Op-Ed: Will FERC uphold state support for clean energy?

Source: By Danny Cullenward and Shelly Welton, Utility Dive • Posted: Tuesday, June 5, 2018

The energy law community is abuzz with the news that the Federal Energy Regulatory Commission (FERC) weighed in on a high-profile case challenging a state-level support program for nuclear generators. In a May 29 amicus brief joined by the U.S. Government, FERC argues that the Seventh Circuit should not resort to the “extraordinary and blunt” remedy of preempting Illinois’ nuclear subsidy program.

Some are now celebrating the brief’s apparent defense of state environmental policies, but that reaction is premature. Rather than defend state programs, FERC has asked the court to let it decide what’s right. If the Commission follows its recent practice in approving capacity market reforms that shift costs to generators that receive state environmental policy support, that could spell bad news for state-supported clean energy.

The case at hand, Village of Old Mill Creek v. Star, concerns a challenge to Illinois’ zero-energy credit (ZEC) program. Under state law, utilities in Illinois must buy ZECs from qualified nuclear power plants, which receive extra revenue from ZEC sales that is necessary to keep these clean energy generators in business. Energy law experts are watching this case — and a companion case challenging a similar program in New York — for clues to the evolving landscape of state and federal authority.

Critical for nuclear and renewable energy

The outcome is critical for nuclear and renewable energy alike. New Jersey recently implemented its own ZEC program, bringing a third state into the mix; and some 29 states and the District of Columbia have Renewable Portfolio Standards, which require utilities to buy renewable energy certificates (RECs) from renewable generators. If the courts preempt or otherwise restrict states’ ability to regulate environmental attributes from power production, this would constitute a transformative shift in the balance between state and federal authority.

On this point, there is some unambiguously good news in FERC’s brief. First of all, the Commission calls on the courts not to preempt ZEC policies, appropriately reading a recent Supreme Court case, Hughes v. Talen Energy Marketing, as narrowly prohibiting only those state policies that directly interfere with federal energy market operations. (One of us — Welton — signed an energy law professors’ amicus brief that made a similar argument.)

In addition, FERC approvingly cites a 2012 Commission decision called WSPP Inc. in which FERC declared that so-called unbundled RECs — that is, renewable credits sold separately from wholesale electricity — are outside the Commission’s authority and therefore are not preempted by federal law.

But it would be a mistake to rely on these important statements as the final word on FERC’s approach to state clean energy policy. For one thing, FERC’s WSPP Inc. decision remains subject to re-interpretation — including, potentially, in the ZEC-related matters currently before the Commission. More noteworthy, however, is the actual request FERC makes of the court, and the troubling precedent it draws on to support it.

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Agency deference

To be clear, FERC did not indicate its support for state-level environmental policies. Rather, FERC asked the Seventh Circuit to let it decide whether or not state policy support results in “just and reasonable” rates in the wholesale energy markets FERC regulates. And the Commission explicitly indicated that if it concluded that ZECs cause wholesale market rates to be “unjust and unreasonable,” then FERC would have the authority to remedy the situation under the Federal Power Act.

As a reading of its statutory power, that position is sound. Moreover, there are plenty of good reasons to let expert agencies like FERC resolves technically complex issues, such as the economic interaction between state clean energy policies and federal wholesale energy markets.

Nevertheless, FERC’s recent willingness to approve regional market reforms that punish state-supported clean energy gives serious reason to be concerned about the direction it may take in responding to ZECs. In short, FERC seems to be misreading its “just and reasonable” authority to allow markets to prioritize providing profits to fossil fuel generators, at the expense of consumers and state clean energy preferences.

After declaring FERC as the proper venue for the dispute over nuclear subsidies, the Commission cites two recent capacity market proposals that address the same tension over state policies and federal markets. In its recent ISO New England Inc. Order, FERC approved a capacity market design that forces state-subsidized resources to compensate retiring legacy generators in order to receive capacity market compensation.

FERC is now reviewing a similar proposal from the mid-Atlantic PJM market operator, which offered the Commission two options: first, a “Capacity Repricing” proposal that aims to increase market prices to prop up fossil generators, and second, a “minimum offer price rule” (or MOPR) that punishes state-supported resources. Remarkably, most of the PJM states oppose the market operator’s two proposals, on which FERC is expected to decide soon. (FERC had previously imposed a MOPR in its ISO New England Order, as well, which has caused some clean energy advocates to express serious concern.)

Balancing state and federal interests

So what should the energy community make of all of these details?

It’s great news that FERC has asked the federal courts not to preempt state clean energy policy. That’s the right approach to balancing state and federal interests on today’s fast-evolving grid. And there is a solid argument for letting expert agencies, like FERC, manage the technically complex balancing of economic outcomes when multiple policy systems interact.

But FERC has also made clear in its recent actions — which the Commission cites explicitly in its amicus brief — that it can and will make life difficult for state-supported clean energy resources, at least when regional market operators demand those changes. That’s a very bad sign for states that support nuclear or renewable energy yet participate in regional energy markets.

Time will tell what FERC decides. FERC has the means to ease tensions between state clean energy policies and effective wholesale market designs. The open question now is whether it will seek to create robust markets for clean energy or use its statutory authority to promote fossil generators. Here’s hoping the Commission lets states retain their historical right to choose their own mix of generating resources without federal interference and finds ways to build smart markets around those preferences.

Danny Cullenward is a Research Associate with Near Zero and Carnegie Science. He also teaches energy and climate law at Stanford Law School. Shelley Welton is an Assistant Professor at the University of South Carolina, where she teaches energy, climate and environmental law.



• April 13, 2018

Dive Brief:

  • New Jersey lawmakers on Thursday passed major pieces of energy legislation that would establish a 50% renewable energy standard by 2030, provide support for uneconomic nuclear plants and set new energy storage targets for the state.
  • Gov. Phil Murphy (D) is expected to sign the bills, which would set a 2 GW storage target by 2030 and establish a retail surcharge to support the state’s nuclear fleet. Analysts warn, however, that he could issue a conditional veto on parts of legislation, which would require a two-thirds vote in both chambers to override.
  • The bills’ passage after the PJM Interconnection, the regional electricity market that serves New Jersey, submitted two capacity market reform proposals to federal regulators that seek to mitigate the impact of nuclear subsidies like those in the bill. The Federal Energy Regulatory Commission is currently reviewing the proposals.

Dive Insight:

If Gov. Murphy signs the New Jersey legislation it would become the third state to enact cost supports for nuclear generators at risk of retirement. New York and Illinois also have Zero Emission Credit (ZEC) programs that aim to compensate the plants for their carbon-free power.

The existing ZEC programs are the subject of federal court challenges, with gas generators in both states arguing they infringe on FERC’s authority to regulate wholesale power market prices. Analysts say a similar challenge is likely to the New Jersey bill if it is signed, but the measure contains one key difference to the existing ZEC programs.

“New Jersey’s proposal does not mention wholesale market prices at all,” ClearView Energy Partners wrote in a note its clients. “Instead, the bill provides the New Jersey BPU authority to reduce the $0.004/kWh retail charge in subsequent eligibility periods if the board determines that a reduced charge will ‘nonetheless be sufficient to achieve the State’s air quality and other environmental objectives by preventing the retirement of the nuclear power plants.'”

That change could give the New Jersey program firmer legal footing than the existing ZEC programs, which have already been viewed favorably by federal district courts in recent decisions. The impact on wholesale market prices, however, is less clear.

Earlier this month, PJM filed two competing proposals to reform its capacity market at FERC — a two-part capacity auction and an extension to minimum offer price rules (MOPR). Both plans seek to diminish the impact of electricity subsidies — like ZEC programs — on wholesale market prices, which PJM worries are being artificially depressed by the policies.

Those proposals explicitly mentioned ZEC programs as policies that would be affected by the capacity reform proposals. PJM has asked FERC to choose one of the policy options or recommend no action by June 29.

Multiple media outlets report that Gov. Murphy is likely to sign the bill, though ClearView warns he could issue a conditional veto. Business and consumer groups in the state oppose the bill, the analysts note, “which could encourage the governor to seek revisions that lower the program’s total cost, potentially be reducing the $0.004/kWh retail charged imposed on customers to pay for the program.”

If Murphy does sign the nuclear bill, legal challenges are expected immediately. In a Thursday statement, the Electric Power Supply Association, a trade group for generators, said the bill would raise prices for New Jersey consumers and pressed FERC to act.

“Should it become law, a bailout of New Jersey’s profitable nuclear power plants would undermine competition in the broader PJM markets and thus unfairly harm competitors who depend on those markets,” EPSA CEO John Shelk said. “A New Jersey nuclear bailout makes it more urgent than ever for the Federal Energy Regulatory Commission to swiftly implement effective countermeasures to protect the integrity of PJM’s energy and capacity markets.”