Michael L. Krancer and Frederick M. Lowther
The Department of Energy (“DOE”) last Friday rolled out a Notice of Proposed Rulemaking (“NOPR”) with the Federal Energy Regulatory Commission (“FERC”) that amounts to requiring subsidies for nuclear plants and coal plants. The NOPR is made under the authority of Section 403 of the Department of Energy Organization Act, which allows the DOE Secretary to propose rules to FERC.
If FERC takes the action requested by DOE it would be a sea change in how competitive electricity markets work. Some would say the proposal scraps competitive wholesale electricity markets. See: www.energy.gov/articles/secretary-perry-urges-ferc-take-swift-action-address-threats-grid-resiliency.
The proposed rule would provide for “accurately pric[ing] generation resources necessary to maintain reliability and resiliency.” There would be “recovery of costs of fuel-secure generation units frequently relied upon to make our grid reliable and resilient.”
The proposed rule applies to wholesale generating units that have a 90-day fuel supply—that means nuclear units and coal units (hydro units also could qualify). They are the only units with a 90-day fuel supply on hand. Such units would be guaranteed “full recovery of costs” and a “fair rate of return.” Obviously, that fair rate of return would have to be paid by rate paying consumers.
To be precise, the DOE’s NOPR is really not a proposed rule itself but if enacted by FERC would require FERC to require regional transmission organizations (“RTOs”) and grid operators to establish rate tariffs that ensure such units recover its costs and earn a fair profit.
There is no question that this would be the biggest change to the competitive wholesale electricity market operations since we have had competitive markets. Some would say this is a long overdue lifeline for needed baseload plants and an overdue recognition, in the form of market compensation, for their important services of reliability and resiliency. Others, however, will say this would be antithetical to the concept of competitive wholesale power markets and fuel diversity, and a bailout for struggling uncompetitive nuclear and coal plants. Opposition to last Friday’s DOE proposal was filed with FERC on Monday by a combination of oil and gas, renewable energy, and consumer groups such as American Petroleum Institute (“API”), the Natural Gas Supply Association (“NGSA”), and the American Wind Energy Association (“AWEA”). The Interstate Natural Gas Association of America (“INGA”) President Don Santa reacted immediately last Friday saying that “we are deeply disappointed” with DOE’s proposal. Environmental groups are certain to oppose the proposal as well.
This proposal does leave the other power generating units, including natural gas units, in the cold. Those other units would be left without guaranteed cost recovery or a guaranteed rate of return on investment.
This NOPR follows on the heels of the DOE Staff Report to the Secretary on Electricity Markets and Reliability issued in August. There is irony, however, since the Staff Report declined to endorse a policy favorable to any particular fuel type. It adhered to a market based approach where government eschewed picking winners and losers.
It will be important for all participants in the market and consumers who want to have input in this to participate actively and smartly in this NOPR process before FERC. Strategic building of the comment record will be critical to whatever cause one is trying to advance. Very quick action is needed on that front. The DOE says that FERC must act on this NOPR within 60 days after it is published in the Federal Register. If that cannot happen, then DOE says FERC should issue the rule as an Interim Final Rule adopting the DOE proposal, effective immediately, with provision for later modifications after consideration of public comments.
There is irony there, too—and more. The DOE staff took almost five months to issue their Report on Electricity Markets and Reliability. But the DOE, in what looks like pulling rank, orders FERC to complete the huge undertaking with the huge number of stakeholders involved of partial re-regulation of the wholesale energy market in just 60 days. The “safety valve” of telling FERC that if it cannot act that fast to enact the proposal as an interim rule seems a bit problematic as well—FERC is, after all, an independent federal agency.
FERC, as an institution, has been a champion of competitive wholesale power markets. So one has to wonder whether FERC is going to embrace this partial re-regulation of a chosen sector of the market. One would love to be a fly on the wall in the various FERC Commissioners’ offices to hear what each is saying about both the idea behind the DOE’s NOPR and the muscle flexing by DOE.