DOE NOPR: Enormous Impacts to Competitive Wholesale Energy Markets
October 5, 2017
On September 29, 2017, the U.S. Department of Energy (“DOE”) requested that the Federal Energy Regulatory Commission (“FERC”) open a Notice of Proposed Rulemaking (“NOPR”) to require that RTOs/ISOs “fully compensate” nuclear and coal generation facilities as “reliability and resiliency resources” (i.e., “RRRs”). The DOE request included a draft NOPR that FERC could issue. On October 2, 2017, FERC issued a Notice requesting initial comments on the DOE NOPR (Docket No. RM18-1-000) be filed by October 23, 2017; reply comments are due by November 7, 2017.
The DOE’s request is unusual; it is the first time that the DOE has requested that FERC issue a NOPR in more than 30 years. Moreover, the draft NOPR on which FERC is seeking comments raises a significant number of troubling questions, including:
- Which electricity generation facilities should be defined as “reliability and resiliency resources”? The NOPR vaguely defines RRRs, in part, as having “a 90-day fuel supply on site”. Would a natural gas generation facility with backup fuel oil qualify as an RRR? Would a large hydroelectric facility with a dam full of water qualify as an RRR? Must the facility be capable of generating a minimum level of electricity 24/7 for 90 days?
- How can an RTO/ISO calculate the correct amount of money that will “fully compensate” an RRR so that it “recovers its fully allocated costs and a fair return on equity”? Will FERC conduct individual cost-of-service rate cases for each RRR to establish such subsidies? Will such cost accounting fully reflect the “stranded cost” payments that many of the RRRs received 20 years ago when wholesale competitive markets were first implemented?
- Where will an RTO/ISO obtain the funds to pay the RRRs? Although the RRR subsidies will have to paid by electricity customers, will all customers (even those that arguably do not receive power from RRRs) bear proportionate cost responsibilities?
- How will an RTO/ISO operate competitive wholesale energy markets consistent with the NOPR subsidies to RRRs? Will RTO/ISOs abandon “locational marginal pricing” (“LMP”) which is based upon dispatching the least-cost resources first to encourage the most reliable and efficient generation resources to operate? Will subsidized RRRs always be dispatched by the RTO/ISO first, so that competing resources will only be dispatched during high load conditions?
- What impact will payments to RRRs have on RTO/ISO capacity markets? RTO/ISO capacity markets are separate from energy markets and have been designed and approved by FERC to compensate generation resources for “being available”. If RRRs are subsidized so that they are always available, will RRRs be entitled to receive both capacity payments as well as “full recovery” of their energy costs?
- Will resulting RTO/ISO energy and capacity prices for RRRs be “just and reasonable”, as required by Section 205 of the Federal Power Act (“FPA”)? Courts have consistently determined that electricity prices which are determined based upon competitive market conditions are “just and reasonable” pursuant to the FPA. If some (or all) electricity prices are administratively determined by an RTO/ISO, will these prices remain just and reasonable? Will FERC be forced to standardize payments to all RRRs (and also to all other electricity generation resources)?
- Will the NOPR permanently prevent the retirement of existing or future non-competitive coal and nuclear plants? What economic incentive would an RRR have to ever retire if it was guaranteed that it would always be “fully compensated” for continuing to operate no matter how inefficiently or infrequently it operated?
- Will the subsidy to RRRs extend for one year or ten years, or will it be permanent? The NOPR contains no end-date; it appears that the subsidies to RRRs will last as long as the generation facility can produce electricity, no matter how inefficiently the facility operates.
- What will the ultimate impact of the NOPR be on new, more efficiency energy resources (e.g., solar, wind, electricity storage, energy efficiency resources, fuel cells, demand response resources, etc.)? If RRRs are permitted by the NOPR to be fully compensated (including “a fair return on equity”), all resources that are not RRRs will have difficulty competing in such an unbalanced market. This will stifle, if not destroy, the economic incentive to develop and install more efficient electricity generating facilities.
- Will the proposed subsidies be consistent with the U.S. Supreme Court precedent in Hughes v. Talen Energy Marketing, LLC?
It is not surprising that on October 4, 2017, FERC staff raised many similar questions regarding the NOPR. See, 20171004 FERC OEPI ROI RM18-1 (2).pdf.
This NOPR will represent a significant test for the new Commission that was nominated by the current President (all but one Commissioner will be joining FERC for the first time during 2017). Will FERC issue a final Rule based upon the 20-years of precedent that has consistently supported competitive wholesale electricity pricing, and which has encouraged the most efficient generation resources (and those with lowest forced outage rates) to operate? Or will the Commission surrender these principles and authorize enormous subsidies to nuclear and coal (and possibly other) electric generation facilities? FERC’s decision in this rule-making proceeding may determine the future of competitive wholesale electricity markets.
This Eckert Seamans Energy and Utilities Blog is intended to keep readers current on matters affecting businesses and is not intended to be legal advice. If you have any questions, please contact Dan Clearfield at (717) 237-7173 – dclearfield@eckertseamans.com.