This is the first in a two-part series on how the Federal Energy Regulatory Commission could change its approach to key federal energy policies under the Biden administration. This first installment will tackle the political realities of enacting a new administration’s energy and climate change imperatives via an agency expected to retain a Republican majority for some time to come. Most notably, we’ll examine how this could influence one of its most pressing challenges: finding a resolution to the FERC-ordered capacity market structures for Eastern U.S. grid operators.
Over the course of the Trump administration, the nonpartisan nature of the Federal Energy Regulatory Commission has been called into question by clean energy advocates and states with carbon reduction mandates. Now, with a Biden administration set to take the reins, those critics are asking what FERC can do to further their goals.
To be clear, FERC’s authority over interstate energy policy remains rooted in the Federal Power Act, which delineates its authority and makes clear that all proposed regulatory changes must result in “just and reasonable” rates and tariffs, and must avoid being “unduly discriminatory” in their effects on different technologies or classes of market participants.
But several major decisions approved by FERC’s Republican majority over objections of its Democratic minority have led to accusations of political bias. Most notably, FERC’s orders regarding Eastern U.S. capacity markets have been decried by clean energy groups as undermining state clean energy policies and propping up fossil fuel generators.
FERC has other key decisions that will play a role in the Biden administration’s clean-energy ambitions, from policies to encourage transmission grid build-out to connect growing utility-scale renewables across the country and off its coasts, to market structures to integrate aggregated distributed energy resources such as batteries, electric vehicles and flexible demand-side resources.
But it’s likely that the most contentious issue before FERC will involve finding a resolution to the capacity market rules imposed by its Republican majority over the past two years. These include the minimum offer price rule structure imposed on mid-Atlantic grid operator PJM, the refusal to allow New York state grid operator NYISO to exempt state-supported resources from buyer-side mitigation rules, and FERC’s approval of capacity and fuel security market designs by ISO New England.
What can be done about capacity markets and state clean-energy mandates?
The particulars of these decisions vary. But the underlying principle cited by their Republican backers is that they’re needed to counteract state policies that distort wholesale markets by incentivizing clean energy, thus undermining competition from non-subsidized resources, primarily fossil-fueled power plants.
But opponents argue that these decisions work in the opposite direction by artificially forcing clean energy resources out of capacity market structures in ways that will raise costs to electricity consumers and prop up uncompetitive carbon-emitting power plants. While these effects may be relatively small in the early years, they could increase over the course of the next decade, with larger and larger amounts of state-supported clean energy resources being left out of the wholesale markets geared to assess their value in maintaining a reliable grid.
States also argue that FERC’s decisions overstep its authority to dictate their energy policy choices, and they have filed legal challenges to overturn those decisions. Over the past year, states including New Jersey, Maryland, Illinois and New York have begun considering radical steps to exit wholesale capacity markets altogether to free them from the constraints posed by these FERC decisions.
What can the Biden administration, or a Democrat-led FERC, do to resolve these disconnects? One resolution could emerge if the Biden administration is able to convince Congress to pass a national clean energy standard, Ari Peskoe, director of the Electricity Law Initiative at Harvard University, noted in a November FERC policy briefing.
That could give FERC the authority to “modify existing market structures to match the goals of the new clean energy mandate,” Peskoe wrote, which would presumably include undoing policies that are expected to force many classes of clean energy out of capacity markets.
With control of the U.S. Senate hanging on January runoff elections in Georgia, it’s unclear whether Democrats will have the majorities in Congress to pass such an ambitious clean-energy policy. Even without it, however, FERC could still “reverse its recent decisions that support unnecessary polluting generators and make state clean energy programs more expensive,” Peskoe wrote.
What the Biden administration can, and can’t, do to alter FERC’s path
Since mid-2017, Republicans have held a majority of FERC seats, allowing them to approve many orders over Democratic members’ objections. A Republican has also held the position of FERC chair, who sets the agenda for the agency.
Richard Glick, the only Democrat sitting on FERC today, is likely to be named chairman soon after Biden is inaugurated to replace James Danly, who replaced long-time chairman Neil Chatterjee in a surprise post-election decision from the Trump administration. That would prevent Danly, considered FERC’s most conservative Republican, from setting its agenda.
Meanwhile, the Senate is poised to hold full confirmation hearings for two new FERC nominees, Republican Mark Christie and Democrat Allison Clements, who if confirmed would bring the agency to its full five members. Clements may be an ideal eventual pick as FERC chair, Jon Wellinghoff, FERC chairman from 2009 to 2013 and CEO of Grid Policy, said in an interview last week.
As the founder and president of energy policy consulting firm Goodgrid, director of clean energy markets at the Energy Foundation and former director of the Natural Resources Defense Council’s Sustainable FERC project, Clements “has the capability, the intellect and the background to, I think, lead that agency in a very positive way to decarbonize the electric grid,” Wellinghoff said.
“That would still give you a Republican majority on the commission,” he added. FERC commissioners can only be removed before the end of their five-year terms due to “inefficiency, neglect of duty, or malfeasance in office” according to federal statute. Chatterjee's term runs through June, opening the potential for adding a Democrat to replace him. Danly's term ends in 2023, and Clements and Christie would serve through the end of Biden’s first term.
Whether or not two Democrats would be able to convince Republicans to take steps to reverse these decisions remains an open question. Wellinghoff noted that Chatterjee has “shown a willingness and capability to move ahead with some very progressive actions,” including championing aggregated distributed energy resources through Order 2222 and opening FERC to grid operator carbon pricing proposals (more on that later).
But Chatterjee has also voted for and publicly supported FERC’s minimum offer price rule (MOPR) and buyer-side mitigation (BSM) decisions as steps to create a “level playing field” for all resources in capacity markets. “I believe that markets drive competition and innovation,” he said in an April press conference. “I’m also a big believer in the business case for renewables. I believe the costs of clean energy have come down now [to a degree] that they can compete without subsidies.”
Court challenges or regulatory action?
As FERC’s sole Democrat, Glick has long expressed antipathy for these decisions, which he has said he considers illegal infringements of states’ right to set their own energy policies. “What we’re doing here — and we’re doing it on purpose — is making it very difficult for state-preferred resources to clear in the capacity market,” he said in a December dissent.
It’s possible that standing court challenges to these orders may find judges that agree, Glick said during a recent virtual conference. “If the courts were to remand those orders back to the commission, I think it would be the obligation of the commission to rework those orders,” he said.
Even if courts don’t act, “the commission can explore these orders on their own,” Glick said, acknowledging that the outcome of that is “not up to me — we have to get a majority of the commissioners” to agree.
Norman Bay, who served as FERC chairman from 2015 to 2017, said in an interview that commissioners could initiate a new proceeding to examine the broader issue of whether forcing state-subsidized resources to adhere to administratively set minimum bids in capacity markets — the core concept behind MOPR and BSM rules — is an appropriate method to ensure just, reasonable and nondiscriminatory markets.
Just how a Democratic-led FERC might address these capacity market rules is an open question. Simply reverting to the markets’ pre-2018 rules would be unlikely, given that both PJM and ISO-NE sought to change them to address real problems with securing grid reliability and disputes between market participants over their fairness, Peskoe wrote.
“Instead, I suspect that FERC would seek to impose rules that allow market participants to opt out of procurement requirements or provide mechanisms for procuring capacity that meets states’ clean energy standards,” he wrote.
For example, FERC proposed in 2018 to allow utilities in PJM to use a rule called a “fixed resource requirement” to reduce their capacity procurement obligations by the amount of clean energy capacity they’ve obtained through bilateral contracts or state-sponsored mechanisms. “FERC abandoned this proposal, but a Democratic-led FERC might revive it,” he wrote.
“Alternatively, FERC might look to build on proposals that market participants have already developed as part of regional discussions about harmonizing RTO markets with state clean energy goals,” he wrote. “Several proposals include mechanisms for utilities to procure renewable capacity, energy credits or other products that meet state clean energy standards.”
Bay, now head of the energy regulatory group at law firm Willkie Farr & Gallagher, agreed that “it’s always hard to unwind an existing market design. You certainly have to focus on how you manage that process and the transition to new design. […] Stakeholders should not assume that that process of vacating the MOPR can happen overnight.”
But, he continued, “At the end of the day, the use of the MOPR is not sustainable,” he said. “Even people who support the MOPR now recognize that it’s not a sustainable policy. We have states threatening to withdraw from the [Eastern] capacity markets. That’s a problem. You can’t destroy the market in order to save it.”
Carbon pricing as a solution?
Last month, Glick and Chatterjee agreed (over Danly’s objections) to issue a policy statement making clear that FERC is open to proposals to allow independent system operators (ISOs) and regional transmission organizations (RTOs) to add carbon emissions pricing to their energy markets. This could offer groups that initially supported FERC’s use of MOPR in Eastern capacity markets an option that limits its negative impacts, from further delays in PJM’s capacity market auctions to the threat of states departing markets altogether.
“We supported MOPR as a tool,” Todd Snitchler, CEO of the Electric Power Supply Association, said in an interview. EPSA is the trade group of merchant generators that filed a complaint with FERC in 2016 that started the regulatory process that has yielded PJM’s current capacity-market conundrum.
“Competition and innovation deliver the best results, and that works best in a broader footprint” of wholesale markets, rather than “a state patchwork” that might result from departures from PJM or ISO New England’s capacity markets, he said. A recently released analysis sponsored by EPSA indicates that carbon pricing could save consumers billions of dollars, compared to alternatives now being sought on a state-by-state basis, he said.
While EPSA hasn’t stated its policy preference for the eventual rules that should govern those markets, Snitchler said the group has "engaged with FERC in all these issues,” including carbon-pricing options. “We are trying to signal that we’re in the solutions business and not putting our head in the sand.”
Of course, carbon pricing is far from a certainty for Eastern markets. To date, only NYISO has approved a carbon-pricing regime and is awaiting final decisions from other state agencies to inform any final plan it may submit to FERC.
A single-state ISO will likely have a much easier time than will multistate ISOs in reaching consensus on a carbon-pricing mechanism. PJM has created a senior task force to investigate the potential in its 13-state region, and ISO-NE CEO Gordon Wylie has raised the potential for the same in its six-state territory.
Whether or not FERC has the authority to demand that ISOs and RTOs create carbon-pricing mechanisms is a contentious issue. If Congress passes a clean-energy standard, that could give FERC clear authority to declare that markets that lack carbon pricing are unjust and unreasonable, Peskoe noted.
Absent congressional action, the options are less clear. “I would say that with regard to carbon pricing generally, it’s still dependent on the states,” Glick said in this month’s virtual conference. “I’m not sure the commission has very broad authority to implement carbon pricing on its own.”
Given the overlap between energy and environmental policy, FERC has a critical role in facilitating the U.S. response to climate change, Bay noted.
“I could see the chair assessing the impact of climate change on the grid and ways to mitigate the risk of climate change,” he said. In a recent Energy Bar Association article, Bay has also argued that FERC has the authority to accept a filing from an RTO market that includes a price on carbon.
Chatterjee could be a swing vote on this issue, Wellinghoff noted. While the Trump administration hasn’t stated why it demoted him from the role of FERC chair, Chatterjee has speculated to news outlets that his decision to issue a policy statement on carbon pricing might have been one of the reasons.
“I knew it would be controversial for some; I knew it might put me in a vulnerable position professionally, but I also knew it was the right thing to do,” Chatterjee said of the carbon-pricing decision in last week’s FERC meeting. “Although it may have cost me the gavel, I stand by my actions. Some might prefer to ignore the pressing questions of the day, but I thought we had to face them head-on.”