Supporters of the Department of Energy’s proposal to provide cost recovery for coal and nuclear plants are leaning on a broader interpretation of the Federal Power Act to justify the rule in their comments at the Federal Energy Regulatory Commission.
Comments from key supporters of the DOE proposal, including coal generator FirstEnergy, mining giant Murray Energy and nuclear operator Exelon, argue FERC has interpreted its mandate to provide just and reasonable rates too narrowly, not accounting for the long-term risks to power customers posed by the retirement of baseload generators.
Because of that, the commenters argue, FERC has designed power markets that do not adequately compensate coal and nuclear plants for their value in providing generation diversity and onsite fuel supplies.
“The organized markets were not designed to address resilience to fuel supply interruptions, and as a result customers have been left exposed to catastrophic risks,” Exelon, the nation’s largest nuclear generator, wrote in its comments. “As a result, the organized markets are no longer producing just and reasonable market outcomes, and they need modification in order to comply with the Federal Power Act.”
While the supportive commenters differed in how they want FERC to implement any new rules, their argument for a broader interpretation of the FPA could become central to a prolonged debate over market design as federal regulators respond to the DOE notice.
“You’re going to see some macro-level arguments that basically say to the commission, 'You’ve been focusing too narrowly until now, and you’ve been focusing solely on reliability and a very narrow technical definition of resilience,'” Andy Weissman, senior counsel at the Washington, D.C. law firm Pillsbury, told Utility Dive in an interview. “But you also have your core responsibility under the FPA is to protect customers against unreasonable electricity costs and some very strong evidence [shows] that the current market rules are not doing that and you need to broaden your focus.”
"[T]he organized markets are no longer producing just and reasonable market outcomes, and they need modification in order to comply with the Federal Power Act."
The supportive comments were just a few of hundreds filed in response to the DOE’s Notice of Proposed Rulemaking (NOPR), announced late last month, that proposed full cost recovery for all merchant generation plants with a 90-day fuel supply onsite.
The proposal caused alarm among regulators and market participants who fear that moving such a large portion of the generation fleet into cost recovery will unravel wholesale electricity markets. Eight former FERC regulators, attorneys general from ten states and the nation’s independent grid operators all filed comments opposing the proposal, along with a broad swath of generation and consumer groups, including renewable energy and natural gas interests.
But while the anti-NOPR comments are greater in number, calls for a broader FPA interpretation with respect to grid resilience could hold special sway in the debate. Secretary of Energy Rick Perry has repeatedly made similar arguments, telling House lawmakers this month that grid reliability is too important to leave to the “free market” and that FERC should rethink how it approaches valuing coal and nuclear plants. Acting FERC Chairman Neil Chatterjee indicated even before the NOPR was filed that the commission would look at enhanced compensation for baseload generators.
“I don’t think Rick Perry has yet developed these arguments to the extent that they need to be developed,” Weissman said. “But to the extent that he started to make these comments is why I expect that one of the really important issues that’s raised on these filings is [whether] FERC’s current narrow focus is right or should it be taking a much wider focus.”
Pillsbury, Weissman’s firm, has long served coal and nuclear clients. The senior counsel said he spoke with a number of market participants, including some of the comment filers, about a broader interpretation of the FPA, but could not name individual companies or groups.
“Some of them have retained us to provide assistance, to provide input that their attorneys may have taken into account in drafting comments but I can’t disclose the list,” he said. “I’ve been pleased by the extent to the comments which I've had a chance to review, like the [Nuclear Energy Institute] comments for example, do an effective job of highlighting these bigger picture issues.”
Aligning cost estimates
Nuclear and coal interests base their concerns of “catastrophic” consumer price risks on a report from consultancy IHS Markit, released in September shortly before the NOPR was filed. The report, commissioned by the U.S. Chamber of Commerce, compared the performance of the current “diversified” U.S. generation fleet with a hypothetical “less efficiently diverse” fleet, concluding that the current portfolio “lowers the cost of electricity production by around $114 billion per year.”
Some analysts have criticized the report for constructing policy and fuel mix scenarios to benefit coal and nuclear plants, while recent analyses from firms ICF and Energy Innovation argue the NOPR would cost U.S. power customers billions. Even so, the IHS study has enjoyed traction in the debate. Perry quoted directly from the report in his letter to FERC announcing the NOPR, and the coal and nuclear interests pull extensively from its findings in their filings.
“As stated succinctly in a recent IHS Markit report, ‘[N]ot having all the nation’s eggs in one basket makes a power supply portfolio a cost-effective risk-management strategy.'"
“As stated succinctly in a recent IHS Markit report, ‘[N]ot having all the nation’s eggs in one basket makes a power supply portfolio a cost-effective risk-management strategy,’” FirstEnergy wrote, before listing four key findings from the analysis.
Murray Energy, meanwhile, lauded IHS as “the leading global economic consulting firm” before extensively citing its generation cost estimates: “As shown in the ... IHS Study, in some instances, on a properly-calculated apples-to-apples basis, the cost of electricity generated by a newly-constructed power plant may be approximately twice that of a baseload coal or nuclear plant that has recently retired."
Divergent solutions, high hurdles
While many of the key pro-NOPR comments from coal and nuclear interests endorsed a broader FPA interpretation as well as the IHS cost estimates, they diverged on how FERC should actually implement the NOPR.
FirstEnergy urged the commission to finalize the rule with only minor modifications and offered a plan to roll it out to the nation’s organized markets.
"The proposed compliance tariff provisions and [Resiliency Support Resource] agreement provide that, in exchange for a resiliency support resource unit remaining in operation and providing energy and ancillary services in times of need by the RTO/ISO, the RTO/ISO will ensure that the RSR unit receives a payment each month equal to its full costs of operation and service less market revenues for capacity, energy and ancillary services," FirstEnergy wrote.
NEI, meanwhile, argued the NOPR is necessary as an “interim backstop” to keep at-risk generation online, but the commission should undertake a broader grid resilience inquiry.
"While the commission considers how to achieve the [energy] secretary's goal for the long term, a full cost of service recovery mechanism as an interim backstop is necessary to ensure that nuclear generation units are not prematurely retired, and their resilience benefits lost forever," NEI wrote.
Exelon was the most tepid of the group in its view of the NOPR, never explicitly endorsing it in their 65-page filing. But the company notably argued that FERC’s current interpretation of the FPA is too narrow, and wrote it would be open to cost recovery proposals developed in organized markets.
“The core finding FERC would have to make is that the current state of being is unjust and unreasonable. That’s a high hurdle.”
Former FERC Chair Pat Wood III
While Exleon said FERC should “act immediately” to “correct price formation” in PJM though an expanded FPA interpretation, the company urged regulators to then direct the nation’s grid operators to extensively detail the grid’s vulnerabilities.
“Exelon believes that RTOs should be given the opportunity to propose such market reforms. But, given the urgency of the problem, we need to 'get it right' the first time,” the company wrote. “So the Commission should also consider the efficacy of alternative remedies, including non-market approaches, particularly if those have the potential to achieve the goal at a lower overall system cost.”
Regardless of the implementation strategy, critics of the NOPR say its proponents face a tough task in persuading FERC to find that its current approach to ratemaking is flawed.
“The core finding FERC would have to make is that the current state of being is unjust and unreasonable,” former FERC Chair Pat Wood III wrote to Utility Dive in an email. “That’s a high hurdle.”
“There is a distinction between what FERC can do as a matter of law and what it should do,” Ari Peskoe, a senior electricity fellow at Harvard Law School, wrote to Utility Dive in an email. “As a matter of law, once FERC makes a technical judgment that a market rule will result in just and reasonable rates, as long as it has some evidence in the record to support its decision, it’s difficult to get a court to overturn that determination."