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As legal questions swirl, FERC to act on DOE grid proposal in 60 days

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Essential Energy Insights - September 17, 2020

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As legal questions swirl, FERC to act on DOE grid proposal in 60 days

Many legal questions have emerged surrounding a U.S. Department of Energy proposal calling on federal regulators to ensure full cost recovery for certain nuclear and coal-fired assets. But what is certain, according to the Federal Energy Regulatory Commission's general counsel, is that the agency will act on the proposal within 60 days, as requested by Secretary of Energy Rick Perry.

"Right now, the commission is internally reviewing the notice of proposed rulemaking that was put forward by the secretary," FERC General Counsel James Danly told the U.S. Senate Committee on Energy and Natural Resources' energy subcommittee on Oct. 3.

"We are reviewing the options that are available, and we are in the process of building the record by soliciting these comments and reply comments. Once they are assembled, we are going to review them and take the appropriate action within the 60-day timeframe established by the [notice of proposed rulemaking]," Danly said.

Danly did not specify what such "appropriate action" might include, however. "It would be premature at this point ... for me to even imagine what the method of approaching the subject is going to be," Danly stated. "Rest assured, the commission is diligently working and reviewing the rulemaking proposal and attempting to assemble as many comments as it can."

The FERC official's comments were made just a day after an unusual group of 11 energy industry associations representing gas, wind, solar and other segments of the sector asked FERC to reject the DOE's proposed timeline to devise new rules to ensure that reliability and resilience in power generation are "fully valued."

The DOE's Sept. 28 petition told FERC to either act on the proposed rulemaking within 60 days or issue an interim rule immediately subject to future modification. In addition, the DOE said the commission should allow just 45 days for comments and give organized market operators just 15 days after the effective date of the final rule to submit compliance filings.

In asking FERC to provide more time for comments and agency action, the 11 trade groups said the record shows that no reliability issue exists to justify such an expedited timeline for considering a proposal that would dramatically impact the power industry and electricity prices.

Without addressing the groups' request to extend the deadlines established by the NOPR, FERC set even more expedited comment deadlines than the DOE's. The Oct. 2 notice said initial comments on the proposal will be due Oct. 23 and reply comments will be due Nov. 7. FERC refused to comment on the reasoning behind setting those deadlines.

According to Danly, the commission fully intends to act on the DOE proposal within 60 days. Of course, such "action" could include FERC rejecting the proposal outright or releasing a more detailed NOPR of its own intended to address DOE's concerns, but it also could entail the agency's issuing a final rule reflecting the DOE proposal.

Former FERC officials chime in

If the agency were to take the latter approach, it most likely would be subjected to considerable litigation given the many legal questions presented by the DOE's petition. For instance, former FERC Commissioner Tony Clark in an interview said that under traditional FERC processes, the agency would have to find that existing rates are unjust and unreasonable before it could require a new rate to be established.

However, he said FERC also could "use its bully pulpit to lean" on regional transmission organizations and independent system operators to engage with their stakeholders to develop a new rate filing under Federal Power Act Section 205. Clark noted that FERC has done something similar before with respect to certain price formation efforts, where the agency "moves a set of ideas" and the grid operators "take the hint" and file a new rate.

In a separate interview, former FERC Chairman Norman Bay agreed with Clark that FERC would have to find the existing rates unjust and unreasonable before it could establish a new rate on its own. He insisted that a recent decision by the U.S. Court of Appeals for the District of Columbia Circuit in Emera Maine v. FERC made that "very clear."

Specifically, the court stressed that when FERC uses its authority under FPA Section 206 to set a new rate, that agency bears the burden of showing that the "existing rate is unlawful," Bay recalled. FERC then must establish that the new rate is just and reasonable, making a "rational connection" between the record evidence and its decision.

But Bay also agreed with Clark that the grid operators could go through their stakeholder processes to propose a new rate. If they were to do so, Bay cautioned, the market operators could establish very different rate regimes.

Clark said yet another option would be for FERC to incorporate the DOE filing into an existing docket, such as its price formation proceedings, "and handle it as part of the normal course of business ... as opposed to considering it to be a totally separate rulemaking."

Which option FERC chooses will impact the kind of record the agency would need to justify its action, Clark continued. He noted that the DOE proposal is very vague regarding actual implementation and compensation and therefore the record needed "is a very open ended question."

But Clark also observed that the DOE proposal is very specific with respect to the types of resources that would qualify for full cost recovery — merchant nuclear and possibly merchant coal-fired generation if it has 90 days of fuel supply on site. Yet he noted that the proposed solution is vague, leaving FERC and the market operators to figure out the details.

Clark said the market reforms FERC could choose to pursue could be fairly modest, such as focusing on price formation and marginal pricing and modifying reliability must-run agreement requirements. And some of these existing dockets already have a substantial record established, he noted.

Bay said no record exists to support a dramatic new FERC rulemaking, citing statements contained in a DOE staff report on grid reliability and those made by reliability officials and others indicating that the grid currently is very reliable despite the retirement of coal and nuclear units over the past few years. The former chairman said the commission possibly could try to use the record compiled in one of its price formation efforts to require some changes, but he added that doing so might not give parties adequate notice that FERC was going to take the dramatic action demanded by the DOE.

Turning to the DOE deadlines, Clark said they would be logistically difficult to meet and leave whatever action FERC decides to take "very vulnerable" to legal challenges. "You wouldn't want to do something that increases its likelihood of being overturned," he said.

Finally, Bay cited the vagueness of the DOE's proposed requirement that generators must have a 90 day fuel supply on site to qualify for full cost recovery. "Given the importance of that factor, I would have expected the NOPR to spill more ink on it and specify the conditions that meet the requirement," he concluded. (FERC docket RM18-1)