Header graphic for print
Focus on Regulation

Department of Energy Proposes Major Changes to Wholesale Power Market Rules

During his confirmation hearing to be Secretary of Energy, Rick Perry repeatedly expressed support for an “all of the above” approach to energy development and use.  On Friday, September 29, he initiated one of the first concrete policy actions of the Trump administration to implement that approach, by submitting a rulemaking proposal to the Federal Energy Regulatory Commission (FERC or Commission) on grid resiliency.  The U.S. Department of Energy (DOE) filing directs FERC to act on a proposed rule that would require FERC-approved organized power markets (independent system operators (ISOs) and regional transmission organizations (RTOs)) to develop and implement market rules that “accurately” price the production of certain electric generation resources.  The rule would benefit generation facilities that are:

  • Physically located within such RTOs and ISOs;
  • Able to provide “essential energy and ancillary reliability services”;
  • Have a 90-day fuel supply on site;
  • Compliant with all applicable environmental laws and regulations; and
  • Not subject to state or local cost-of-service rate regulation.

The on-site fuel supply requirement essentially limits the rule to coal and nuclear plants (although some dual-fuel gas-fired facilities may also qualify).

The core of the proposed regulatory language is one paragraph and reads as follows:

Each Commission-approved independent system operator or regional transmission organization shall establish a tariff that provides a just and reasonable rate for the (A) purchase of electric energy from an eligible reliability and resiliency resource and (B) recovery of costs and a return on equity for such resource dispatched during grid operations. The just and reasonable rate shall include pricing to ensure that each eligible resource is fully compensated for the benefits and services it provides to grid operations, including reliability, resiliency, and on-site fuel assurance, and that each eligible resource recovers its fully allocated costs and a fair return on equity.

The DOE submission explains as a basis for its proposal that “[d]istorted price signals in the Commission-approved organized markets have resulted in under-valuation of grid reliability and resiliency benefits provided by traditional baseload resources, such as coal and nuclear. The rule will ensure that each eligible reliability and resiliency resource will recover its fully allocated costs and thereby continue to provide the energy security on which our nation relies.”

The submission further argues that “[t]here is a growing recognition that Commission-approved organized markets do not necessarily pay generators for all the attributes that they provide to the grid, including resiliency.” It explains that ensuring such resources are able to fully recover their costs is necessary to limit the planned retirements of large numbers of baseload generating facilities.

Secretary Perry proposes this new rule “pursuant to Section 403 of the Department of Energy Organization Act [the Act].”  He “directs” (and later on uses the word “require[s]”) FERC to issue a final action on the proposed rule within 60 days of its publication in the Federal Register (with comments due in 45 days), or to simply issue the proposed rule as an interim final rule, subject to modification after comments are received.  In either case, the rule would then be effective within 30 days after publication, with compliance filings by the affected ISOs and RTOs due 15 days thereafter.

Section 403 of the Act (42 U.S.C. § 7173) gives the Secretary of Energy authority to propose rules for matters under FERC’s Federal Power Act (FPA) jurisdiction.  However, at the same time, the Act gives FERC “exclusive jurisdiction” to “consider and take final action on” the Secretary’s proposal, and, under the FPA, FERC cannot approve any wholesale electricity tariffs unless it finds that the tariff is just and reasonable and not unduly discriminatory.  FERC is therefore not required to adopt the DOE proposal as submitted and will be able to modify the rule as necessary to meet FPA requirements.  It may even potentially reject the rule after consideration of public comments.

The DOE’s timing requirements are extremely tight and present a significant challenge to FERC and the affected market participants.  Many important implementation details are not addressed in the proposal and will need to be resolved before the rule can go into effect.  The proposed rule does not address the mechanism through which the generators are to be compensated (i.e., would it be through a surcharge outside of the normal market or by adjusting market prices to which the generators would otherwise be entitled or through some other mechanism).

No matter how such compensation is implemented, it will have significant impacts on the markets and other market participants.  These markets currently pay generators based on bid-based market clearing prices.  Some of the markets also have capacity auction or procurement mechanisms that enable generators to recover a portion of their fixed costs.  Modifying these markets to incorporate cost-based pricing or payments envisioned under the proposed rule, while retaining the bid-based and auction pricing mechanisms for all other generation resources, will involve major restructuring changes to every ISO and RTO market.

The Act requires FERC to proceed “in an expeditious manner in accordance with such reasonable time limits as may be set by the Secretary.”  Given the significant scope of DOE’s proposal, FERC may conclude that the DOE-mandated timeline is simply not reasonable.  However, as an initial matter, FERC can be expected to attempt to meet the DOE deadlines.