FERC chair outlines three paths for power market reforms ahead of technical conference

Without a negotiated solution to generation subsidy issues, acting Chair Cheryl LaFleur fears states may back themselves into an unplanned re-regulation of their power markets

The acting chair of the Federal Energy Regulatory Commission laid out her vision for an upcoming technical conference on generation subsidies yesterday, telling an audience of sector insiders she hopes for a negotiated solution to the issues plaguing wholesale power markets in the U.S.

“As I see it, there are three potential outcomes that we could achieve here, and the first is some kind of negotiated or planned solution — in my mind, the best option for stakeholders in different regions,” acting FERC chair Cheryl LaFleur said.

Speaking at the National Press Club in Washington, D.C., LaFleur outlined the pressures facing wholesale power markets in the Eastern United States, noting that many of the states that deregulated their electricity sectors in the 1990s are the same ones pursuing generation subsidies.

Acting FERC Chair Cheryl LaFleur

“In my own state of Massachusetts, legislation was passed last year to recommend procurement of 1.2 GW of non-emitting generation ... and an additional 1.6 GW of offshore wind,” she said. “Other states including New York and Illinois have initiatives in place to provide support payments based on carbon credits to give state nuclear units.”

“I've been out of the office for 45 minutes, so maybe there's another state,” she quipped.

LaFluer said she respects the right of states to determine their own power mixes, but the rapid spread of state generation subsidies is putting pressure on the organized market model.

“When a state goes around the market, obviously it can weaken the market's usefulness by undermining the price signals that everyone else who's not subsidized is relying on to signal the need for capital deployment and to recover the money that they need through the market,” LaFleur said. “And

The subsidies show that in some cases, states “aren't satisfied with the set of resources that the market's collecting,” LaFleur said. But continued survival of the wholesale market model will rely on states being “reasonably assured that the markets are meeting their needs."

When companies don't have confidence in their ability to recover cost through the market, they won't invest — potentially impacting the reliability and increasing cost to customers."

Cheryl LaFleur

Acting Chairman of FERC

Ensuring that continued confidence in the market model is the motivation behind FERC’s upcoming technical conference on generation subsidies, which is scheduled for May 1 and 2. In her speech, LaFleur laid out three general directions the conversations could take, while cautioning that any concrete action from federal regulators could not be taken until new FERC commissioners are confirmed by the Senate, giving the commission the quorum it needs to make decisions.

Option 1: Negotiated solutions

LaFleur’s preferred outcome of the technical conference and continued state discussions is some sort of negotiated settlement that reconciles the tension between state subsidies and wholesale price formation.

A number of those conversations are already taking place at the ISO/RTO level, she noted. In ISO-NE, the Imagining Markets and Public Policy (IMAPP) initiative has been working with the ISO staff to devise a proposal for the technical conference, and the New York ISO has commissioned a study from the Brattle Group on carbon pricing in their market.

Each of these initiatives falls into one of two buckets, LaFleur noted. The first is carbon pricing, already instituted among nine Northeast states through the Regional Greenhouse Gas Initiative (RGGI).

These initiatives “allow states that have climate goals or are trying to support carbon-free resources that they're worried about to retain or develop carbon-free resources through pricing the carbon in-market,” LaFleur said. “This is very market-friendly, and it builds on the existing Regional Greenhouse Gas Initiative that has nine states.”

The second idea is more novel — involving the addition of “some sort of a new market to add to the energy capacity and all the ancillary services markets — an idea that's being called a forward clean-energy market.”

Under that model, the ISO would operate a market that is “like an energy market, but forward — sort of like a regional RFP, but run by the ISO to somehow supplement what you’re getting in the capacity market.”

A third solution would focus on making adaptations to the capacity markets themselves, splitting them into two parts to handle subsidized and unsubsidized resources separately.

“Usually people talk about two-tier pricing,” LaFleur said. “Run the market — unsubsidized resources that are relying on the market for their revenue get a price. Run the market again — subsidized resources that are being screened out of the market get a different price, and then you continue to run the market in that form.

This two-tiered market design was likely a reference to a proposal from ISO-New England, which had not been made public at the time of the speech. As Utility Dive reported soon after the speech, ISO staff will present a proposal to their board of directors this week that aims to create a two-level capacity market — one in which unsubsidized resources can transfer their capacity obligations to subsidized generation and gracefully exit the market. That proposal will also be floated at the FERC technical conference next month.

Though there’s already significant movement toward a negotiated solution on market models, LaFleur cautioned that roadblocks remain. States will need to not only come to a consensus on the problems that need to be solved and the timeframe in which to solve them, but also agree to work across their borders to protect the market model.

“Different states have very different political ecosystems, different energy and environmental goals, and often strong disposition that they don't want their citizens stuck on the environmental or energy goals of another state, even one just across the border,” she said.

Options 2 & 3: Litigation and re-regulation

If states cannot come to an orderly solution to protect wholesale markets, LaFleur said the issue would likely first fall to the courts.

“Litigation is the ultimate fallback resolution in civil society,” she said, “but in my opinion, it is not the ideal way to resolve complex market issues.”

That door is already open, LaFleur added. Last year, the Supreme Court struck down a state generation support for natural gas in Hughes v. Talen, and a number of current challenges to state nuclear subsidies make the same argument that the state policies are preempted by the Federal Power Act, which reserves jurisdiction over wholesale power markets to FERC alone.

“There are cases pending in federal district court in New York and Illinois where certain states' programs … are being challenged by people who oppose those programs as preempted by the Federal Power Act, which is also going to be an issue for the courts to decide.”

Additionally, those same nuclear subsidies are the subject of complaints pending at FERC. Those petitions do not claim that the subsidies themselves are pre-empted, but instead seek a ruling on whether the subsidies allow for a “just and reasonable market price point,” LaFleur said.  

Even if a negotiated solution can be found for generation subsidies, these court cases are likely to be litigated in the coming months regardless.

If the subsidies survive their challenges, LaFleur said they could lead to a third direction in the wholesale market debate — re-regulation of state power markets.

That could take two forms, the acting FERC chair said. The first is planned re-regulation — “states that don't like the outcomes that they're getting in the markets ... could simply choose to re-regulate resource adequacy.”

That issue could come to a head soon in Ohio, where AEP has pledged to make a legislative push for re-regulation after FERC blocked subsidies for a group of its coal plants last year.

That bill has yet to be introduced, but LaFleur said she is more worried about unplanned re-regulation — a gradual eroding of market pricing that eventually scuttles the entire construct.

“I'm concerned that if the states only want to procure certain resources while relying on the market to set adjusted reasonable price for the other resources, the hybrid system will not be sustainable and could lead to a cycle of gradual unplanned re-regulation,” she said.

LaFleur described the process as a self-perpetuating cycle, one that can already be seen in markets where nuclear plants are pushing for subsidies.

“So some resources get subsidized, they suppress the market price, another set of resources is threatened, they go to the state wanting a subsidy, that suppresses the market state until another set of resources needs a subsidy and pretty soon you've re-regulated but not on purpose,” she said. “You've re-regulated in a way that cannibalizes the market in a disjointed way, is costly to customers, and could lead to reliability issues if things fall in the cracks between the state and the federal government.”

“To me, [unplanned re-regulation] is a door into the void. It's more important to be honest about what we're about."

Cheryl LaFleur

Acting Chairman, FERC

That path, LaFleur said, is likely the least optimal of any option.

“To me that's a door into the void. It's more important to be honest about what we're about, and if possible resolve, it through door number one — the planned solution — or at least not fall into a solution,” she said. “At least do something on purpose.”

Toward the technical conference

Avoiding that “door into the void” is precisely the motivation behind FERC's two-day technical conference scheduled for the beginning of next month.

“We tried to organize it to make sure we get perspectives from all sides of the issues about how they define the issue, what issue are we solving, and what solution they see that might be practicable,” LaFleur said.

The first day of the conference will be organized by region, so federal regulators and staff can hear from different states and ISOs about “what the problem is and what's happening and what the impact of various state programs would be on the market.”

The second day will be more “cross-cutting,” LaFleur said, “first, with a group of stakeholders to talk about possible solutions based on what they've heard the day before, talk about the problem, how we define it and the implications of different approaches.”

The conference will end with a “genius bar,” where industry experts and professors can weigh in on the proceedings.

“And then, just because we have nothing else to do,” LaFleur laughed, “we'll take comments from everyone else as well, whether you got a seat at the table or not. Because we really need to hear from all sides on this.”

LaFleur said she expects a great deal of progress on market design issues at the conference, but cautioned that the sector should not expect a full solution from the meeting.

“I've said before I don't expect white smoke to billow out of the commission meeting room and down the hall, and it's all solved at 5:00 pm on May 2,” she said.

Even if a true consensus is achieved, FERC will not be able to issue an order on market design until at least one more commissioner is confirmed. Since former chairman Norman Bay resigned in February, FERC has been left with only two commissioners — LaFleur and Commissioner Colette Honorable — which puts them one short of the number needed to issue decisions. President Trump is said to have settled on three nominees for the vacant FERC seats, but there has been no indication as to when the Senate will take up the issue.

“Until we have a quorum, we can't issue an order or even decide what we're going issue in one of the pending dockets and we cannot impose a solution on the situation,” LaFleur said.

Correction: A quote from Acting FERC Chair LaFleur has been updated to reflect that Massachusetts mandated the purchase of 1.2 gigawatts of hydroelectric power, not 1.2 megawatts.

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Filed Under: Generation Regulation & Policy
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