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On January 8, 2018, the Federal Energy Regulatory Commission (“FERC”) issued an order (available here) terminating a rulemaking proceeding it opened in early October 2017, in response to a proposal by the Department of Energy (“DOE”) to address the valuation of reliability and resiliency effects of “baseload generation.” According to the DOE, its proposed “Grid Resiliency Pricing Rule” (“Proposed Rule”) was aimed at strengthening reliability and resiliency by increasing the compensation paid to coal and nuclear generation resources that help maintain the reliability and resiliency of the bulk electric system in regions operated by independent system operators (“ISOs”) and regional transmission organizations (“RTOs”). While the details were unclear, the Proposed Rule would have required the RTOs and ISOs to establish new cost-of-service rates to compensate generators that support reliability and resiliency of the electric grid by providing, among other things, a 90-day supply of on-site fuel assurance. Compensable costs would have included operating and fuel expenses, costs of capital and debt, and a higher return on equity and investment.  

FERC unanimously ruled that DOE’s Proposed Rule failed to show that the current RTO/ISO tariffs were unjust and unreasonable, a showing required by the Federal Power Act. FERC found that the proposal’s requirement for on-site 90-day fuel supply criteria would permit only certain resources to be eligible for the new cost-of-service rates, excluding other resources that may also contribute to reliability and resiliency. Further, FERC stated that DOE’s proposal would allow all eligible resources to receive the proposed cost-of-service rates with no regard to prudence, resulting in discriminatory or preferential treatment. FERC noted that its regulation of wholesale electricity markets thus far has resulted in market-based competition with economic benefits accruing to consumers, and any out-of-market actions FERC may have taken were to respond to specific reliability concerns. Addressing the DOE’s concerns that planned coal and nuclear generation retirements were a threat to reliability, FERC cited comments submitted by the RTOs and ISOs asserting that no past or planned generator retirements pose a threat to grid resilience.   See the Order at footnote 24. Further, FERC noted that the DOE proposal did not adequately show that FERC’s past price formation efforts were a sufficient foundation to add cost-of-service rates for bulk power system resilience. Nevertheless, FERC noted that affordability and resilience of the bulk power system in the regions operated by the RTOs and ISOs warrant further attention and, as such, initiated a new proceeding in Docket No. AD18-7-000 to evaluate those issues.

In its new proceeding, FERC directs the RTOs and ISOs to submit comments within 60 days on three specific issues: i) what the regional operators’ understanding of “resilience” means and how it comports with FERC’s understanding; ii) how each RTO and ISO identifies and treats threats to resilience in their own regions; and iii) how each entity mitigates threats to resilience. FERC noted that DOE’s Proposed Rule focused only on one possible aspect of grid resilience: secure onsite fuel. FERC, however, held that a “proper evaluation of grid resilience should not be limited to that single issue, and should instead encompass a broader consideration of resilience issues, including wholesale electric market rules, planning and coordination, and [North American Electric Reliability Corporation] standards.” Order at para. 19. After the RTOs/ISOs submit their comments, interested parties have 30 days to provide reply comments. FERC didn’t fully make clear the potential path forward following the comments, but anticipates that the new proceeding will identify gaps in current resiliency efforts in the bulk power system (Order at para. 20) and to “promptly decide whether additional Commission action on this issue is warranted.” Order at para. 28.

While FERC’s full panel of five commissioners all unanimously supported the termination of the DOE Proposed Rule docket and creation of the new proceeding, Commissioners LaFleur, Chatterjee and Glick penned individual concurrences. Commissioners LaFleur and Glick cited DOE’s own grid study to assert that “the transformation of the [electric generation] resource mix to date has been accomplished without compromising reliability,” and any new findings in the latest proceeding will help FERC inform its continued work in strengthening resiliency. See LaFleur Concurrence at pp. 2-3 and Glick Concurrence at p. 2. Indeed, Commissioner LaFleur hopes that FERC will continue to define resilience in a “fuel-neutral way, and either allow[] the market to transparently price it or establish[] broad requirement to ensure that a needed service is provided.” Id. at p. 4.

Commissioner Chatterjee welcomed FERC’s continued vigilance on resiliency with the new proceeding but asserted that bulk power system resilience was at risk due to the planned economic retirement of many coal and nuclear plants by 2025. Chatterjee Concurrence at pp. 1-2. Commissioner Chatterjee stated that in addition to instituting the new proceeding, FERC should have required the RTOs/ISOs to submit tariff revisions to provide interim compensation for existing generation resources that may provide resilience attributes but are at risk of retirement before the new proceeding is concluded, or to show cause as to why they should not be required to do so. Id. at p. 3.

Commissioner Glick, in his concurrence, noted that it was not without irony that the DOE’s Proposed Rule would exacerbate resiliency challenges by forestalling coal-fired generators, “which emit significant quantities of greenhouse gases that contribute to anthropogenic climate change.” Glick Concurrence at p. 4. Glick urged the RTOs and ISOs to use the newly initiated proceeding to examine how traditional technologies as well as newer technologies perform in the face of extreme weather, including droughts. Id. Commissioner Glick also asserts that it is the transmission and distribution systems that have been “the principal cause of virtually all significant disruptions” to the bulk power system, rather than electric generation. Id. Commissioner Glick also reiterated that RTOs and ISOs should not prejudge what technology or fuel type provides the best solution to resiliency challenges within their markets. Id.

For more information on this proceeding or other electric reliability and energy regulatory matters, please contact Thomas Rudebusch, Michael Postar, Sean Neal or Jason Gray.