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31 Oct 2017

Initial Comments on DOE’s Proposed Grid Resiliency Rule Raise Issues and Draw Battle Lines Before FERC

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The “Grid Resiliency Pricing Rule” submitted in late September by the Secretary of Energy for consideration by the Federal Energy Regulatory Commission (FERC)[1] has attracted the proverbial avalanche of initial comments from a broad spectrum of interests, including former FERC Commissioners, labor unions, independent power producers, traditional utilities, environmental groups, state public service commissions, energy consumer groups, investors, natural gas producers and pipeline companies, and the U.S. Congress. The comments raise numerous issues, including whether there is a “resiliency” problem in US bulk power markets and, if so, whether it is an urgent problem, the cause of any resiliency problem in US bulk power markets, whether the problem exists across the US or only in certain markets, the best way to resolve any resiliency problem, the potential effect of the Pricing Rule on competitive electricity markets, federal versus state jurisdiction over generating facilities, and the status of FERC as an independent agency under the Department of Energy (DOE).  The comments generally put coal and nuclear-powered generation interests on one side of the battle line, with natural gas- and renewable-powered generation interests on the other side.

As proposed by DOE, the Pricing Rule would amend FERC’s regulations governing tariffs and operations of FERC-approved Independent System Operators (ISO) and Regional Transmission Organizations (RTOs)[2] to require that RTO and ISO tariffs provide a rate for the purchase of electric energy from an eligible reliability and resilience resource that ensures that each such resource dispatched during grid operations is fully compensated for the “reliability, resiliency and on-site fuel assurance” it provides to grid operations, recovers its costs (such as operating and fuel expenses, and costs of capital and debt) and receives a return on equity. The Pricing Rule defines an “eligible grid reliability and resiliency resource” as an 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.[3] The 90-day on-site fuel supply criterion generally is understood to encompass baseload coal- and nuclear-powered generating facilities.

DOE argues that the Pricing Rule is necessary because “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]

DOE claims that, among other things, the 2014 “Polar Vortex” cold weather event in the eastern and central US exposed resiliency problems in the electricity grid. According to DOE, PJM Interconnection, L.L.C. (PJM) struggled to meet the increased demand for electricity during the Polar Vortex because a significant amount of natural gas-fired generation was not available due to already limited natural gas resources being diverted from electricity generation to meet increased residential heating demand.[7] DOE asserts that 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.”[8]

As published in the Federal Register, the Pricing Rule would apply to FERC-approved ISOs and RTOs with energy and capacity markets and a tariff that contains a day-ahead and a real-time market or the functional equivalent.[9] This language differs from the proposal as originally submitted to FERC, which did not require that an RTO/ISO have energy and capacity markets, and has been interpreted as directing the Pricing Rule at the three northeastern RTOs/ISOs – PJM, The New York Independent System Operator, Inc. (NYISO), and ISO New England Inc. (ISO-NE). Indeed, several commenters asked FERC to clarify the proposed scope of the Pricing Rule. The Edison Electric Institute, which represents all US investor-owned electric companies, asked FERC to clarify that the Pricing Rule applies only to “resources that are physically located in the eastern RTOs/ISOs that have mandatory capacity markets and that are fully or mostly restructured so that the resources are compensated through the markets.”

Several commenters contend that the proposed Pricing Rule is a political effort by President Trump to honor his campaign promises to save the coal industry. Tenaska, Inc. contends that “it is difficult to conclude that DOE’s proposal represents anything more than a thinly-veiled political handout to the coal industry,” and that “[a]s an ‘independent agency of the United States,’” FERC “should resist the administration’s attempt to use FERC to implement a political agenda. . . .” Several commenters point out that Energy Secretary Rick Perry’s decision to direct FERC to consider the Pricing Rule followed closely after DOE’s decision not to issue an order under Section 202(c) of the Federal Power Act (FPA) in response to several requests by FirstEnergy and Murray Energy Corporation to President Trump and Secretary Perry. Under Section 202(c) of the FPA, where the Secretary of Energy “determines that an emergency exists by reason of . . . a shortage of electric energy or of facilities for the generation. . . of electric energy. . .” the Secretary may “require by order such . . . generation . . . of electric energy” as the Secretary determines “will best meet the emergency and serve the public interest.”[10]

A letter dated August 18, 2017, from Murray Energy Corporation (Murray Energy) to the Secretary of Energy requested that DOE invoke Section 202(c) of the FPA, claiming that failure to invoke Section 202(c) of the FPA could result in the bankruptcy of FirstEnergy Solutions, which could in turn, cause the bankruptcy of Murray Energy. The letter further asserts that PJM’s wholesale electricity market is “a fundamentally flawed market, where the valuable attributes of baseload coal and nuclear generation is taken for granted and not considered in the marketplace.” A DOE spokesperson said later that the White House and DOE agreed that the evidence presented in Murray Energy’s request did not warrant the use of emergency authority under Section 202(c) of the FPA.

Murray Energy filed comments in support of the Pricing Rule, arguing, among other things, that FERC’s failure to act expeditiously to approve the Pricing Rule will “threaten the livelihoods of hundreds of thousands of people who rely on the baseload coal and nuclear generation and related industries.”

In its comments on the Pricing Rule, FirstEnergy Service Company and its affiliates (FirstEnergy) argues that “[t]ime is of the essence in order to prevent additional premature retirements of fuel-secure generation resources that have the essential reliability and resiliency attributes needed to keep the lights on in times of crisis,” and urges FERC to “promptly adopt a final rule by no later than December 11, 2017. . . .” First Energy not only expressed strong support for the Pricing Rule, “subject to certain limited modifications,” it also submitted pro forma tariff provisions and a proposed Resiliency Support Resource (RSR) Agreement that could be adopted by FERC in a final rule. Under the pro forma tariff provisions and RSR Agreement, in exchange for a RSR Unit remaining in operation and providing energy and ancillary services in times of need by the RTO/ISO, the RTO/ISO would ensure that the RSR Unit receives a payment each month equal to its full cost of operation and service less market revenues for capacity, energy and ancillary services. FirstEnergy asks FERC to direct all RTOs/ISOs to adopt the proposed tariff provisions and RSR Agreement.

Exelon Corporation (Exelon) contends that, in the proposed Pricing Rule, the Secretary of Energy “is asking whether wholesale markets in PJM, NYISO and ISO-NE—which are designed to ensure we have enough megawatts to serve load—should also be designed to ensure we have the right megawatts to serve load; those that have a stable source of fuel that will enable the system to withstand interruptions that could dramatically interfere with the ability of the system to power our economy and society.” Exelon argues that “[t]he retirement of nuclear units—the most resilient and reliable generators on the system—and their replacement by resources that are neither fuel secure nor emissions-free will have a strongly negative impact on the grid’s resilience, not to mention the environment.”

Other commenters supporting the Pricing Rule, including numerous labor groups, argue that, in addition to reliability, the Pricing Rule would retain the jobs of thousands of coal, nuclear and electricity generation workers. Over a dozen Locals of the International Brotherhood of Electrical Workers (IBEW), primarily located in Ohio and Pennsylvania, filed comments in support of the proposed Pricing Rule, arguing that baseload coal and nuclear plants provide good paying union jobs and economic opportunities to IBEW Local union members. The IBEW Locals further contend that the loss of jobs and tax revenues resulting from the closure of baseload coal and nuclear plants, and the ripple effect of such losses throughout local economies, would have “a severely detrimental impact on the country.”

Several commenters who expressed support for the Pricing Rule also asked FERC to expand the eligibility criteria under the Pricing Rule. Cleco Power LLC (Cleco), which serves retail customers in Louisiana and supplies wholesale power in Louisiana and Mississippi, “agrees that organized markets should adopt appropriate mechanisms to compensate and encourage grid resiliency and reliability,” and argues that any final Pricing Rule, “should also include compensation mechanisms for near-site storage of other fuel types, such as natural gas,” which may be stored at a facility near the generating unit or transported over a pipeline owned by the owner of the generating facility. The National Hydropower Association (NHA) also agrees with the proposed Pricing Rule that “current markets ‘do not necessarily pay generators for all the attributes they provide to the grid, including resiliency,’” and argues that “[t]his is “particularly true for America’s hydropower and pumped storage fleet, which is not adequately compensated for these essential services.” NHA recommends that FERC work with ISOs and RTOs to define services and attributes that support reliability and resilient grid outcomes, rather than focusing too narrowly on a subset of eligible resources.

Tesla, Inc. (Tesla), which manufactures battery energy storage systems, urges FERC to dismiss the proposed Pricing Rule, which “completely excludes the benefits of energy storage and distributed energy resources,” but in the event that FERC moves forward on the Pricing Rule, suggests that FERC “build the record on the definition of resiliency and reliability and what grid services and resource attributes make the greatest contribution to improving resiliency and reliability,” including co-location with load and the ability to serve loads when some portion of transmission or distribution service is not available, and fuel sources that require no transportation.

The comments of Cleco, NHA and Tesla, among others, suggest that, if FERC decides to provide baseload coal-and nuclear-powered generating facilities the rate relief envisioned by the Pricing Rule, it also may have to expand the eligibility criteria to allow other resources, such as natural gas, hydropower and energy storage, the opportunity to demonstrate their “resiliency” and eligibility for similar rate relief.

The Pricing Rule did not receive support from FERC-jurisdictional RTOs/ISOs. PJM argues that the proposed Pricing Rule “is well wide of the mark both in its statement of the problem it seeks to address and in its identification of a reasonable remedy,” as it “takes observations about overall changes in the resource mix across the nation as the basis for a sweeping and unsupported conclusion that, solely in regions with capacity and energy markets, certain units, regardless of their location, performance history, or competitiveness, deserve full cost recovery through out-of-market mechanisms.” According to PJM, if the Pricing rule were adopted, “it would remove half of all the capacity in the PJM region from the discipline of competitive market forces.” NYISO contends that its market rules, “to a large extent, already value and compensate resources that provide ‘resiliency’ in various ways,” and states that it cannot support the Pricing Rule in its current form, as it is flawed and premised on assumptions and statements that are not accurate as they relate to New York.” ISO-NE asks FERC not to adopt the proposed Pricing Rule, because “it will significantly undermine the efficient and effective wholesale electricity markets that, with [FERC’s] guidance, the New England region has built.” ISO-NE contends that its three-year forward capacity market has ensured resource adequacy until at least 2021, and the region already has taken steps to improve operating procedures and generator incentives to secure firm fuel supplies.

While the Midcontinent Independent System Operator, Inc. (MISO) “supports [FERC’s] continuing efforts to improve grid reliability,” it argues that the Pricing Rule “should not be adopted, in particular for the area served by MISO,” because the Pricing Rule “identifies no imminent reliability or resilience issues, and no near-term reliability or resiliency issues’ in MISO that “require immediate action beyond application of ongoing processes and existing tools that address resource reliability and retirement in the MISO region.”

In its comments, the Southwest Power Pool (SPP) agreed that ensuring a resilient electricity grid is an important goal, but argued that “this important goal should be assessed over a longer period of time and in a more deliberate manner that does not unduly disrupt any competition-fostering and market development aspects of significant [FERC] initiatives from the last several decades.” SPP also states that it is not completely clear at this point whether the Pricing Rule applies to SPP, which has no capacity market.

The California Independent System Operator Corporation (CAISO) contends the proposed Pricing Rule would not apply to CAISO, since CAISO does not have a capacity market and there are no baseload coal or nuclear resources physically located in CAISO that would be eligible for the compensation scheme in the Pricing Rule. CAISO also states that it does not support adoption of the Pricing Rule because, among other things, “[t]here is no basis for a universal finding that having a 90-day, on-site fuel supply is essential for ISOs and RTOs to maintain grid reliability or resilience.” CAISO argues that any action taken by FERC in response to the Pricing Rule “must allow each ISO and RTO to have the flexibility to determine which resources and capabilities are needed to maintain reliability and resiliency based on the specific circumstances in its respective region.”

In its comments, the North American Electric Reliability Corporation (NERC), the FERC-authorized Electric Reliability Organization for the US, recommends that FERC “continue to pursue policy reform that recognizes the secure capacity and essential reliability service attributes currently and historically provided by coal and nuclear generation, incentivizes development of such reliability attributes in non-synchronous resources, such as wind and solar facilities, and promotes fuel assurance for natural gas-fired resources.” NERC states that the bulk power system in North America “is reliable and resilient.” NERC further states that while it “has not identified an immediate or near-term emergency related to [retirements of traditional coal and nuclear generation],” its assessments “demonstrate that the ongoing trend reduces system flexibility to respond to events and may affect reliability, increasing risk to the [bulk power system].” According to NERC, “[w]ith their benefits, non-synchronous resources also experience variability, while natural gas-fired resources are more susceptible to fuel interruptions in the supply chain than coal and nuclear generation.”

Many commenters asked FERC to clarify the terms “resilient” and “resiliency.” Duke Energy Corporation contends that while the Pricing Rule “proposes a requirement for a 90-day on-site fuel supply for a resource to be considered ‘resilient’ and eligible for compensation of its full costs, FERC does not specifically define resiliency in this . . .nor in any other rule.”

Numerous commenters, including those representing the natural gas and renewable energy industries, challenged the premises underlying the Pricing Rule. The Advanced, Renewable and Storage Energy Industry Associations argue that “there is no evidence demonstrating that a failure by RTOs/ISOs to subsidize resources with 90 days of on-site fuel will cause additional disruptions in service during severe weather events or otherwise.” The Natural Gas Supply Association argues that “[t]he evidence shows that generators with 90-day on-site fuel are no more reliable or resilient than natural gas generators with firm pipeline service.” The Interstate Natural Gas Association of America, which represents interstate natural gas pipelines, contends that during the 2014 Polar Vortex, “natural gas performed approximate to or better than ‘fuel-secure’ sources,” and that, contrary to DOE’s claim, “there was no diversion” of natural gas from electricity generation to residential heating during the Polar Vortex.

Several commenters observed that, in order to satisfy the requirements of Section 206 of the FPA, which gives FERC authority to, on its own motion, determine “just and reasonable” rates for the wholesale sale of electricity, FERC must first make a fact-based determination that current rates are not just and reasonable, and then make a fact-based determination that the new rates it proposes to establish in response to the Pricing Rule are just and reasonable.

Many commenters argued that adopting the Pricing Rule would have an adverse effect on competitive wholesale electricity markets developed over the past 25 years. Notably, a bipartisan group of eight former FERC Commissioners[11] urged FERC “not to move forward” with DOE’s proposed Pricing Rule, as to do so “would be a significant step backward from the Commission’s long and bipartisan evolution to transparent, open, competitive wholesale markets.” The former Commissioners argued that “[s]ubsidizing resources so they do not retire would fundamentally distort markets. The subsidized resources would inevitably drive out the unsubsidized resources, and the subsidies would inevitably raise prices to consumers. Investor confidence would evaporate and markets would tend to collapse. This loss of faith in markets would thereby undermine reliability.”

Beal Bank USA argues that “[t]hose providing financing to generating facilities are looking for steady regulation that ensures that newer, more efficient, and environmentally friendly resources can fairly compete,” and that the proposed Pricing Rule “would mark a dramatic shift in wholesale electricity regulation and allocation of market risks, which would either increase debt costs for generation companies that remain in wholesale markets or curb such lending altogether.” Beal predicts that if the Pricing Rule is implemented, “investors and lenders would likely retreat from this sector, which would likely hurt the evolution of the market and development of emerging technological advances.”

An ad hoc group of “major corporations employing thousands of American workers and contributing billions of dollars a year to the US economy”[12] opposes the Pricing Rule, citing a preliminary analysis showing that it would “increase electricity costs by up to $3.8 billion annually, a significant cost that will be passed through to American businesses and households.”

The Sierra Club asked FERC not to “force utility customers to pay billions in energy costs each year to prop up aging and polluting power plants, while doing nothing to guarantee the reliability of our electricity system,” but instead, to “adopt policies that update our outdated transmission and distribution systems and invest in clean technologies, like smart- and micro-grids and battery storage, to promote the reliability and resiliency of our electricity system.”

Several commenters expressed concern that the proposed Pricing Rule could cross the federal-state jurisdictional line with respect to electricity generation. The National Association of Regulatory Utility Commissioners urged FERC to “give full deference to the States’ longstanding authority over electric generating facilities,” in its consideration of the Pricing Rule, as the Pricing Rule could affect States’ ability to choose between market forces and cost-of-service regulation by extending cost-of-service compensation for certain generation services that currently are compensated through market pricing. Entergy Services, Inc. argues that “federal action should not preempt lawful state decisions about which resources provide value to the customers in each state.”

Many commenters asked FERC to provide additional time for parties to provide comments and information in response to the proposed Pricing Rule and additional time for FERC to consider its response to the proposed Pricing Rule. FERC previously denied a motion filed by an ad hoc group of Energy Industry Associations for an extension of time to file comments.[13]

Reply comments on the Pricing Rule are due by November 7.

It is not clear when FERC will issue an order in response to the proposed Pricing Rule. The Secretary of Energy has directed that FERC take final action on the proposed Pricing Rule by December 11, and that any final rule adopting the Pricing Rule take effect within 30 days of publication in the Federal Register. However, to date, the only open Commission Meetings scheduled after the close of the comment period are November 16 and December 21.

With respect to the substance of a FERC order in response to the Pricing Rule, observers of the energy sector are carefully sifting the public comments of FERC Commissioners for hints as to what FERC may do.

Speaking before the Energy Bar Association on October 17, current FERC Chairman Neil Chatterjee, who was nominated by President Trump and who will be Chairman until Kevin McIntyre, the third Republican commissioner appointed by Trump, is confirmed by the Senate, expressed his belief that “there’s real value in Secretary Perry initiating a conversation regarding whether FERC-jurisdictional organized markets adequately compensate certain generators for their contribution to the reliability and resilience of the nation’s grid,” and that the Pricing Rule “contemplates and builds on FERC’s existing regulatory initiatives on price formation.” He also acknowledged that the proposed Pricing Rule has raised concerns with respect to FERC’s independence, and stated that he remains “committed to upholding” FERC’s independence. Chatterjee previously had identified several options available to FERC other than simply adopting or rejecting the proposed Pricing Rule, including issuing an Advance Notice of Proposed Rulemaking or a Notice of Inquiry, or establishing a proceeding under Section 206 of the FPA.

Commissioner Robert Powelsen, also nominated by President Trump, publicly has challenged as a “mistruth,” the claim that “the gas industry caused the interruptions of the polar vortex,” and also has said that he did not become a FERC commissioner in order to “blow up” competitive power markets.

In a statement issued on October 25, DOE asserts that the proposed Pricing Rule was intended to “jumpstart a long overdue conversation about grid resiliency,” and that, while DOE “still is reviewing” comments filed in response to the Pricing Rule, “it is clear that there is a significant amount of support for the Secretary’s proposal.”

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[1]  “Grid Resiliency Pricing Rule,” Notice of Proposed Rulemaking, Docket No. RM18–1–000, 82 Fed. Reg. 46940 (Oct. 10, 2017) (“Pricing Rule”).
[2]  18 C.F.R. § 35.28(g)(2017).
[3]  Pricing Rule, 82 Fed. Reg. at 46948.
[4]  Pricing Rule, 82 Fed. Reg. at 46942, citing Transforming the Nation’s Electricity System: the Second Installment of the Quadrennial Energy Review, (Jan. 6, 2017).
[5]  Pricing Rule, 82 Fed. Reg. at 46942.
[6]  Pricing Rule, 82 Fed. Reg. at 46945.
[7]  Pricing Rule, 82 Fed. Reg. at 46942.
[8]  Pricing Rule, 82 Fed. Reg. at 46945.
[9]  Pricing Rule, 82 Fed. Reg. at 46948.
[10]  16 U.S.C. § 824a(c)(2012).
[11]  Elizabeth Anne (Betsy) Moler, James J. Hoecker, Donald F. Santa, Jr., Linda Key Breathitt, Nora Mead Brownell, Pat Wood, III, Joseph T. Kelliher and Jon Wellinghoff.
[12]  Including, among others, Walmart, Bloomberg, HP, Unilever, and Ben & Jerry’s.
[13]  Grid Reliability and Resilience Pricing, Notice Denying Extension of Time, Docket No. RM18-1-000 (Oct. 11, 2017).

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