Federal Energy Regulatory Commission (“FERC”) members on June 19, 2018, affirmed their commitment to regional energy market stability. Their remarks came in response to a leaked Trump administration draft plan and President Trump’s own June 1, 2018 public statement that Secretary of Energy Rick Perry “take immediate steps” to prevent coal and nuclear plant closures.
Such a directive could mean a policy of requiring regional grid operators to buy electricity from selected coal and nuclear plants, which, in turn, could undermine the current power markets developed with FERC assistance over recent decades. “Avoidance of any significant distortion in organized markets would very much be a concern of ours that we would keep an eye on as we proceeded with the rate matter,” said FERC Chairman Kevin McIntyre in response to a leaked draft plan from the White House. “I don’t see any reason why any of that should interfere with our ongoing consideration of the grid resilience issues and the very good input we’ve gotten on those issues.”
The directive of the leaked draft plan relies on novel statutory authorities, Section 202(c) of the Federal Power Act and the Defense Production Act of 1950, with the aim of guaranteeing financial returns for all produced energy from select coal and nuclear plants for two years. If the Department of Energy were to use Section 202(c) or the Defense Production Act of 1950 to keep specific power facilities open and force grid operators to buy power from such facilities, neither the profitability of such power facilities nor the greenhouse gas emissions would be a consideration in the selection these plants, according to the draft plan. The main thrust of basing such action on Section 202(c) is that the Department of Energy would claim the authority to order specific power facilities to remain open during times of crisis. Historically, “times of crisis” has meant events such as hurricanes or war. The Defense Production Act of 1950 allows the federal government to intervene in private industry in the name of national security. While President Trump made commitments to revive coal during his campaign, data recorded by the Sierra Club indicates over 25 coal factories have closed during his presidency, likely heightening the administration’s sense of urgency to intervene.
President Trump furthered speculation about a potential energy market intervention when he made mention of Section 202(c) of the Federal Power Act during an April 2018 rally in West Virginia. Meanwhile, Secretary Perry told members of the House of Representatives that he was considering utilizing the Defense Production Act of 1950 to issue subsidies to struggling power plants.
Citing national security concerns as the justification for the policy pivot (and indicating the Defense Production Act of 1950 as a basis for such policy), the draft plan suggests that coal and nuclear power plants can serve as fallback energy sources in case of cyberattacks on natural-gas pipelines. The administration has referred to coal and nuclear power plants as “fuel-secure” because they can house their fuel supplies on-location, rather than relying on pipelines for distribution like natural gas plants. This follows on the heels of a 2017 Department of Energy grid study which found that there were not reliability problems caused by renewables. However, the study also found that coal and nuclear plants were being “disadvantaged” and that closure of such “baseload” generators could lead to reliability challenges in the future, namely in a lack of fall-back energy sources in the case of a cyberattack.
FERC Commissioners have declined to comment on the assessment that the nation’s power supplies are at risk. During a Senate Committee on Energy and Natural Resources hearing, when asked if they could answer “yes” to whether a national security emergency could exist due to current power plant retirement trends, all five commissioners remained silent. FERC Commissioner Ron Powelson, a Trump appointee, noted that energy sector bankruptcies happen with some degree of regularity without resulting in loss of service or widespread blackouts. Powelson pointed to the reorganizations of Texas-based Energy Future Holdings as a recent example where a significant regional energy supplier declared bankruptcy yet there was no loss of service to the region served.
FERC members have indicated that, under the guise of national security, the proposed subsidies may be within the powers of the Executive. In response to questions about whether the Department of Energy has the authority to make declarations of emergency, Chairman McIntyre replied, “Under the roles assigned to the Secretary [of Energy] by Congress, it is up to the Secretary to determine if the conditions exist” to justify a market intervention on national security grounds.” Furthermore, McIntyre posited that Section 202(c) subsidies could
occur without involvement from the FERC. “Under the law as it’s written and the regulations of the DOE, I think that there are different scenarios that could develop that would not involve a rate proceeding before the FERC,” McIntyre said. These statements conflict with other remarks made by McIntyre indicating that a compulsory subsidy policy for coal and nuclear plants could involve a FERC rate case; thus, it remains an open question, likely to be based on the justification used in the administration’s intervention, of what control, if any, FERC will have over the implementation of the policy.
Energy market stakeholders signaled concern that a shift in policy from the Department of Energy could result in significant price increases for energy users. Commissioner Richard Glick testified before the Senate that a market intervention would “clearly” result in utility rate increases. Former FERC Chairman John Wellinghoff also predicted that proposed subsidies for coal and nuclear power plants could have the effect of depressing prices for the rest of the power market. Forbes has estimated such changes could result in $8 billion in consumer utility increases. This potential effect may cause financial strain to other generators.
Critics of the draft plan suggested that any Department of Energy action utilizing either Section 202(c) or the Defense Production Act of 1950 would be accompanied by a multitude of suits in federal court. While courts have typically been highly deferential to the executive branch on issues of national security, it is noteworthy that in 1973, the D.C. Circuit court held that Section 202(c) of the Federal Power Act “is aimed at situations in which demand for electricity exceeds supply, and not at those in which supply is adequate but a means of fueling its production is in disfavor.”
It is yet to be seen how the Department of Energy will go about meeting Trump’s directive. Secretary Perry has acknowledged that he has considered using Section 202(c), but said it “may not be the way that we decide that is the most appropriate, the most efficient, way to address this.”
“My responsibility is to make sure that when the demand is there for this country,” Perry continued, “whether it’s an economic demand, whether it’s a personal demand or whether it’s a national security demand, that when that event occurs, we have the power.”
The administration’s leaked draft plan is not their first attempt to initiate subsidies for coal and nuclear plants. In September 2017, Secretary Perry requested FERC consider guaranteeing subsidies for any power plant that could stockpile 90 days’ worth of fuel on-location. FERC unanimously rejected this request, noting that the nation’s grid had plenty of spare electric capacity on hand, even with the loss of coal and nuclear units in recent years. Critics asserted that the threshold of 90-day stockpiles of energy were intended to revive energy plants in spite of a diminishing market, since natural gas, wind, and solar plants cannot stockpile such reserves.
In response to the 2017 request, FERC launched its own process to define grid resiliency “because affordable and reliable electricity is vital to the country’s economic and national security.” The May 31, 2018 leaked draft plan from the White House arrived during FERC’s incorporation of public comments into its efforts to define grid resiliency.
It remains an open question whether the Department of Energy will intervene in energy markets to revive struggling coal and nuclear power plants. What is more certain is the administration is serious about their commitment to the coal and nuclear energy sectors and may make unprecedented efforts to demonstrate that commitment. If the administration follows through with the policies of the draft plan, it may not be a question of “if” an executive energy market intervention occurs, but “how” such an intervention will take place and how FERC will respond to such intervention. Even with market interventions looming, FERC members remain publicly steadfast in their commitment to energy market reliability and stability. What remains to be seen is whether the administration’s goals and the FERC members’ commitments can co-exist.