On September 28, 2017, Secretary of Energy Rick Perry exercised the authority of section 403 of the Department of Energy Organization Act of 1977 to direct FERC to issue a proposed rule on grid resiliency pricing. The Secretary alleged that the premature retirement of traditional baseload generation, like coal and nuclear plants, and distorted price signals in the wholesale power market, which fail to adequately compensate the resiliency of such baseload generation, are threatening the reliability of the nation’s electric grid. The Secretary’s proposed rule requires organized markets to implement market rules that “accurately” price generation resources by allowing full recovery of the costs of certain “eligible units,” which are defined as units that are able to provide energy and ancillary reliability services, and have at least 90-days of on-site fuel storage.
With this directive, the Secretary is taking advantage of a little-used and obscure provision in the Department of Energy Organization Act. Enacted on August 4, 1977, the Act reorganized the energy functions within the federal government and consolidated them under the newly created Department of Energy. The Act also created the Federal Energy Regulatory Commission that we know today, and it inherited many of the responsibilities previously held by the Federal Power Commission.
The drafters of the Act intended for FERC to function autonomously. In the July 26, 1977 House Conference Report No. 95-539 discussing the Act, FERC was described as “a collegial body independent of the Secretary’s control to determine major energy pricing and licensing matters.” However, the drafters did intend for the Secretary of Energy to have some influence over FERC. The same House Conference Report provided that “[b]ecause the role of the Commission in energy regulatory matters will be a large and important one, the Conferees retained provisions . . . designed to assure the Secretary an opportunity to participate actively in the Commission's decision-making process, and to assure expeditious Commission consideration of important regulatory matters.” As such, section 403, now being utilized by Secretary Perry, allows the Secretary of Energy to “propose rules, regulations, and statements of policy of general applicability with respect to any function within the jurisdiction of the Commission . . . .” 42 U.S.C. § 7173(a).
Strikingly, in the past, the Secretary of Energy has only used this power to propose rules to FERC on two occasions. Both dealt with natural gas issues. In 1979, the Department of Energy proposed a rule to encourage and facilitate the granting of applications filed by interstate pipelines requesting authorization to transport natural gas to displace fuel oil. See Transportation Certificates for Natural Gas for the Displacement of Fuel Oil, 46 Fed. Reg. 27355 (May 19, 1981). The Department found that there was a temporary surplus of natural gas deliverability that could be utilized in order to reduce the nation’s reliance on foreign oil and to increase the stocks of middle distillate fuel oils. In response, FERC issued Order No. 30, which established a short-term program authorizing the transportation of natural gas for the displacement of fuel oil.
In 1985, the Secretary proposed a rule to eliminate vintage-based pricing of old gas through the establishment of a uniform ceiling price and to establish incentive prices for certain categories of old gas under the Natural Gas Policy Act of 1978. Ceiling Prices; Old Gas Pricing Structure, 50 Fed. Reg. 48540 (Nov. 25, 1985). The Secretary sought to encourage long-term investment in natural gas exploration, development, and production. In response to the proposal, FERC’s Order No. 451 adopted the proposed ceiling price and eliminated vintaging. FERC also established procedures designed to make the price for those categories of natural gas responsive to actual conditions in the competitive wellhead markets for gas.
What should we make of Secretary Perry’s use of a power that has only been previously exercised twice in FERC’s history? Perhaps this represents a sea change in how the Department of Energy views its relationship with the independent agency. With this proposed rule, Secretary Perry may be hinting that he is more willing to utilize the authority provided by section 403 in order to more forcefully shape FERC’s agenda. Maybe we should expect more such directives from the Secretary in the future. Time will tell.