U.S. Electricity Regulator Takes a Hard Look at Carbon Pricing

In September the U.S. electricity regulator, the FERC, held its first conference to explore carbon pricing in the nation’s electricity markets. Is a carbon price finally on the way?

In late September the regulator of America’s electricity markets, the Federal Energy Regulatory Commission, took the unusual step of convening a conference at which it, and members of the electricity industry, considered putting a price on carbon dioxide emissions. The meeting came as wholesale electricity markets, which supply power for two-thirds of Americans, have entered into a period of turmoil that, at the extreme, threatens to break those very markets apart, and which is based in the challenge of addressing climate change. 

Mike Borgatti, Vice President for RTO Services and Regulatory Affairs at energy consultancy Gabel Associates, explains the debate over carbon pricing in electricity markets, and the FERC’s recent, contentious efforts to balance conflicting state and national climate agendas.  

Andy Stone:  Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone.

In late September, the regulator of America’s electricity markets, the Federal Energy Regulatory Commission took the unusual step of convening a conference at which it and representatives from the electricity industry considered putting a price on carbon dioxide emissions. The meeting came as competitive wholesale electricity markets, which supply power for two thirds of Americans, have entered into a period of turmoil that, at the extreme, threatens to break those very markets apart, and which is based in the challenge of addressing climate change.

And today’s podcast, we’ll explore the debate over carbon pricing in electricity markets. And will discuss the FERC’s recent efforts to balance conflicting state and national climate agendas. My guest is Mike Borgatti, Vice President for RTO Services and Regulatory Affairs at Gabel Associates, an energy and public utility consultancy. Mike advises clients from nearly every sector of the energy industry that participate in the nation’s electricity markets. And he has been at the forefront of efforts to explore carbon pricing in the world’s largest power market, PJM Interconnection.

Mike, welcome to the podcast.

Mike Borgatti:  Hi, Andy. Thanks for having me.

Stone:  Mike, before we begin an in the spirit of transparency, I’d like it to be know that in addition to hosting this podcast with the Kleinman Center, I also work with you and Gabel Associates in a role that is related to the energy markets that we’ll be discussing today.

So, that said, Mike, I wonder if you could get us started by telling us about your work with electricity markets and on carbon pricing in particular?

Borgatti:  Absolutely. I’d be glad to. So, there are these kind of crazy constructs out there that, you know, frankly when I started in the industry about 12 years ago at this point, when I was just sort of a young buck getting out of law school and starting at the New Jersey Board of Public Utilities, I learned that there are these giant regional organizations, of which PJM Interconnection is one of them, that are private entities that are sort of supposed to act independently to dispatch and manage the power grid in regional markets throughout a large territory of the United States.

PJM itself is huge. It extends for all or part of 13 states between Michigan and the north, sort of down south to North Carolina and then east back to the Pennsylvania, New Jersey, and New York border. Inside of that footprint there are about 1,300 power plants and 180,000 miles of transition lines that PJM is managing and administering every day.

The power markets that they’re running are actually these big competitive constructs where they’re attempting to take sort of offers to sell energy from power plants and match them with bids from load serving entities to buy power in order to serve their demands. And when they’re doing this, they’re using these kind of complex series of algorithms to stack up all of these power plants based upon the cheapest or the lowest cost resources that they’ve got, all the way up to whatever the most expensive resource that they need is to serve that demand.

So, kind of think about this as trying to create sort of a commodity-like market. The same way that you would have, you know, any type of commodity market out there where you would be buying or selling, for example, pork bellies or frozen orange juice concentrate. Really all a power plant is, is it’s an electron factory that takes sort of fuel of one kind, maybe it’s coal, maybe it’s natural gas, maybe it’s wind or offshore wind or sunshine, and converts it into commodity electrons on the other side. And PJM is essentially taking and creating a market for those commodity electrons.

I work within these constructs because they actually have kind of a crazy regulatory structure where the companies that are coming together to buy and sell in these markets actually have a say in the rules that govern their behavior. You can kind of think about it as sort of the inmates here run the asylum. That literally the folks that are transacting get to sort of decide whether the rules that will govern them are, at least in their opinion, just and reasonable. And once, you know, they come up with that set of rules, they propose it down to FERC. And FERC will take a look and decide whether or not they agree with it. And ultimately, that’s how these markets go down the row.

Well, fast forward to a couple years ago and we had a number of clients who were considering the effect that New Jersey rejoining the Regional Greenhouse Gas Initiative might have on these markets and on their positions. So, RGGI is a multi state construct. It’s different from PJM. Where a number of states have gotten together and decided that they’re going to run, essentially, an auction for carbon credits. And so, if you own a generation asset in one of the states that is a participant in the RGGI construct, you’ve got to go out and essentially purchase one credit for every ton of carbon that you emit.

Here what we see is sort of with New Jersey initially having left RGGI when Governor Christie’s administration came in. Murphy comes in there. After decides we’re going to jump back into RGGI. That carbon cost would impact, sort of, the production costs or the bids that different suppliers could offer their energy for in these markets. And so we were looking at carbon pricing as an option to effectively facilitate this kind of public policy and to make sure that the power prices the market was reflecting represented those carbon costs so that buyers were getting, effectively, what they’re paying for, the benefit of these carbon policies and the incentive to sort of have the cleanest resources be prioritized here because they would be less expensive than dirtier things. And also so that you effectively saw the positive effects of that policy.

And so, we’ve been at the forefront of having that conversation at PJM here for the last couple years as we worked through potential rules to facilitate that type of a paradigm.

Stone:  25 percent of the United States’ greenhouse gas emissions come from the electric power sector. So, the electricity industry is going to be crucial to efforts to address climate change. What efforts, above and beyond the RGGI example that we just talked about, have been made to date to reduce emissions in the electricity sector?

Borgatti:  Yeah, absolutely. So, what’s really interesting, to be honest, is that the energy sector, not just in PJM, sort of nationally within the United States here, has been declining fairly significantly for the last decade or so. For example, since 2005 the carbon emissions in PJM have decreased by 65 percent. And just looking at sort of a more recent snapshot in time, EPA released some data earlier this year that said that in the first two quarters of 2020, carbon emissions were about 16 percent lower than they were in the year before.

Now those should be pretty encouraging statistics. But what’s really driving that actually isn’t the sort of conventional types of policies that we would think about. To be honest, when we think about sort of things like state renewable portfolio standards or RGGI and carbon prices, those to date have not necessarily been the most significant driver here. You know? The era where we see states adopting these really big RPS programs where they’re targeting 50 or 100 percent renewable energy relatively near term are pretty new. Those have been cropping up for the last couple of years. And you know, in the more longer-term past we’ve seen the RPS levels be a lot lower, sort of maybe ten, 20, 25 percent of the state’s total energy need. So, not quite enough to necessarily really move the needle in a big market like PJM, for example.

And RGGI has done a nice job in sort of creating a mechanism to price carbon. But the auction prices that folks have to pay for those credits have been pretty low historically and not necessarily enough to really move the market.

So, what’s actually been driving that decline has been the national coal to gas transition where we have been seeing a recent shift away from legacy coal-burning assets, which are amongst the highest emitting resources that we’ve got in the country. And towards natural gas fired assets that, one, sort of have a lower carbon content in their fuel. And two, are frankly, much more efficient than these older assets that are out there.

What’s interesting is, I think, we’re actually at sort of the other side of the apex of that trend. So, the natural kind of economic transition that said these gas power plants that are cleaner happen to also be more lucrative or profitable, and so investors were looking to, frankly, deploy capital in those assets. You know, that trend is probably past its peak and we’re on the declining side there.

Stone:  So, it sounds like what you’re saying here is that the carbon reductions that would come from the transition, say, from coal to natural gas fire generation have already substantially played out. So, to get further carbon reductions, it sounds like new types of changes will need to take place.

Borgatti:  Yeah, that’s exactly right. And you know, are we going to see further coal retirements and perhaps some additional gas come online? I think it’s far to say yes. But we’re in sort of the waning days of that trend.

What’s actually happening now is that we’re seeing a combination of these big sort of state initiatives, but also significant commercial and industrial and private sector demand for renewable power being a key, and perhaps primary driver acutely, for renewable resource deploying in PJM as part of sort of these companies’ strategies to reduce their overall carbon footprint.

If you look about 50 percent of the Fortune 500 companies have significant carbon reduction targets or renewable power procurement targets. And of the Fortune 100, about 62 percent of those companies have stated, sort of, renewable or clean energy initiatives at sort of the corporate level here.

You know, we used to be talking about this as kind of the, I would say, the more nouveau companies, you know, Google and Facebook and companies like that sort of taking a vested interest here as part of their overall profile to reduce their emissions footprint. That trend has expanded into more sort of conventional firms like the Walmarts and Goldman Sachs and things like that, that you wouldn’t necessarily see as being, perhaps, these more modern entities. And that’s being a key driver here of what’s to come in the future. We would expect, certainly, that to be a big driver for the interest here in achieving that. And I think will be a big component of how we get to a lower energy future going forward.

Stone:  So, as you’ve said, the low cost of natural gas has been key to carbon emission reductions to date. Also private industry has taken a lead in demanding clean energy. And the states have led by implementing as well through policies such as renewable portfolio standards. So, let’s talk more about the regulatory issues because that’s where we’re going to be going today. So, the electricity sector is regulated at two levels: by the states and the federal government where the FERC is the regulator. A number of states and the federal government appear to have diverging priorities for the electricity system, particularly relating to how they manage the climate impact of the system. Tell us how these priorities have been falling out of alignment.

Borgatti:  Sure. And I certainly agree with that statement. So, the way that we regulate the energy industry, as you, I think, rightly pointed out here, is what we would call sort of in a legal term, a collaborative or cooperative federalist construct. Which means we can argue over where sort of the line of jurisdiction and demarcation is, but it’s clear that there are specific roles that are delegated to the states and other specific roles that are delegated to the federal government, vis-à-vis FERC, the agency that kind of implements those rules on the federal government’s behalf.

And so, one thing that’s important to point out here is that anywhere where you have sort of a jurisdictional divide between one entity’s, for example the state’s jurisdiction and the federal government’s jurisdiction, that’s inherently tensious, right? That’s a line that sort of folks are going to fight over. That’s not unique to the energy industry here. That is just sort of unique to America and the way we run our system of government.

With that being said, we have had cases where FERC has been more, perhaps, environmentally motivated in the past than it is today, in large part because it was fulfilling the policy mandate that, you know, the administration at the presidential, Senate, and certain legislative levels was promulgating for it. A good example of that would be the Clean Power Plan under the Obama Administration. Certainly, EPA was in charge of putting together the Clean Power Plan and coming up with ways for states to reduce their emissions through kind of a national carbon reduction strategy. But FERC was a big player there in implementing that through just and reasonable rates within an organization like PJM.

What we have here today is at least under President Trump’s administration, we don’t necessarily have that same mandate coming out of DC. And there are many states, and I would say a growing number of states, not just within PJM but nationally, that are increasingly concerned and increasingly focused on trying to reduce their overall carbon footprints, and as you say, a big portion of that can come from the energy sector. And they’re adopting local policies to try to achieve, essentially, the result that, perhaps, we’re not implementing on the federal level.

Where we run into tension here is that in these competitive markets like PJM there’s a concern that state incentive programs, for example, payments through RPS programs or other types of financial benefits distort competition in the market. The way that we get these prices and the way we make sure that we have efficient outcomes is bringing sellers and buyers together to compete. Sellers should want to sell at the lowest price that they can in order to maximize the number of folks that buy from them. And certainly in that case buyers should get the best or the most efficient outcome. That’s kind of a baseline theory here.

And lately there’s been a growing concern that some of the activities that states have been doing, or some of the programs that they’ve been using to try and achieve these local goals, can distort those competitive outcomes. And what we’ve seen is FERC implementing a series of policies to try and protect the insulate the market from distortion from these different state activities.

Now, some in our industry see that as sort of necessary to protect the competitive markets and the price signals that investors use to decide, you know, which resources they want to invest in and not. I think on the state level, many states view that as an obstruction or an offense to the public policies that they’re trying to promulgate. And inherently we’re seeing as attention on things like carbon emissions and climate change increases, the level of activity and political attention, and I think frankly the volume around the concern over where this line of demarcation and sort of whether or not FERC is preventing the states from achieving what they want to is coming into greater and greater focus, and frankly, greater and greater conflict. And we’re seeing that as a recent but persistent trend in a lot of these markets, but most particularly in PJM recently.

Stone:  The way I’ve heard the situation characterized is that the FERC’s actions are essentially neutralizing the states’ efforts to pursue their own energy and climate agendas. And that sounds like the root cause of the conflict we’re seeing between between the states, FERC, and the wholesale markets right now.

Borgatti:  Yeah, that’s exactly right. So, if you think about, for example, renewable portfolio standards, you know, those are instruments that have been around a long time to incentivize folks to invest in renewable technologies, renewable generation types. They have been, you know, part of our energy landscape for a while when renewable technologies were kind of in the nascent phase, they were still emerging technologies. And they were designed to incentivize folks to invest in these types of resources.

You know, folks argue that hot programs like that, and you know, more recently, for example, ultra wind and things, are creating a paradigm where, maybe entities that wouldn’t have necessarily entered the market under kind of a pure competitive construct have a leg up over other entities because they receive those types of subsidies.

ZECs are a similar argument on the other side. Those are incentives that some states have enacted to keep nuclear units from retiring. And we do see a similar sentiment where there’s a tension there over whether or not that is sort of a mechanism to achieve these policies, or whether or not it’s ultimately distorted to these market signs. So, I would agree with you, I think it kind of comes down to this tension point around whether what FERC is doing in its view to achieve competitive outcomes and to make sure that the markets are functioning properly, whether or not in doing that they’re actually preventing the states from achieving their climate and energy goals at the local level.

Stone:  You know, Mike, I’d like to go back to something you said a few minutes ago. You pointed out that PJM is a large organization with well over 1,000 members. And that includes electricity generators of all stripes: fossil fuel generators, clean energy generators, etcetera. So, in addition to the jurisdictional tensions that you’ve talked about, I imagine there are tensions within the market itself, right, with all of these generators making the rules in their own market. I imagine that makes it very difficult to come to any consensus on carbon pricing. What have you seen?

Borgatti:  Certainly. That’s exactly right. I mean, you know, at the onset here we kind of talked about the inmates running the asylum regulatory example here. But remember, at the end of the day these are folks that are competing with each other. And, you know, they are investing in very expensive, long-term projects. And you know, they have a vested interest in maximizing their opportunities in the market.

So, yeah, you do see a tension. And at the end of the day there are some real challenges there when you start to bring in these different types of commercial interests. And that’s an important feature of the conversation here. Is you kind of have to acknowledge the realities of those economic differences or those, frankly, externalities that you see affecting the markets focus. You know, concerned about their pocketbooks and concerned about their specific interests as we kind of approach this question.

Another important piece here, and I think this is something that we need to highlight and emphasize because it’s really an important, probably a critical component of this conversation. Certainly in PJM, but I think it’s fair to say nationally as well, the states themselves aren’t in agreement on what energy policies for their jurisdictions should look like either. You know, certainly as I said previously, we do see, in my view, a growing number of states that are focused on things like climate change and greenhouse gas reduction efforts. But that’s not true for all of the states. And if you think about that when we talk about these local policies, that becomes an important driver here. PJM, for example, includes West Virginia and states like New Jersey and Delaware. And I think you can imagine when you contemplate what the energy policy landscape for a coal-centric state like West Virginia may be versus a New Jersey that is focused on things like ultra rind and has some very bold and aggressive clean energy objectives, there’s not a lot of overlap between those local policies. And that creates an important dichotomy here. It’s actually at the center of kind of one of the biggest challenges that we were trying to address here with these carbon pricing initiatives. And that’s a phenomenon called leakage.

What leakage means, this is a term that economists would use to describe what we would say is a spillover effect. And what you can end up with is a case where if, for example, New Jersey enters RGGI and puts a cost on generators that need to buy carbon reduction credits, that increases their cost of doing business. That makes them more expensive or less competitive. That’s what the carbon prices is intended to do. It’s intended to sort of make the least emitting resources out there the most economic so that the system favors those resources when they’re dispatched.

Well, if a state like Pennsylvania or West Virginia doesn’t adopt a carbon price, then you can end up in a case where a cleaner, lower emitting resource in New Jersey is displaced because of that carbon price by a higher emitting resource in somewhere like Pennsylvania or West Virginia. And at the end of the day New Jersey doesn’t get the carbon reduction benefit that it’s looking for because ultimately in this big centralized market like PJM their algorithms picked a dirtier unit that was cheaper for them.

You can also think about leakage in the inverse. That in New Jersey, New Jersey’s constituents have decided that the carbon reduction benefits are worth the cost of, you know, these credits since there’s that incremental effect on energy prices. But that’s not the same in West Virginia. That group of constituencies hasn’t made that choice yet. But in this dispatch, the sort of centralized dispatch universe, we can end up with a generator in New Jersey setting the price of power in West Virginia. And inherently there you would end up with consumers in that jurisdiction actually paying for the carbon reduction policies that they had decided not to implement there.

When we look at kind of a carbon pricing mechanism, this is actually, and frankly, until and unless we get some kind of a national policy, a carbon pricing mechanism is designed to maximize the benefits of those two policy decisions so that both sets of constituents get the result that they’re looking for. At the end of the day this is sort of a mechanism to embrace those policy differences and end up with sort of the most efficient outcome out there. We sort of have to acknowledge from the beginning of this conversation that, you know, these local differences matter. They’re important. And now we need to sort of take that and process that in a way that we can better represent those policy considerations within this regional construct.

Stone:  So, Mike, as you just said, there is incredible political and economic complexity that we’re dealing with here. And into the midst of all this jumps the FERC. So, on September 30th, which was just about two weeks ago, the FERC held its first ever technical conference on carbon pricing. Now, technical conferences at the FERC are significant because they generally signal that the commission is starting to contemplate action on an issue. So, my question is, given all of these pressures that have been building up, what has taken the FERC so long to actually formally look at the issue of carbon pricing?

Borgatti:  Yeah, it’s a great question and you’re absolutely right, this is, I’m hopeful anyway, an important sort of signal of the policy direction that we would expect to see out of the FERC here going forward.

I think that the reason why they were able to really wait so long is that they weren’t experiencing the same level of attention and focus and, frankly, pressure from the states to be able to act on their own behalf. You know, as we talked about earlier the states are very focused on kind of filling that void or vacuum the federal government has vacated in terms of advancing sort of climate change related the climate reduction initiatives. And policies that the states have viewed as blocking or preventing them from achieving those objectives are driving them to look at much more extreme options like stopping participating in these types of constructs like PJM altogether, which has been something that’s been discussed in a number of the PJM states. Moving to sort of much more localized, local regulatory structures that are potentially detrimental to the competitive markets that FERC has spent the better half of the last two decades sort of building up here.

So, why were they able to wait so long? Because there wasn’t necessarily as much push from the states or as much attention on these issues as there are now. Why did they need to jump in now? Is because we really are at sort of that type of an inflection point. And we see the states here sort of staying that if they are not provided with an opportunity to try and facilitate these goals through the FERC jurisdictional markets, then they will opt into the other alternatives or pursue other alternatives to achieve that end state. So, that pressure, I think, has driven them to have this conversation.

And certainly carbon pricing is a really sort of tangible example here of where, I think, FERC can be an enabler of these policies. Certainly lots of states are out there ascribing a value to carbon, or they’re thinking about ascribing a value to carbon, whether it’s through a RGGI type construct or Massachusetts, for example, that has its own sort of local specific one state type of RGGI that it’s overlaying, or some other mechanism altogether. But I think what they’re recognizing now is that this is simply a conversation that in reality is happening and they can’t ignore it. Now is their opportunity to sort of begin to rationalize and recognize that this is something that they need to take seriously and is important to the sort of long-term sustainability of these markets.

Stone:  So, you tuned into the conference. It was obviously virtual given the situation we’re all in right now. What were the highlights of FERC’s technical conference?

Borgatti:  Yeah, it is crazy this virtual universe that we’re living in today. I did tune in.

A couple of key takeaways that I had. One was the sort of unanimous support for carbon pricing in the FERC jurisdictional markets. And I wouldn’t say that that was just PJM, that was writ large. That there was, you know, from what I heard anyway, nearly unanimous support for these types of programs. And the panels were, you know, included a number of companies that were, I would say, much more fossil fuel focused at the moment than perhaps renewable focused. Certainly, portfolios are changing, and people are evolving with our times. But I think that was a big key takeaway, is that there was, basically, unanimous support for this type of a paradigm.

Probably the biggest and most important piece that I heard actually was the first panel in the day, which was the legal panel. Where they had a bunch of kind of legal scholars and, you know, attorneys opining on whether or not FERC has jurisdiction to implement a carbon price. There have been a lot of legal questions around that. Some have suggested that they don’t have the ability to do that. It not within their sort of conventional writ making authority. Others have said they’re not the right agency to do this, that regulating carbon is maybe something that’s better left for the EPA. And there has been kind of lots of back and forth on that issue.

But the legal panel that we saw at FERC was, again, I think, united in their view that FERC actually does have jurisdiction to implement these types of programs. Certainly, they can do in a place like PJM like they’ve done in California ISO, which is a similar system out in the west coast, where they have acknowledged that California has a carbon reduction public policy objective and that California is proposing a carbon pricing or proposed a carbon pricing mechanism to facilitate that. And that the attorneys said that that was something that they could certainly do. But they also actually said that if FERC was concerned that this sort of patchwork of local policies affected the rates that are subject to their jurisdiction, that they actually probably had the legal authority to implement something like this on their own. And that, to me, I thought was a striking and important piece of the conversation to see that in addition to the industry being united, that this was something that they were supportive of. That the folks on the legal side were confident that this is something that PJPM and FERC could achieve if it wanted to.

Stone:  Well, it’s really interesting that you bring up the issue of should and can the FERC regulate carbon dioxide emissions. I think it’s a good moment here just to point out that the FERC very much is an economic regulator. It is not an environmental regulator as the EPA is. In one of the other justifications I have heard that would allow for it potentially to regulate carbon dioxide emissions is more of an economic one. And that’s that carbon dioxide emissions do have a monetary impact. Maybe not on the generators that produce electricity, but on a larger scale societally somebody pays for the pollution in health impacts, whatever it may be. And that without taking those impacts into account, the markets actually fail to reflect the true costs of burning fossil fuels in electricity generation. Was there any discussion about this reasoning or this justification for the FERC to regulate carbon at the conference?

Borgatti:  Yeah, so there was discussion on that. And I think that’s actually another important takeaway. So, I’m very glad you asked that question. Is that we actually embed within power prices today a cost related to all sorts of different kinds of emissions. For example, there have been costs that generators have included in their offers for nitrogen oxide and SO2 emissions for years. And frankly, there’s actually a paradigm that allows generators to include a carbon price today in their markets.

So, when we kind of talk about whether or not FERC has the ability to recognize something other than just sort of the cost of the fuel that a generator needs to create electrons and the efficiency at which it turns that fuel into electrons, asked and answered for decades. We’ve been doing this for a long time. And I think that was an important piece in the conversation that bore out here and was reinforced.

I think the next step is, okay, so if we know that we can do that now, if there are other mechanisms or are there other ways within FERC’s power to make sure that we are recognizing those characteristics or the value of lower-emitting resources in the most efficient way possible? I think that was the important part of the discussion that came out there. That, yes, part of FERC’s just and reasonable rate making authority can be to make sure that we are appropriately accounting for the value we’re ascribing to these types of emissions in the way that we’re producing power prices out there.

Now, what’s important about your point there on the value of the price of carbon and kind of what it is that FERC does, my view, and I think we did hear some of this conversation is, the actual price, that social cost of carbon concept, FERC’s not necessarily an expert in that arena. Right? I would say that FERC probably aren’t the right folks to be out there deciding what the cost in, for example, human health or environmental degradation should be and how we should sort of quantify that. That’s probably best left either to the EPA and sort of the national construct or to states to make those decisions at the local level. But what they can absolutely do is say that when one of those entities has decided that this is the value we’re going to ascribe to carbon, they can create a mechanism to make sure that that is represented in power prices and in dispatch. And I think that’s what really clearly came out.

So, the state says to them, “I think the price of carbon is 20 bucks. It’s the social cost of carbon. It’s the RGGI clearing price.” That’s all well and good. FERC doesn’t need to necessarily weigh in on whether that’s the right value to ascribe or not. That’s for the agencies that are expert there. But they absolutely are in a position, at least from what I heard on this panel, to be able to say, “Okay, how are we going to make sure that that value is properly reflected in our power prices?” And I think that was a very important acknowledgement here that we heard at the technical conference.

Stone:  So, based upon what you did hear, do you see the FERC in the path to regulating carbon?

Borgatti:  I do. And look, this is a bigger conversation. And I think that, you know, where we are in PJM here is that the RTOs and ISOs themselves are probably limited in what they can do unilaterally, absent there being a clear policy mandate from their states. You know? Some of the states in PJM, for example, say, “Yes, PJM, we want you to help us facilitate our public policies through these types of mechanisms.” But, you know, we heard Chairman Chatterjee even say after the technical conference that, look, you know, FERC’s engagement in this area is something that they likely need to take more seriously regardless of how the politics in Washington may change, for example, in November when we have our next election cycle here. So, I do think that there’s an acknowledgement that there needs to be better collaboration, better representation of these policies through the FERC organized markets here.

I’m not sort of naïve enough or, you know, perhaps I don’t refuse to acknowledge the notion that, like, this is a really hard thing to do and it’s complicated. We’re probably at the very beginning of the conversation. And it’s going to take some time to work itself out. But yes, I do think that we sort of started upon a pathway where we can think about ways to allow FERC to better reflect these types of prices in their markets.

Stone:  So, let’s say that FERC doesn’t act on carbon pricing. Okay? Let’s just say that that doesn’t happen for a moment. Will the states continue with their efforts? And will this jurisdictional tug of war continue so that we may see some states as they have threatened so far to do, actually move partly or wholly out of the wholesale electricity markets?

Borgatti:  I think no question, right? That, to me, is the primary kind of root cause of why we’re having that conversation now. Is that in some states this is a priority item for those constituencies. And you know, the governors and regulators in those states are not going to sort of abandon those local policies simply because the federal government hasn’t stepped in to facilitate them. And they’re going to take whatever actions they think are prudent to facilitate those policy objectives at the end of the day. And I think that if there sort of isn’t an effort at the national level to attempt to embrace some of these goals, you’re just see an increasing attention on those types of local solutions, even if they lead to the types of outcomes that you suggested, that perhaps might have been seen as extreme in the not too distant past.

What I also think is important, though, and I’m hopeful that kind of becomes a bigger part of the conversation here is that the states can do a lot to regulate in this arena. And they can do a lot to influence the types of resources that get built, whether they be lower carbon emitting resources or certain types, whether it’s wind or solar or whatever. But they can’t necessarily do everything that they want to in this space on their own.

The best example of this, I think in PJM anyway, is Washington DC. The district has 100 percent renewable energy policy in place now. And they’re trying to very quickly transition to 100 percent clean energy type of environment. Well, there’s actually no generation within the district today. There’s not a single generator that PJM dispatches there. And even if they were as efficient as possible with all of the space that they have in Washington DC, there is just simply not enough land out there for them to achieve that objective. So, if they really do want to get there, they’re actually going to need some type of regional or national structure to achieve that objective.

Frankly, if we’re going to sort of push in this direction, the reality of it is embracing something like carbon pricing or a similar mechanism on a regional level eventually becomes necessary to achieve these types of goals. So I’m hopeful that what we see is sort of a push back up towards FERC and a recognition that, yes, the states may need to take more significant action to achieve what they’re looking for. But also a recognition that the pathway to the ultimate goals that some of them are looking for really will be achieved through these types of regional constructs. So now we can have kind of a collaborative conversation, FERC that has leaned into the possibility of these types of practices and can begin to start to promulgate a policy to help the states achieve what they’re trying to do now.

Stone:  You know, Mike, there’s one issue I want to bring in here. We’re in an election cycle and I want to bring up the issue of politics here for a moment, if I may. Okay? There has been a growing concern in recent years that the FERC, which was always intended to regulate electricity markets free from political considerations has, in fact, become politicized and acted to advance policies favored by the current administration. The former FERC Chairman Cheryl LaFleur has said just as much here on this podcast in the past. And I also want to bring up something else. Recently, the industry publication Utility Dive reported, and I quote, and this references the recent technical conference, that “of the 30 panelists lined up for the technical conference, none represent renewable energy or consumer interests. And only one represents state interests.” So, on the face of it, it appears that the FERC may be most interested in hearing traditional energy industry viewpoints at this point. What do you think is going on here? Are we seeing some politicization? And I guess the real ultimate question here is does what the FERC ends up doing depend upon who is in power in Congress and in the White House?

Borgatti:  Yeah, so certainly to the last point, yes. And as we talked about a little bit earlier on in the podcast, there have been– these types of agencies respond to and implement the policies that are dictated to them, right? So, we talked about the Clean Power Plan where FERC was sort of an enabler of that broader policy objective that was promulgated by, at the time, the Obama Administration. And so, absolutely, politics does matter here. And I think that’s an important piece here.

But, you know, for FERC to effectively regulate in this jurisdiction, I don’t think that they can ignore what’s happening at the state level anymore. And there needs to be a recognition that the states that are advancing these types of policies are real. It’s a growing chorus in the voices that are focusing on this. And I think increasingly so we’re going to see more attention at the local level put on ensuring that there are opportunities to facilitate those policies as quickly as possible.

Stone:  And I want to add here also to give the whole perspective, FERC has every interest in maintaining the wholesale electricity markets. It was instrumental in deregulation of electricity markets beginning in the 1990s. The markets are really its baby. So it doesn’t want to see these markets fall apart, right?

Borgatti:  Oh, very much so. Absolutely. And they have a litany of policies, and frankly, you know, Congress through the Federal Power Act and the Energy Policy Act of 2005, which was kind of the most recent sort of major national energy policy that we’ve seen, have focused on using these types of competitive markets to regulate in the spaces under their jurisdiction. So yeah, you’re exactly right, these are, frankly, hallmark organizations that lots of other countries, Europe, China, and other places, have looked at as kind of the gold standard for how to efficiently use competitive markets to achieve, you know, really good outcomes. I think they’re a source of pride. But they’re also a source of policy on the federal level. And that’s a really important piece of this. And I’m glad that you brought that up.

I think the politicalization piece of this is really important because we can’t ignore, and we actually frankly need to embrace, the serious consequences on all sides of what we’re talking about here. You know, on one hand you have states that view climate change and carbon emissions as a major threat to their constituents, whether it be for environmental reasons or human health reasons or economic reasons, some combination thereof. And that’s a serious matter. You know? There are certainly a lot of focus and a deep concern in many jurisdictions about that issue.

But also when we’re talking about, you know, adopting policies that might end in some generators retiring or deactivating, there’s a very real local consequence there too. You know, I’ve got a client, for example, that has a generator located here in the United States who pays a tax payment to the local community that is upwards of 80 percent of its municipal budget. And there are lots and lots of places around there where you see small towns in Appalachia or other places where these power plants have been around for decades and are the principle economic opportunity in these regions. If they go away, that’s very, very, very bad and there’s a very real human consequence into the effect on the economy and prosperity in those regions.

Those are absolutes. They are functions of this conversation. And I think when we politicize these types of issues here– and we have them away from sort of having a conversation about how do we create efficient economic outcomes, we then exacerbate the challenges that are associated with addressing these very serious consequences. That makes it harder for folks to believe in these outcomes and to trust these institutions. And I think that overall that’s a bad thing.

You know, in terms of the make up of the panel–

Stone:  No, go ahead.

Borgatti:  I was going to say, in terms of the make up of the panel, I would agree that fossil generators were well represented. The states did talk a lot– I’m sorry, excuse me. The constituents that were on those panels did talk a lot about, you know, states rights to regulate in this arena or not. But certainly they weren’t as well represented as one might expect. There was a bit of recalibration between the original announced lineup here and the folks that were on the panels, trended towards some more renewable interests. But it certainly optically did suggest that, you know, that there was to some anyway a view that there were more folks that were directly related to the fossil fuel industry represented than others.

Whether that’s right or wrong, again, I think optics here matter too. And that’s a big piece of kind of the political conversation here and the politicization of the FERC. You know, you want to, whether or not intentional or otherwise, you want to make sure that you’re appearing as level headed and even handed as possible so that we can recognize, and again, appreciate the types of decisions as reasonable and trust that the institutions are carefully considering all of these different factors when they’re going to make decisions on something as important as this.

Stone:  So, final question for you here. Let’s say at some point we get a national carbon price, a national price on emissions of carbon, what does that do to all of these efforts at the FERC and within the electricity markets? Does this make– all become a moot point?

Borgatti:  No, I don’t think so. I think that a national carbon price would be great. And I think most companies out there, and frankly myself included, think that that would be the best outcome. You know, why we’re talking about these subregional programs where we take a group of states and, you know, establish a carbon price in part of the energy market and maybe not others is because we don’t have that national carbon price. But what we see here is that, you know, this is a very complex undertaking. And certainly there are lots of ways that the federal government might go ahead and implement some type of national program here that would build on the foundation that we have started, both with the conversation at FERC with the work that has been happening at PJM, New York ISO and others, to kind of figure out how do you actually do this? I could imagine cases where there could be different carbon prices in different regions because of the resource mix in perhaps one state or another that would end up sort of creating potentially some of the same issues that we see today where you have states, for example in RGGI, and some that aren’t.

So, no, I think if the federal government were to act in this space, that would be great. And I think a national policy would be one of the best opportunities to kind of achieve these types of goals. But certainly I see this as building on the work that we’ve done here so far, not necessarily in [UNINTEL].

Stone:  Mike, thanks for talking.

Borgatti:  Hey, my pleasure. Take care now.

Stone:  Today’s guest has been Mike Borgatti, Vice President for RTO Services and Regulatory Affairs at Gabel Associates. Visit the Climate Center for Energy Policy’s website for more podcast episodes, blogs, and policy digests on today’s most pressing energy and environmental policy topics. You can keep up with the latest from the center by subscribing to our Twitter feed. Our handle is @kleinmanenergy. Thanks for listening to Energy Policy Now and have a great day.


Mike Borgatti

Vice President for RTO Services and Regulatory Affairs, Gabel Associates
Mike Borgatti advises energy industry clients that participate in the nation’s electricity markets, and has been at the forefront of efforts to explore carbon pricing in the world’s largest power market, PJM Interconnection.

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.