On January 8, 2018, the Federal Energy Regulatory Commission (FERC or Commission) terminated the proceeding it had initiated in late 2017 to address the Proposed Rule on Grid Reliability and Resilience Pricing (Proposed Rule) submitted to FERC by the Secretary of Energy. FERC determined that the Proposed Rule failed to satisfy the requirements of section 206 of the Federal Power Act. FERC concurrently initiated a new proceeding to evaluate the resilience of the bulk power system in regions operated by FERC-regulated independent system operators (ISOs) and regional transmission organizations (RTOs).
The Proposed Rule, available here, if adopted, would have directed ISOs and RTOs to ensure, through their FERC-approved tariffs, that “eligible grid reliability and resiliency resources” be “fully compensated for the benefits and services [they provide] including reliability, resiliency, and on-site fuel assurance . . . and a fair return on equity.” To qualify as an eligible grid reliability and resiliency resource, the Proposed Rule would have required that an electric generator meet the following criteria:
- Be physically located within a FERC-approved RTO/ISO;
- Be able to provide essential energy and ancillary reliability services (e.g., voltage support, frequency services, operating reserves, and reactive power);
- Have a 90-day fuel supply on-site enabling operation during emergencies, extreme weather, or disasters;
- Maintain compliance with all applicable federal, state, and local environmental requirements; and
- Not be subject to cost-of-service rate regulation by any state or local authority.
The Secretary of Energy initially directed FERC to take final action on the Proposed Rule by December 11, 2017. However, considering the voluminous record (including over 1,500 submissions), as well as the addition of two new members to the Commission following the close of the official comment period, FERC Chairman Kevin McIntyre requested, and the Secretary of Energy agreed to, a 30-day extension.
FERC Rejects the Proposed Rule
In yesterday's order, FERC noted the importance of grid resilience, but the Commissioners voted unanimously to terminate the pending proceeding on the Proposed Rule due to its failure to satisfy the “clear and fundamental legal requirements under section 206 of the [Federal Power Act].” The Commission explained that neither the Proposed Rule nor the record established in the proceeding satisfied section 206, which requires FERC to find that existing tariffs are unjust, unreasonable, unduly discriminatory or preferential and that the proposed remedy (i.e. the Proposed Rule’s compensation mechanism for certain resources) is just, reasonable, and not unduly discriminatory or preferential before FERC may order a change to those tariffs.
FERC Initiates a New Proceeding to Address Resilience
Concurrent with terminating its consideration of the Proposed Rule, FERC initiated a new proceeding to evaluate resilience issues in RTOs/ISOs and determine whether further action is warranted. Unlike the Proposed Rule, which focused on a resource’s availability of secure on-site fuel, the new proceeding will encompass a broad range of topics impacting resilience. For instance, FERC expects to consider activities such as wholesale market design, transmission planning, mandatory reliability standards, emergency action plan development, inventory management, and routine system maintenance.
Within this broader scope, the Commission established three specific goals for its new proceeding. First, the proceeding will seek to develop a common understanding of resilience. As a starting point in this process, the Commission offered the following initial definition of resilience: “the ability to withstand and reduce the magnitude and/or duration of disruptive events, which includes the capability to anticipate, absorb, adapt to, and/or rapidly recover from such an event.”
Second, FERC intends to develop an understanding of how each RTO/ISO assesses and addresses resilience in its footprint. To this end, the Commission has requested a broad range of information from the RTOs/ISOs regarding identification of threats to resilience, including but not limited to: identification, and methodology for identification, of primary risks to resilience including low-frequency, high-impact risks; information on how the impact and likelihood of resilience-related risks are evaluated; identification of any existing or planned studies and their scope and findings regarding resilience; information on coordination with relevant stakeholders to identify resilience-related threats; and obstacles to assessing such threats. The Commission also directed each RTO/ISO to submit information describing how it mitigates risks to resilience, such as describing how any relevant operational policies, procedures, or market-based mechanisms address resilience-related threats and whether any such processes could be improved.
Third, based on its analysis of the information submitted in response to the topics identified above, the Commission will evaluate whether further action regarding resilience is appropriate.
Three of the Commission’s five members submitted written concurrences explaining their reasons for supporting the unanimous order.
In his concurrence, Commissioner Chatterjee clarified his view that the immediate order is only a “first step.” Further, he argued that enough evidence had been presented to issue an order pursuant to section 206 requiring each RTO/ISO to either (1) submit tariff revisions to provide interim compensation for existing generation resources that may provide necessary resilience related attributes and are at risk of retirement, or (2) show cause why it should not be required to do so.
Commissioners LaFleur and Glick emphasized the view that the Proposed Rule was fundamentally flawed. LaFleur voiced her “serious concerns” with the Proposed Rule's out-of-market payment mechanism and noted that, if warranted, FERC should take a fuel-neutral, transparent approach to the issue of resilience. Commissioner Glick stated that the Proposed Rule had “little, if anything, to do with resilience.” Rather, he argued, it was designed as a “bailout targeted at coal and nuclear generating facilities.” Commissioner Glick also emphasized the need to focus on the threat to the bulk power system posed by challenges to the transmission and distribution systems, rather than focusing solely on generation resources.
Implications and Next Steps
FERC’s order effectively ends the Secretary of Energy’s initiative to provide immediate economic support to coal and nuclear facilities in the form of a guaranteed cost recovery and a “fair rate of return.” The Proposed Rule was widely opposed by representatives of numerous industry segments, including solar, wind, and natural gas-fired generation, who argued that it would distort markets, among other things. Instead, FERC will take a more comprehensive approach to assessing resilience-related risks, and the order leaves open the issue of whether additional Commission action is warranted.
The order directs RTOs and ISOs to file responses to the information requests discussed above by Friday, March 9, and third parties will have until Monday, April 9, to submit responsive comments, after which FERC will decide whether further action is necessary.
FERC’s order and the concurring opinions of Commissioners LaFleur, Glick, and Chatterjee are available here.