FERC and Wholesale Market Stakeholders Prepare Responses to Proposed Rule on Grid Resiliency
On September 29, 2017, the Secretary of Energy submitted to the Federal Energy Regulatory Commission a notice of proposed rulemaking to support electric grid resiliency. The notice states that changes to wholesale market pricing rules are necessary to avoid premature retirements of coal and nuclear generation facilities. The notice further states that these generation resources contribute to grid resiliency because they use fuels that can be stored on-site unlike natural gas-fired resources, which rely on pipeline supplies, or renewable resources, which rely on intermittent resources such as wind and solar. Accordingly, the notice directs FERC to issue a final rule requiring regional transmission organizations (RTOs) and independent system operators (ISOs) to implement market rules that “accurately” compensate grid-resilient resources for the benefits that they provide.
The Secretary’s proposal includes revisions to FERC’s regulations that would require each ISO and RTO to establish a wholesale tariff rate for the purchase of electric energy from an “eligible reliability and resiliency resource” and the recovery of costs and a return on equity to ensure that these resources are “fully compensated for the benefits and services that it provides to grid operations….” In addition, the Secretary proposes to define “eligible grid reliability and resiliency resources” as any electric generation resource that: (i) is located within an ISO or RTO; (ii) is able to provide essential energy and ancillary reliability services; (iii) has a 90-day fuel supply on site; (iv) complies with all applicable federal, state and local environmental laws, rules and regulations; and (v) is not subject to cost of service rate regulation by any state or local regulatory authority. In practice, coal and nuclear facilities would benefit most from the rule if implemented as proposed.
The Secretary gives FERC 60 days from publication of the notice in the federal register to issue a final rule adopting these proposals. The final rule would become effective within 30 days of its publication in the federal register. RTOs and ISOs would have 15 days from the effective date of the final rule to prepare and submit revisions to their wholesale market tariffs to comply with the rule, or to file a statement explaining why their existing tariffs comply with the rule. As discussed further below, it remains unclear if and how FERC and the RTOs and ISOs will comply with the deadlines set forth in the Secretary’s notice.
Expedited Rulemaking Procedures
The Secretary’s authority to initiate a FERC rulemaking derives from the 1977 statute that established FERC as an independent executive agency to replace the former Federal Power Commission. Section 403 of the Department of Energy Organization Act states that the Secretary is “authorized to propose rules, regulations, and statements of policy of general applicability with respect to any function within the jurisdiction of the Commission….” When the Secretary proposes a rule that affects the rates, terms, and conditions of wholesale sales of electricity or transmission, FERC has discretion under the statute to initiate a rulemaking proceeding, which begins with the issuance of a notice of proposed rulemaking, is followed by public comments, and concludes with a final rule issued by FERC, which is subject to rehearing and appeal procedures. The Commission must act “in an expeditious manner in accordance with such reasonable time limits as may be set by the Secretary.”
Although the Secretary’s authority to initiate a FERC rulemaking is clear, it is less clear if FERC can or will respond with a final rule within 60 days. FERC rulemaking proceedings affecting wholesale market design often require many months, if not years, to resolve. Moreover, at FERC’s monthly open meeting in September, acting FERC chairman, Neil Chatterjee, stated that he does not want to address any major issues until the final two FERC vacancies are filled. On September 19, 2017, the U.S. Senate Energy and Natural Resource Committee confirmed the appointments of Kevin McIntyre and Richard Glick to FERC, but it is not clear when the full Senate will vote on their appointments.
Under the Organization Act, FERC is compelled to act on the Secretary’s proposal in “accordance with such reasonable time limits as may be set by the Secretary.” The Secretary states that FERC can respond within the deadline because FERC has already developed an extensive record on price formation within the ISO and RTO markets. In June 2014, FERC initiated a proceeding to evaluate issues regarding price formation in the energy and ancillary markets operates by RTOs and ISOs. After months of comments and reply comments, FERC issued a notice of proposed rulemaking in September 2015, inviting additional rounds of public comments that resulted in a final rule that was issued in June 2016. However, the proceeding did not address the price reforms suggested by the Secretary, and the Secretary’s proposals will no doubt generate significant new comments from the industry.
The timeline established in the Secretary’s notice presents further challenges to the ISOs and RTOs that must comply with FERC’s final rule. The notice directs FERC to make its final rule effective within 30 days of its publication in the final register, and RTOs and ISOs are required to submit compliance filings within 15 days of the effective date of the final rule. However, ISOs and RTOs will need to engage their stakeholders, including vertically integrated utilities and independent power producers, to evaluate the need for and develop revisions to their wholesale market tariffs to comply with FERC’s final rule. Like a FERC rulemaking, ISO and RTO stakeholder proceedings typically require many months to resolve.
On October 2, 2017, eleven industry groups, including the American Council on Renewable Energy, the Electric Power Supply Association, the Interstate Natural Gas Association of America, and the National Rural Electric Cooperative Association, filed a joint motion stating that the Secretary’s notice “does not establish a reasonable and adequate time for the submission of comments.” The joint motion urges FERC to provide at least 90 days for initial public comments, as well as affording an opportunity for reply comments. In addition, the joint motion suggests that FERC convene a technical conference prior to the comment deadline to provide interested parties an opportunity to better understand key aspects of the proposed regulations, and facilitate the submission of meaningful comments. Finally, the joint motion recommends that FERC extend the timelines for FERC to complete the final rule and for RTOs and ISOs to prepare and submit compliance filings.
In spite of the joint motion, and Commissioner Chatterjee’s comments at FERC’s open meeting in September, FERC issued a notice on October 2, 2017, setting deadlines for initial and reply comments of October 23, 2017, and November 7, 2017, respectively. Two days later, FERC issued a series of questions for commenters to address in their submissions to FERC. FERC’s questions address the need for reform, the proposed eligibility requirements, the 90-day on-site fuel requirement, implementation, and potential effects on wholesale markets. On October 5, 2017, several other parties, including the National Associations of State Utility Consumer Advocates, filed motions requesting FERC to extend its comment deadlines. Considering the breadth of reforms proposed by the Secretary, their potential implications on wholesale market operations, and FERC’s lingering questions on the need for reform and implementation, it remains uncertain if FERC can develop a sufficient record and produce a final rule by the 60-day deadline adopting the Secretary’s proposals. In addition, there is no assurance that RTOs and ISOs would be able to prepare and submit compliance filings within 15 days of publication of the final rule in the federal register.
Whatever the outcome of the FERC proceeding, the final rule likely will be subject to multiple requests for rehearing and appeal. When DOE invoked its authority under Section 403 to initiate FERC rulemakings in 1979 and 1985, the respective final rules were subject to multiple requests for rehearing that took years to resolve. In addition, any final action by FERC can be appealed to a United States circuit court of appeals, where the court must evaluate whether FERC’s action or inaction was arbitrary or capricious. Moreover, if a new administration takes control in 2020, these reforms, if adopted, could be reversed. Accordingly, it is difficult to see how owners and investors in coal and nuclear generation will, in the short term, significantly change their planning with respect to generation development and retirement.
Need for Reform
The Secretary’s proposal relies on statements collected from a variety of sources, including from DOE, FERC and the North American Electric Reliability Corporation (NERC). Taken together, these statements may underscore the need for reform, but they also should be viewed in their original context, and it is not clear that all of the reforms proposed by the Secretary are fully supported by existing data. In rendering a final rule in this proceeding, FERC will need to review the entire record, including public comments, to determine if the proposed reforms are necessary.