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FERC is Back and Faces a Full Plate of Electricity Issues - Volume 1

With two new Commissioners confirmed by the Senate and sworn in, FERC’s seven-month period without a quorum is over and it can get back to business.  And with another two nominations now before the Senate with a hearing scheduled for September 7, the agency should be at full strength within the next few months and ready to take on important policy issues.

There are quite a few critical generic electricity policy initiatives already teed up and awaiting Commission action.   Together, the initiatives address fundamental issues spanning a broad range of FERC’s electricity authorities.  Over the course of three posts, this blog will provide short summaries of those initiatives.  Today’s post addresses initiatives affecting wholesale market rules.  The second post, in a few days, will summarize initiatives affecting new resources development and entry issues.  The third post will deal with FERC initiatives concerning analytic issues.

Of course, the new Commission may have other electricity policy priorities in mind.  Hence, it is difficult to predict whether or how the Commission will address these initiatives.  Nonetheless, Commission staff has no doubt already done a good deal of spade work on these policy questions and Commission action is possible over the next few months.

State policies and the eastern organized wholesale markets

New generation resources in the states served by the PJM and New England RTOs and the New York ISO are selected for wholesale capacity and energy payments through competitive auctions in those organized markets.  Those with the lowest-prices offers are selected.  However, states in these regions want certain types of resources developed to meet certain state policy objectives.  These resources may not be the lowest cost and may receive state subsidies, thereby creating tension with the basic RTO market design that is based on least cost principles.

FERC opened a proceeding (AD17-11) to discuss how the competitive wholesale markets, particularly the eastern organized markets, can select resources of interest to state policy makers while preserving the benefits of regional wholesale markets and economic resource selection by the RTOs.  The Commission held a two-day conference in May 2017.  Some of  the issues raised were:

  • The features of the existing RTO market design that should be modified to meet specific state and region policy goals.
  • Ways to achieve state or regional policy objectives within the RTOs centralized energy and capacity markets.
  • The consequences for wholesale markets, as well as for market participants’ ability to make long-term decisions, of continued state financial support for certain resources outside wholesale markets.

One of the thorny issues here is what is known as the Minimum Offer Price Rule that is applied in the RTO auction markets.  This rule, intended to prevent subsidized resources from lowering market prices and driving out other investments, requires supply offers to be no lower than non-subsidized costs.  The problem is that states view this rule, and others, as preventing them from supporting resources that attain their policy objectives.

FERC requested post-conference comments and invited commenters to address five potential “paths forward.”  The paths basically presented  varying degrees of applying the Minimum Offer Price Rule.  FERC also wanted comments on other topics, including the principles and objectives that should guide the selection of a path forward and the degree of urgency for reconciling wholesale markets and state policies.

Intertwined in this proceeding is the boundary between FERC and state jurisdiction.  The Federal Power Act reserves jurisdiction over generation facilities to the states but gives FERC responsibility for prices in wholesale markets.  Last year the Supreme Court set out some guidance on this issue, finding that states may not tread on FERC jurisdiction over wholesale power markets but have some latitude to encourage certain types of generation.  Recently, Federal courts in Illinois and New York found that certain state subsidy programs for nuclear generation facilities did not encroach on FERC’s jurisdiction.

Resolving the question of whether or how FERC should defer to state preferences as it seeks to ensure wholesale market integrity is of critical importance to the power industry and consumers.   This area of policy is likely to play out over several months or years in an iterative process involving decisions by FERC, various states, and the federal courts.

FERC may face an additional challenge of harmonizing policy-driven resource selection in the organized RTO markets.  In April, the Secretary of the Department of Energy directed his staff to prepare a study examining electricity markets and the reliability of the U.S. electric system.  Specifically, the study is to explore whether wholesale energy and capacity markets are adequately compensating attributes such as on-site fuel supply and other factors that strengthen grid resilience and, if not, the extent to which this could affect grid reliability and resilience in the future.  The report, not yet issued, may propose policy changes to protect baseload generation resources (i.e., nuclear, coal and natural gas-fired power plants).   Any such proposals are likely to be controversial.   Given that DOE has limited authority over wholesale electricity markets, it will be left to the new FERC to grapple with whether or how to implement DOE’s proposals in the organized and bilateral wholesale markets.

Electric storage participation in markets operated by RTOs and ISOs

FERC has expressed concern that, as the capabilities of electric storage resources and distributed energy resources continue to improve and their costs continue to decline, such resources may face barriers that limit them from participating in organized wholesale electric markets.  Accordingly, FERC issued a Notice of Proposed Rulemaking in November 2016 intended to knock down barriers to storage resource participation.  The proposed rule would require each RTO and ISO to revise its tariff in two ways:

  • Establish market rules that recognize the characteristics of storage resources and accommodate their participation so that those resources no longer have to participate in the markets under rules designed for other types of resources.
  • Allow distributed energy resource aggregators to participate in the markets so that individual resources can satisfy operational and other requirements that they could not meet on a stand-alone basis.

Because storage and other distributed resources may be located on local distribution systems regulated by state and local authorities, the proposal raises issues regarding the boundaries of state and federal jurisdiction, such as:

  • Whether FERC may force states to allow retail customers to bypass retail programs and participate directly in the wholesale market.
  • Whether states should be able to opt-out of allowing wholesale market participation of electric storage resources.
  • Whether states will lose jurisdiction over storage resources participating in wholesale markets — given FERC’s exclusive jurisdiction over wholesale sales.
  • Given that FERC does not have jurisdiction to regulate local distribution systems, how will local distribution system reliability be maintained?

Comments on the proposed rule have been filed.

Use and compensation of electric storage resources in organized markets

Storage resources can be used to provide both what are traditionally classified as transmission services as well as standard wholesale electricity services, and they may even  provide different types of service simultaneously.  How these services are classified can have important implications for pricing in the markets.  FERC policy now applies quite different pricing policies to these different services.  Transmission service compensation is limited to cost-based rates because such service is usually provided by a monopoly transmission operator.  In contrast, generation services in wholesale markets are generally allowed unlimited pricing flexibility.  Thus, defining what storage-provided services may be classified as transmission, generation, or both, is important.

FERC held a technical conference in November 2016 and then received comments aimed at distinguishing between these services.  The conference also addressed a number of operational and compensation issues associated with storage resources, such as:

  • The operational implications of using storage resources as both transmission assets and as providers of other wholesale electricity services, such as power sales.
  • The types of resources that can provide simultaneous services, and how those services should be priced and considered in grid planning models.
  • The potential for quickly deployable storage resources to compete to supplant uneconomic traditional generators needed to meet reliability needs.

FERC has not indicated how these issues will be addressed in future policy determinations.  Nonetheless,  paving the way for full participation in wholesale markets by innovative storage resources would be an important step by FERC.

Fast-start pricing in markets operated by RTOs and ISOs

A fast-start resource can start up in 10 minutes or less and has a minimum run time of one hour or less. Fast-start resources are valuable because they typically are committed in real-time, very close to when needed, and can respond quickly to unforeseen system needs.

While RTOs and ISOs have developed some elements of pricing for fast-start resources, FERC expressed concern that those practices could produce prices that do not reflect the value of fast-start resources and fail to provide incentives for efficient investments.  Accordingly, FERC issued a NOPR in December 2016 proposing requirements for each RTO and ISO to incorporate in its pricing fast-start resources.  Among other things:

  • Fast-start pricing must be applied to any fast-start resource committed by the RTO/ISO that submits economic energy offers to the market and must be used in both day-ahead and real-time markets.
  • A committed fast-start resource’s commitment costs, i.e., start-up and no-load costs, must be included in energy and operating reserve prices during the fast-start resource’s minimum run time.
  • An RTO/ISO must relax the economic minimum operating limit of fast-start resources and treat them as dispatchable from zero to their economic maximum operating limit for calculating prices.

Comments on the proposal have been filed.

*    *    *

The initiatives described above are aimed at ensuring that wholesale market policy evolves to keep up with changes in the marketplace.  How FERC should deal with state generation preferences that affect wholesale markets is a question that looms large and cannot be ignored by the Commission.   Clearing out unnecessary barriers to market participation by innovative resources is similarly of critical importance.    The new Commission will have the opportunity to deal with these and other pressing wholesale market policies.

Part 2- FERC Is Back And Faces A Full Plate Of Electricity Issues (Volume 2)

Part 3- FERC Is Back And Faces A Full Plate Of Electricity Issues (Volume 3)

© 2017 Covington & Burling LLP

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About this Author

Wilbur C. Earley, Energy Policy Advisor, Covington Burling Law firm
Energy Policy Advisor

Bud Earley is a non-lawyer member of Covington’s Energy practice with over 36 years of experience in the energy industry.  Prior to joining Covington, Mr. Earley served for over 30 years in various staff positions at the Federal Energy Regulatory Commission (FERC).  While at the FERC, Mr. Earley was instrumental in developing and applying policies regarding the transition of the electric utility industry to competition, including policies regarding independent power producers, transmission access, standard generator interconnection procedures, organized electricity markets, mergers and...

202-662-5434
Massey, Covington, Portrait,
Senior Counsel

Before joining Covington as head of its energy practice, William Massey served as a Commissioner at the Federal Energy Regulatory Commission (FERC) for over ten years.

Working out of Covington’s Washington, DC office, Mr. Massey has a high profile, broad-based energy regulatory and government affairs practice.  He has extensive experience with complex regulatory issues before FERC and state utility commissions, and with energy legislative matters before Congress and state general assemblies.

Mr. Massey advises clients on mergers and acquisitions, enforcement and investigations, electricity and natural gas markets, energy exports, wholesale and retail market structure, transmission and pipeline infrastructure investment, RTO tariffs, and legislative strategy at the federal and state levels.

202-662-5322