Congressional Oversight Hearing Examines FERC’s Regulatory Activities During a Time of a “Heightened Importance”

This article appears as published in The Foster Report No. 3078, issued December 11, 2015

The House of Representatives Committee on Energy and Commerce’s Subcommittee on Energy and Power held an oversight hearing on Dec. 1, reviewing FERC’s activities in light of increasing environmental policies (including the Environmental Protection Agency’s (EPA’s) Clean Power Plan (CPP)),  expanding electric markets, and the need for more natural gas infrastructure.

All four sitting Commissioners testified at the two-hour subcommittee hearing: Chairman Norman Bay; Commissioner Tony Clark; Commissioner Cheryl LaFleur; and Commissioner Collette Honorable. The Commission currently has one vacancy, following the recent departure of Phillip Moeller after his 10 years’ service as Commissioner.

Each Commissioner responded to the lawmakers’ varying comments, questions, and home-state priorities.  Topics ran the gamut from physical and cyber security measures required to protect the nation’s grid, to gas-electric coordination issues, to the phenomenon of increased popular activism against infrastructure siting projects, and to impending climate change-driven regulations.

Chairman Bay led off, portraying the significance of the Commission’s work “particularly in this time of great change in the energy space.”  He identified major trends that are impacting the energy industry and are the backdrop to the Commission’s efforts: (1) the shale revolution has resulted in an abundant and historically low-priced gas supplies; (2) organized electric markets are expanding, yet there is low load growth and increased energy efficiency, impacting the energy markets the Commission oversees; (3) more renewable energy and distributed generation sources are being integrated into the energy system; (4) state and federal public policies are affecting the energy industry; and (5) the energy industry is seeing a period of increased technological innovation.

Chairman Bay outlined his priorities at the Commission, Commissioner Clark focused on infrastructure, while Commissioner LaFleur addressed reliability and the competitive market.  Commissioner Honorable addressed, among other things, FERC’s position with respect to the CPP. Clark voiced grave concerns over the implementation of the CPP.

Chairman Bay.  At the Commission’s helm, Bay’s priorities include: (1) focusing on the fundamentals of the competitive markets; (2) ensuring the reliability of the electric grid; (3) facilitating more infrastructure, both in gas facilities and electric transmission; and (4) protecting FERC’s “human capital” (staffing) needs.  “We are getting back to the basics,” he told Congress.  In handling matters that come before the agency, the Chairman emphasized “it is essential to be fair, balanced, and pragmatic; to decide cases on the merits, based on the facts and the law; and to be consensus-oriented.”

For the electric markets, the Commission — among many other things — is continuing to work with the regional transmission organizations (RTOs) and independent system operators (ISOs) to promote greater efficiency, competition, and transparency.  As part of its price-formation proceeding, FERC recently issued a Notice of Proposed Rulemaking (NOPR) to align real-time settlement and dispatch intervals and to implement shortage pricing for shortage events.   FERC also has directed each RTO/ISO to submit reports on 5 price formation issues in their energy and ancillary services market, which Bay suggested will help identify best practices that provide incentives to maintain reliability, facilitate accurate and transparent pricing, reduce uplift, and help market participants operate consistent with dispatch signals.

And FERC Chairman Bay recognizes “the important need” for additional natural gas pipeline and electric transmission in different parts of the U.S., while staying within the framework of the Commission’s duty to review pending licenses, permits, and applications “in a thorough, professional, and timely manner.”  FERC has recently certified a number of major gas projects.  “In my view, it is important for FERC to prioritize infrastructure, because infrastructure can enhance reliability and resiliency, provide economic benefit by reducing congestion and making markets more competitive, and further state and federal public policies,” Bay told Congress.

Finally, while the Commission has added to its workforce over the past several years, Bay conveyed the view that employee needs would continue to grow.  The Commission currently employs approximately 1,480 people.  In the next few years, 30% of these employees will be eligible to retire, so the Commission must focus on retaining current employees, facilitate “knowledge transfer” when employees retire, and recruit highly skilled people to replace any departures.  “And we must do this in a way that maintains our status as one of the best places to work in government,” the Chairman said, noting that FERC ranked third out of 37 federal agencies for employee satisfaction and fourth for employee “engagement.”  In this aspect, he suggested Congress can help by approving additional full-time equivalent employees (FTEs) for the agency.

Commissioner Clark.  Speaking on another key component of the Commission’s reliability work and its responsibility for authorizing the construction of energy infrastructure, Clark relayed that the agency’s efforts “are perhaps more visible than ever,” while the level of pipeline certification activity itself has also grown.

In August 2014, the Commission had pending applications representing 1,000 miles of pipe and 24 Bcf/d of deliverability, but by Nov. 2015 FERC had pending applications for 4,600 miles of pipelines and more than twice the capacity (50 Bcf/d).  The Commission has authorized 7 LNG export projects (as of Nov. 2015), totaling 10.62 Bcf/d capacity.  Another 10 projects have formal applications pending in various stages of review, totaling 12.53 Bcf/d.  Not included in these totals are 12 other LNG projects that are in the “prefiling” stage, Clark noted.

Commissioner Clark assured the subcommittee that FERC is generally able to handle most energy projects in a timely matter.  In the last 10 years, 92% of all applications have been processed and completed within 12 months.  However, he confided that infrastructure development and siting “is becoming more challenging.”

“Infrastructure, be it related to natural gas, large hydropower projects and electric transmission or generation (the last two being sited at the state level) engenders a level of opposition that was rarely seen in the past,” Clark told the subcommittee.

“In years gone by, intervention in regulatory proceedings tended to be driven by those most directly affected by the energy project – for example, a landowner who would prefer an energy project be located on ‘Site A’ rather than ‘Site B.’ The regulatory process is well equipped to consider and weigh these sorts of comments, and we still do receive a fair amount of this type of intervention in our cases.  In fact, as a Commissioner, I have always viewed this type of intervention as particularly critical to our work because it helps develop a complete record regarding where infrastructure is both well and poorly suited.”

However, Clark continued, it is the increasing trend towards “Just Say No” intervention that gives him pause.  “This intervention is designed to block entire classes of infrastructure projects – either through outright denial or through a strategy of ‘defeat through delay’,” he said.  This type of opposition is not based on a particular project or its location — it is an opposition to all infrastructure as a matter of ideology, and is often framed by concerns about climate change and carbon emissions.

“The irony is that much of this infrastructure is being necessitated by the very regulations that are
being promulgated in the name of reducing carbon intensity in the electric generating sector,” Clark observed.  “In the case of gas pipelines, it is in large part due to fuel generators that are either replacing higher carbon-emitting baseload coal plants or being paired with variable energy resources like intermittent wind and solar.  In the case of electric transmission lines, it is often to facilitate geographically distant renewables, and to optimize their use to compensate for their inherent intermittency.”

As a result, Commissioner Clark believes the major challenge for energy regulators over the next several years – at both the federal and state levels – will be “to grapple with this tension” of dealing with policies that necessitate large infrastructure projects in an era of heightened infrastructure opposition.  On top of those issues, EPA’s new carbon regulations (pursuant to the agency’s Clean Air Act section 111 powers) and the CPP will heighten the challenges.  “For if infrastructure development is largely delayed or blocked, I have difficulty envisioning affordable or reliable ways for utilities to meet the EPA mandates,” Clark surmised.

Furthermore, the section 111(d) rules put regulatory commissions at the state and federal level “in a very precarious” position.  ”The rules are not ours; they are the product of the EPA, yet nearly all of the potential negative outcomes fall squarely on our shoulders, whether related to affordability or reliability.”  Clark cautioned that although the final CPP rule extended state compliance timelines by up to 2 years – making final state implementation plans due in 2018 — major pipeline and transmission projects can take anywhere from 3-12 years, or longer, to evolve from concept to in-service completion.

If a generation resource shift is compelled prior to necessary infrastructure completion, electric reliability could be a challenge; but regardless, affordability will almost certainly suffer, he said.  “Substantially higher energy costs have been the result everywhere this has occurred, and it will not be any different in this case if expanded infrastructure is not built in time to meet the generation mix changes required by the regulation.”

The problem would be compounded in certain parts of the country, where there is a significant risk of infrastructure being stranded “years” before the end of their useful lives, meaning that consumers will be paying “not just for the new infrastructure, but also for the previous investments in assets that are being retired to comply with the EPA regulation.”

An additional important consideration, according to Clark, is that EPA’s rule will not impact states evenly.  “To be perfectly honest, some states may not have as difficult a road to compliance,” Clark told the subcommittee.  “This is often related not so much to any particular policy choice the state made, but rather to the vagaries of the math behind the state-by-state targets set by EPA in relation to the nature and vintage of a state’s legacy electric generation fleet.  And it can be argued this has more to do with luck than planning.”

Clark further pointed out that the difference between what the EPA proposed in last year’s draft rules are much different than the final rules.  Clark’s home state of North Dakota, between the draft and final rules, had its emissions reduction target skyrocket from 11% to 45%, even though actual emissions in the state decreased 11% between 2005 and 2014 — despite a rapidly growing economy.  The state’s utilities invested in a significant amount of wind power during that time, in part as a hedge against carbon regulatory risk.  “Unfortunately, it turned out to be a hedge for which they will receive no credit,” Clark lamented.

In addition, although his state of North Dakota has coal-fired generation, the fleet is relatively young, and the state was one of the few able to meet full attainment of EPA’s National Ambient Air Quality Standards.  Nonetheless, under the CPP, North Dakota was given “an emissions reduction target so punitive that I struggle to conceive of a way it can meet it in an affordable manner,” Clark shared.  The total estimated cost of compliance if the state adopted the emissions credit-trading program under the CPP could reach $400 million per year, “a staggering figure” for a state of less than 750,000 people.

Commissioner Clark expressed his hope that committee members will understand “how problematic this is for states like North Dakota that did not fare so well under the EPA’s state-by-state emissions target math.  Such states stand to see a huge transfer of wealth out of them, and will receive little in quantifiable environmental benefits in return, given the worldwide nature of carbon emissions.”

Commissioner LaFleur.  One of LaFleur’s top priorities at FERC is in the area of maintaining the reliability of the nation’s electric grid.  Two core aspects of the Commission’s reliability work include:  (1) efforts to protect the grid from emerging systemic reliability challenges through the adoption of mandatory reliability standards and (2) oversight of wholesale electric markets.

LaFleur observed that the U.S. is experiencing significant change in its generating resource mix, given the significant increase in the reliance on natural gas for electric generation, not only due primarily to the increased availability and affordability of domestic gas but also to its relative environmental advantages and the role of natural gas in balancing the growing fleet of variable resources.  EPA’s new environmental regulations, particularly the Mercury and Air Toxics Standards (MATS) rule – along with the CPP – are helping to drive changes in the U.S. power supply, she affirmed.

The growth of gas resources as well as new environmental requirements are leading to the retirement of baseload capacity, particularly coal, and driving the need for new investment.  At the same time, the energy industry is seeing considerable growth in renewable energy and demand-side resources, fostered by developments in technology and policy initiatives at both the state and Federal level.  “These changes are stress-testing the competitive markets,” the Commissioner said.

During the initial transition several years ago to competitive market structures (the rise of RTOs/ISOs), most U.S. regions had excess generating capacity and regional markets produced efficiencies that led to lower wholesale prices.  Now, however, some areas of the country are “going from generation surpluses to scarcity,” resulting in higher forward capacity prices and more focus on market outcomes.

“At the same time, affordable and abundant domestic natural gas is creating challenges for other resources, while the deployment of new renewable technologies is leading to integration challenges,” LaFleur continued.  “In many places, we see lower energy prices during most hours due to the low variable cost of renewables and gas, yet we also see spikes in the cost of electricity during times of system stress.  These changes are also causing the competitive market operators across the country to examine their rules to ensure that reliability is properly valued and sustained.”

LaFleur believes it is particularly important that markets send accurate price signals to both existing and new resources.  As a result, FERC’s recent efforts have focused on the competitive markets, including the energy, capacity, and ancillary services markets.  LaFleur is convinced that the policies outlined in FERC’s recent NOPR on settlement intervals will go a long way in making sure that marginal energy prices “properly and transparently” reflect the true costs of supplying electricity and support efficient investments to maintain reliability.

Among the Commission’s successes so far, Commissioner LaFleur told the subcommittee that FERC’s work on gas-electric interdependence issues, which came out of the increased reliance on gas-fired generation particularly in regions that also rely on natural gas for heating during the winter, established new rules to “better harmonize” scheduling in the two markets.  The Commission also modified its rules to promote increased communication between transmission operators and gas pipelines.  “These market rule changes should help maintain reliability at times when gas pipeline capacity is stressed,” LaFleur noted.

Commissioner Honorable.  FERC’s newest Commissioner Honorable spoke to FERC’s involvement in EPA’s CPP, among other things.  She reported to the subcommittee the Commission’s series of regional technical conferences earlier this year on the implications of CPP compliance efforts and the associated host of issues that informed the Commission’s advice and counsel to the EPA.  She herself had co-moderated a “deep dive” workshop on specific reliability measures that may be needed to help shore up the electric grid during the compliance phase with the CPP if necessary.

Going forward, FERC “stands ready” to work with EPA, the Department of Energy (DOE), the states, regions, NERC and other stakeholders, she assured Congress.  The Commission has offered to review analyses; request additional assessments; or continue to hold technical conferences/workshops as states and utilities begin implementation of the rule.

Although many states are challenging the EPA’s rule in court, she stressed that these same states are also working in parallel on compliance plans should the rule be upheld.  “My home state of Arkansas is a fitting example,” Honorable said.  During her tenure as chairman of the Arkansas Public Service Commission, the PSC had worked closely with the Arkansas Department of Environmental Quality and a diverse group of stakeholders to evaluate the issues associated with Arkansas’s compliance with the Plan.  These discussions continue, she noted, “even though the state has joined the litigation against the final rule.”

Regional compliance plans will have “considerable potential” to reduce compliance costs, Honorable believes.  In the Midwest, for example, both the Southwest Power Pool (SPP) and the Midcontinent Independent System Operator (MISO) released studies concluding that regional compliance would be more efficient, less costly, and better for consumers.  “It is imperative that all affected stakeholders engage and work collaboratively to maintain reliability while minimizing any potential cost impacts of plan implementation going forward,” Honorable advised.

Infrastructure remains an important consideration also to Honorable.  Natural gas and renewable energy will continue to have a larger role in the U.S. generation resource mix.  As of Sept. 2015, 60% of new generation in service this year (January-September 2015) came from renewable sources (mostly wind and solar).  Gas-fired generation accounted for 2,884 MW, or 39.6% of installed capacity thus far in 2015.  In order to bring “this new and diverse generation” to market, new infrastructure, including pipelines, power lines, and other technologies, will be necessary.

Q & A.  In the subcommittee forum, Chairman Bay explained to Rep. Jerry McNerney (D-Calif.) that FERC would be closely monitoring CPP-related reliability issues going forward.  FERC has played an interactive role with EPA so far, holding technical conferences and submitting key recommendations to the agency.  Based on FERC’s feedback, for instance, EPA did push back the compliance dates, added a “sliding path” target, and the agency adopted other flexibility measures (such as emissions credits), all of which will help in the CPP’s implementation.  FERC has entered into an agreement to meet quarterly with DOE and EPA to address the CPP and reliability concerns.

“This is something that we are going to watch closely,” Bay assured the congressman.  “In my view, while it will take a lot of work, communication, and collaboration between the agencies and other stakeholders such as the North American Electric Reliability Council (NERC), I do believe reliability challenges can be addressed.”

Rep. Pete Olson (R-Texas) suggested that the siting of pipeline projects and the intense opposition “is out of control.”  Bay confirmed that in the last 15 months protesters have tried to disrupt FERC’s monthly meetings.  FERC staff has reported that even out in the field during scoping meetings they are seeing a great level of opposition.

In response to questions, Clark reaffirmed that testimony from affected landowners in the past customarily had been very specific to a line itself, while the new type of opposition — “not in anyone’s backyard” – is growing.  “I really want to draw your attention to these challenges that the Commission is going to face going forward,” he insisted.  “The problem of ‘no infrastructure anywhere’ brings all kinds of cost and reliability impacts to consumers if all infrastructure is blocked.”  With the new level of protests and high volume of applications at FERC, it may be “very difficult” to keep achieving the high average (of efficiently processing applications – 90% within 12 months) going forward.

Congress can facilitate things by encouraging other agencies that inform FERC’s permit siting process to operate in a timely manner, Clark said.

When asked whether cyber-attack or CPP is potentially the greater threat to reliability, Commissioner LaFleur affirmed there are different kinds of threats, and cyber threats would be more systemic.  But “we need to focus on” both.

 

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Copyright © 2015 by Concentric Energy Publications, Inc.  All rights reserved.

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