Initial Comments on DOE’s Proposed Grid Resiliency Rule Raise Issues and Draw Battle Lines Before FERC
The “Grid Resiliency Pricing Rule” submitted in late September by the Secretary of Energy for consideration by the Federal Energy Regulatory Commission (FERC) 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) 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. 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,” 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. 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.”
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. 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.”
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. 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.”
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.