On September 29, 2017, Secretary of Energy Rick Perry issued a formal proposal urging the Federal Energy Regulatory Commission (FERC) to exercise its exclusive jurisdiction to take swift action to “address threats to U.S. grid resiliency” in the form of a proposed new rule titled the “Grid Resiliency Pricing Rule” (Proposal), available here. The Proposal, if adopted, will direct FERC-regulated independent system operators (ISOs) and regional transmission organizations (RTOs) to ensure, through their FERC-approved tariffs, that certain electric generation resources are “fully compensated for the benefits and services [they provide] including reliability, resiliency, and on-site fuel assurance . . . and a fair return on equity.” The proposal is subject to action by FERC.
DOE’s PROPOSAL - AUTHORITY AND SUBSTANCE
The Department of Energy (DOE) issued the Proposal pursuant to its authority under section 403 of the Department of Energy Organization Act (DOE Act). The DOE Act provides that the Secretary of Energy may propose rules, regulations, and statements of policy with respect to functions within the jurisdiction of FERC. FERC maintains exclusive jurisdiction to take action on such proposals, though it must do so in an expeditious manner in accordance with reasonable time limits as may be set by the Secretary of the DOE.
DOE’s proposal provides that ISOs and RTOs must establish tariffs that provide just and reasonable rates for the purchase of electric energy from “eligible grid reliability and resiliency resources.” This includes recovery of costs (such as operating and fuel expenses, and the costs of capital and debt) and a fair return on equity for such resources. The rates must ensure that each eligible resource is fully compensated for the benefits and services it provides, including reliability, resiliency, and on-site fuel assurance. In order to qualify as an eligible grid reliability and resiliency resource, an electric generator must meet the following criteria:
- Be physically located within a FERC-approved ISO/RTO;
- 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.
DOE cites to certain studies and analyses prepared by DOE, FERC, NERC, and private entities, as well as concerns voiced by congressional leaders, as evidence of an immediate need to better recognize the value of those resources covered by the Proposal. For example, DOE notes that grid reliability and resiliency resources are particularly valuable in circumstances that put immense stress on the grid, such as the 2014 Polar Vortex. Absent prompt action to compensate for continued operation, DOE asserts that such resources may not be available during future grid emergencies.
DOE has directed FERC to reach a final decision on the Proposal within 60 days of its publication in the Federal Register or, alternatively, to issue an interim final rule immediately with a provision allowing later modifications in light of public comment. If a final rule is issued in the proceeding as proposed, ISOs/RTOs would have 15 days following the effective date of the rule to either submit revised tariffs or demonstrate that they are already in compliance. FERC is under no obligation to adopt DOE’s proposal. On October 2, 2017, FERC released a notice inviting comments on the Proposal. Comments are due by October 23, 2017, and reply comments are due by November 7, 2017.
Although the Proposal is targeted toward compensating particular resource attributes, in practice the resources most likely to have such attributes are coal and nuclear facilities. As such, DOE’s proposal has drawn considerable attention from its potential beneficiaries, from various environmental groups, and from other segments of the electric generation market that may not qualify as eligible grid reliability and resiliency resources. Interested stakeholders can be expected to devote significant resources toward shaping the outcome as FERC deliberates on the Proposal, both through the administrative process and potentially through subsequent legal challenge.