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3 Oct 2017

DOE Directs FERC to Consider Rule Providing Cost Recovery for Coal- and Nuclear-Fired Generating Facilities Operating in RTO/ISO Markets

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On September 29, 2017, Rick Perry, the Secretary of Energy, sent a letter to the Federal Energy Regulatory Commission (FERC) directing that FERC consider exercising its ratemaking authority under Sections 205 and 206 of the Federal Power Act to require regional transmission organizations (RTOs) and Independent System Operators (ISOs) subject to FERC jurisdiction with day-ahead and real-time markets, or the functional equivalent, to allow for the recovery of costs and a return on investment by “eligible grid reliability and resiliency resources” participating in those markets.

The Department of Energy (DOE) defines “eligible grid reliability and resiliency resources” as any electric generation resource that is physically located within a FERC-approved ISO or RTO, is able to provide essential energy and ancillary reliability services, such as voltage support, frequency services, operating reserves and reactive power, has a 90-day fuel supply on site enabling it to operate during an emergency, extreme weather conditions, or a natural or man-made disaster, is compliant with all applicable federal, state and local environmental laws, rules and regulations, and is not subject to cost-of-service rate regulation by any state or local regulatory authority. DOE also sent the proposed rule to be considered by FERC.[1]

Section 403 of the Department of Energy Organization Act (DOE Organization Act) allows the Secretary of Energy to propose rules, regulations and statements of policy of general applicability with respect to any function under FERC’s jurisdiction. FERC must consider and take final action on any proposal made by the Secretary of Energy in an expeditious manner in accordance with such reasonable time limits as may be set by the Secretary of Energy.[2]

DOE’s decision to invoke this rarely used provision of the DOE Organization Act has been interpreted by industry observers as a fulfillment of President Trump’s campaign promises to help the US coal industry by shielding coal- and nuclear-fired baseload power plants from competitive wholesale markets at the expense of natural gas-, wind- and solar-powered generating facilities. In the Staff Report to the Secretary on Electricity Markets and Reliability, issued in late August[3] and cited in the proposed Pricing Rule, DOE staff found that the increased use of natural gas in the electricity sector has resulted in sustained low wholesale market prices that reduce the profitability of “other generation resources important to the grid,” and further cited expert testimony that competition from wind- and solar-powered generating resources that benefit from State Renewable Portfolio Standards and federal tax credits reduces revenues for “traditional” baseload power plants, by lowering the wholesale prices they receive and displacing a portion of their output.

In its proposed Pricing Rule, DOE argues that “the changing electricity sector is causing the closure of many coal and nuclear plants,”[4] and that because wholesale pricing in organized markets does not adequately consider or accurately value benefits that fuel-secure generation resources provide to the grid, such resources often are not compensated for those benefits.[5] DOE also asserts that “the continued loss of fuel-secure generation must be stopped” because these generation resources “are necessary to maintain the resiliency of the electric grid.”[6] According to DOE, FERC must adopt rules requiring FERC-jurisdictional RTOs and ISOs to “reduce the chronic distortion of the markets that is threatening the resilience of the Nation’s electricity system.”[7]

Under DOE’s proposed Pricing Rule, FERC would amend Section 35.28(g) of its regulations[8] governing tariffs and operations of FERC-approved ISOs and RTOs to require that RTO and ISO tariffs provide a just and reasonable rate for the purchase of electric energy from an eligible reliability and resilience resource and for the recovery of costs (such as operating and fuel expenses, and costs of capital and debt) and a return on equity for such resource dispatched during grid operations. The proposed Pricing Rule prescribes that the just and reasonable rate ensure that each eligible resource is fully compensated for the benefits and services it provides to grid operations, including reliability, resiliency and on-site fuel assurance, and that each eligible resource recovers its fully allocated costs and a fair return on equity.

DOE observed that in several proceedings over the past few years, FERC has developed an extensive record on price formation in FERC-approved ISOs and RTOs, but that the “fundamental challenge of maintaining a resilient electric grid” has not been addressed by either FERC or the ISOs and RTOs.[9]

If FERC decides to implement DOE’s proposal, the effects of the Pricing Rule may be felt in wholesale energy markets as soon as the first quarter of 2018. DOE urges FERC to “take action before the winter heating season begins so as to prevent the potential failure of the grid from the loss of fuel-secure generationas almost happened during the 2014 Polar Vortex,”[10] and directs FERC to either consider and take action on the proposed Pricing Rule within 60 days from the date of its publication in the Federal Register or to issue the proposed rule as an interim final rule, effective immediately, with provision for later modifications after consideration of public comments. The Secretary of Energy directed that any final FERC rule adopting DOE’s proposal must take effect within 30 days of its publication in the Federal Register, and DOE proposes that each ISO and RTO subject to the Pricing Rule be required to submit a compliance filing within 15 days of the effective date of FERC’s final rule. Under this timeframe, FERC could issue a final rule in early December, with an effective date in early January and RTO/ISO compliance filings due in mid-January.

Public comments on DOE’s proposed Pricing Rule must be filed with FERC by October 23. Reply comments are due by November 7.

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[1] “Grid Resiliency Pricing Rule,” Notice of Proposed Rulemaking, Docket No. RM18-1-000 (issued Sept. 28, 2017) (“Pricing Rule”).
[2] 42 U.S.C. §§ 7173(a) and (b) (2012).
[3] Staff Report to the Secretary on Electricity Markets and Reliability, US Department of Energy (Aug. 2017).
[4] Pricing Rule at p. 3, citing Transforming the Nation’s Electricity System: the Second Installment of the Quadrennial Energy Review, (Jan. 6, 2017).
[5] Pricing Rule at p. 5.
[6] Pricing Rule at p. 10.
[7] Pricing Rule at p. 10.
[8] 18 C.F.R. § 35.28(g)(2017).
[9] Pricing Rule at p. 10.
[10] Pricing Rule at p. 11.

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