a problem in order to implement a pre-determined “solution” designed to distort the market.

Commissioner Chatterjee: FERC should take action to protect grid resilience “amidst tremendous changes in our generation resource mix.”

Commissioner Neil Chatterjee’s concurring opinion set a starkly different tone from Commissioner LaFleur’s concurrence. Chatterjee began by “applaud[ing] Secretary Perry’s bold leadership” in drawing attention to the “urgent challenge” of ensuring grid resiliency. According to Chatterjee, “rapid, unprecedented changes in our generation resource mix”—characterized by increased deployment of natural gas, wind, and solar energy resources and the retirement of coal and nuclear resources—could potentially create near-term resiliency challenges for the grid.

In Chatterjee’s opinion, increases in renewable energy generation and “the fast evolving national security threat environment” are somehow exposing coal and nuclear plant operators to a “spectrum” of fuel supply risks. (As an example of such fuel supply risks, Chatterjee cites the inability of natural gas generating resources to control risks associated with pipelines and gas wells. He does not provide an example of comparable risks facing coal and nuclear plants.) According to Chatterjee, because RTOs/ISOs are not required to mitigate these vague fuel supply risks, current market rates may not adequately compensate coal and nuclear plants that take action to mitigate their risk exposure. Therefore, Chatterjee argued that FERC should have instructed each RTO/ISO to provide additional compensation to coal and nuclear plants that are at near-term risk of retirement and require any RTO/ISO that declines to provide higher rates to “show cause” for its decision. 

Here is my interpretation of Chatterjee’s argument: 1) coal and nuclear plants require a constant supply of fuel; 2) fuel shipments can occasionally be disrupted due to shifts in the generation mix and undefined national security threats; 3) because RTOs/ISOs are not obligated to mitigate these supply disruptions, coal and nuclear plants incur additional expenses to safeguard their fuel deliveries; and 4) because renewable resources do not incur these extra costs, consumers should pay more for electricity produced by coal and nuclear plants.

While this proposed remedy seems to blatantly conflict with free-market principles, Chatterjee insisted that he shares FERC’s “preference for market-based solutions.” He therefore would encourage RTOs/ISOs to “identify market mechanisms” to address the unjust compensation discrepancy. However, Chatterjee also noted that certain circumstances justify other forms of regulatory intervention—such as providing additional out-of-market payments to certain resources—but that these mechanisms should only be used as a last resort. Chatterjee expressed his disappointment that FERC’s Order did not proactively address the compensation issue, but conceded that the Order represented “a positive step forward” in addressing grid reliability issues.

Commissioner Glick: The Proposed Rule aimed to subsidize uncompetitive facilities, not promote grid reliability and resilience. 

In the Order’s final concurring opinion, Commissioner Richard Glick quickly voiced his belief that Secretary Perry’s proposal was primarily designed to subsidize uncompetitive coal and nuclear plants, and any resiliency concerns the Secretary may have considered were secondary at best. Glick echoed Commissioner LaFleur’s assertion that efforts to promote resiliency must consider and adapt to the evolving energy sector, rather than aim to preserve the status quo.

Glick stated that the Proposed Rule had failed to identify a need “to interfere with the continued evolution of the bulk power system.” He noted that the Department of Energy’s own research concluded that coal and nuclear retirements have not threatened reliability or resiliency and found that increases in renewable energy, energy storage, and demand response have supported grid resiliency.

Moreover, Glick argued, Perry’s proposed solution—to give coal and nuclear plant owners billions of dollars to keep uneconomical facilities online—would do little, if anything, to improve resiliency within the system. Many of the Proposed Rule’s “eligible” coal and nuclear plants have experienced operating failures during extreme weather events. If Perry was truly concerned with protecting grid reliability, the Proposed Rule should have focused on improving regional transmission and distribution systems, which are responsible for “virtually all significant disruptions” on the grid.

Diverging Visions for the Future of the U.S. Energy System

The three concurring opinions reflected a fundamental divide in the FERC Commissioners’ views on the modernization of the U.S. energy system. The concurrences written by Commissioners LaFleur and Glick, the only Democrats on the Commission, promoted the energy transition as an opportunity to improve the bulk power system. Commissioner Chatterjee’s concurrence, on the other hand, presented the same fearful vision of the future reflected in Secretary Perry’s Proposed Rule. Chatterjee and Perry both appeared to view the energy transition as a threat to entrenched corporate interests and thus aim to impede or prevent modernization of the energy sector. These divergent visions for the future of the U.S. energy system are not confined to FERC. The energy transition has become a contentious political issue in the United States, and the divide between the parties’ opposing visions for the future has grown increasingly pronounced since the Trump Administration took office. In its recent Order, however, the Commissioners’ diverging visions for the future did not prevent FERC from reaching consensus on the need to avoid interfering with competitive market forces.

Commissioner LaFleur—the lone Obama appointee on the Commission—presented an optimistic vision of our energy future, a vision in which competitive forces spur technological and operational innovations that will enable the electricity sector to modernize without compromising reliability or resilience. Under LaFleur’s vision, regulators should help facilitate the energy transition by providing guidance and assistance to grid operators, and should only impose out-of-market controls where absolutely necessary to maintain reliability within the system.

Commissioner Glick—a Democrat appointed by President Trump—echoed LaFleur’s optimism regarding the energy transition, though he went a step further by recognizing climate change as an additional impetus for transitioning the energy sector away from coal power. From a reliability standpoint, Glick was adamant that reliability services should be compensated on a technologically neutral basis. However, he also emphasized the need to consider the advantages that emerging technologies may provide in supporting reliability and resilience.

Commissioner Chatterjee—a Republican Trump appointee and the former energy policy advisor to Senator Mitch McConnell—presented a decidedly less optimistic view for the future. Chatterjee viewed the diversification of the U.S. energy mix as a threat that must be preemptively confronted. He supported subsidizing uneconomical coal and nuclear plants based on his belief that market rates undercompensate these facilities. He asserted that regulatory intervention is likely justified to prevent these plants from retiring. In other words, Chatterjee advocated for a future that looks remarkably like the past.

These diverging visions have tremendous implications for the future of the U.S. energy system. For much of the twentieth century, the electricity sector relied on the same general technologies to produce electricity and deliver it to customers. Reliable delivery of low-cost electricity was (and still is) the industry’s primary objective, and innovation and technological advancement were secondary considerations at best. This dynamic has started to shift over the past few decades. Renewable energy technologies have advanced at a rapid pace and are now the least-cost resource in some areas. Energy storage technologies are quickly advancing as well. The way in which we manage and operate the grid has also evolved. So far, the energy transition has created jobs, reduced energy costs, and made the human and natural environments cleaner and safer for all Americans.

The Trump Administration is now actively trying to impede and reverse the progress and advancements the country has achieved in recent decades. At the behest of the fossil fuel industry leaders, the Administration has taken steps to weaken environmental regulations, open up public land to mining and drilling, and discourage renewable energy development. Trump has made it his mission to revive the energy system of fifty years ago, and his Energy Secretary is making a concerted effort to achieve this goal. 

Thankfully, FERC unanimously rejected Perry’s directive to bail out uncompetitive coal and nuclear plants. The Commission’s decision provided a welcome, if somewhat unexpected, reminder that the rule of law still governs in the executive branch. In such a divisive political climate, it is reassuring to see federal regulators set aside their political differences and support the interests of the American public, rather than political donors. Within an administration intent on de-modernizing the energy system, FERC has provided a loud and clear message: it will not be a pawn in the administration’s game.