FERC’s Move to Defend Competition Actually Hurts Competition

December 17, 2019 | 1:34 pm
Dennis Schroeder/NREL
Mike Jacobs
Senior Energy Analyst

The FERC  (Federal Energy Regulatory Commission) decision expected Thursday will allow PJM to counteract the intended effects of state energy policies supporting nuclear and renewable energy.  But the decision is expected to allow PJM to ignore a larger, and more common state policy protecting monopolies from competition.

States continue regulating utility decisions, as they have for 100 years, with layers of public processes offered by state commissions and by legislatures. Thursday FERC will provide PJM, a limited liability corporation approval to counter state laws in more ways than are obvious in this decision.  State laws are not changed by FERC or PJM, but this decision raises the costs for consumers, the legal risks for PJM and its suppliers, and the challenges for states’ authority to choose their energy strategies. A range of higher costs from the limits PJM will apply have been predicted by others, with guesses about the eventual timing and rules for this market.

Photo by DJ Johnson on Unsplash

The states have varied policies, and a range of energy types benefit depending on the state and the policy.  The FERC decision is expected to say PJM’s administrative version of a market knows best, and endorse PJM’s early 2016 argument that subsidies are affecting prices and driving away investments. But the effect of the protection for traditional utilities with old-style state regulatory protection is to strengthen that protection for the original utilities and their investment in power plants. The 20-25% of PJM power plants with cost-recovery in monopoly utility rates are the big winners in this decision.  PJM’s plan is to ignore how these add costs, and we expect that FERC will allow that form of favoritism, and source of higher costs, to continue in this decision.

PJM’s plan to limit the bids to supply power from renewable and nuclear power plants ignores the much larger amount of mostly coal and nuclear plants that are funded by other state laws.  Every state in the PJM region has one or more laws or policies that provide funding to power plants. In fact, 35 U.S. states continue traditional regulation and funding for-profit utility monopolies. The decision by FERC is likely to protect such monopolies, while declaring other state practices interfere with the competition. This could be a very inconsistent decision, and is unlikely to survive a court challenge.

Thursday’s ruling is expected to grant PJM’s request to allow the states’ old-style control over payments to utilities’ power plants, with little or no concern for markets or competition. The states in the PJM never gave up all their authority over electric utilities.  The irony, or the flaw, with the anticipated FERC decision is that it attacks the state policies that share with the federal government authority over power plant payments.  This decision will likely push states to reassert their authority.

Impacts besides cost: Monopolies and transmission

Beyond the costs of this decision, two other big-deal issues are affected.

  1. By shielding the state-supervised monopolies from the new policy, FERC and PJM will have inadvertently reinforced the traditional approach of state regulated monopolies making power plant choices under state authority. States can push their utilities and preferred power plant decisions into the framework that PJM and FERC have exempted from the expected decision.
  2. This decision will do exactly the wrong thing for increasing our use of renewable energy. Because planning improvements to the PJM transmission system (i.e. the grid) is based on what power plants are selected in the capacity market, and this decision is aimed at excluding renewables that have policy supports from the capacity market, transmission needed for the growth of renewables will not be provided by the normal PJM planning. States will have to act explicitly on transmission proposals to accompany renewable energy goals and procurements.

States need to take action   

The FERC decision is expected to provide a path for states to re-assert their authority regarding power plant types by making more explicit the payments and interference in competitive markets. PJM and FERC have left open for the traditional direct supervision of utilities, either through rates or through reliability. The states can still direct their utilities to build transmission, just as they did in the days before FERC gave PJM a role in transmission planning.

PJM and FERC are challenging the states to defend their policies, or to back down. In 29 states, 11 of them in PJM, the policies support alternatives to fossil fuel. These are rare and popular policies that are even more urgent now that climate impacts begin to besiege our communities. States can return to some of their traditional roles as utility regulators and clear this all up.

Some examples states can pursue

States use planning process to ensure supply meets demand, and authorize procurements to meet demand.  Illinois has proposed legislation to expand the role of the Illinois Power Agency. Other states use integrated resource planning reviews.

States can expand their commitments to renewable energy procurement and climate-related policies with actions to lower carbon caps through the Regional Greenhouse Gas Initiative (RGGI), re-asserting their supervision of resource or supply adequacy through the utility commission review of electricity supplies to meet demand, and continued contracting for renewable energy under state renewable energy goals and standards.

States direct their utilities to obtain renewable generation, and build the transmission that goes with that selected renewable generation.  The most successful example is from Texas, where a competitive transmission process first identified zones where renewable energy was under development. Recent state actions increasing NJ offshore wind and Massachusetts renewable standard are vital steps, and could use a state commitment to include any associated transmission upgrades.

Regions that have built transmission to meet state renewables goals have seen widespread benefits and savings exceed costs. In Texas, the “CREZ” development of a series of transmission projects enabled a big boost for state wind goals. In the Midwest, a “multi-value” approach to build transmission that served multiple purposes, as well as wind, also provides greater benefits than costs.

Once we see the FERC decision Thursday, and listen to the states rights vs. federalism arguments, then we will need to get to work. Most of that work will be in state capitals.