The FERC, An Under-the-Radar Federal Regulator, Is Key To U.S. Energy-Climate Balance

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This piece was first published in Forbes on May 24, 2019. It is reprinted with their permission.

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The energy system in the U.S. has changed dramatically over the past 20 years and the Federal Energy Regulatory Commission, the government agency charged with regulating much of the nation’s electricity and natural gas system, is struggling to adapt. The root of the FERC’s current challenges is two-fold.

In the two decades since the FERC developed the rules by which it governs the nation’s interstate gas and electricity trades, natural gas has emerged as the preferred fuel for the generation of electric power, today accounting for 35% of the power mix thanks to the shale revolution. Over the same period, climate change has grown from a non-issue to a key driver of state energy policy, as demonstrated by the emergence of renewable portfolio standards last decade and, more recently, policies in Illinois, New York and New Jersey to support economically vulnerable nuclear power plants for the carbon-free electricity they generate.

The one-two punch of abundant, cheap gas and climate-focused state energy policies has given the country an electric generation mix that would have been unthinkable at the close of the last century. Pressured by cheap natural gas, coal-fired generation’s share of the country’s power mix has plummeted.  The U.S. Energy Information Administration projects that coal’s share of the generation mix will fall below 25% this year. In 2018 natural gas, wind and solar collectively accounted for 99% of new utility-scale power.

At the same time, new gas pipeline projects have multiplied to carry abundant gas to market, crisscrossing gas-rich states like Pennsylvania and entangling communities, gas companies, state regulators and – at the federal level – the FERC in battles over economic and environmental impacts.

As the regulator for wholesale electricity and gas, the FERC’s decisions influence the prices that consumers pay for energy and the environmental impact of energy consumption. Yet today the FERC is fractured by internal division, frequently along familiar Democratic-Republican lines, over the extent to which climate concerns should factor among the largely economic criteria it uses to review proposals for new gas pipelines and liquefied natural gas export terminals.

The climate issue also underpins recent confrontations between the FERC and the states regarding their respective jurisdiction over the electricity system and, by extension, their ability to influence the types of resources that will power the grid in the future, from nuclear to renewables to battery storage.

When states subsidize nuclear power through zero emissions credits (ZECs), which they’re legally entitled to do, those generators can more cheaply bid their electric capacity into markets. The end result can be lower market prices and distortion of wholesale markets which, and this is the key point, fall under the FERC’s purview. Boiled down to simple terms, some deem this as the states stepping on the FERC’s jurisdictional toes (FERC can return the favor, as we’ll get to in a moment) and co-opting of federal authority.

The jurisdictional challenge is playing out most dramatically right now with PJM Interconnection, the country’s largest wholesale electricity market. To simplify a long and convoluted story, in June 2018 the FERC concluded that PJM’s market for electricity generating capacity was “unjust and unreasonable.” FERC’s majority, led by then Chairman Kevin McIntyre, ruled that state subsidies were indeed distorting PJM’s market and unfairly discriminating against resources not benefitting from equivalent subsidies, notably fossil generators.

FERC ordered PJM to come up with new rules to correct the problem, and steered the market to devise a plan that would, in practical effect, neuter state efforts to curtail carbon dioxide emissions through subsidies. It’s important to note that the FERC laid out the rules that govern today’s power markets during the era of electricity deregulation in the 1990s. The agency has been very protective of the markets it created ever since.

FERC had a full contingent of five commissioners when issued its guidance to PJM last June. The agency’s three Republicans supported the plan and its two democrats dissented. By October, when PJM submitted its proposal to comply with the FERC ruling, one of the Republicans, Robert Powelson, had left the commission, leaving FERC with a 2-2 split along partisan lines.

The Democrats, Cheryl LaFleur and Richard Glick, had opposed FERC’s June guidelines on the ground that they were stepping on states’ rights to shape their generation mix, and they continue to oppose PJM’s market reform proposal.

“The Commission’s role is not—and should not be—to exercise its authority over wholesale rates in a manner that aims to mitigate, frustrate, or otherwise limit the states’ exercise of their exclusive authority over electric generation facilities,” Glick wrote at the time.

With the FERC unable to rule, PJM has been forced to proceed with its coming capacity market auction, delayed until August, under the “unjust and unreasonable” market rules of old. PJM runs the very real risk of having its auction outcome ruled invalid by the FERC as a result.

The resolution to FERC’s impasse may come when its longest-serving commissioner, democrat Cheryl LaFleur, steps down at the end of her term on June 30. At some point thereafter, President Trump will seat two new commissioners, one Democrat and one Republican (FERC cannot have more than three commissioners from a single party) and an agency designed to be independent of the partisan battles of Washington will, odds have it, vote along partisan lines to move forward a plan similar to the one FERC recommended and PJM has proposed.

The outcome would be bad news for state efforts to promote clean energy and also, quite possibly, for the future of competitive markets if certain states, conceivably, opt to re-regulate electricity markets in order to make sure they get the mix of carbon-free generation they want.

FERC’s divide over climate also shows up in its consideration of pipeline proposals.

Two years ago the DC Circuit Court ruled that FERC must consider indirect climate impacts of pipelines that it reviews. Indirect impacts result when a new pipeline causes more natural gas to be produced and burned, producing carbon dioxide emissions.

But FERC, at the time with a full cohort of five commissioners, subsequently deemed the Court’s ruling impossible to follow as the end uses of the gas would be “virtually unknowable.” That stance left the FERC’s minority democratic wing fuming, with Glick arguing that the agency majority took “a remarkably narrow view of its authority under [the National Environmental Policy Act],” which requires government agencies to consider environmental impacts of their decisions.

Despite its current 2-2 split, FERC has been able to issue approval of three recent LNG export terminals on the Gulf coast. LaFleur agreed to vote with her Republican colleagues under a compromise by which direct carbon emissions from the terminals’ operation would be quantified, but there would be no judgement of climate impact. Yet the détente between her and the Republicans has been shaken by remarks from current FERC chair Neil Chatterjee to the effect that all differences have been resolved.

“I agonize in every case to concur,” LaFleur said earlier this year.

Looking forward, its unlikely that FERC’s internal rifts will mend anytime soon. What is certain, however, is that the commission, and the ideologies of its commissioners, will play a major role in the country’s response to climate change in years to come.