Tuesday, January 22, 2019

FERC’s Independence to be Tested by DOE NOPR

By Rich Heidorn Jr.

Energy Secretary Rick Perry acted within his legal authority in ordering FERC to consider his Notice of Proposed Rulemaking to support struggling coal and nuclear plants. But he has no power to make FERC provide the relief he is seeking, legal experts said Monday.

FERC DOE cybersecurity Rick Perry

Trump (left) and Perry

As a result, the outcome of the baseload battle will come down to the commission’s five members and how much they are willing to assert their independence from the Trump administration’s pro-coal agenda. Perry’s proposal would require that generators with 90 days of on-site fuel supply receive “full recovery” of their costs. (See related story, Perry Orders FERC Rescue of Nukes, Coal.)

Perry issued the NOPR under Section 403 of the Department of Energy Organization Act, subsection (a), which authorizes the secretary and the commission “to propose rules, regulations and statements of policy of general applicability with respect to any function within the jurisdiction of the commission.”

But subsection (b) gives the commission “exclusive jurisdiction with respect to any proposal made under subsection (a).”

Smith | Van Ness Feldman LLP

“Section 403 is pretty clear. What [Perry has] done so far is within his authority,” said Douglas Smith, a partner with Van Ness Feldman who served as FERC general counsel from 1997 to 2001. “It’s also clear that the final determination about what to do with a NOPR like this rests entirely with FERC.”

The act also spells out FERC’s independence. Section 401 (d) states that, “In the performance of their functions, the members, employees or other personnel of the commission shall not be responsible to or subject to the supervision or direction of any officer, employee or agent of any other part of” DOE.

Does FERC have to Act?

The NOPR lists FERC docket number RM17-3, which was opened last December to consider fast-start pricing in RTO markets. (See FERC: Let Fast-Start Resources Set Prices.) But the commission filed the NOPR and Perry’s accompanying letter to FERC in a new docket, RM18-1. Late Monday, the commission issued a notice setting an Oct. 23 deadline on comments on the proposal, with reply comments due Nov. 7.

The notice came after 11 industry groups representing natural gas, wind, solar, rural electric cooperatives and other technologies filed a motion in that docket opposing DOE’s request and requesting a minimum 90-day comment period and a technical conference before the comment deadline. The groups said the deadline imposed by Perry — final action on the proposed rule within 60 days from its publication in the Federal Register — is “wholly unreasonable and insufficient.”

Former FERC Chairman Jon Wellinghoff, now a renewable energy advocate and consultant, said in an interview that FERC can ignore the proposal without taking any action.

FERC DOE cybersecurity Rick Perry

Hoecker | © RTO Insider

But others said the commission will almost certainly make some sort of formal response.

“I don’t think they can ignore it. It would, No. 1, not be politically cricket,” said former FERC Chairman and General Counsel James Hoecker. “Particularly since [interim FERC Chairman] Neil [Chatterjee] is from Kentucky and his former boss, Sen. [Mitch] McConnell [R-Ky.], has been pretty clear about wanting to soften the blows on the coal industry. I’m sure the commission will do something.”

“Regardless of what legally the commission has to do, I think it’s unlikely the commission is going to just stiff arm the secretary and the administration,” agreed former Commissioner Tony Clark, now an adviser with Wilkinson Barker Knauer.

One reason for uncertainty is the recent turnover in the commission’s membership: Chatterjee and fellow Republican Robert Powelson joined Commissioner Cheryl LaFleur on the commission in August. Republican nominee Kevin McIntyre and Democratic nominee Richard Glick are awaiting a Senate floor vote.

FERC DOE cybersecurity Rick Perry

FERC commissioners (left to right): LaFleur, Chatterjee and Powelson | © RTO Insider

The commission has traditionally been independent and rarely decides issues on party lines. But some FERC watchers fear that could change because they believe the White House has already exerted its influence by dictating the selection of the commission’s new general counsel, James Danly, and Chief of Staff Anthony Pugliese.

The two were named by Chatterjee, who is serving as interim chairman pending the confirmation of McIntyre, who was tapped by Trump to lead the agency. New chairmen typically select their own general counsel and staff chiefs. But at a news conference following the commission’s meeting Sept. 20, Chatterjee suggested Danly — an Iraq War veteran who joined the commission from Skadden, Arps, Slate, Meagher and Flom — was not a temporary hire.

Asked whether Danly would remain in his position after McIntyre arrives, Chatterjee said of Danly, “I think his biography and service to his country speak for themselves, and at this time I don’t anticipate any senior-level staffing changes.”

The Commissioners

Chatterjee, who like McConnell is from the coal state of Kentucky, has appeared sympathetic to Perry’s claims that the grid’s resilience is at risk from coal retirements.

In a podcast interview posted on the FERC website in August, Chatterjee said “baseload power … including our existing coal and nuclear fleet, need to be properly compensated to recognize the value they provide to the system.”

He added, “as a nation, we need to ensure that coal, along with gas and renewables, continue to be part of our diverse fuel mix.”

Whether the other commissioners share that view is unclear.

Asked at his confirmation hearing whether he agreed with Chatterjee, McIntyre said that “FERC is not an entity whose role includes choosing fuels for the generation of electricity.”

Glick echoed McIntyre’s position, adding that although the grid study released by DOE in August did not conclude that the loss of baseload generation had impacted reliability, “they also suggested it was something to keep an eye on and look for in the future.”

“McIntyre and Chatterjee, I just think will have so much political pressure to pursue this, the expectation is that they will want to do so,” said one former senior FERC official who asked not to be named. “Glick and LaFleur I would expect to be less inclined. The interesting one is Powelson. He’s a pro-market person. … How will he reconcile competition with what is proposed here?”

Rather than pursuing a cost-of-service approach, he said, the commission could adopt a more market-based approach that boosted prices for all capacity resources, including natural gas. “Then the gas folks end up winning just as much as coal and nuclear,” he said. “My expectation is that Powelson would go more [for] that route.”

What Does Perry Want?

Smith said it was unclear whether Perry is seeking to ensure generating plants have fuel on site or is concerned about frequency response, inertia and other attributes of traditional baseload units.

“There’s precious little detail in the proposed regulatory text about what exactly would be responsive,” said Smith. “From FERC’s perspective that may be good. It gives FERC more discretion … to determine what is plausibly responsive to this.”

Ari Peskoe, senior fellow in electricity law at the Harvard Law School Environmental Law Program Policy Initiative, and a former FERC practitioner, said Perry raised more questions than he answered. “Is this cost-of-service ratemaking or is DOE suggesting that rate should be based on a plant’s ‘benefits and services?’” he asked in a series of tweets last week. “Does an eligible generator always receive this rate, or do they normally get paid LMP but receive this rate under certain circumstances? How does dispatch work if an eligible plant is not bidding into the market? Or is an eligible plant ‘bidding’ this special rate?”

If FERC issues a rule predicated on fuel supply and not on the type of fuel itself, some observers have noted, it could extend to gas plants that add a tank containing 90 days of fuel oil or those that sign firm pipeline contracts. (See Steve Huntoon’s commentary, Counterflow: Cash for Clunkers Redux.)

FERC DOE cybersecurity Rick Perry

Wellinghoff | © RTO Insider

The proposed “rule doesn’t appear to have any real limiting principle, so nukes, coal and gas (so long as they kept on site diesel) could all qualify,” said Montana Public Service Commissioner Travis Kavulla, former president of the National Association of Regulatory Utility Commissioners in a tweet.

Wellinghoff noted that solar can bid into PJM’s capacity market with a discounted capacity value. “Can solar show it has 90 days of resource? That will be a very interesting question,” he said.

‘Just and Reasonable’ Standard

If FERC were to act in response to Perry’s proposal under Section 206 of the Federal Power Act, it would first have to make a finding both that current rules are not just and reasonable and that the new rules are, FERC legal experts say.

But the commission won’t find that evidence in Perry’s NOPR.

“The NOPR does not devote much attention to connecting the policy arguments in the preamble of the NOPR to the specific predicate findings required under Section 206, i.e., that current rates are not just and reasonable,” Smith said. “FERC would need to connect those dots.”

The evidence also is far from clear cut in the DOE grid study released in August. The study quoted NERC’s warning that “premature retirements of fuel-secure baseload generating stations reduces resilience to fuel supply disruptions.” But it also noted that NERC’s most recent State of Reliability report concluded “bulk power system reliability remained … adequate” in 2016, repeating the group’s findings from 2013–2015.

“If there’s some ability to make a showing that plants with on-site fuel contribute to resilience and reliability … it may be appropriate to compensate that value, but I have yet to a see a study that does that,” said Wellinghoff. “That’s why it was shocking to see this letter on the heels of the DOE grid study. It seems to be contradictory to that study.”

“DOE is calling this a proposed rule, but it’s not,” Peskoe said. “There’s no rule; just an impossible timeline for FERC/RTOs to figure something out. And since there’s no proposed rule, I don’t think FERC can proceed to a final rule; DOE’s timeline is practically and legally impossible.”

Peskoe quoted from the Administrative Procedure Act, which says a proposed rule must “provide sufficient factual detail and rationale for the rule to permit interested parties to comment meaningfully.”

“The two-sentence description of the proposed ‘Reliability and Resiliency Rate’ raises many questions that DOE doesn’t even attempt to answer,” Peskoe said. “There’s a legal question about what [Perry’s] document actually is. Can FERC treat it merely as a filed comment?

FERC DOE cybersecurity Rick Perry

Clark | © RTO Insider

“DOE’s so-called proposed rule doesn’t say that current rates are not just and reasonable; hence, [there is] no authority for FERC to take final action,” he continued. “It’s not just that DOE’s notice is missing the magic words; it has no discussion of current RTO tariffs.”

Clark said that whatever FERC decides, it is unlikely to act in the short time frame Perry called for. “If they did something major within just the context of this rulemaking on a very expedited timetable, they’d probably open themselves to some litigation risk, because you have a fairly vague rule that people are being asked to comment on.”

Impact of the Proposal

FERC DOE cybersecurity Rick Perry

Kavula | © RTO Insider

Kavulla said Perry’s proposal would replace competitive markets with “FERC-administered cost of service regulation,” making it “the largest change to electricity regulation in decades.”

“Some conservative reforms might have tried to take away or mitigate subsidized resources’ perks. Instead, this reform is sort of the [DOE] equivalent of the Oprah ‘you get a car, and you get a car. And you? A car!’ approach,” he added.

“The practical effect of implementing the order as written would be to basically destroy the wholesale energy markets as we know them, and I don’t think anyone wants that,” Wellinghoff said. “Ultimately it will cause prices to go up significantly for consumers.”

FERC DOE cybersecurity Rick Perry

Brownell | NY Energy Week

Former Commissioner Nora Mead Brownell, a Republican, said she was “shocked and frankly disappointed” by the proposal. “If Republicans are presumably about fiscal responsibility and markets, this totally contradicts that,” she said in an interview.

“It’s the antithesis of good economics. It’s going to destroy the markets [and] drive away investment in new more efficient technologies, whether they be generating plants or energy efficiency, at a cost to business and ratepayers that is astronomical.”

“If you want to throw $80 or $90 billion at something, spend it on cybersecurity.”

Brownell noted that the coal and nuclear plants in question are fully depreciated and in many cases received stranded cost compensation in states that adopted retail choice. Before the rise of shale gas and renewables cut clearing prices,
“these plants made a lot of money,” she said. “In what other industry would we save old, fully depreciated, inefficient plants that have been paid for many times over? Markets are supposed to allocate resources efficiently and this totally distorts any valid signals you might have.”

Clark said the NOPR, like the DOE grid study, “puts another exclamation point” on the issue of price formation in the markets.

“Is the commission going to do more than it was already prepared to do? That I don’t know,” he said.

“It’s pretty clear it would be challenging to the market design as it exists today, like the New York and Illinois [zero-emission credits for nuclear plants are] challenging to those markets. You’d be talking about nuclear plants across the entire footprint of restructured markets, and most coal plants too.”

Michael Brooks contributed to this article.