Energy Regulator FERC Finds Itself Cornered Over Climate Change

Faced with an existential threat to competitive electricity markets, FERC looks for help in the form of carbon pricing.

This piece was first published in Forbes on November 1, 2020. It is reprinted with their permission.

The regulator of the United States’ wholesale electricity markets finds itself backed into a very tight corner, of its own making, over the issue of climate change.  The Federal Energy Regulatory Commission has spent the last three years issuing rules that insulate the electricity markets it oversees from responsibility for the climate damages they cause.  The result has been a backlash from states that are determined to reduce their carbon emissions, and a conflict that threatens to dramatically weaken the electricity markets themselves.

Faced with an existential threat to the competitive markets it has spent two decades nurturing, and which today supply two-thirds of the nation’s electric power, FERC is now looking for a way to navigate its way up from the hole it has dug for itself.  FERC’s likely savior?  A carbon price.

To this end, in September FERC held its first formal, public discussion on the possible implementation of a carbon price in the multi-billion dollar markets it oversees, which include PJM Interconnection, ISO New England and New York ISO.  The event featured commentary from electricity generators, state utility regulators and consumer advocates, and an accompanying army of lawyers who debated whether FERC actually has the jurisdiction to price carbon emission.  The consensus of the day’s discussions was that, yes, it does. 

At the root of FERC’s mess is a related question of jurisdiction.  The FERC, as a federal agency, oversees interstate commerce in electricity.  The wholesale electricity markets extend across state boundaries with PJM, the largest of the markets, in fact spanning 13 states and Washington, D.C.  The rules that govern the transport of electricity along high-voltage powerlines, and the financial transactions of the markets themselves, begin and end with the FERC.

In contrast, the local delivery of electric power is governed by the states.  State public utility commissions approve the rates that electric utilities charge residential and business customers.  The states also determine the mix of electricity generation that operates within their borders.  Accordingly, they have the authority to support certain types of generation in the service of meeting their stated public policy goals, including wind, solar and carbon-free nuclear power that are essential to their efforts to reduce dioxide emissions.

For a long time, FERC and the states coexisted in relative harmony, each largely steering clear of the jurisdictional turf of the other.  Yet the past decade has seen an accelerated evolution of the electricity industry that has led to a blurring of traditional state-federal jurisdictional boundaries.

The rise of distributed solar power is a prime example.  A growing quantity of solar power comes from residential and commercial rooftop arrays, connected to neighborhood power lines that fall under the purview of state regulators.  Yet recent developments pave the way for rooftop power to be sold into wholesale markets, where the FERC makes the rules.  Who gets to say how all that rooftop power should be managed within the larger context of electric grid?  Good question.

And in recent years, as the Trump administration has worked to block rules to reduce carbon emissions, climate-concerned states have responded by ratcheting up subsidies for wind and solar power and, most recently, by introducing subsidies for carbon-free nuclear power in places like Illinois and New York.

The states’ efforts have raised the ire of FERC.  It ruled that the subsidies distort electricity markets by allowing utility-scale renewable and nuclear generators to bid at artificially low prices into wholesale electricity auctions, thereby displacing higher-cost generators like coal-fired plants.  In a 2018 ruling, FERC found that out-of-market subsidies rendered PJM’s market, in particular, unjust and unreasonable.  FERC then proceeded to order PJM to change its market rules to neutralize the state subsidies.

The result is PJM’s Minimum Offer Price Rule (MOPR).  The rule sets an offer price floor for generators that receive state subsidies, making it harder for them to clear the market.  Yet the overriding impact of FERC’s order is to effectively prevent the states from pursuing their climate policies, as is their right.

The states have cried foul.  FERC has stood firm in its judgement that it is an economic regulator above all else, and that its action is justified in the name of preserving a level playing field in the markets.

Yet FERC’s reasoning is woefully out of date in a world where climate change plays a growing role in economic decision making.  Take, for example, the chorus of equities investors that now demand disclosure of climate risk.

Few industries are more directly exposed to the economic and operational impacts of an increasingly volatile climate than the electricity sector.  Yet FERC continues to stubbornly claim that it is an economic regulator in the limited, old-school sense.

And FERC faces tumult from within.  In the wake of the agency’s recent decision on an esoteric aspect of its MOPR order, Richard Glick, the lone Democrat among the FERC’s three commissioners, lashed out in his dissent, calling the MOPR proceeding “one of the Commission’s all-time worst, both in the baffling decisions it reached and the bumbling way it got there.”

He continued with a remark positioning FERC on the wrong side of history.

“It is becoming increasingly clear that the PJM MOPR saga will ultimately be remembered as a model case of egregious Commission overreach.  The majority has taken MOPRs, already a controversial topic, and thoroughly weaponized them as a tool for increasing prices and stifling state efforts to promote clean energy.”

Regardless, FERC is now stuck.  In the wake of the MOPR announcement a number of progressively minded states within the PJM footprint, including New Jersey, Maryland and Illinois, are now considering abandoning the market if it continues to stifle their efforts to take climate action.  Similar turmoil now embroils ISO-New England, which operates electricity markets in six New England states.

Should these states ultimately act on their threats, the damage to the markets could be severe.  Fewer generators would lead to less competition and higher electricity rates, while leaving the system with less flexibility to confront operational challenges.

Recognizing that FERC has boxed itself into a corner, and that the markets it has nurtured from their infancy are now at risk, chairman Neil Chatterjee convened the September 30 technical conference to consider how carbon pricing might be brought to its markets.

But carbon pricing won’t be an easy sell.  PJM in particular is an amalgamation of old, fossil generators and new, renewable ones.  It’s also an uneasy mix of states with a deep stake in coal, like West Virginia, and champions of clean energy like New Jersey and Maryland.

Finding sufficient common ground to implement a carbon price won’t be for the faint hearted.  And, if all sides do come to terms with the inevitability of some form of carbon price, could that price ever be high enough to satisfy the most climate forward states?

The future of the markets could very well depend on it.

Andy Stone

Energy Policy Now Host and Producer
Andy Stone is producer and host of Energy Policy Now, the Kleinman Center’s podcast series. He previously worked in business planning with PJM Interconnection and was a senior energy reporter at Forbes Magazine.