On September 28, 2017, the Department of Energy (“DOE”) issued a Notice of Proposed Rulemaking (“NOPR”) to the Federal Energy Regulatory Commission (“FERC”) pursuant to §403(a) of the DOE Organization Act.  Regulations proposed in the NOPR would require FERC-jurisdictional Independent System Operators (“ISOs”) and Regional Transmission Organizations (“RTOs”) to develop rules for compensation of certain “fuel-secure” electric generating facilities for their grid reliability and resiliency attributes.  The NOPR establishes a tight 60-day timeframe for FERC action on the NOPR.  On October 2nd, the FERC issued a notice inviting comments on the NOPR, which are due on or before October 23, 2017.  As discussed in more detail below, FERC Staff has now issued a list of questions that it invites commenters to address.

DOE explained in the NOPR that existing wholesale markets have failed to provide adequate compensation for “grid reliability and resiliency resources,” including coal-fired and nuclear generators. According to the NOPR, market changes are necessary to prevent the rapid retirement of such resources, which provide electrical reliability and resiliency, reduce the likelihood of electrical outages in the event of fuel disruptions, and provide jobs.  Citing an August 2017 DOE Staff report and studies prepared by the North American Electric Reliability Corporation (“NERC”), DOE believes that the premature retirement of fuel-secure generators would threaten the reliability and security of America’s bulk power system.

It appears that the DOE has structured the proposed new regulations after those compensation mechanisms available to generators that offer environmental benefits, such as production tax credits and revenues from renewable energy credits. Under the regulations, each FERC-regulated ISO/RTO with a day-ahead and a real-time market or the functional equivalent would be required to establish new just and reasonable rates in its tariff for the purchase of electricity from eligible generators.  In order to be eligible, such generating facilities would need to provide “essential” energy and ancillary reliability services, have a 90-day fuel supply on the premises which would enable it to continue operating in the event of a supply disruption, and not already benefit from cost-of-service rate regulation. The new rate would need to ensure that each eligible generator is compensated for the benefits and services it provides to grid operations, such that it recovers its fully allocated costs along with a fair return on equity.

The NOPR does not specify how the cost recovery mechanism should be designed, which means that each ISO/RTO and its stakeholders would have the leeway to establish a cost recovery mechanism that is best adapted to the design of its market. Each ISO/RTO would then need to file the new rates with the FERC pursuant to section 205 of the Federal Power Act.  Such filings would then be subject to public comment, FERC scrutiny, and subsequent judicial review.

On October 4, the Director of the FERC Office of Energy Policy and Innovation issued a list of questions to be addressed by parties filing comments regarding the NOPR. The list of questions gives an indication of the issues and complexities that FERC Staff anticipates as it evaluates the proposed new rules.

For example, the FERC Staff asks a critical threshold question: “What is resilience, how is it measured, and how is it different from reliability?” and “How are reliability and resilience valued, or not valued, inside RTOs and ISOs?” The FERC Staff also addresses what will undoubtedly be a thorny issue – what generating resources will be eligible?  Should the final rule be limited to existing units, or include new resources or repowered units?   Staff also asks whether there are “alternative approaches that could be taken to accomplish the stated goals of the proposed rule?”

With respect to rates, commenters are asked to opine on what costs should be included or excluded and how ISO/RTOs should allocate such costs on market participants. From a procedural standpoint, Staff addresses the quick time frame head-on by asking for comments on the 15 day time frame for the development of new market rules and an additional 15 days to implement such rules.

What it Means

Even with a short notice period, FERC will undoubtedly receive a vast number of comments from all energy industry sectors and consumer organizations with highly divergent opinions. It is unlikely that the aggressive timeline proposed by the rule will be met given the wide range of issues and technical complexities to be sorted out by FERC and eventually the ISO/RTO stakeholders in their respective governance processes.  On the other hand, too long of a delay could defeat the primary purpose of the rule which is to stave off premature baseload generation retirements.