Capacity Market Energy Efficiency FERC Litigation PJM Planning

FERC’s Power Grab

April 21, 2020

A coalition of environmental groups is suing the Federal Energy Regulatory Commission (FERC) in court to reverse FERC’s disastrous 2019 decision undermining state clean energy programs. On April 16th FERC issued a series of orders mostly upholding last December’s infamous “minimum offer price rule” decision. But in some important ways, FERC’s latest decision makes the MOPR worse, undercutting the congressionally established authority of states to craft their own electricity policies. This rule threatens to reshape the politics of the entire electricity sector in ways that protect old, polluting power plants and undercut our transition to a carbon-free energy system.

This federal overreach violates the law, and that’s why we are suing to stop it.

First off, what is this odd duck called the MOPR? The MOPR concerns so-called “capacity markets,” which are used to make sure the power grid has enough electricity at all times. With the MOPR, FERC has ordered that electricity suppliers supported by state or local governments raise their prices to a level set by FERC’s rules. So much for a free market. For nearly all new resources (everything except some gas-powered plants and maybe utility scale solar), the price is set so high that the resource is forced out of the market. The capacity market is how grid operators plan for the future, so the MOPR forces them to pretend state-supported clean energy resources don’t exist and instead buy needless capacity from fossil-fuel fired plants.

But, there’s a more insidious side.  When they’re first built, resources can avoid the MOPR if they commit to never accepting a subsidy. If a resource makes that commitment but then later takes a subsidy anyway, it is banned from the capacity market for the remainder of its economic life. The financial impact this would have on a power plant is so devastating that industry insiders have come to call it the ‘death penalty’. Newly built gas plants are eager to join the market, so many will make this commitment, leaving them ineligible to take any action that would trigger the MOPR lest they incur the death penalty.

MOPR supporters say it is trying to protect market participants from competing against others who get subsidies, but no market forces consumers to buy things they don’t want.  This is government price support for a favored industry, pure and simple.

In its rehearing decision last week, FERC largely upheld its December decision, but also expanded it in some important ways.

The definition of “Subsidy” is incredibly broad

Much criticism of last year’s MOPR order pointed out that FERC’s definition of subsidy was extremely broad, and included many things that we don’t ordinarily think of as subsidies. The definition is a long twisty sentence, even by legal standards:[a] direct or indirect payment, concession, rebate, subsidy, non-bypassable consumer charge, or other financial benefit that is (1) a result of any action, mandated process, or sponsored process of a state government, a political subdivision or agency of a state, or an electric cooperative formed pursuant to state law, and that (2) is derived from or connected to the procurement of (a) electricity or electric generation capacity sold at wholesale in interstate commerce, or (b) an attribute of the generation process for electricity or electric generation capacity sold at wholesale in interstate commerce, or (3) will support the construction, development, or operation of a new or existing capacity resource, or (4) could have the effect of allowing a resource to clear in any PJM capacity auction.

In the rehearing orders, FERC stood by that definition, and clarified that all the “or”s mean that as long as condition (1) is met, any of conditions (2), (3), or (4) would make something count as a subsidy. Just to see where that leaves us, let’s parse out one path that counts as a subsidy:

A direct or indirect payment that is a result of any action of a subdivision or agency of a state that will support the operation of a capacity resource.

That seems to include any purchase of electricity by any government entity other than Federal. Once a government purchases power – for example, a town operating street lights — the MOPR is triggered. The most direct consequence of this is to erect a barrier to governments contracting for clean energy: from now on, most renewable resources built in PJM will be forced out of the capacity market forever as soon as they sell any power to any government agency. The only exception might possibly be utility scale solar, which could be cheap enough to stay in the market if MOPR’ed.

So, direct contracts are out. But what about “indirect payments”? Municipal purchases of RECs seem to be out (FERC lumps together “state-mandated” and “state-sponsored” REC procurements). Carry this further through: when a consumer pays its power bill, some the money flows to power plants. Does that count as an indirect payment? If so, it would mean that as soon as your town library pays its electric bill, some large group of power plants are receiving an indirect payment from a government entity. Under that reading, every power plant in PJM will be subject to a MOPR price floor in short order. That reading seems silly, but FERC’s claim that all government activity is a subsidy seems to demand it. Central planning, but written for the natural gas industry.

In any event, one thing we know for sure: the MOPR doesn’t only target state clean energy policy, it aims to block cities and states from purchasing clean power for their own use as well.

In many states, basic electricity service triggers the MOPR

Many PJM states have competitive supply, but also offer default service. If as a consumer, you do nothing to choose an electricity supplier, you end up with default service through the incumbent utility. In a surprise, the rehearing orders clarified that this default service—or at least the procurement process behind it—counts as a state subsidy.

This is huge. A large portion of residents of New Jersey, Pennsylvania, Ohio, Maryland, and Washington, D.C. take some flavor of default service. Most new renewables will now have to choose between providing energy to those people or being in the capacity market, but never both. Ironically, the same states that are committing to building large renewable fleets are now being told they will face penalties for using those renewables to supply their own population. This rule also means that some nuclear plants and new gas plants that made the “no subsidy pledge” will left ineligible to provide basic electric service. Strange times.

Public Power is in FERC’s sights

The orders almost go out of their way to single out public power. About 1/7th of the people in the U.S. get their electricity from non-profit public utilities like municipal utilities or electric co-ops. Remarkably, Thursday’s orders affirm that since public power is chartered by state governments, any action by a public power utility counts as a state subsidy. Anything. Even the standard power purchase agreements that all utilities use to buy their power will trigger the MOPR if executed by a public utility.

This has the expected result of making it harder for renewables to sell to public power, but seems to go further and leaves public power at a permanent disadvantage compared to private-sector utilities. Since any transaction with a public utility places a power plant under the MOPR, many power plants may be reluctant to enter these transactions. In particular, a power plant that claimed it was unsubsidized when first built would end up banned from PJM’s capacity market if it ever sells power to a muni or co-op. For decades, public power has managed to offer its members lower rates than for-profit utilities; this order seems set to end that and create real challenges to the financial viability of the public power model.

But, in case you were worried, rest easy.  Otherwise uncompetitive old coal plants can still sell their power freely.

Is Energy Efficiency next?

FERC also took a shot at energy efficiency, saying that “under PJM’s current rules, energy efficiency resources permanently reduce demand for electricity. Decreased demand resulting from a State Subsidy will suppress prices just as a State Subsidy to supply will suppress prices.” Following that logic, are we going to see FERC start to “protect” fossil fuels by forcing ratepayers to purchase power for the load that is reduced by energy efficiency programs?

Ominously, FERC suggests the answer may be yes, stating in Thursday’s order that “The Commission is concerned that there may be a point where energy efficiency is unable to supply capacity when needed to maintain system reliability. However, that issue can be pursued in a separate proceeding.” Look for FERC to target EE in a future proceeding possibly by mis-applying performance standards used for dispatchable generators to EE.

As a package, these clarifications show that FERC is going beyond just trying to suppress clean energy policies. The restrictions the MOPR places on cities, states and public power sharply reduce their role in the electricity space altogether. The “cooperative federalism” behind U.S. power sector regulation has always been an uneasy tension, but it’s one that needs to be respected. FERC has committed to a path to collapse that system in favor of nearly complete federal control. If the order stands, states committed to a clean future will have little choice but to leave federally regulated power markets and pursue their own solutions.

Luckily, we are confident the courts will curtail FERC’s abuse of its authority. We agree with legal scholars that the order is fatally flawed in several ways. Most glaringly, it’s a direct attempt by FERC to go beyond the limits Congress has set on its jurisdiction. The courts have made very clear that agencies cannot try to take power Congress has reserved for others, and are unimpressed when they try clever tricks to get around the law. Beyond that, the order manages to be both unjust and unreasonable, the two criteria for overturning an agency decision. On the one hand, in writing the MOPR so carefully to target some resources but not others, FERC has created a web of arbitrary distinctions that make the rule discriminatory and unjust. On the other hand, the MOPR forces the engineers who plan the power grid to make decisions based on a fictional world where state-supported resources don’t exist. Telling ratepayers that they have to spend real money on power plants to meet an imaginary need is about as clear a case of unreasonable rates as you could hope to find.