Tag: FERC

Toward Greener FERC Regulation of the Power Industry

By Christopher J. Bateman and James T.B. Tripp

America’s electricity industry is at the heart of some of the nation’s and world’s biggest environmental challenges, including climate change. Yet the Federal Energy Regulatory Commission (“FERC”), which has regulatory jurisdiction over wholesale sales and transmission of electricity in interstate commerce and is charged with ensuring that rates and other aspects of the industry are “just and reasonable,” has an official policy of excluding environmental considerations from its regulation of the industry. This Article traces the evolution of this policy and argues that it is time for a new and better approach—one that integrates economic and environmental regulation of the industry, helps the United States achieve a clean energy future, and reduces excessive environmental impacts.

This Article explores the possibility of such an approach under the Federal Power Act (“FPA”), which provides FERC’s mandate. In doing so, it addresses FERC’s reasoning for its current policy and finds these reasons unpersuasive as a matter of law and policy. Contrary to FERC’s position, it is plausible to view the FPA alongside other federal laws as being silent or ambiguous about FERC’s environmental authority, thus permitting an environmentally inclusive approach within reasonable constraints. This reading of the FPA is reinforced by a host of policy considerations: the urgent need to address the U.S. electricity industry’s significant contribution to climate change; the inadequacy of and continuing uncertainty surrounding existing regulatory efforts on this front; FERC’s expertise in aspects of the electricity industry important to effective design and implementation of regulatory solutions; the unique nature of greenhouse gas emissions as pollutants and the feasibility of FERC regulation of carbon emissions in particular; and the glaring problems with our schizophrenic approach to energy regulation, in which environmental regulation and traditional utility regulation often undermine each other, creating inefficiencies.

This Article offers a number of concrete examples of the types of progressive industry reforms that would be possible if FERC adopted an environmentally inclusive approach, while also acknowledging and exploring the limits and challenges of this approach. On balance, the rewards seem to far outweigh the risks. Incorporating environmental considerations would allow FERC to make better informed decisions about how to maximize social welfare in areas such as transmission planning and organized electricity markets, and could create possibilities for productive collaborations with other regulatory authorities, including the Environmental Protection Agency, to guide the nation toward smarter energy policy.

Cite as: Christopher J. Bateman and James T.B. Tripp, Toward Greener FERC Regulation of the Power Industry, 38 Harv. Envtl. L. Rev. 275 (2014)

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Toward Greener FERC Regulation of the Power Industry

Photo credit: Nixdorf, Wikimedia Commons
Photo credit: Nixdorf, Wikimedia Commons

August 12, 2014 at 1:30pm

America’s electricity industry is at the heart of some of the nation’s and world’s biggest environmental challenges, including climate change. Yet the Federal Energy Regulatory Commission (“FERC”), which has regulatory jurisdiction over wholesale sales and transmission of electricity in interstate commerce and is charged with ensuring that rates and other aspects of the industry are “just and reasonable,” has an official policy of excluding environmental considerations from its oversight of the industry.

In “Toward Greener FERC Regulation of the Power Industry,” in the forthcoming issue of the Harvard Environmental Law Review, Harvard Law School alumnus Christopher Bateman and Environmental Defense Fund senior counsel James T.B. Tripp trace the evolution of this policy and argue that it is time for a new and better approach—one that integrates economic and environmental regulation of the industry, and helps the United States achieve a clean energy future, especially with respect to greenhouse gas emissions.

Bateman and Tripp explore the possibility of such an approach under the Federal Power Act (“FPA”), which provides FERC’s mandate. In doing so, they address FERC’s reasoning for its current policy and find these reasons unpersuasive. Contrary to FERC’s position, they argue, it is plausible to view the FPA alongside other federal laws as being silent or ambiguous about FERC’s environmental authority, thus permitting an environmentally inclusive approach within reasonable constraints. This reading of the FPA is reinforced by a host of policy considerations: the urgent need to address the U.S. electricity industry’s significant contribution to climate change; the inadequacy of and continuing uncertainty surrounding existing regulatory efforts on this front; FERC’s expertise in aspects of the electricity industry important to effective design and implementation of regulatory solutions; the unique nature of greenhouse gas emissions as pollutants and the feasibility of FERC regulation of carbon emissions in particular; and the glaring problems with our schizophrenic approach to energy regulation, in which environmental regulation and traditional utility regulation often undermine each other, creating inefficiencies.

The article offers concrete examples of the types of progressive industry reforms that would be possible under an environmentally inclusive approach, while also acknowledging and exploring the limits and challenges of this approach. On balance, Bateman and Tripp conclude, the rewards seem to far outweigh the risks. FERC’s current policy causes it to regulate essentially in the dark as to environmental costs and benefits. By incorporating environmental considerations into its oversight of areas such as transmission planning and organized wholesale electricity markets, and by approaching environmental problems in a coordinated way with EPA and other regulators, the Commission would make better informed decisions and could potentially help the nation achieve significant, welfare-maximizing reductions in greenhouse gas emissions.

The question of whether FERC is doing enough to address climate change is one that scholars and policymakers are increasingly starting to raise. Recently, a pair of Berkeley scholars proposed a set of reforms—endorsed by United States Congressman Henry Waxman on the floor of the House–that FERC could undertake across its jurisdictional areas to do more. Focusing on FERC’s oversight of the electricity industry, Bateman and Tripp reach similar conclusions about the need for FERC to do more, and seek to provide the most sustained argument yet for a new approach to meet the defining energy and environmental challenges of our time.

Smart Rules for the Smart Grid (HELR Podcast)

Power lines_Wikimedia Commons Non-dropframe
Photo credit: Non-dropframe, Wikimedia Commons

By Sachin Desai — Oct. 24, 2013 at 8:18am

What makes the Smart Grid “smart”?  Of course the technology plays a role.  Grid-scale batteries allow renewable energy generators to be more competitive.  New smart meters allow homeowners to know which appliances are energy hogs.  However, what also makes the Smart Grid “smart” is legal in nature.  In particular, a unique approach is being undertaken to develop the standards and regulations that will govern the new grid.  Professor Joel Eisen, one of the nation’s energy law experts, leads us through this critical aspect of the renewable energy revolution in an article and podcast published by the Harvard Environmental Law Review (HELR).

The Smart Grid has often been compared to the internet, a giant network, governed by an underlying set of traffic rules, which allows energy to travel, two-way, from place to place just like information.  However, unlike the internet, the Smart Grid is being built in an environment with huge entrenched interests, as well as multiple federal and state regulatory agencies with diverging missions.  The current grid consists of 3,200 electric utilities, interacting with even more suppliers and supporting businesses.  To top it off, citizens groups are resisting the Smart Grid due to privacy concerns.

So how can all these different organizations come together to develop the common foundation of rules and standards that will govern the electric internet?  One traditional route is command and control – where (federal) agencies set the rules after notice and comment.  However, private groups and state agencies have fought against this approach, in large part arguing that federalism prevents the federal government from reaching into private homes and intrastate utility operations.  Another traditional route is self-regulation – where the private sector set its own rules (many internet standards were set this way).  However, getting so many actors with different incentives together on their own has proven difficult, to say the least.

Professor Eisen discusses an alternative: a novel, “democratically-led” process for rule-making.  It’s a two-part process. First, the National Institute of Standards and Technology, through its Smart Grid Interoperability Panel (SGIP), has brought together hundreds of participants to set standards through negotiation and dialogue.  SGIP can leverage its benign, disinterested status (it does not have regulatory power) to bring skeptics to the table.  The Federal Energy Regulatory Commission (FERC) can turn those standards into legally enforceable regulations only once “sufficient consensus” has been reached among the body.  This process, especially in light of recent FERC decisions, has allowed Smart Grid standards to be created and implemented in an environment otherwise resistant to change.  Professor Eisen discusses this and more in his article, “Smart Regulation and Federalism for the Smart Grid,” published by HELR in the fall issue of Volume 37.  Professor Eisen also sat down with Sachin Desai of HELR to talk about this article and the concepts behind it an HELR exclusive podcast, “Smart Rules for the Smart Grid.”

FERC and the future of energy efficiency

By Kelsey Bagot — Aug. 21, 2013 at 5:10pm

Photo credit: Nixdorf, Wikimedia Commons
Photo credit: Nixdorf, Wikimedia Commons

With U.S. climate-change bills and international climate talks repeatedly facing defeat, one of the main ways for the United States to significantly reduce its greenhouse gas emissions could be through both improving grid efficiency and transmission and integrating renewable energy into the electricity network.  But surprisingly (or maybe not surprisingly), the government agency with the necessary driving force and legal authority to do so is relatively unknown to most individuals.

FERC Jurisdiction

Enter the Federal Energy Regulatory Commission, or FERC – the big bad regulators of the US energy market. Most recently, FERC led the investigation of JP Morgan for its alleged manipulation of California energy market prices through unlawful bidding schemes, ultimately resulting in a $400 million settlement.

Under the Federal Power Act (FPA), FERC has exclusive jurisdiction over the transmission and sale of electric energy in interstate commerce and all facilities for such transmission or sale, which, among other things, includes setting wholesale electricity rates.[1] Under its statutory mandate, FERC must ensure supplies of electric energy at just, reasonable, and not unduly discriminatory or preferential rates.[2]

Under recent leadership, FERC has taken a more aggressive approach in defining its statutory power under the FPA and has begun to play a more prominent role in energy efficient and renewable generation. One of the first, and most significant, ways FERC has flexed its regulatory power with regards to energy efficiency is with the integration of demand response resources into the wholesale electricity market.

Demand Response

FERC defines demand response as a reduction in the consumption of electric energy by customers from their expected consumption in response to an increase in the price of electric energy or to incentive payments designed to induce lower consumption of electric energy.

Retail electricity customers often pay a fixed rate for electricity. However, in organized wholesale markets, electricity prices vary widely between seasons and even throughout the day depending on demand, supply, and other transmission constraints. This price structure creates a disconnect between wholesale and retail electricity markets, and therefore retail customer usage is not responsive to fluctuations in wholesale electricity markets. Demand response promises to “bridge the wholesale-retail gap by giving retail customers the incentive to withhold consumption when wholesale prices are high, easing strains on the system at time of peak electricity usage.” Currently, however, much debate surrounds the question of how best to send wholesale price signals to retail customers.

FERC Order 745

FERC Order 745, issued March 15, 2011, mandated that retail customers participating in demand response programs be compensated for their reductions in energy use at the wholesale market price for energy. Order 745 has been criticized by electric utilities, who claim that it overcompensates demand response participants by providing a double payment: the benefit of avoiding the cost of purchasing electricity and the wholesale price of electricity.  According to the Order’s critics, this will lead to economically undesirable outcomes and inefficient behavior long-term. After FERC denied a request for rehearing on the Order, these objecting parties sought review at the Court of Appeals, where the case is currently pending.

Possible Consequences of Order 745 and Demand Response

Critics of demand response are concerned that rather than causing an overall decrease in energy consumption, these programs will simply shift demand from high-peak to off-peak periods, possibly resulting in even greater energy consumption in total. For example, in a scenario without demand response programs, a business seeking to reduce its electricity costs might install energy efficient equipment to reduce its electricity consumption.  Alternatively, as a participant in a demand response program, the business might shift production to off-peak periods, consuming the same level of electricity while paying lower costs and receiving market-rate compensation.

However, many in the clean tech industry support providing demand response participants with wholesale prices, claiming demand response can act as a cost-effective alternative to building new generation. What this means is that a variety of entrepreneurs and technology solutions start-ups will have a chance to create value for their product, and consumers will have the ability to make choices in the energy markets.

Bottom Line

FERC’s introduction of demand response does not exactly equate to energy conservation. However, it may pave the way for increased participation and generation of electricity by new renewable sources. And with FERC taking a new aggressive stance on its jurisdiction to regulate demand response resources, the agency is showing promising first signs of its willingness to take on reductions in fossil fuel consumption and U.S. production of greenhouse gases.

[1] 16 U.S.C. § 824(b).
[2] 16 U.S.C. § 824d.