Could FERC put a price on carbon?

EPA can require emissions cuts but FERC can make emissions unaffordable for utilities.

The Federal Energy Regulatory Commission (FERC) could be more effective than the EPA in the Obama administration’s fight against greenhouse gas emissions, according to a new legal opinion. And such a move by FERC would not be without precedent, says one of the opinion’s authors.

Through FERC’s authority over electricity rates, power contracts, and utility planning, as well as its responsibility for new transmission and natural gas pipelines, the agency can influence the cost-effectiveness of new generation and new infrastructure by putting a price on emissions, according to Addressing Climate Change Without Legislation from the University of California Center for Law, Energy, and the Environment.

“It is not unusual for FERC to be aggressive in implementing what it sees as appropriate public policy,” explains co-author Steven Weissman.

Congressman Henry Waxman (D-CA) urged such action on climate change to FERC commissioners at the July 29 House Energy and Commerce subcommittee hearing.

"The statutory standards that FERC administers give the agency many tools to help combat climate change," Waxman told all four commissioners. The ideas proposed in the U.C. Berkeley legal opinion, which he entered into the Congressional Record, deserve "serious consideration" and show "we don’t have to choose between protecting the environment and reliable electricity." 

Wholesale electricity rates are in FERC's jurisdiction

“FERC’s regulatory duties include overseeing wholesale electricity rates to ensure that they are just and reasonable and not unduly discriminatory or preferential,” the opinion reads.

The Federal Power Act does not define “just and reasonable” but FERC and the Supreme Court have interpreted the phrase, the opinion goes on. They did not require a specific rate calculation methodology but said rates must be in “a zone of reasonableness” that balances the interests of electricity suppliers and customers while protecting “the general public interest.”

For suppliers, “rates will be just and reasonable if they provide an opportunity to earn sufficient revenue to cover the operating expenses and capital costs of the business and provide a return on investment,” the opinion says. And for customers, “just and reasonable rates do not permit exploitation, abuse, or gouging, or unjust discrimination between customers.”

Because fossil fuel generators do not pay for the environmental costs of emissions, the opinion argues, they have a potentially unreasonable competitive advantage over renewable energy developers. FERC could use its authority over rates to eliminate this advantage with a “carbon adder” on the wholesale electricity rate that reflects such costs.

“With the exception of parts of Texas and Maine, all electricity transmission in the contiguous U.S. occurs through interstate grids and is therefore subject to FERC regulation.” 
 

Through its authority over utility power purchase agreements, FERC could impose that carbon adder on contracts, the opinion notes. Through its authority over utility planning, it could require their Integrated Resource Plans to consider such an adder.

“There has already been a significant amount attention to climate issues in FERC’s considerations,” says Weissman, a former California Public Utilities Commission (CPUC) Administrative Law Judge and policy advisor. CPUC decisions reflected an increasing awareness over time of the link between energy and climate change, Weissman says, and three particular recent decisions from FERC in support of renewables suggest it may also soon be ready to join the climate fight.

“Under the Federal Power Act (16 U.S.C. §791a et seq.), FERC is responsible for overseeing wholesale rates for interstate electricity sales, which includes all sales utilizing the interstate grid.”
 

Possible FERC action not without precedent

Congress created a “chicken and egg” dilemma when it established the principle that access to transmission has to be non-discriminatory, he explains. Developers of utility-scale solar and wind need to know they will have transmission lines to their remote locations before they build but transmission builders need to know they will have users to pay for the new infrastructure before they will build.

FERC resolved the dilemma by deciding non-discrimination meant unfair discrimination,” Weissman says. In a decision supporting renewables, it pronounced renewables “locationally constrained” to where the sun shines and the wind blows and therefore in need of special consideration.

In a similar decision, FERC interrupted delays in transmission build-outs to locationally constrained resources, Weissman goes on. It decided the cost of a new line would not fall only to the developer but to all those generators within that system who benefit from it.

And finally there is the just-enacted Order 1000, Weissman argues. It required transmission planning to be coordinated and paid for regionally, making it “easier to move renewable energy while spreading the cost of new transmission across a broader base of customers,” he explains.

“Those orders don’t necessarily mention climate change but they recognize the need for new transmission for public policy ends,” Weissman says. They showed that FERC can have its own sense of what public policy can be and proceed aggressively.

A precedent in which FERC used rate adjustments for public policy ends, the opinion reports, was in its 2006 order, subsequently upheld by the court, for PJM Interconnection “to impose a charge equal to the marginal cost of transmission line losses on all wholesale customers.”

The decision was made “on policy grounds” and to send “the strongest signal possible” to PJM generators to use transmission efficiently. PJM estimated the change has saved $100 million annually.

FERC was aware the added charge would produce “a mismatch between costs and revenues and would most likely lead to a significant over-collection by PJM,” the opinion explains. That is why it also ordered that surplus funds be fairly returned to market participants.

Climate action?

“It is not a huge step for FERC to take more direct climate change action,” Weismann says. “It is likely in time there will be a price on carbon. Including a carbon adder in wholesale electricity rates now would help ensure that electricity demand is met using the generating resources with the lowest environmental cost and help guide utilities in directions that would not leave them vulnerable to sudden cost increases later.”

The opinion also outlines ways FERC could similarly act through its authority over U.S. hydroelectric and hydrokinetic development and over natural gas infrastructure and pipelines construction permitting.