The Partisan Threat to U.S. Energy Regulation
This piece was first published in Forbes on October 31, 2019. It is reprinted with their permission.
People will make out-of-character decisions to reduce the uncertainty in their lives. Companies will, upon occasion, do the same. Take, for instance, the emergence of support from oil majors like Exxon, BP, Shell and others for a national price on carbon. As Americans’ concern over climate change has spread and bloomed into full-fledged anxiety, oil and gas companies have come to the realization that sooner or later governments, even conservatively led ones, will be compelled to take direct action to curb emissions.
By finding a seat on the carbon-price bandwagon, former deniers of climate science aim to become partners in inevitable regulatory change. Along the way, the questions of when new regulations will come into play, and how big their impact will be, become manageable and the intensity with which executives and investors nibble at their fingernails declines.
Yet the brand of all-or-nothing partisanship that has infiltrated the sphere of U.S. energy and environmental regulation has brought new uncertainty to the regulatory process and, in the extreme, paralyzed both regulators and the industries they oversee.
A prime example of this emerging partisanship can be found inside the country’s top regulator of natural gas and electricity markets, an agency whose decisions impact the price paid by all Americans for the energy we consume. The Federal Energy Regulatory Commission, commonly called the FERC, oversees the nation’s competitive wholesale electricity markets and, where it comes to the transportation of energy, reviews applications for new long distance electric transmission lines, gas pipelines and LNG terminals.
The agency is primarily an economic regulator, focused on making sure that electricity and gas are delivered as cheaply as possible while maintaining reliable service. Recently, however, the FERC’s job has been complicated by developments that are altering the U.S. energy landscape and the way in which Americans think about energy. Ironically, these changes aren’t rooted in energy per se, but in the impact of energy use on the environment.
Since the early 2000s concern over climate change has seeded the growth of now robust wind and solar energy industries, opened the floodgates of investment into advanced batteries, and driven long-established automakers to bet their future existence on electric vehicles. Climate concern even helped grease the way for natural gas to emerge as the top fuel for the generation of electricity, by giving producers room to tout the lower-carbon bona fides of gas compared to coal.
The role of the FERC as arbiter of gas and electricity markets hasn’t been lost on politicians in Congress and in the White House who see the agency as a tool they might use to push for their favored energy outcomes and to advance their own political priorities.
Yet the FERC was designed to operate outside the political sphere, its decisions hinged to the realities of science, engineering and market economics. Historically its five-member decision making body, though composed of a varying mix of Democrats and Republicans, has been trusted to issue non-political rulings over the workings of energy markets.
Regardless, the first high-profile, blatant effort to impose politics on the FERC took place in 2017, when former Energy Secretary Rick Perry asked the agency to develop rules to subsidize coal and nuclear-fired power plants for the resiliency they were professed to offer the country’s electric system. The FERC, then overseen by Republican Chairman Kevin McIntyre, understood that the claim of resiliency had no basis in fact and that Perry’s ask was a thinly veiled attempt to cater to the energy secretary’s benefactor, the president, and his fossil fuel constituency.
While the FERC unanimously rebuffed the energy secretary, on other issues the FERC’s commissioners have split along lines that are uncharacteristically partisan. In 2017 the D.C. Circuit Court of Appeals ruled that the FERC must take into account downstream carbon emissions that result from new gas pipelines. A year later the commission, voting along the lines of its 3-2 Republican majority, defied the court by announcing that it would not consider downstream emissions in its required environmental reviews.
And, in June of 2018 the FERC, along the same partisan fissure, directed the largest of the U.S. wholesale electricity markets, PJM Interconnection, to develop market rules that would essentially neuter state efforts to promote low carbon energy, from wind and solar to nuclear power. Former FERC commissioner Cheryl LaFleur, who was one of the Democrats that voted against the majority in both cases, called the FERC’s issuance of the “thinly sketched proposal” an “act of regulatory hubris.”
Two votes might be considered scant evidence of a larger trend toward a partisan divide within the FERC. But LaFleur, who departed the commission on August 31 following a decade as a commissioner that included stints as chairman under presidents Obama and Trump, thinks the votes indeed reflect emerging partisanship.
“Historically over many decades, and on significant issues FERC has very often come up with a compromise or consensus vote where all the commissioners voted unanimously on a bipartisan basis as they made new policy,” LaFleur says.
“What’s happened in the last couple of years is we’ve seen on significant policy cases far more voting along partisan lines and an inability to coalesce in the middle.”
In January Republican FERC chairman McIntyre passed away, leaving the FERC with a 2-2 Republican-Democratic split of its commissioners. Partisan animus spilled beyond the FERC’s walls shortly thereafter, when LaFleur agreed to a compromise that would allow proposed LNG projects on the Gulf coast to move forward, thereby avoiding a stalemate. Per the compromise, the full climate impact of the terminals was not weighed in FERC’s approval, though LaFleur did account for these emissions in her concurrence. (LaFleur’s Democratic colleague, Richard Glick, voted against the projects).
Following the ruling the new FERC chair, Republican Neil Chatterjee, issued an exuberant tweet to the effect that the accord meant a green light for future LNG terminal projects. That message was met by congratulatory posts from members of the Energy Department and from within the White House.
“I stressed to Chairman Chatterjee that I was going to look at projects on a case by case basis,” says LaFleur. “I was troubled by the narrative that we had reached a general agreement on all LNG approvals.”
Most recently, the FERC has been at a stalemate over what to do about PJM Interconnection’s proposed rules to address the market effects of state subsidies for clean energy. Recall that the FERC had ordered PJM to develop the rules in June 2018, when Republicans held a 3-2 majority on the commission. Democrats dissented on the ruling as it would discourage states from incentivizing clean generation, as is their legal right. With the FERC split 2-2 after McIntyre’s death, the commission has been unable to approve the very market changes that it had previously ordered.
Now that the FERC is down to an odd three members, will the stalemate over PJM’s market redesign be broken, and will gas pipelines and LNG projects breeze through FERC review?
Recusal issues may delay the FERC from reaching the 3-member quorum needed to vote on some issues. But on gas and LNG, “I assume the three commissioners who are there will act on things as they come up,” LaFleur says.
The president could, conceivably, further his own energy agenda by nominating just one person to the commission despite the fact that there are now two open seats. That would be breaking with the tradition of pairing nominees, one Democrat and one Republican, when two vacancies exist. Trump has announced his intention to nominate Republican FERC general counsel James Danley to the commission. He has not put forth a Democrat.
And what will be the impact of partisan FERC? If the experience at another five-member body, the Federal Communications Commission, is useful as a guide, the energy industry might look forward to a future where regulation endures not for decades but only until the next election. The FCC has flip-flopped on the weighty issue of Net Neutrality in recent years as its majority has shifted between parties.
The same dynamic could be coming to the FERC, denying the industry the visibility into the future it needs to adapt. If it does, executives’ and investors’ anxiety over an uncertain regulatory future will rise, and nail biting will begin anew.