My Take on Energy Department’s Prompt Letter to FERC

The Federal Energy Regulatory Commission (FERC) is the federal agency responsible for regulating interstate power flows, but the Department of Energy Organization Act authorizes the Department of Energy to propose rules for FERC to consider in the furtherance of ensuring “just and reasonable rates.” Two weeks ago, the Department of Energy exercised this authority, and today, Energy Secretary Rick Perry discussed this decision in his testimony before the House Energy and Commerce Committee. Below, I sketch out the relevant background, describe the Energy Department’s action, and offer my take (all in a mere 600 words!).

• In the late 1990s/early aughts, many states “restructured” their electricity markets, effectively freeing power generators from many aspects of state control. Many other states did not restructure. As a consequence, non-restructured states protect baseload generators in their states in a way that restructured states do not (this is the key point).
• Natural gas generation generally provides the benchmark on competitive wholesale power markets, and historically low natural gas power prices (<$23/MWh) means that beneficiaries of wind production tax credit (worth ~$23/MWh) can bid very low on wholesale power auctions—sometimes below zero.
• During the Obama administration, the EPA subjected coal-fired power plants to a suite of unnecessary air quality regulations for the purpose of saddling existing plants with steep compliance costs.
• Demand for electricity flattened during the recession and recovery.
• The combination of the above points has resulted in a scenario whereby baseload generators in restructured states face a big competitive disadvantage with baseload generators in non-restructured states on wholesale markets. Left unaddressed, there could be a simultaneous wave of baseload power closures in the medium future, and no viable investment potential to replace it, which would be a problem for restructured states that rely on the wholesale.

In response to this matter, the Energy Department exercised its authority to prompt regulatory action from FERC. (Though FERC has been thinking about this for a while; and to wit, the FERC convened a technical conference on the subject last May.)

As a solution, the Energy Department basically proposes direct ratepayer payments to baseload generators in form of cost-recovery plus a rate of return (basically a 10 percent profit) for on-site stockpiles of fuel.

Here’s my take: This is a very sticky wicket. Fundamentally, the Energy Department’s policy is picking winners and losers in order to solve a problem created by, inter alia, picking winners and losers, like the wind production tax credit (PTC). Along these lines, you’d think the solution is easy: just jettison the wind PTC. However, there’s a big problem with that: The wind PTC is locked in for 10 years. So even if you got rid of it, the problem is still there.

This suggests that a government response is somewhat just. Insofar as government action (i.e. the wind PTC) wronged merchant baseload power generators, and in light of the wind PTC being “locked in,” a government handout was warranted—especially if there is indeed a supply crisis on the horizon due to the government’s first intervention. To be sure, I’m not endorsing this. I’m just saying it’s complicated.

A true solution is to completely overhaul how states regulate electricity, in addition to jettisoning the wind PTC (and perhaps some sort of compensation for harm wrought by the wind PTC—ideally in form of deregulatory measures). Of course, that’s a massive undertaking, and it is one that enjoys infinitesimal odds of occurring. This is all to say: It’s a sticky wicket.

I’ve one last point: The administration’s messaging on this has been awful. Energy Secretary Perry basically presented it as a sop to coal. I get that the Trump administration digs the coal miners, and I also get that the underlying issues aren’t intuitive. But I think they would have been much better served by trying to explain real reasons they did what they did, instead of reducing it to rhetoric and talking points.