FERC Rejects DOE’s Grid Reliability and Resilience NOPR

By William M. Keyser, Molly Suda, Gillian R. Giannetti and Toks A. Arowojolu

On January 8, 2018, the Federal Energy Regulatory Commission (the “Commission”) issued an order rejecting the Department of Energy’s (“DOE”) notice of proposed rule making (“NOPR”) that would have allowed fuel secure generation that would include coal and nuclear generation facilities with a 90-day fuel supply to “fully recover costs” to maintain the resiliency of the electric grid. The Commission found that the NOPR did not comply with Section 206 of the Federal Power Act (“FPA”). Instead, the Commission initiated a new proceeding to “examine holistically the resilience of the bulk power system” and directed regional transmission organizations (“RTOs”) and independent system operators (“ISOs”) to respond to questions outlined in the order addressing grid resilience issues by March 9, 2018. All other interested entities may submit reply comments by April 9, 2018. Commissioners LaFleur, Chatterjee, and Glick each issued separate concurring opinions.

I. Background: DOE’s NOPR

On September 29, 2017, U.S. Department of Energy Secretary Rick Perry submitted the NOPR pursuant to Section 403 of the DOE Organization Act. The NOPR specifically required affected ISOs and RTOs to establish “just and reasonable rate tariffs” for the recovery of costs and a fair rate of return for “fuel-secure generation units.” The NOPR also required that units eligible for cost recovery must be able to provide essential energy and ancillary reliability services and have a 90-day fuel supply on site. Eligible units must also comply with all applicable environmental regulations and not be subject to state cost-of-service rate regulation.

The Commission received extensive comments and reply comments in response to its issuance from utilities, generators, legislators, regulatory agencies, environmental organizations, and individuals, among others. Advocates from the coal and nuclear industry were its strongest supporters, while other stakeholders demonstrated significant opposition.

II. The Commission’s Decision

The Commission terminated the NOPR proceeding because it found that the NOPR’s proposed changes had not satisfied the two-prong test to allow the Commission to act under Section 206 of the FPA. Section 206 grants the Commission authority to implement tariff changes if two statutory standards are satisfied. First, the Commission must find that the existing tariffs are “unjust, unreasonable, unduly discriminatory or preferential.” Second, the proposed remedy must be “just, reasonable, and not unduly discriminatory or preferential.”

To the first requirement, the Commission found that neither the NOPR nor the comments submitted in support of the NOPR demonstrated that the existing RTO or ISO tariffs were unjust and unreasonable. The Commission found that the assertions regarding grid resilience issues caused by generator retirements do not demonstrate that the tariff provisions are unjust and unreasonable.

The Commission also found that the record did not support a finding that the remedy proposed by the NOPR, allowing all eligible resources to receive cost-of-service rates regardless of need or cost, would be just and reasonable and not unduly discriminatory or preferential. The Commission cites to the NOPR’s on site 90-day fuel supply requirement and finds that it may also exclude other resources that have resilience attributes.

III. Industry Impact: A New Proceeding to Address Grid Resilience

The Commission emphasized that its termination of the DOE’s NOPR did not end its efforts to address the issue of resilience. Instead, the Commission is initiating a new proceeding, in Docket No. AD18-7, to address resilience in a “broader context” and directs participation from the RTOs and ISOs. The Commission outlined three goals of the new proceeding: “(1) to develop a common understanding among the Commission, industry, and others of what resilience of the bulk power system means and requires; (2) to understand how each RTO and ISO assesses resilience in its geographic footprint; and (3) to evaluate whether additional Commission action regarding resilience is appropriate at this time.”

In line with its first goal, the Commission notes that there are various definitions of the word “resilience” in the electric industry. The Commission provided its own definition of resilience: “[t]he ability to withstand and 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.” To foster a common understanding, the Commission directs the RTOs and ISOs to comment on this definition. In furtherance of its second goal, the Commission asks the RTOs and ISOs to address 19 questions about the unique resiliency challenges that exist in their respective regions. Finally, the Commission asks the RTOs and ISOs to address 5 questions on how they evaluate and mitigate risks to the grid.

The Commission notes that it is “encouraged” by the efforts already underway by PJM, ISO-NE, and MISO to understand and address the challenges of their systems. Further, the Commission believes that promoting resilience of the bulk power system is a top priority: “the topic of the new proceeding – resilience of the bulk power system – will remain a priority of the Commission and we expect to review the additional material and promptly decide whether additional Commission action on this issue is warranted.”

The DOE’s NOPR has generated significant interest from the industry drawing strong support for and opposition to the proposals. The Commission’s order demonstrates a reasoned legal analysis of the issue and a methodical approach to gathering information and analyzing the issues identified in the NOPR. The process will unfold over the next several months as responses from the RTOs and ISOs are submitted. K&L Gates’ energy attorneys will continue to monitor the proceeding, so please stay tuned to the blog for important updates on how the RTOs and ISOs respond to the Commission’s new plan of action to address grid resilience.