The public comment period ended Tuesday on Secretary Perry’s rarely-used Section 403 Notice of Proposed Rulemaking requesting that the Federal Energy Regulatory Commission (FERC) issue a final rule that compensates reliability and “full recovery of costs” in wholesale power markets flowing to generators who maintain 90 days worth of fuel on site.
The rule requires power market operators to “establish just and reasonable rate tariffs for the recovery of costs and a fair rate of return.”
The proposed rule is designed to provide subsidies to coal and nuclear generators. Since most coal operators keep at most 60 days worth of fuel on site, the final rule would encourage coal sales to power companies in the US. Uranium sales would also benefit but it is worth noting that most uranium sales to the US come from imports – an issue the administration may address at a later point.
FERC has complied with the Department of Energy’s request to consider the proposed rule on a fast-track basis. The next deadline is for reply comments by November 7 and sets up the possibility that FERC could act within the 60 days requested by DOE.
Hundreds of public comments have been filed with FERC that both support and oppose the DOE proposal. The most common argument made by supporters is reflected in Exelon’s written comments that “organized markets are no longer producing just and reasonable market outcomes, and they need modification in order to comply with the Federal Power Act.”
On the other side is the PJM grid operator that filed comments in opposition to the DOE proposal. PJM is the nation’s largest electricity market and will be most affected by the proposed DOE rule. Andrew Ott, PJM’s CEO told reporters the DOE proposal is “unworkable” and “is discriminatory and inconsistent with the Federal Power Act.”
However, while Ott said PJM is opposed to the DOE proposal, he also acknowledged the need to take action on DOE’s concerns. “We think there’s a better way to do it,” Ott said while admitting that PJM has been considering potential steps to address “the need to properly value reliability in the context of energy price formation.” Ott explained that “a better and least-cost solution would be to do a proper valuation of resource attributes through a market construct rather than the proposed approach to do a regulatory construct.”
DOE issued a statement last night that said “we are pleased by the level of interest resulting from the proposed rule Secretary Perry sent to FERC,” adding “it is clear there is a significant amount of support for the Secretary’s proposal.”
While FERC has so far been abiding by DOE’s fast-track timeline, we believe FERC will likely extend consideration of the DOE NOPR as it awaits two additional commissioners expected to be confirmed by the Senate at soon as this week - including Trump’s designated new FERC Chairman Kevin McIntyre and Democrat Commissioner-nominee Richard Glick. McIntyre may have his own views on the proposed DOE rule that we think could further set back any FERC action on the rule.
There has also been a great deal of focus on FERC Commissioner Rob Powelson who indicated in a speech earlier this month to a PJM industry association that he “did not sign up to blow up markets.” Powelson, who is one of two Republicans on the commission, could create problems for the DOE policy proposal. His comments are being viewed as a big obstacle but we think he is willing to work with fellow commissioners on the issue. In the same speech, Powelson also said “I’ll give Secretary Perry credit; he’s trying to be thoughtful in the approach but there’s many different approaches on how we can tackle this issue.”
Our view is that FERC is open to the DOE proposed rule but will likely take longer than the prescribed 60 days to consider and certainly to implement any similar policy. We also believe FERC would be moving in a similar direction even without the DOE nudge so while any final action may not look like what DOE proposed, it will likely provide compensation for grid reliability. We think the timeline for such action is closer to March 2018 and very unlikely to happen this year.
We also expect DOE to continue to use Section 403 authority to propose other rules to FERC. At the Hedgeye Energy Conference on October 11, Deputy Secretary Dan Brouillette acknowledged the rarely used Section 403 authority and joked that many lawyers had to go back to the law books to understand DOE actions. Brouillette added that DOE plans to use Section 403 power “many times again in the future” as well as other extraordinary authority to prod FERC on both electricity and other issues.
