Electricity Markets

DOE proposal ‘fits comfortably’ within FERC reliability efforts: Chatterjee

A Department of Energy proposal that would require organized wholesale power markets to develop and implement market rules ensuring cost recovery for “fuel-secure” generation resources necessary to maintain the reliability and resiliency of the U.S. bulk power system “fits comfortably” within the Federal Energy Regulatory Commission’s reliability efforts, said FERC Chairman Neil Chatterjee.

At the same time, Chatterjee on Oct. 17 noted that the DOE proposal “has caused some to raise concerns regarding the independence of the commission.”

He made it clear that he remains “committed to upholding the commission’s independence on this and the many other issues that may come before us. That’s a sentiment that I’m sure my colleagues would firmly agree with.”

Chatterjee made his comments at the Energy Bar Association’s mid-year energy forum in Washington, D.C., where he spoke about a wide range of topics including grid reliability.

In a Sept. 28 letter to FERC, Perry said that pursuant to section 403 of the Department of Energy Organization Act, he was sending to FERC a rulemaking proposal for consideration and final action by FERC.

The Department of Energy is focused on the need to preserve “fuel-secure” generation as a way in which to guard against threats to the reliability and resiliency of the power grid and it therefore wants to allow for the recovery of costs of those units.

“Reliability is and will continue to be our foremost priority,” Chatterjee said in detailing FERC’s role when it comes to maintaining a reliable grid.

He noted that FERC “facilitates the creation of market structures, incenting reliability-related investment, monitors and enforces grid reliability within those markets and provides oversight of NERC’s reliability standard setting activities.” NERC refers to the North American Electric Reliability Corporation.

“In my view, the DOE NOPR fits comfortably within those efforts,” Chatterjee told the audience of energy attorneys.

“I believe there’s real value in Secretary Perry initiating a conversation regarding whether FERC-jurisdictional organized markets adequately compensate certain generators for their contribution to the reliability and resilience of the nation’s grid,” he said.

“This is entirely consistent with FERC’s historical efforts to ensure that organized markets provide necessary compensation for reliability-related services including, but not limited to, Order 755 providing compensation for frequency regulation in organized wholesale markets, and orders providing for the approval and refinement of capacity markets in certain RTOs and ISOs,” Chatterjee went on to say.

The DOE NOPR “contemplates and builds on FERC’s existing regulatory initiatives on price formation,” he said. “It’s a conversation that I believe we need to have. We must ensure that we don’t find ourselves coming to regret not having asked hard questions like these amongst all the changes in the energy industry.”

As for the independence of FERC, Chatterjee noted that the 1977 Department of Energy Organization Act established FERC as an independent regulatory commission.

“Over the last four decades, my predecessors in this position and my fellow commissioners have zealously guarded that independence,” he said. “That’s not going to change so long as I and my colleagues sit on the commission.”

Chatterjee’s priorities

Noting that this was his first speech before the EBA, Chatterjee said he “wanted to use this occasion to share what I envision as my priorities for the commission’s activities during my time here.”

He discussed several areas where he believes the Commission can “continue to build and improve” on progress made by FERC through the years:

  • Streamlining project review processes to improve review timelines;
  • Better aligning electric transmission investment incentives with need;
  • Maintaining grid reliability and resilience “in a period of rapid change;”
  • Bolstering defenses related to “ever-evolving” cyber threats;
  • Evaluating de novo review of enforcement actions; and
  • Public Utility Regulatory Policies Act of 1978 reform.

Project review timelines

“One of the biggest complaints that I hear from stakeholders is that it takes too long to review applications for natural gas and hydro power projects,” Chatterjee noted.

“That’s not to say that the commission doesn’t have success stories,” he went on to say. Chatterjee noted that since the quorum was recently restored at FERC, “my colleagues and I have voted on around 5 Bcf per day of new natural gas pipeline capacity, the most recent examples being the approval of the Atlantic Coast and Mountain Valley pipeline projects just last week.”

At the same time, he said that FERC’s review process “continues to get longer and longer due in large part to increased participation in the process by stakeholders including numerous legal challenges.”

Chatterjee said that the regulatory uncertainty “created by burdensome delays in the project review process are problematic for numerous reasons, for those on both sides of the issue.”

What does he mean by this? “Delays discourage investment in projects. It’s a question fundamentally of opportunity costs. If I were a financial investor or a project sponsor I’d want predictable cash flows and return and would be reluctant to put my money toward a project for which there’s no predictable length of time for the regulatory review process,” he remarked.

Also, “if FERC believes my project is a non-starter, I’d prefer to learn that sooner rather than later so I can invest elsewhere.”

At the same time, delays also harm the community in areas surrounding a project, he said. Chatterjee noted that when one looks at FERC dockets related to hydropower licensing and natural gas pipeline proceedings, there are both adverse and supporting comments “from concerned citizens in communities near a project.”

He said, “FERC owes both sides an opportunity to articulate their position, to have it reviewed thoughtfully by the Commission and ultimately to receive a timely up or down decision.”

Delays can also “cause broad-based harm to end users and consumers. Delays can have direct impacts hitting consumers in the pocketbook by way of higher monthly electrical or natural gas bills. They can also result in indirect impacts to consumers. When delays increase the price industry pays for energy, the cost of goods and services throughout the economy inevitably increase,” he said.

Chatterjee emphasized that FERC is not the primary source of these delays. “No matter how diligent FERC staff is, there are many areas of the project review process that we simply have little control over,” he said.

“Ultimately, I would like to see FERC significantly reduce its review timelines for major natural gas pipeline certificates and other projects,” he said.

Electric transmission

Meanwhile, Chatterjee said that “I don’t think anyone would dispute the fact that we need significantly more and upgraded electric transmission capacity throughout the country to meet diverse end user needs and energy policy objectives.”

That is why he believes that it is “critical for FERC to ensure that there are policies in place that adequately incent investment in transmission infrastructure.”

Changes in the generation mix also require changes in the transmission system, Chatterjee said. “Gas displacement of baseload generation assets in PJM and other parts of the country require new transmission assets to bring that energy to market,” he continued. “Ambitious renewable portfolio standards in New York, California and elsewhere demand new or upgraded transmission infrastructure to link distant renewable generation assets with industrial consumers in major population centers.”

He noted that transmission infrastructure can go a long way in helping to address concerns regarding the reliability and resilience of the nation’s grid. “The challenge facing my fellow commissioners and I is determining how to create a regulatory ecosystem that promotes development of new or upgraded transmission infrastructure while also protecting consumers.”

FERC “has grappled with this issue for some time, with Order 1000 representing the most notable example of these efforts,” Chatterjee said. In its landmark Order 1000, which was issued in 2011, FERC reformed its transmission planning and cost allocation requirements.

From Chatterjee’s vantage point, “the most critical near-term piece of the transmission investment puzzle is ensuring that the right financial incentives are in place to attract the investment capital for new infrastructure” satisfying the policy goals outlined by the FERC chairman.

“In concrete terms, this means that the commission must address the question of what represents a just and reasonable return on equity for transmission projects” in the wake of a decision issued by the U.S. Court of Appeals for the District of Columbia Circuit earlier this year (Emera Maine (formerly known as Bangor Hydro-Electric Company), et al., v. FERC).

“This is a difficult question and my colleagues and I continue to evaluate the path forward, but it also means casting a wider net than just our response to a single D.C. Circuit decision,” he went on to say.

For example, he believes the commission should take a hard look at Order 679 and the commission’s transmission incentives policy statement “to consider innovative ways in which we can apply the principles animating those documents to better promote transmission development.”

In its Emera Maine ruling, the appeals court vacated orders issued by FERC in 2014 and 2015 that established base return on equity rates for New England transmission owners, saying that FERC did not comply with Federal Power Act requirements for modifying rates and that the agency "failed to provide any reasoned basis" for specifically choosing 10.57 percent as the new base return on equity.

Enforcement

Turning to enforcement issues, he noted that the Energy Policy Act of 2005 gave FERC broad new enforcement authority to combat abuse in electricity markets.

“I believe that FERC’s enforcement responsibilities are a critical part of our mission and that electricity markets work best when investors, operators and the public have confidence that everyone is playing by the rules,” he said.

But he noted that this enforcement authority has not come without some controversy. “One of the main points of contention has been over the scope of de novo review under the Federal Power Act,” he said, referring to legal disputes over the level of scrutiny that federal courts must apply in reviewing FERC penalty orders.

The courts have rejected FERC’s interpretation of de novo review five times under the FPA, Chatterjee told the conference. “The courts have spoken, and I, for one, am listening,” he said.

“I believe that the proper scope of de novo review is a matter my colleagues and I need to examine so we can chart a new course that is fair and legally defensible.”

PURPA reform

Chatterjee noted that PURPA reform has been receiving a significant amount of attention both at the Commission and on Capitol Hill.

“The energy landscape that existed when PURPA was conceived was fundamentally different than it is today: solar and wind power were fledgling technologies, there was no open access to wholesale electricity markets and natural gas was in scarce supply,” he said. “As we all know, none of those things are true today, which is why PURPA so often feels like it’s out of sync with our modern energy landscape.”

The FERC chairman said that while the fundamental aspects of PURPA are established by the statute, the Commission has discretion to evaluate how it implements the law within the context of evolving energy markets.

To this end, he believes FERC should continue to examine the record developed in a 2016 technical conference to determine whether changes in existing regulations and policies could better align PURPA implementation with modern realities.

“One particular area where many parties have indicated a need for a different approach is the ‘one-mile rule’ for qualifying facilities. Of course, others may exist too, and we owe it to stakeholders to continue taking a hard look at our regulations to identify those opportunities for improvement.”

A recent House hearing heard from electricity industry stakeholders who discussed PURPA, its current effects on consumers and whether it should be updated by Congress.