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.
