Electricity Markets

Association urges FERC to reject DOE proposed rule tied to market changes

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In comments filed on Oct. 23, the American Public Power Association urged the Federal Energy Regulatory Commission to reject a Department of Energy proposed rule that would require organized electricity markets to adopt tariff changes that would ensure full cost recovery for certain “fuel-secure” resources.

The Association said in a news release that while it agrees that the DOE’s proposed rule has raised important questions that the industry should study further, the proposed rule is ambiguous and incomplete in many respects, and unworkable in its current form.

In its comments, the Association asked FERC to terminate the proposed rule docket rather than proceed with what the Association believes is an ill-defined and hastily-promulgated rule (Docket No. RM18-1-000).

The DOE on Sept. 28 directed FERC to issue a final rule that would require organized wholesale power markets to “develop and implement market rules that accurately price generation resources necessary to maintain the reliability and resiliency” of the country’s bulk power system, and specifically describes such rules as establishing electric energy rates that provide for the recovery of costs and a return on equity for certain “eligible reliability and resiliency resources.”

“The DOE’s directive to FERC proposes extreme measures that will impose significant costs on customers without any justification,” said Sue Kelly, president and CEO of the Association. “The RTO-operated markets are not designed to achieve fuel diversity. The markets do need significant reform but the DOE proposal would take us in the wrong direction,” she said.

The public power group said it agrees with the DOE that fuel diversity helps to enhance system reliability and resilience. “As Energy Secretary Rick Perry pointed out, the organized markets operated by RTOs and ISOs are not well suited to address fuel security and diversity. But the proposed rule is not a reasonable approach to address these issues,” the Association said.

In its filing at FERC, the Association details several reasons the rule proposed by the DOE would not work.

The Association said the proposed rule fails to establish that the premature retirement of fuel-secure generation resources presents an immediate reliability threat that must be addressed through a hastily defined rule.

In addition, there is no evidence that the proposed amendments to the FERC regulations would reasonably address the resilience concerns raised by the Secretary of Energy, the Association said.

Also, the proposed rule requires regional transmission organizations and independent system operators to modify their tariffs “without even considering the potential rate impact on consumers, contradicting the Federal Power Act,” the Association said in the news release.

In the filing, the Association said it is axiomatic that application of the just and reasonable standard involves consideration of both consumer and investor interests. “Where, as here, the Commission is asked to balance non-cost factors such as reliability and resiliency against the cost to consumers, it must explain how it evaluated the proposed rule’s anticipated costs and claimed benefits, and how it weighed them to determine that the resulting rates would be just and reasonable,” the Association said in its comments. 

Although the potential cost impacts of the proposed rule are difficult to determine given the uncertainty as to how the NOPR might be implemented, “it likely would be extremely costly under any scenario.  The NOPR, however, does not include any discussion, let alone quantification, of the potential costs of the proposed rule, nor does it attempt to balance such costs against the benefits the NOPR seeks to achieve.”

Moreover, the proposed rule presupposes the need for a very specific class of resources, and then proposes to pay them a cost-of-service rate without any meaningful analysis of whether those resources are actually required for system reliability or resilience, the association said.

It said that overlaying a cost-of-service recovery mechanism for “fuel-secure” resources onto RTO markets could present consumers with a “worst of both worlds” scenario in which they may be forced to pay the higher of generator cost or market price to certain resources in the organized markets – a danger “implicitly recognized” in a FERC Staff Notice. 

“Moreover, depending on how the additional costs associated with ensuring cost recovery for eligible units are allocated, utilities, including public power utilities, that rely primarily on their own resources for capacity and energy could end up paying a portion of the costs of the ‘fuel secure” generation resources under the new RTO tariff provisions proposed in the NOPR, as well as the costs of their own energy and capacity resources,” the public power group said.

Adopting the proposed cost-of-service mechanism for a specific class of resources “would likely have significant collateral impacts on the organized wholesale markets, which could raise costs to consumers and have other undesirable long-term effects,” the Association argued.

“To cite one important concern, the NOPR’s cost-of-service recovery framework could have an adverse impact on bilateral markets because resources that have guaranteed cost-of service recovery through an RTO tariff mechanism will have much less incentive to enter into bilateral contracts,” it said.

If there is truly an imminent threat to reliability posed by the premature retirement of a specific generation resource, all the Commission-approved RTOs potentially impacted by the NOPR have some form of reliability-must-run contract to preserve generation needed for reliability without the need for the broader market intervention proposed by the NOPR, the Association pointed out.

Proposed rule is “impermissibly vague”

The Association went on to argue that the amended regulations included in the proposed rule are incomplete, ambiguous and confusing in numerous respects, and the notice of proposed rulemaking “therefore fails to provide adequate notice of the proposed rules to allow for meaningful review and comment,” as required by the Administrative Procedure Act.

“This lack of clarity also effectively precludes any finding that the proposed regulations would be just and reasonable or the product of reasoned decision-making.”

The Association said that it is not even clear which RTOs and ISOs would be covered by the proposed rule, pointing to ambiguity created by a change in the text of the rule when it was published in the Federal Register. In particular, it is unclear whether the rule is intended to apply to the Midcontinent Independent Transmission System Operator, the association said, urging FERC to exclude the Midcontinent ISO if it proceeds with the NOPR.

Deadlines

The DOE “has imposed impossible deadlines,” directing FERC to act by Dec. 11, the Association went on to say.

As a result, FERC has given interested parties a far shorter comment period than for other significant proposed rules. “The deadlines do not allow sufficient time for vetting and analysis of the proposal by interested parties and FERC itself,” the public power group said in the news release.

Association recommends technical conference

The Association believes that FERC should undertake a process for RTOs and ISOs to evaluate what resource mix would maximize and ensure reliability and resilience, and to identify any current or projected shortfalls in these resources.

In addition, FERC should convene a technical conference to discuss the framework for such an evaluation, the Association said. The conference would address the standards for resiliency, attributes and services needed by the RTOs and ISOs for reliability and resiliency, how current market rules affect these attributes and services, and other relevant topics.

The Association said it agrees with the DOE that the best way to accommodate a diverse mix of fuel resources in the wholesale markets warrants further discussion and analysis by stakeholders.