Special Report: DOE's Proposed Reliability Rule - FERC Appears Skeptical
The Department of Energy's (DOE) groundbreaking Notice of Proposed Rulemaking (NOPR) directed the Federal Energy Regulatory Commission (FERC) to issue a rule to direct regional transmission organizations (RTOs) and independent system operators (ISOs) to revise their FERC-approved market rules to ensure the reliability and resiliency of the nation's bulk power system. After a week of industry pundit speculation, late yesterday FERC staff offered a preview into how it views this unprecedented action by suggesting that the staff is seeking to validate the underlying assumptions on which it is based. And just today, Commissioners Powelson and LaFleur expressed their skepticism, with Powelson stating to the press today that he "didn't sign up to go blow up the energy markets."
The proposed rule would subsidize certain baseload plants that, among other requirements, maintain at least 90 days of on-site fuel supply. Though ostensibly "fuel neutral," this requirement essentially limits the beneficiaries of the proposed rule to nuclear and coal-fired generating plants due to operating standards at such facilities. The rule provides for the full recovery of costs for eligible plants, located within the market areas RTOs and ISOs, and not subject to cost-of-service rate regulation by a state. In issuing the NOPR, Secretary Rick Perry acted pursuant to his authority under Section 403 of the Department of Energy Organization Act, a provision seldom used in the past.
FERC Staff Appears Skeptical of the Rulemaking
DOE's NOPR calls for FERC to take final action on the proposed rule within 60 days from its publication in the Federal Register -- a very aggressive timeline. In response, on October 2, FERC issued a notice setting an October 23 deadline for public comments, with reply comments due two weeks later. FERC's quick response, and its adherence to the requested timeline initially indicated that it may not have institutional opposition to Secretary Perry's relatively unprecedented maneuver.
However, yesterday, FERC staff issued a list of questions to be addressed by commenters in order to "assist Staff in understanding the implications of the proposed rule." It remains to be seen how much discussion occurred between staff and the FERC Chairman's office before releasing the questions. These questions are also reminiscent of those provided by industry to Congressional staff on proposed legislation in order to assist the staff in understanding the practicalities and complexities of applying a proposal to the "real world."
The comprehensive list of questions included, tellingly, what "resources can address reliability and resilience" -- suggesting perhaps that abundant fuel stored onsite may not necessarily equate to system reliability and resiliency. FERC's list of questions also includes whether commenters agree that the proposed rule's references to the 2014 Polar Vortex and the effect of recent hurricanes are examples of the need for the proposed rule. Taken together, these questions suggest that FERC is seeking to validate the underlying assumptions and predicates on which the DOE's proposed rule is based.
The efforts required to publish the requested final rule will further burden or perhaps distract the commissioners from other responsibilities, namely their efforts to review and approve Certificate orders that have been backlogged due to the recent lack of a quorum among the commissioners. It may also encumber movement on court-mandated changes to the Master Limited Partnership Tax Allowance rulemaking, which has been ongoing for almost one year.
The Proposed Rule Will Not Apply Everywhere
The proposed rule will only apply to plants regulated by FERC-approved RTOs and ISOs. RTOs and ISOs operate in all or parts of only 28 states and the District of Columbia; power plants in the rest of the country are unaffected by the proposed rule. So, for example, electric generating plants located in Florida, where natural gas and solar energy are quickly replacing coal, will not be affected by the proposed rule.
In addition to FERC's required actions, the proposed rule also requires RTOs and ISOs to make changes to market rules and rate tariffs to maintain and achieve grid reliability and resiliency. It's possible that RTOs and ISOs may examine the reliability and resiliency requirements and conclude, in light of their existing rules, that no additional action is required. As such, for these reasons, the breadth of the impact on the country as a whole may be limited.
In fact, the most robust section in FERC's questions yesterday for commenters involved eligibility, suggesting that the proposed rule is unclear on the scope. For example, FERC questioned whether other resources, such as hydroelectric and "generating units with firm natural gas contracts, or energy storage" may also be eligible.
Industry Opposition May Sidetrack the Rulemaking
Advocates for gas-fired plants and renewable energy, as well as environmentalists, will oppose this initiative. In fact, a coalition of 14 trade groups, including the American Petroleum Institute, and the American Wind Energy Association, filed a motion with FERC on Tuesday, asking FERC to revise its short-fused comment period to a more routine 90-day initial comment period and a 45-day reply comment period.
It's possible that non-nuclear/coal generators might attack the underlying premise of the proposed rulemaking -- that onsite fuel storage is the wrong metric to measure reliability and resiliency, and that grid reliability is more related to the maintenance and preservation of distribution and transmission infrastructure, rather than the amount of fuel stored onsite. Gas operators may argue that storing gas near a generating plant, or maintaining an enhanced or redundant supply system, is the functional equivalent of onsite fuel storage for gas operators, thus making gas-fired plants eligible under the proposed rule.
States May Re-Regulate Cost of Service
State opposition to the proposed rule could motivate a state to disestablish its state-specific ISO, in order to remove itself from the reach of the new federal mandate. New York, for example, is committed to the planned retirement of the Indian Point nuclear plant, located just 30 miles north of New york City, in 2021 -- but New York has its own subsidies in place to ensure the continued operation of New York's three otherwise unprofitable nuclear plants in upstate New York. To avoid the prospect of Indian Point's continued operation by virtue of the proposed rule, New York could choose to "re-regulate" the cost of service for New York's electric generating plants, while disestablishing the NYISO, and thus preventing the continued operation of the Indian Point plant.
Variations of this theme could be realized in other states. For example, California and Texas each have a state-specific ISO. If the proposed rule were to negate, for example, California's environmental goals, it could disestablish its ISO to avoid the federal mandate. Likewise, Texas could disestablish its ISO if it found that the proposed rule was counter to, for example, its financial interests.
With so much uncertainty surrounding the underlying assumptions of the rule, its intent and which organizations can make decisions to address the rule, it is hard to believe that the FERC will issue any market shifting rules in the DOE's compressed timeframe. Both FERC staff's questions and comments made today by Commissioners LaFleur and Powelson seem to suggest the same.