On September 29, 2017, Energy Secretary Rick Perry invoked a rarely-used statute to propose that the Federal Energy Regulatory Commission (FERC or Commission) adopt new regulations that would provide an assurance of cost recovery (including a fair return on investment) to certain generating plants (mostly nuclear and coal) that are located within Regional Transmission Organizations (RTOs). On October 2, 2017, FERC invited public comments on the proposed rule.

So, what happens now? In this alert, we spell out the unusual legal process under which this rule is proposed, explain the legal parameters of FERC’s responses, and highlight some potential consequences, perhaps unintended, such as complicating the confirmation processes for two pending nominees to the FERC.

The DOE Asked FERC to Do What? - Department of Energy NOPR

The Secretary’s proposed rulemaking (DOE NOPR) would direct RTOs and independent system operators (ISOs) to revise their tariffs to “develop and implement market rules that accurately price generation resources necessary to maintain the reliability and resiliency” of the bulk power system. The DOE NOPR targets nuclear and coal generators that “provide essential grid reliability and resiliency” services and have a 90-day fuel supply on site. If adopted as proposed, the DOE NOPR could have potentially far-reaching impacts on FERC and the energy industry. It conceivably could transfer rate regulation of the qualifying energy resources to FERC and change the current relative costs of the different energy resources.

On October 2, 2017, FERC issued a notice on the DOE NOPR, inviting comments. Grid Reliability and Resilience Pricing, Docket No. RM18-1. Initial comments are due on or before October 23, 2017; and reply comments are due on or before November 7, 2017. On October 2, 2017, various Energy Industry Associations filed a motion requesting that FERC initiate a technical conference, allow for at least a 90-day comment period for initial comments and provide for an opportunity for reply comments, and reject the expedited timeframe for finalization and compliance detailed in the DOE NOPR.

The DOE NOPR defines “eligible grid reliability and resiliency resources” as:

  • an “electric generation resource physically located within a Commission approved” RTO or ISO;
  • eligible to provide “essential energy and ancillary reliability services;”
  • having a “90-day fuel supply on site enabling it to operate during an emergency, extreme weather conditions, or a natural or man-made disaster;”
  • compliant with all applicable federal, state, and local environmental laws, rules, and regulations; and
  • not subject to cost of service rate regulation by any state or local regulatory authority.

The DOE NOPR defines “compensable costs” to include “operating and fuel expenses, costs of capital and debt, and a fair return on equity and investment.” The preamble describes coal and nuclear plants as essential to grid reliability and resiliency.

Section 403 of the DOE Act – A Lever that Has Rarely Been Pulled

The Secretary proposed the DOE NOPR pursuant to section 403 of the Department of Energy Organization Act (DOE Act). Section 403 authorizes the Secretary to propose rules with respect to any function within FERC’s jurisdiction. The Commission, however, has exclusive jurisdiction over the resolution of such proposals; it is not required to adopt the Secretary’s proposal. The statute provides that FERC may, after public comment, (1) concur in the adoption of the rule or statement as proposed by the Secretary; (2) concur in adoption of the rule or statement only with such changes as it may recommend; or (3) recommend that the rule or statement not be adopted. 42 U.S.C. § 7174(b). FERC must publish its recommendations (which may be in the form of a final rule) with an explanation of its reasoning and an analysis of the comments, thus requiring the notice and comment process the Commission has commenced.

The Secretary may intervene and participate in the FERC’s proceeding pursuant to their rules of procedure, but the Secretary’s intervention “does not affect the obligation of the Commission to assure procedure fairness to all participants.” 42 U.S.C. § 7175. After FERC publishes its final action on the DOE NOPR, the DOE Act provides that the Secretary may: (1) issue a final rule of the DOE NOPR reflecting FERC’s concurrence with such NOPR; (2) issue a final rule of the DOE NOPR as modified by FERC; or (3) order that the final rule not be issued. 42 U.S.C. § 7174(c). We have found no instance where the Secretary has exercised such power in the past. It is not entirely clear how this provision would work in practice if FERC adopts a final rule pursuant to its general ratemaking authority instead of publishing recommendations.

The Timing of FERC Action

The DOE NOPR mandates that FERC “consider and take final action” on the DOE NOPR within 60 days from the date of publication in the Federal Register. Alternatively, the DOE NOPR urges FERC to issue an interim final rule to be effective immediately subject to later modifications after consideration of public comments. The DOE NOPR directs FERC to make any final rule effective 30 days from publication of that final rule in the Federal Register. The DOE NOPR requires each RTO and ISO to file tariff amendments, pursuant to section 205 of the Federal Power Act, within 15 days of any final rule, “to demonstrate that it meets the proposed requirements set forth” in the final rule or that its “market rules are consistent with or superior to” those in the final rule. As mentioned above, certain Energy Industry Associations requested that FERC reject the expedited timeframe for finalization and compliance detailed in the DOE NOPR. Their motion is pending.

FERC Previous Interaction with DOE Section 403 Proposals

FERC has dealt with such proposals before, all addressing natural gas issues. In 1979, FERC issued Order No. 30, which established a short-term program authorizing the transportation of natural gas for the displacement of fuel oil, in response to a proposal of the Economic Regulatory Administration of the Department of Energy pursuant to section 403(a) of the DOE Act. Transportation Certificates for Natural Gas for the Displacement of Fuel Oil, 44 FR 30323 (1979). Likewise, in 1986, FERC issued Order No. 451, which revised the maximum lawful price for natural gas priced under sections 104 and 106 of the Natural Gas Policy Act of 1978, and established procedures designed to make the price for those categories of natural gas responsive to actual conditions in the competitive wellhead markets for gas. That rulemaking proceeding began with a notice of proposed rulemaking issued by the Secretary of Energy. Most recently, in 2014, FERC issued a “Policy Statement on Cost Recovery Mechanisms for Modernization of Natural Gas Facilities.” That proceeding was initiated, in part, in reaction to a letter from Secretary of Energy Ernest Moniz sent to the Chairman of the Commission recommending FERC explore efforts to provide greater certainty for cost recovery for new investments in modernization of natural gas transmission infrastructure as part of FERC’s work to ensure just and reasonable natural gas pipeline transportation rates.

What is the Next Shoe to Drop?

The impact of the DOE NOPR on FERC may be far reaching.

  • How will FERC react? If they act on the Energy Industry Associations’ motion to initiate a technical conference and for rejection of the expedited rulemaking process prior to acting on other comments, such action could indicate how FERC will view the process demands of the DOE NOPR. The Associations’ motion clearly reflects their concern that the Secretary’s proposal implicates potentially significant changes to energy pricing and resources and requires greater time and process to evaluate than the Secretary’s proposal contemplates.
  • The DOE NOPR also could have an impact on the confirmation on the two pending nominees to serve on FERC. On September 7, 2017, Kevin McIntyre and Richard Glick testified before the Senate Energy & Natural Resources Committee on their FERC nominations. Both of them emphasized that FERC should be “fuel neutral.” If the DOE NOPR is perceived to affect fuel neutrality, congressional committees may ask for the nominees’ views. This raises a number of questions, including: How will the DOE NOPR, if at all, impact their pending nominations? Will the Committee seek additional testimony? Will the nominees receive additional questions regarding their continued fuel neutrality? Will their confirmation vote be affected because of the uncertainty around the DOE NOPR?