United States: FERC Rejects Department Of Energy's Bid For Coal, Nuclear Subsidies

Joseph Donovan is a Partner for Holland & Knight's Washington, D.C. office

HIGHLIGHTS:

  • The Federal Energy Regulatory Commission (FERC) has voted to terminate a Notice of Proposed Rulemaking stemming from Department of Energy (DOE) Secretary Rick Perry's September 2017 proposal to initiate new pricing rules.
  • The proposed rules sought to allow certain generation units in competitive wholesale power markets to recover costs for power plants with at least 90 days' supply of fuel on hand – reserves that generally apply only to coal and nuclear generation plants.
  • In unanimously rejecting the proposal, FERC held that DOE hasn't created a record demonstrating that the existing market rules for regional transmission organizations (RTOs) and independent system operators (ISOs) are "unjust and unreasonable" under Section 206 of the Federal Power Act.

After months of speculation impacted by lack of quorum, delayed confirmations, new commissioners and replacing an interim chairman, the Federal Energy Regulatory Commission (FERC, or Commission) voted on Jan. 8, 2018, to terminate a Notice of Proposed Rulemaking stemming from Department of Energy (DOE) Secretary Rick Perry's Sept. 29, 2017, proposal to initiate new pricing rules. The proposed rule sought to allow certain generation units in competitive wholesale power markets to recover costs for power plants with at least 90 days' supply of fuel on hand – reserves that generally apply only to coal and nuclear generation plants.

DOE argued in its proposed rule under Section 403 of the Department of Energy Organization Act that the price changes were needed to prevent immediate dangers to grid resiliency caused by the rising number of retiring coal and nuclear power plants in the competitive markets.1 The proposed rule directed FERC to consider requiring certain regional transmission organizations (RTOs) and independent system operators (ISOs) to establish a tariff mechanism providing for: 1) the purchase of energy from an eligible "reliability and resilience resource;" and 2) the recovery of costs and a return on equity for such resources (i.e., a "resilience rate"). The Proposed Rule stated that eligible reliability and resilience resources must be: 1) located in an RTO/ISO with an energy and capacity market; 2) be able to provide essential reliability services; and 3) have a 90-day fuel supply on-site.

In unanimously rejecting this proposal, the Commission held that DOE hasn't created a record demonstrating that the existing RTO/ISO market rules are "unjust and unreasonable" under Section 206 of the Federal Power Act.

Neither the Proposed Rule nor the record in this proceeding has satisfied the threshold statutory requirement of demonstrating that the RTO/ISO tariffs are unjust and unreasonable. While some commenters allege grid resilience or reliability issues due to potential retirements of particular resources, we find that these assertions do not demonstrate the unjustness or unreasonableness of the existing RTO/ISO tariffs. ...
[W]e note that the Proposed Rule would allow all eligible resources to receive a cost-of-service rate regardless of need or cost to the system. The record, however, does not demonstrate that such an outcome would be just and reasonable.2

As Commissioner Richard Glick noted in his concurring opinion, even DOE's own grid reliability study that it cited to justify the proposed rule "concluded that changes in the generation mix, including the retirement of coal and nuclear generators, have not diminished the grid's reliability or otherwise posed a significant and immediate threat to the resilience of the electric grid."

In its place, FERC voted to initiate a new proceeding to consider additional steps in resilience issues in the RTOs/ISOs. The goal of this proceeding is: 1) to develop a common understanding among the Commission, industry and others of what resilience of the bulk power system means and requires; 2) to understand how each RTO and ISO assesses resilience in its geographic footprint; and 3) to use this information to evaluate whether additional Commission action regarding resilience is appropriate at this time.

FERC ordered each RTO/ISO to submit responses to specific questions within 60 days of publication. Importantly, noting that DOE's proposed rule focused solely on a single aspect of resiliency (90-day fuel supply on site), the new proceeding will "encompass a broader consideration of resilience issues, including wholesale electric market rules, planning and coordination, and NERC standards."3 The Commission will also allow interested entities an opportunity to reply to the RTO/ISO comments within 30 days of submission.

Required Comments for RTOs, ISOs

Some highlights of the topics that the Commission has required RTOs and ISOs to comment upon include:

  • FERC's proposed definition of "resilience" in the context of the bulk power system
  • how each RTO or ISO currently evaluates the resilience of the system
  • how the RTOs and ISOs identify and plan for naturally occurring and man-made risks and risks associated with high-impact, low-frequency events (e.g., physical and cyberattacks, accidents, extended fuel supply disruptions or extreme weather events)
  • identify any studies that have been conducted, are currently in progress, or are planned to be performed in the future to identify the ability of the bulk power system to withstand a high-impact, low-frequency event
  • how the RTO or ISO evaluates whether specific components of the bulk power system contribute to system resilience
  • how the RTO or ISO coordinates with other RTOs/ISOs, Planning Coordinators and other relevant stakeholders to identify potential resilience threats and mitigation needs
  • describe any existing operational policies or procedures you have in place to address specific identified threats to bulk power system resilience within your region and how existing market-based mechanisms (e.g., capacity markets, scarcity pricing or ancillary services) currently address these risks and support resilience
  • identify any market-based constructs, operating procedures, NERC reliability standards or planning processes that should be modified to better address resilience

Footnotes

1 Generators in vertically integrated utility markets operate on cost-of-service basis subject to state public utility commission regulation and therefore are not at risk of cost competition in the same way as independent power generators operating in competitive wholesale markets.

2 Order Terminating Rulemaking Proceeding, Initiating New Proceeding, 162 FERC ¶ 61,012 at PP. 15-16 (citations omitted).

3 Id. At P. 19.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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