Surprise DOE Proposal Presses FERC to Provide Full Cost Recovery for Reliability Attributes of Generators in Bulk Power Markets

by Stinson Leonard Street

On September 29, 2017, the Department of Energy (DOE) issued what DOE variously describes as a Notice of Proposed Rulemaking (NOPR) and a directive (Grid Resiliency Pricing Rule) that will involve DOE in wholesale electric market design to an unprecedented degree. The NOPR calls on the Federal Energy Regulatory Commission (FERC) to issue a new rule directing Regional Transmission Organizations and Independent System Operators (RTOs/ISOs) to implement electric market pricing policies designed to "accurately price" generating resources so that "the reliability and resilience attributes of generation with on-site fuel supplies are fully valued." DOE's objective is to "allow [] for the recovery of costs of fuel-secure generation units frequently relied upon to make our grid supplies reliable and resilient." According to DOE, such units "provide reliable capacity, resilient generation [and] frequency and voltage support."

Scope of DOE's Grid Resiliency Pricing NOPR

DOE's substantive direction to FERC and to the marketplace is broad in scope and limited in detail. It would require that new and existing wholesale electric market tariffs implemented by RTOs/ISOs provide compensation mechanisms to promote baseload generation with on-site fuel resources – for instance, coal and nuclear units.

The pricing policy advanced by DOE will be limited to generators that: (1) are physically located within RTOs/ISOs; (2) are capable of providing "essential energy and reliability services;" (3) have a 90-day on-site fuel supply to endure supply disruptions; (4) comply with applicable environmental regulations; and (5) are not subject to state or local cost-of-service rate regulation. DOE states that FERC must act within 60 days of the NOPR's publication in the Federal Register, i.e., "before the winter heating season."

Beyond this, the NOPR does not specify what pricing policies RTOs/ISOs must implement, though they must act quickly. Within 15 days of the effective date of FERC's final rule (set by DOE at 60 days from Federal Register publication), RTOs/ISOs must either file new market tariffs designed to accomplish DOE's objective or demonstrate that their existing pricing policies already do so.

DOE's Basis for Action

DOE issued the NOPR under section 403 of the DOE Organization Act (Act), 42 U.S.C. 7173, which authorizes "[t]he Secretary [DOE] and the Commission [FERC]…to propose rules, regulations and statements of policy of general applicability with respect to any function within the jurisdiction of the Commission." Under section 403(b) of the Act, the Secretary of DOE may establish "reasonable time limits" for completion of action by FERC. The Secretary has rarely acted on this authority, though DOE cites a 1979 NOPR regarding transportation of natural gas, and generally references other instances in which DOE has taken action.

To support the need for immediate FERC action, DOE points to its grid study issued earlier this year and North American Electric Reliability Corporation (NERC) reliability assessments as evidence that early retirement of substantial baseload generation threatens grid reliability. DOE further cites FERC's wholesale market price formation dockets that question whether capacity markets are achieving desired investment, as well as the 2014 Polar Vortex (a band of cold weather that affected much of the eastern U.S.) to reinforce the need for on-site fuel supply.

A Directive or a Proposal for FERC?

It is unclear precisely what FERC must do next, as the NOPR simultaneously styles itself as a proposal and a directive:

  • "[T]he Secretary is directing the Commission to issue a final rule requiring its organized markets to develop and implement market rules that accurately price generation resources necessary to maintain the reliability and resiliency of our Nation's bulk power system." (NOPR at 11)
  • "[T]he Secretary is requiring the Commission to consider and take final action on the proposed rule herein within 60 days…As an alternative, the Secretary urges the Commission to issue the rule…as an interim final rule, effective immediately, with provision for later modifications after consideration of public comments." (NOPR at 12)

Despite DOE's conflicting signals, it seems likely that FERC will treat the NOPR as a proposal with a strong suggestion by DOE, rather than a firm directive. The DOE Organization Act does not on its face authorize DOE to compel FERC to issue rules. Section 403(b) of the Act specifies that FERC "shall have exclusive jurisdiction with respect to any proposal made under [section 403(a)]." And the Act is generally read to assure FERC's independence: section 401(a) specifies that FERC is "an independent regulatory Commission," and section 401(b) provides that "members, employees, or other personnel of the Commission shall not be responsible to or subject to the supervision or direction of any officer employee or agent of any other part of the Department [DOE]."

While the statute is not without ambiguity, it has generally supported the view that FERC is independent of DOE. On the other hand, FERC's Chairman is designated by the President. Even if the NOPR is not treated as a directive, the Chairman will have a strong incentive to act.

FERC's Next Steps Are Uncertain

In any event, DOE's NOPR is sure to sow controversy at a time when FERC, under new leadership, is resuming its work after a six-month hiatus. Among the emerging issues on its plate is a review of whether wholesale electric market prices should be revised to support baseload generation. FERC Chairman Chatterjee has said it will be a priority of his; Chairman-In-Waiting Kevin McIntyre indicated he will review the issue, bounded by the need for a record and his view that the laws underlying FERC's authority are resource-neutral.

States, meanwhile, are lobbying FERC to allow wholesale power markets to accommodate state policy initiatives promoting certain forms of generation such as nuclear and renewables. And now, DOE's NOPR calls for immediate FERC action to promote baseload generation with on-site fuel supply.

Public Comment Process

The Secretary requires FERC to consider and take final action on the proposed rule within 60 days of publication in the Federal Register. Yesterday, FERC issued a notice setting an initial comment date of October 23, 2017, and a reply date of November 7, 2017.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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