What’s the FERC, and How Is It Shaping Our Energy Future? (Part 2)
The Federal Energy Regulatory Commission regulates the United States’ wholesale natural gas and electricity markets, wielding influence over the cost of energy and the environmental impacts of the nation’s energy consumption. Today, the FERC finds itself at the center of intense debate over the extent to which environmental and climate concerns should factor in the shaping of the U.S. energy system.
Colette Honorable, a FERC commissioner from 2015 to 2017, discusses FERC’s struggle to balance clean energy development with the economic and supply considerations that have been the core of its regulatory mandate. Honorable also examines the growing tension between the states and the FERC around state efforts to subsidize nuclear and renewable energy, and over environmental review of the nation’s natural gas infrastructure.
In Part 1 of this two-part interview, released on April 30, 2019, Colette discussed FERC’s history and mandate.
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. Two weeks ago, on Energy Policy Now, I began a discussion with Colette Honorable, a former commissioner with the Federal Energy Regulatory Commission, into the role the FERC plays in overseeing the energy industry in the United States. The FERC, which is a vitally important agency that tends to fly under the public radar regulates the country’s bulk natural gas and electricity markets. The first decisions influence the price we pay for energy, and the environmental impacts of our energy consumption. Today, the FERC finds itself at the center of intense debate over the extent to which environmental and climate concerns should factor into the shaping of our energy system.
Two weeks ago, Colette introduced the FERC’s mandate in history. On today’s podcast, we’ll take a look at the key issues the fork is now grappling with, including how to incentivize the development of clean energy, while balancing economic and energy supply considerations. We’ll also look at the growing tension between states and the fork around state efforts to subsidize low carbon energy. Colette, welcome back to the podcast.
Colette Honorable: Thanks, Andy. Great to be back.
Stone: So Colette, we did a background there on the FERC in the last episode. So today, I thought we just would jump into the challenges that the FERC is grappling with. And it seems that these challenges can be broadly put into two categories. One is jurisdictional and the other is environmental. Could you introduce the overriding issues?
Honorable: Absolutely. And you’ve started our second discussion here very nicely. FERC is tackling two, I would say very broad challenges. And it certainly has a lot on its plate these days for certain. The first that I describe more broadly, our jurisdictional challenges that arise and how FERC’s work is carried out and pursuant to federal law, and how that work intersects with the work of the states and regions and how that is all evolving based upon not only state statutes. But very important policy considerations happening at the state level, that relate to, and lead into, what I think is the second, and I think, greatest challenge right now. And that is how we view environmental matters through both the FERC lenses, and that is how economic regulation contemplates the very necessary integration of clean energy policy, to address climate change, to support clean energy development.
So much of that work is happening at the state level, and how these policies intersect with what is happening at FERC. And so we’re in a new age and time, thank goodness we are. We have a collective heightened awareness about the fact that climate change is real, about the very real impacts of climate change, and the steps we all need to take together to move to a better place for generations to come. And so that awareness is challenging a process that is rooted in federal statutes that were written decades ago.
But we’ve seen FERC attempt to make some effort to shift and move in that direction, although some would tell you they’re not shifting enough. And so I think this creates a number of challenges in terms of how energy is integrated, how infrastructures developed, how our regional market processes and transmission planning and cost allocation processes are evolving or not, depending upon who you ask to meet these very real challenges.
Stone: I’d like to go back to a point that you highlighted in the in the last episode that forecasts a mandate to ensure that the energy markets it regulates provide energy to consumers reliably and at rates that are quote “just and reasonable.” Why is this mandate so central and how might this mandate be challenged today.
Honorable: So if we think about FERC, in the first instance, is an economic regulator. And that means it is created by Congress to sit in judgment of the rate that utilities and those in the energy sector pass along to consumers. So, in the first instance, FERC is not an environmental regulator, but an economic one. And under the federal power act, Congress charged FERC with the role of overseeing the reliability of the grid.
What that means. And I think consumers really take it for granted. I know I certainly did that before I learned more about the FERC. What this means is that every time a consumer in their home, his or her home, flips the light switch at a business, if they turn on the lights and start the assembly line, or start the arc furnace, or start moving a crane, consumers and people in the business sector expect the electricity to be there, unless there is a severe weather event or an act of God, or some unusual disruption or interruption to the flow of electricity. And that is their job to make sure that that is happening across the U.S. And more broadly in in some places in North America.
This work is overseen at FERC. But the duties of ensuring that those reliability standards are carried out is actually delegated to an electric reliability organization called NERC, the North American Electric Reliability Corporation. All of this is mandated by Congress. Now FERC also has the job to carry out its duties pursuant to other laws. We’ll talk about some of those shortly. But as it relates to ensuring just and reasonable rates, FERC stands in the gap for consumers. And their role, therefore, is to make sure that the costs that are incurred by utilities, many of which are then paid by consumers, that those utilities, many of which are monopolies should only be allowed to be paid by consumers if they are fair, or reasonable.
And that means that these costs must pass a certain level of scrutiny. For instance, they must relate to electric facilities, or equipment that is in use or will be in use to benefit consumers. And also, another example, may be the costs that are expended by utilities. In the industry, we say there is no gold plating. That means the utility cannot charge the highest amount or build the biggest and best what is necessary to ensure reliable service and service at a just and reasonable rate. And so, there is a very important and inherent consumer protection rules that start place.
Stone: Now there’s some debate, that first mandate, as you as you just described, is actually potentially out of date. And that climate should be given the same priority as economic and reliability concerns, particularly as climate changes become such an issue in the last few years. What are your thoughts on this?
Honorable: I have a few thoughts on this question, Andy, because FERC clearly has a duty, though it’s not in the first instance and environmental regulator, like the EPA, it does have duties which Congress mandates pursuant to NEPA, the National Environmental Policy Act, as well as other laws, that it must consider environmental impacts in the carrying out of its work in several instances. And we are now in this age of enlightenment and a requirement that FERC consider, in particular with a number of the decisions that we’re seeing from the court slightly,FERC must do a better job in reviewing the environmental impacts of several types of projects, in particular, interstate natural gas pipelines.
We talked about those in our previous podcast, and also liquefied natural gas terminal sidings. And so there is some truth to the fact that this economic regulatory agency must be able to shift now, where we have better information about environmental impacts, to be able to consider that as it makes decisions about whether certain projects are in the public interest.
Stone: So in the electricity markets, the FERC and the states are now at odds over a variety of clean energy incentives. And that goes into the whole climate discussion that we’ve just been having. How is this debate over the incentives now playing out?
Honorable: It’s really interesting to sit back now after my tenure at FERC, and see how it actually has been evolving and growing over the past. Maybe 10 years for work in this area has been consistent, though some would say not perfect. And I would be one of those because of the challenges inherent in what is happening at the state level. And it’s amazing, terrific work. But how we respect the diversity of the states, and how we work cooperatively with the states to ensure that their important work is integrating well into wholesale electricity markets, which are overseen and governed by FERC.
We have been on a journey for some time to really understand what these conflicts are and how they can be resolved in ways most favorable to consumers. As recently as May of 2017, the ACC held a technical conference, and I believe we talked a little bit about it in the last podcast. But the reason I mentioned it here is because of your question. It really highlighted the significant challenges happening at the state level. And the terrific progress, even though the U.S. unfortunately decided to withdraw from the Paris Climate Accord. We’ve seen state mayor, corporations rise up. And it’s really been the most beautiful prologue to that unfortunate part of our energy history.
We’ve seen galvanization and collective desire to move ahead with meeting those goals. So, we have mayors with climate goals, we have a number of governors, and legislators that have developed wonderful and ambitious climate goals in some instances. And now we have to make sure that we can support that at the regional level where wholesale markets are operating. And in keeping and in recognition of the authority to regulate those markets. It really gets down to understanding how capacity markets, in particular, which are planning for the future delivery of resources. And this rolls up into the broader duty to ensure reliability.
The market, as we discussed previously, are the place where sellers of various energy resources bring their wares. And there is an auction that occurs. And those resources are provided to certain locales around the us through these regional constructs. But we now have to do our jobs better because we are in this age of enlightenment about the energy we use, where it comes from, how its consumed, and how its generated. And we need to be able to at least accommodate state goals in the regional process, hopefully, at some point achieve the full integration of those state goals in the wholesale capacity market operation.
So, it seemed like it took a lot for me to say that it’s even harder in practice. And we’ve seen three regions in particular really struggle with this issue. Some are getting out more head than others. But there are three regional transmission organizations or independent system operators, which operate in the U.S., which have capacity market.
Stone: Yes. So taking that to the next step. I think the specific issues that we’re looking at, that you’re referencing, where for example, the zero emissions credits from states such as New York and Illinois, potentially Pennsylvania is thinking about this that would support nuclear power plants. And I wanted to ask you about what’s actually going on specifically in the electricity markets, for example, this issue really has come to head in the case of PJM Interconnection, which I think I mentioned in the last episode, is the electricity market. And grid operator for the basically the MidAtlantic region into the Midwest, in PJM, is struggling to balance state subsidies, such as the zero emissions credits for nuclear, with the competitive aspects of its market, and it’s currently at an impasse, waiting for a FERC ruling on this issue. Can you explain?
Honorable: Certainly. And to do that, Andy, I will talk about the differences of these regions. So PJM is the largest of the three that operate capacity markets. And there’s ISO New England which is comprised of the New England states, and then the New York ISO (Independent System Operator), which is a one state ISO. So even in the mere description of the three can see where I’m heading, it may be much easier for the New York ISO to galvanize and find a pathway forward, even though all of this is quite complex, but it’s a one state ISO.
And so, New York has quite ambitious and somewhat say aggressive energy goals. And, but the participants and the members are all operating in one state. They’re in ISO New England, those are all of the New England states. And they tend to be fairly aligned in terms of their energy policy. And many of the states, if not all of them, are members of RGGI, the Regional Greenhouse Gas Initiative. And they tend to think alike in terms of how climate should be addressed generally, that’s not to say they’re monolithic, every state is different. You may see Massachusetts with different goals from Vermont. But, generally speaking, they are aligned.
Now then take PJM, which is the largest region, and it is comprised of states and the District of Columbia, with goals that may be similar to those in New England. They also have a number of states which are not, such as Ohio, a portion of Kentucky, some portion of Pennsylvania. And so, it becomes very difficult to manage the desires and the mandates of the various market participants and ISO members, along with the operation of capacity markets. And so it may be more difficult for a region like PJM, to gain the same consensus that a New York ISO gains or that ISO New England gains.
Stone: So, Colette, what’s at the root of the impasse at the FERC right now over this issue?
Honorable: Well, we certainly don’t want to try to get into where the positions are of each commissioner. But history tells us that, and certainly at the time, when there were five members of the Commission. We had one commissioner, Rob Paulsen, who was a former state commissioner, as was I, as was Tony Clark, and others. We have seen now given the evolution of this work, a challenge in number one, removing barriers to entry for not only policy goals, but also cleaner energy in the regional context, that it’s been a challenge.
And we are also seeing a challenge among the, so that’s the environmental matter that we talked about that challenge. We’re also seeing a jurisdictional challenge, in that FERC must ensure that states are respected during this process. And we work together under the framework of cooperative federalism, that means we respect the diversity of the states. We respect the geographic diversity, the policy diversity, and attempt to accommodate that in the regional process where possible.
And I think we’ve at least seen two commissioners recently that have expressed a concern that FERC was not honoring that. This is a very delicate balance. And it’s important in order that states and regions operate as they see fit. And that we have very healthy, robust markets operating and providing the necessary certainty and proper market signals that we be able to move through these challenges in a transparent way, in a way that is in recognition of the law and policy, both at the federal level and at the state level, and that we respect the role of the state.
Stone: One of the Democratic commissioners Cheryl LaFleur is set to leave her post at the end of June and she is one of the commissioners who going upon what you just said is of the opinion that the FERC’s ruling may not adequately respect the state’s rights in this policy issue. Now again, she’s set to leave the FERC at the end of June. Will that resolve the stalemate that we’re seeing right now?
Honorable: I think time will tell but since you’ve raised Commissioner LaFleur, I have to speak to what a travesty it is that she’s leaving the commission. I know her personally. She has been terrific colleague, a dear friend. Even when we didn’t agree we could always work together and find a compromise. But she knows the market construct better than any commissioner with which have been acquainted in recent years. And so, it’s unfortunate because of her, she’s from the New England region and because of her experience there in the sector, she’s just tried to be a student evidence she’s been committed to resolving the problems.
What remains to be seen is what happens after Commissioner Leflore leaves her posts. On the commission now, our Chairman Neil Chatterjee, Commissioner Rich Glick, and Commissioner Bernard McNamee, two Republicans and a Democrat. But more importantly, we have to take a look at their views on these issues. And whether they’re able, quite frankly, to reach a consensus, two commissioners cannot issue a decision. So it depends upon whether the Administration and the Senate will be able to find qualified commissioners to fill those positions in order to be able to move beyond a potential stalemate.
Stone: So as we mentioned at the beginning of the episode, FERC is also facing environmental and climate challenges related to its approval process for natural gas pipelines. And for LNG or liquid liquefied natural gas terminals, what’s happening there?
Honorable: Certainly, there’s been quite a bit of evolution, both in terms of where FERC has been in the last couple of years, what the courts have said about FERC’s work. And what we’re seeing most recently from FERC. FERC continues to be challenged with the amount of scrutiny it gives to environmental considerations, and how it’s analyzing greenhouse gas impacts from certain projects that appear before it.
Certainly, FERC work differs, it’s not a boiler plate analysis, it differs based upon the type of project that comes before it, if it’s the hydropower facility, that analysis and the considerations may be different from interstate natural gas pipeline, and depending upon how that pipeline will flow, whom it will serve, etc. And then the same varied consideration for liquefied natural gas terminals. This is really one of the greatest challenges on FERC’s plate right now. Because we are really seeing the differences among the perspectives of the commissioners, what they believe the law requires, what they believe NEPA requires, and then another layer of complexity, how they are interpreting the court, direction to them about how they analyze the environmental impacts of these projects.
Stone: One of the specific issues that seems that the U.S. is facing is quantifying and understanding the impact the climate impact of pipelines that it’s the responsibility is to approve. And one of the big issues here is specifically related to indirect climate impacts. So, you build a pipeline and the operation of that pipeline, or that LNG terminal, may have its own greenhouse gas emissions. But then the idea here is that when you put these new pipelines in, you may have more consumption of gas downstream and more production of gas, for example, upstream, which potentially could raise the emissions.
On the other hand, when it’s downstream, you don’t know where that gas is going. Is it going to serve new load or to replace old coal? Is that a positive or negative for the climate? So, it seems like there’s been a big issue, also an impasse somewhat on the on the FERC, about how these up and downstream emissions should be quantified these indirect emissions. Interestingly enough, in 2017, the DC Circuit Court ruled that the FERC must consider fully these up and downstream emissions, these indirect emissions. The FERC though said that this is not practical. Can you tell us a little bit more about what’s going on with that conflict and where it stands right now?
Honorable: Certainly. And in the first instance for duty and mandate to pass judgment on the project. But then this is very important for consumers. Those who are aggrieved can appeal that decision to that D.C. Court of Appeals. And we’ve seen quite a bit of appellate activity, which I think is a beautiful thing because we see more and more people involved and concerned about how this work will be carried out, and therefore how it will impact consumers all across the country.
Now, we’re speaking about the environmental impacts. And certainly the 2017 D.C. Circuit decision was quite clear, then it becomes FERCs duty to consider that directive from the D.C. Court of Appeals, and how it’s carrying out its work. We are still seeing for challenge with what it sees its role as in terms of evaluating the indirect impacts of greenhouse gas emissions, the court was very clear, in particular, with downstream projects that can be quantified, we can get some understanding of the upper bound and even lower bound, but if we were going to just look at upper bound estimates. How that should be considered as FERC determines the environmental impact of these projects.
We’ve seen a split still among the commissioners, although we’ve seen some projects moving ahead, even as recently as in the last couple of weeks where FERC recently approved a project, but also included more of an analysis of the downstream greenhouse gas emissions, and that that allowed Commissioner LaFleur to sign on to the project. I believe that we still see both commissioners who LaFleur in Glick holding the opinion that more can and should be done. And Commissioner Glick has spoken out recently about the fact that that must be done. And that is required underneath that and under recent court rulings, and that there is a pathway to do it. And so, we still see FERC, very splintered here in terms of their philosophical or ideological views on its role in considering and evaluating these greenhouse gas impacts.
Stone: Attention also has arisen as states have refused to approve pipeline applications over water quality concerns, and I think this is most, most obviously taking place in New York State. This isn’t so much a FERC issue, but it does come as the pace of pipeline development and subsequently FERC approvals has accelerated in recent years. Why is this such a challenging issue?
Honorable: Well, it’s challenging because of the duties that are given to both FERC and to the states. This particular provision that you’ve referenced section 401 of the Clean Water Act, it falls squarely within the wheelhouse of state environmental agencies. So, your state may have a state environmental quality agency, your state could have a state EPA agency, and that agency is required to consider the impacts of such projects on water quality, and that’s a very important role. Their mandate is an environmental one, not an economic one, but they have a really important duty to carry out to make sure that that water quality throughout the states and regions is protected.
So, those are the work that happens at FERC to consider whether to issue or allow a certificate of convenience and necessity to be granted is very different from this the state consideration under a section 401 permit. But there is still quite a bit of uncertainty here where FERC may approve a project and then at the state level, it may be rejected. Now, certainly the it is well within the state’s jurisdiction to reject a matter based upon the law based upon environmental impacts that may not be mitigated. It is not permitted for states to not approve a permit because they don’t like gas or because they have 100% renewables goal they correct for political reasons they have to apply the law.
We also have seen some gamesmanship of 401 processes in certain states where they may push off or ask but withdraw and refile and application. But courts have recently said that is not permitted. And should a state go beyond that one year period, they will waive their ability to review that section 401 application. So, we’ve seen some movement there by the interpretation of duties by the courts on the 401 permit status.
Stone: Then the FERC is currently involved in review of its pipeline review process. It’s something that began about a year and a half ago. And that current process that the FERC uses, actually dates back about two decades. What’s going on with that process? Do we have any updates? And what changes might we see?
Honorable: There has been an issue that has been looming for several years. And certainly, you’re correct. The pipeline review process hails in part through the mandates we discussed, but also through a 1999 policy statement that first developed back two decades ago, as he said, which really needs reviewing, as we have looked over the past 10 years that how pipeline matters have moved through the agency.
Questions are now arising about whether more scrutiny is needed to consider what need is required in order to gain a certificate? And also, should there be some regional view? Need? Should policy considerations come into play? For instance, the needs in terms of energy sources or resources in a particular region? And then finally, what is required in terms of the types of agreements that are considered? We call them precedent agreements in the business. What types of projects should qualify for need? Are those projects that serve communities? Are those projects that serve businesses are those projects that serve an LNG facility, etc.
And so, the evolution and movement in the sector prompts them to believe that we really do need another look at this policy statement. I would suggest that there are a number of issues that may be waiting for a full iteration of the Commission, this may be one of them. And I believe, the full five.
Stone: Contingent of five commissioners?
Honorable: Correct. And it probably would be better if FERC is going to contemplate a policy that would potentially be on the books for another two decades, that they have a full body of commissioners who bring the diversity of thought and perspective in order to consider the future of how these projects are considered for the benefit of consumers. And by the way, that would apply, generally speaking, for interstate natural gas pipelines. But clearly the work happening with regard to hydropower facilities, LNG facilities, those processes would be continuing as they are pursuant to the federal law and FERC policy and precedent.
Stone: Colette, that thank you for talking.
Honorable: Thank you. It’s been great to visit with you once again.
Stone: Today’s guest has been Colette Honorable former commissioner with the Federal Energy Regulatory Commission, and a partner in the Energy and Natural Resources group with the Reed Smith Law Firm in Washington D.C. For more energy policy insights and the latest news and events from the Kleinman Center visit our website. Our web address is kleinmanenergy.upenn.edu. And get the latest news from the center by subscribing to our Twitter feed at climate energy. Thanks for listening to Energy Policy Now and have a great day.