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Issues To Watch At FERC In 2020

Source: 
Mondaq Business Briefing

Several developments may raise the profile of the Federal Energy Regulatory Commission (FERC or the Commission) in 2020.

First, the growing importance of renewable energy generation will raise new issues for FERC. On December 19, 2019, for example, FERC ordered a major grid operator, PJM Interconnection (PJM), to revise the rules for its wholesale electricity market, which could affect how—or even whether—renewable energy generators can participate in that market. 

Second, FERC is likely to continue a strong program of enforcement against instances of alleged energy market manipulation.

Third, FERC's priorities may become an issue in the 2020 presidential race. At least two of the Democratic candidates—Elizabeth Warren and Bernie Sanders—have announced their intent to refocus FERC's efforts (and perhaps even its name) on renewable sources of energy so that the Commission could support an emerging effort to fight global climate change.

Commission Makeup

Since the departure this past summer of Commissioner Cheryl LaFleur, FERC has been operating with three Commissioners, two short of its full complement of five. Three Commissioners are sufficient for a quorum, and periods with only three Commissioners are not uncommon. Nevertheless, with the burden falling on just three Commissioners, there is the chance that FERC action on, for example, energy infrastructure project authorizations could face delays. If a matter arises on which one of the three Commissioners is recused, the Commission would be unable to issue orders. 

President Trump nominated James Danly, who presently serves as FERC's general counsel, to replace Kevin McIntyre, who passed away at the beginning of 2019. The White House broke with tradition by nominating Danly—who would be a third Republican Commissioner—without also nominating a Democrat to fill LaFleur's seat. Danly's nomination was approved by the Senate Energy and Natural Resources Committee on November 19, 2019, but it has since been returned to the White House. Because the Senate failed to vote on the nomination in last year's session, Danly will need to be renominated. That gives the White House an opportunity to pair Danly with a Democratic nominee. Whether the Trump Administration will do so, and potentially fill all five Commissioner seats in 2020, remains to be seen.

Changes to the Minimum Offer Price Rule

On December 19, 2019, FERC issued an order requiring PJM to expand its Minimum Offer Price Rule (MOPR) to cover out-of-market support to all new and existing resources, regardless of the resource type.

Under the MOPR, certain new generators must bid at or above a price floor. The MOPR provided exceptions for certain types of resources, such as wind and solar facilities. Over the past two decades, such resources have benefited from various state policies, such as Renewable Portfolio Standard (RPS) programs, which require electricity suppliers to obtain specific amounts of their supplies from renewable sources.

FERC's recent order directed PJM to provide exemptions for certain demand response, energy efficiency, and capacity storage resources, certain resources that forego state subsidies, certain resources participating in RPS programs, and certain vertically integrated utilities. FERC has also stated that federally-subsidized resources (such as projects that receive federal tax credits) will not be subject to the MOPR.   

The order was a 2-1 decision, with the two Republican Commissioners in the majority. In issuing the order, FERC Chair Neil Chatterjee stated, "An important aspect of competitive markets is that they provide a level playing field for all resources, and this order ensures just that within the PJM footprint." In his dissent, Commissioner Richard Glick asserted that the order served "one overarching purpose: To slow the transition to a clean energy future."

FERC required PJM to comply with the order within 90 days (i.e., by March 18, 2020). In the meantime, PJM has stated that it will engage with stakeholders "to discuss the substance of the order and its impact." Entities with affected interests should participate in the stakeholder process as their interests warrant.

Market Manipulation Enforcement and Self-Reporting

FERC's Office of Enforcement (OE) recently released its annual report for fiscal year 2019 with statistics on its investigative and enforcement activities. Although the number of enforcement cases dipped in FY2019, the report illustrates the importance—and prevalence—of self-reporting. OE received 149 self-reports in FY2019, the largest number of self-reports in a single fiscal year since FERC began publishing the report on enforcement.

As in previous years, the vast majority of self-reported potential violations were closed without enforcement action—only two had led to investigations as of the publication of the report, although some self-reports remained pending. FERC strongly encourages companies to self-report, and doing so can result in credit that can significantly mitigate penalties. Robust self-reporting policies should be a part of a strong compliance program to guard against instances of market manipulation and other violations, which can result in FERC's imposing significant penalties.

The report also details a reorganization within OE that resulted in the elimination of one of its enforcement divisions—the Division of Energy Market Oversight (DEMO). DEMO's functions, which included monitoring natural gas and electric power markets and preparing an annual State of the Markets Report, were shifted to other FERC offices. Although OE's annual report states that the reorganization will promote efficiencies that will allow OE to be "more focused on its core mission" of overseeing market activities, investigations and audits, some lawmakers perceive another motivation, viewing the change as weakening OE's monitoring and compliance capabilities.

FERC to FREC?

As part of their respective plans to address climate change, Democratic presidential candidates Senators Bernie Sanders and Elizabeth Warren have each endorsed a proposal to change FERC's mission to focus on reducing greenhouse gas emissions. (The proposal even contemplates transposing the middle letters in FERC's acronym by renaming the agency the Federal Renewable Energy Commission.) Underlying the call for change is FERC's authority to approve gas pipeline infrastructure and to ensure "just and reasonable" interstate electricity rates. Climate change activists have criticized FERC for too readily approving gas pipeline projects and using its rate-setting authority to prop up traditional energy sources, diluting the effect of state and local clean energy initiatives.

Neither Senator Sanders nor Senator Warren has offered a detailed plan for reshaping FERC. Given that FERC's current statutory mandates are not tied to renewable energy, any plan for a major overhaul at the agency would likely require congressional action. While divisions in Congress make a major overhaul (and rebranding) of FERC unlikely, the 2020 presidential race could bring more attention to the agency than usual as Democratic candidates make climate change a key issue in their platforms. 

Conclusion

FERC is in a relatively dynamic period of its history. Its leadership and organizational makeup are in flux, with calls for even more drastic changes to its structure and mission. FERC's oversight of energy markets remains active. WilmerHale's Energy, Environment and Natural Resources Group will continue to closely monitor developments at the agency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Jonathan Cedarbaum

WilmerHale

60 State Street

Boston

Massachusetts 02109

UNITED STATES

Tel: 6175266000

Fax: 6175265000

E-mail: Marina.Pano@wilmerhale.com

URL: www.wilmerhale.com

 

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