FERC Ends Department of Energy’s Proposed Resilience Rule but Initiates a Resilience Proceeding of Its Own

On January 8, the Federal Energy Regulatory Commission (FERC) terminated the proceeding initiated in September 2017 (Docket No. RM18-1-000) to address the proposed rule on grid reliability and resilience pricing (DOE NOPR) submitted to FERC by Secretary of Energy Perry. This decision came after FERC had been busy adding new commissioners as well as building its knowledgebase of grid reliability and resilience. FERC had received in excess of 1,500 comments on the DOE NOPR, and the commission had recently sworn in two commissioners, one of whom was Chairman McIntyre.

FERC’s Reasoning for Declining to Pursue the DOE NOPR

The DOE NOPR was issued under a seldom-used provision of the Department of Energy (DOE) Organization Act, which allows the energy secretary to propose rules for promulgation and implementation by FERC. In its order, FERC went back to its statutory mandate to determine whether and how to proceed. It found that the DOE NOPR did not show that “the existing RTO/ISO tariffs are unjust, unreasonable, unduly discriminatory, or preferential,” a key finding required by the statute to justify FERC action.

FERC also stated that, based on RTO[1]/ISO[2] comments, there was not sufficient evidence to conclude that impending planned generator retirements were, in fact, a threat to grid resilience. Furthermore, even if they were, evidence had not been presented that the retirements were caused by unjust, reasonable, unduly discriminatory, or preferential tariffs.

FERC further found deficiencies in the evidence provided to support the DOE NOPR’s proposed remedy—a cost-of-service rate to be paid to certain generators with a 90-day, on-site fuel supply. FERC stated it “has not been shown that the remedy in the proposed rule would not [itself] be unduly discriminatory or preferential.”

Importantly, FERC reaffirmed its commitment to market-based measures, stating that “support for markets and market-based solutions has been a core tenet of Commission policy” and that such commitment is not incompatible with reliability.

FERC Pursues Their Own “Holistic” Resilience Proceeding

FERC, however, did not merely reject the DOE NOPR. It noted that it has been acting to address resilience, even though FERC might not have used that term. Some examples are its activities regarding gas-power coordination, grid response to the 2014 Polar Vortex, and RTO/ISO approaches to fuel assurance. FERC accepted that grid resilience is an important issue that requires its continued attention.

FERC thus initiated a new proceeding (FERC Proceeding) to evaluate bulk power system resilience and directed each RTO and ISO to submit information on certain resilience issues to enable it to “examine holistically the resilience of the bulk power system.” Instead of the single issue of fuel security on which the DOE NOPR focused, FERC is interested in a broad set of resilience issues, including market rules and coordination, transmission planning, and reliability standards. Importantly, this proceeding is not a rulemaking; FERC will review information submitted and then determine whether additional commission action is necessary.

A Bit of History: Elevating Grid Resilience as a Regulatory Concern

Secretary Perry Commissions a Resilience Study

In summer 2017, Secretary of Energy Rick Perry commissioned DOE to conduct a reliability and resilience assessment of the electrical grid. The report (DOE Report), released in August 2017, focused mainly on the evolution of wholesale markets, whether markets are properly compensating generators with on-site fuel supply, and factors that may be responsible for the uptick in retirement of baseload power plants.

A primary takeaway from the DOE Report was that cheap and abundant natural gas was a main driver of the retirement of baseload plants. The report also found that wholesale markets have adequate energy resources, but warned that markets must evolve to ensure reliability as more variable renewable energy is installed. The report also found that markets compensate resources that provide reliability but still need work in addressing resilience.[3] DOE identified areas for additional research, including proposed analysis of how market and non-market mechanisms could better compensate generators with desired grid attributes (e.g., providing essential reliability services, having high fuel availability, and “high resilience” features). Specifically, the report pushed for research on compensation for “potentially under-recognized contributions from baseload power plants.”

A Shoe Drops: DOE Proposes a Resilience Rule

In late September, the DOE filed a notice of proposed rulemaking aimed at increasing the resilience of the nation’s electricity grid. The DOE NOPR directed FERC (under an unusually short deadline) to issue a final rule requiring organized markets develop and implement market rules that compensate power plants possessing certain attributes that DOE stated increase the resilience of the grid. Under the DOE NOPR, plants with a 90-day, on-site fuel supply were presumed by DOE as critical assets in ensuring grid reliability and resilience.

The DOE NOPR did not apply to all of the nation’s power plants. The DOE NOPR only applies to plants that are (i) not subject to cost-based rate recovery and (ii) operate an ISO or RTO with organized energy and capacity markets. The DOE NOPR urged FERC to require RTOs and ISOs to propose “just and reasonable” rates for “fuel-secure” generation units.

A Debate Unfolds

The debate over the DOE NOPR divided the energy industry. Opponents of the DOE NOPR said the rule could drastically change competitive energy markets for the worse. Opponents also point to the fact that FERC must be fuel agnostic, and the DOE NOPR would overwhelmingly support coal and nuclear plants. Andrew Ott, the CEO of PJM, an RTO that would have been affected by the DOE NOPR, stated that he doesn’t “know how this proposal could be implemented without a detrimental impact on the market.” Moreover, mechanisms like PJM’s capacity performance payment scheme seek to reward generating units for their reliable operation. Other grid operators filed joint comments and argued that the DOE NOPR would have hurt reliability and “undermine[d] price formation and competition in the nation’s organized electricity markets.”

Supporters of the DOE proposal argued that the DOE NOPR would have fixed competitive markets which they say currently do not properly account for risks posed by the premature and permanent retirement of baseload generators, which provide valuable grid support. Secretary Perry believes the effort to ensure grid resilience is too important to leave to competitive wholesale markets alone, which do not allow “fuel-secure generation units” to recover costs.

We expect that these competing views will be voiced and further elaborated in the FERC Proceeding.

What Is Resilience, Anyway?

DOE’s report and NOPR have spurred debate over the meaning of “resilience” and “reliability” for purposes of regulation and ratemaking. While the concepts are related, there appears to be no generally accepted definition of resilience, at least for FERC regulation. In her concurrence, Commissioner LaFleur voiced her opinion that resilience is “unquestionably an element of reliability.”

The DOE Report uses the National Infrastructure Advisory Council’s (NIAC)[4] definition of “resilience” which has been adopted by the North American Electric Reliability Corporation (NERC). FERC adopts and modifies this definition for purposes of its proceeding, defining resilience as “the ability to reduce the magnitude and/or duration of disruptive events which includes the capability to anticipate, absorb, adapt to, and/or rapidly recover from such an event.”

The DOE Report also uses NIAC/NERC’s definition of reliability which identifies two components of reliability—resource adequacy and operating reliability. Resource adequacy is defined as “the ability of the electric system to supply the aggregate electric power and energy requirements of the electricity customers at all times,” while operating reliability is defined as “the ability of the electric system to withstand sudden disturbances to system stability.…”

We expect that the FERC Proceeding will be focused on analyzing potential impacts of discrete potential events. But FERC may also need to parse the differences between effects of “disruptive events” versus “sudden disturbances” to inform any direction that it might ultimately give grid operators.

What’s Next

The 18 Questions: Resilience Risk Assessment, Mitigation, and Processes

The FERC Proceeding is focused on risk assessment and risk mitigation for grid resilience—which risks are the electric industry going to protect against and what steps will be taken to ensure those risks are addressed, acknowledging that there are going to be regional differences. To that end, FERC has solicited responses from RTOs/ISOs on 18 questions summarized below. Many are “what” questions that seek information on resilience risks, but a number are “how” questions about processes for threat identification and prevention or mitigation:

  • What are the risks?
    • Primary risks to resilience and their characterization
    • Process for assessing impact and likelihood of risks
    • Process for identifying and planning for risks from high-impact, low-frequency events
    • Position on whether RTOs/ISOs should be required to identify resilience needs by assessing its portfolio of resources against contingencies that could result in the loss or unavailability of key infrastructure and systems
  • How are they assessed and what mitigation is planned?
    • Identification and frequency of studies of system ability to withstand resilience events
    • Specific events and contingencies that are assessed and rationale
    • Criteria (e.g., duration of load loss) used to determine ability to withstand resilience events
    • Actions planned or taken as mitigation to withstand resilience event(s) and whether additional actions are needed
    • Manner of determining (approaches, criteria, etc.) whether threats to resilience require mitigation
    • Manner of evaluating whether further steps toward mitigation are needed
  • How should resilience be evaluated and increased?
    • Attributes that contribute to system resilience
    • Manner of determining the quantity and type of bulk power system physical asset attributes needed to support resilience
    • Whether an RTO/ISO considers specific challenges to resilience affect various generation technologies differently, and how different generation technologies perform in face of those challenges
    • Resilience challenges for transmission and distribution systems and protective actions that could be taken
    • View of an appropriate time horizon for resilience assessments
  • How are these efforts coordinated and managed?
    • Process of coordination with other RTOs/ISOs
    • Obstacles to obtaining necessary information on resilience threats
    • Whether after-the-fact analyses of resilience events have been performed and description of any recommendations and implementation thereof

The Timeline: FERC Fact Finding and a “Slow Reveal” of Viewpoints

The FERC Proceeding solicits responses to its questions from RTOs and ISOs within 60 days, by March 9. Further, FERC has invited non-RTO/ISO stakeholders to chime in, seeking their input within 30 days after the RTOs/ISOs comment, by April 9.

This will be a major proceeding under the newly constituted FERC, so it may reveal the viewpoints of each commissioner toward FERC’s market-oriented approaches and preferred areas of regulatory focus, whether market design, generator compensation, transmission adequacy, or planning and coordination, among others. The order initiating the FERC Proceeding was unanimous but had three concurrences (see Figure 1 below), probably signaling some differences between commissioners in their regulatory priorities.

Another area of interest will be FERC’s view on the issues arising from the increasingly large role of natural gas in power generation. In November, NERC published a special reliability assessment that found that the impact of disruptions to natural gas supply (e.g., California’s Aliso Canyon gas storage leakage in October 2015–February 2016) have highlighted the nation’s significant reliance on natural gas supply to meet electric demand. The report concluded that many areas in the United States could experience stability issues if natural gas infrastructure was compromised. What the RTOs/ISOs have to say about this issue and FERC’s response will be worth watching.

Figure 1: Reading the Tea Leaves: Selected Quotes from Concurrences in Order on Grid Resilience in RTOs and ISOs (AD 18-7-000)

Commissioner LaFleur Commissioner Chatterjee Commissioner Glick
“In each case, [where FERC has seen evidence of the need for greater system resilience], it has recognized a customer need, relied upon evidence to define it in a fuel-neutral way, and either allowed the market to transparently price it or established broad requirements to ensure that a needed service is provided.” “I would have allowed RTOs/ISOs to define which resources provide necessary resilience attributes and are at risk of retirement before the conclusion of the proceeding…[and provided] the RTOs/ISOs with latitude in determining the implementation of any interim measures needed.” “If a threat to grid resilience exists, the threat lies mostly with the transmission and distribution systems, where virtually all significant disruptions occur…. RTOs and ISOs should consider how best to mitigate these [resilience] challenges within their markets and without prejudging what technology or fuel type provides the best solution.”

Additional Contributing Author: Benjamin Lozier

[1] Regional transmission organization

[2] Independent system operator

[3] This distinction is discussed later.

[4] NIAC is a U.S. government advisory council which provides the President advice on the security of information systems for critical infrastructure supporting certain sectors of the economy: banking and finance, transportation, energy, manufacturing, and emergency government services. FERC’s order (at footnote 38) references NIAC’s Critical Infrastructure Resilience Final Report and Recommendations, at p. 8 (Sept. 8, 2009).

View More

Welcome to ScottMadden!

Sussex Economic Advisors is now part of ScottMadden. We invite you to learn more about our expanded firm. Please use the Contact Us form to request additional information.