The Federal Energy Regulatory Commission (FERC) has issued a notice that its staff will convene a two-day technical conference to discuss mechanisms to “reconcile” the operation of wholesale energy and capacity markets in eastern Regional Transmission Organizations (RTOs), which are explicitly fuel- and technology-neutral, with state policies that prioritize particular generation resources. Scheduled for May 1–2, 2017, the conference in Docket No. AD17-11 will look for solutions that provide for development of “resources of interest to state policy makers while preserving the benefits of regional markets and economic resource selection.”
As the notice recognizes, “wholesale competitive markets, as currently designed, select resources based on principles of operational or economic efficiency without specific regard to resource type.” But there are a host of reasons why states—who have Federal Power Act authority over generation facilities and the distribution side of the electric industry, and ultimately are held responsible for keeping the lights on—may prefer particular resources. For example, a state may want to maintain a diverse fuel mix to ensure its power supply is not hostage to the availability of one or a few particular fuels. Or a state may be interested in controlling power plant emissions, and, therefore, in promoting low-carbon power or sources that smooth out the variability of wind or solar energy and facilitate integration of such facilities.
Under the classic vertically integrated model, a state could direct its electric utilities to build generation to meet its policy goals. In a restructured environment, however, where distribution utilities have divested their generation operations, states may need other approaches. As is evidenced by the growing body of litigation before FERC and the courts, the question of whether a state has the authority to support these other approaches is complex. In particular, some are questioning whether state policies supporting particular resources distort market prices and/or intrude upon FERC’s authority over wholesale markets. To date, at least three federal appellate courts (the D.C., Third, and Fourth Circuits) and the Supreme Court have addressed aspects of this issue, and at least two federal district court cases are pending (in the Northern District of Illinois and Southern District of New York).*
The FERC technical conference is aimed at “foster[ing] further discussion regarding the development of regional solutions in the Eastern RTOs/ISOs that reconcile the competitive market framework with the increasing interest by states to support particular resources or resource attributes.” The notice states that:
Commission staff seeks to discuss long-term expectations regarding the relative roles of wholesale markets and state policies in the Eastern RTOs/ISOs in shaping the quantity and composition of resources needed to cost-effectively meet future reliability and operational needs. At one end of the spectrum, state policies would be satisfied through the wholesale energy and capacity markets. At the other end of the spectrum, state policies would be achieved outside of the wholesale markets, and the wholesale markets would be designed to avoid conflict with those state policies. There are numerous alternatives between these two ends of the spectrum. . . . In the end, Commission staff seeks to understand the potential for sustainable wholesale market designs that both preserve the benefits of regional markets and respect state policies.
Commissioner Honorable issued her own statement on the conference. While “[s]ome [state] approaches have worked,” she said, “others have encroached upon or interfered with the operation of wholesale markets. The Commission’s whack-a-mole response to such state action is inefficient and prolongs uncertainty.” Through this “broader effort,” Commissioner Honorable “hope[s] to work with stakeholders to find ways to advance various policy goals—fuel security, environmental, or otherwise—while preserving valuable price signals and consumer benefits provided by regional electricity markets.” In Commissioner Honorable’s view, “all options are on the table” and “[t]here will likely not be a one-size-fits-all solution.”
*Spiegel & McDiarmid LLP has represented state or state ratepayer advocate interests in a number of these cases.