Week Ending October 2, 2020

Carbon Pricing Analysis at FERC Should be Reactive, Not Proactive, Speakers Say

This Article Appears as Published in Foster Report No 3318
Carbon Pricing Analysis at FERC Should be Reactive, Not Proactive, Speakers Say

There was essentially unanimous support among panelists at a FERC technical conference on carbon pricing that the Commission has the legal authority to act on tariff proposals from independent system operators that seek to include a price on carbon in ISO markets.

Such a reactive approach in response to a Federal Power Act (FPA) Section 205 filing from an ISO could be relatively straightforward as a cost recovery exercise, most speakers said, while acknowledging that details on multi-state markets, leakage across state borders of economic and environmental effects and what to do with the revenue a price on carbon would generate present some thorny issues to consider.

There was much less support for the notion that FERC could act on its own, through Section 206 of the FPA with a finding that by not including a price on carbon, wholesale market prices are not just and reasonable. That proactive approach – which FERC used for its final rule to have ISOs and regional transmission organizations include distributed energy resources (DER) — was broached by at least one speaker at the September 30 session (AD20-14). But when asked by Commissioner James Danly about this specific point, few expressed belief that FERC has the authority under the FPA to go that far on carbon pricing in organized markets.

Such a move would be “a lot of bridges too far” outside of FERC’s jurisdiction, said consultant Roy Shanker. Shanker was among the first panelists during the technical conference that lasted 9.5 hours and explored different aspects of FERC authority, state efforts to drive clean energy policies, ISO and RTO market mechanisms and support for a price on carbon.

A few others noted that an approach under FPA Section 206 might be needed to address inconsistencies in state policies or any market effects that could be deemed to harm just and reasonable rates for consumers. When asked by Danly on this threshold legal question, Ari Peskoe, director of the Electricity Law Initiative at Harvard University, said FERC would have to establish a record that the different treatments of carbon pollution is harming markets and needs to be addressed on a broad level. If the Commission determines that the best way to address the disparities in the current markets is to impose a carbon tax, that would not be beyond FERC’s authority, Peskoe said.

Others did not take such a stance, with David Hill of Columbia University’s Center on Global Energy Policy and Professor Jim Rossi of Vanderbilt University’s School of Law commenting that acting on an FPA Section 205 petition to include a price on carbon is a much safer legal move. FERC acting on its own under FPA Section 206 “walks pretty far afield into areas where it would present very difficult jurisdictional issues with other agencies,” Hill told Danly.

Among the 31 speakers spread across five panels during the day, most expressed support for a carbon price and many noted that action in energy markets is a less optimal means of addressing carbon pollution compared with an economy-wide mechanism through legislation in Congress. The difficulties with ISO and RTO governance, differing state views and other intricacies could be avoided with legislation, said Chris Parker of the Utah Department of Commerce and others. Just because RTOs are private entities that can cover multiple states, “I’m wary of half-measures like an RTO picking a carbon price” when “we have a body out there to settle interests of national concern and it’s called Congress,” Parker said on the last panel of the day.

His comment bookended the opening remarks of Sen. Sheldon Whitehouse (D-R.I.), who sought to dispel the notion that a price on carbon has met its demise politically in the Senate. There is carbon pricing legislation and many Republican lawmakers that want to address climate change support a price on carbon. “A price on carbon make sense,” has been endorsed by The Wall Street Journal and it has worked for states in the Regional Greenhouse Gas Initiative (RGGI), producing economic benefits for the Northeast and Mid-Atlantic states that participate in RGGI, Whitehouse said.

The Commodity Futures Trading Commission recent report warned of a global economic crash if nothing is done to address climate change and investors like BlackRock Inc. have made similar warnings, Whitehouse said.

He noted that “even the fossil fuel industry” is slowly coming around to the notion that a price on carbon is the best way to address emissions through a market-based mechanism.

Dena Wiggins, president and CEO of the Natural Gas Supply Association (NGSA), made that point in her comments in response to a question from FERC Chairman Neil Chatterjee, stating that the NGSA believes in markets, with a motto that “markets matter” adopted nearly 10 years ago. It was nearly a year ago that NGSA adopted a position supporting a price on carbon, Wiggins noted.

Wiggins recognized that some states have taken their own individual approaches on clean energy transitions, through renewable portfolio standards, renewable energy credits (RECs), zero emission credits (ZECs) and other steps. “We hope those state efforts are seen as transitional mechanisms” leading to a well-functioning carbon pricing model, she said.

FERC and ISO leaders do not have all the answers on how best to solve some of the complicated matters associated with carbon pricing, but if people do not dig in their heels on their parochial views and instead work together, an effective market mechanism could be worked out, Wiggins said.

Chatterjee made similar remarks at the outset of the event, with a line that was repeated by several panelists that the perfect should not be the enemy of the good when it comes to addressing carbon pricing in ISO markets. Representatives from PJM Interconnection, ISO New England (ISO-NE), the California ISO, New York ISO and academia all asserted that a price on carbon could be included in wholesale market designs easily enough, but stakeholders can get wrapped up in complexities that produce different outcomes for different state resource decisions.

FERC could approve a carbon price that reflects different elements, with states controlling the resulting revenues to use as they see fit, similar to RGGI prices and revenues, said Joseph Bowring of Monitoring Analytics, the independent market monitor for PJM.

State mandates for wind and solar resources or ZECs have significant effects on prices in PJM already, but those effects and the objectives of the different states are not as transparent as a price on carbon, Bowring said. A single price on carbon would be the most efficient means to reach clean energy goals, but it would have to be high enough to drive investment changes and incentives for consumers to take actions, added William Hogan, professor of global energy policy at Harvard University. RGGI costs were integrated into the markets in those states in the program without incident, but the costs are not high enough to be a driver for clean energy investments, said Gordon van Welie, president and CEO of ISO-NE.

Compared with multi-state entities like PJM and ISO-NE, the ISOs in California and New York have single state markets with only one state’s energy policies to address. That should make it easier to gain buy-in from stakeholders, but even as the grid operator that is farthest along in a carbon pricing plan, NYISO has challenges with regional market disparities within the state, said Richard Dewey, president and CEO of NYISO. Even with two different studies showing the effectiveness of a carbon price in meeting New York clean energy goals, NYISO still has work to do to gain more support, Dewey told Commissioner Richard Glick.

When Glick asked about the chances for getting six states in ISO-NE to agree on a carbon price, van Welie admitted that the chances are slim. States are not in harmony on decarbonization, and compensating resources that will be needed to balance a grid operating with more intermittent solar and wind projects will need to be addressed holistically, van Welie said.

Bowring suggested that not all states within an ISO need to agree on a set carbon price for the entire market. States could redistribute revenue from a carbon fee based on different prices in different states, he said.

The leakage issues – where a state or region without a carbon price sends cheaper power into an area with a carbon price, harming the purpose of a carbon price and putting cleaner resources at a disadvantage – was addressed multiple times throughout the day. Bowring and Arne Olson, senior partner at Energy and Environmental Economics, said leakage is unavoidable and commonly associated with interstate markets. Trying to measure power flows across areas with different carbon pricing plans or sorting out all the effects of leakage could turn into a fruitless exercise and leakage should not be used as a reason to avoid carbon pricing, they said as part of the same panel

Chatterjee emphasized at the beginning of the technical conference that FERC is not an environmental regulator. “We have neither the expertise nor the authority to weigh in on how best to curb emissions. What we do have is the expertise, and the mandate, to ensure just and reasonable wholesale rates.” That mandate requires the Commission to ensure that ISO markets it oversees, with their diverse footprints, complex mechanisms and different challenges, remain efficient and transparent, Chatterjee said.

States are exploring and adopting different policies to curb GHG emissions, and diverse sets of stakeholders have embraced carbon pricing as an important step for those efforts, Chatterjee said. But energy markets cannot be walled off from state environmental goals, which is clear to anyone who has watched FERC wrestle with difficult issues that crop up in debates on state policies and wholesale markets.

“We’re at a pivot point when it comes to these discussions – a point that I think will ultimately lead to action in some shape or form,” Chatterjee said. Some of the market design proposals can bring more harm than good, and “that’s why I think, as we face this crossroads, we have to take this issue head on,” he said.

Costs associated with RGGI are reflected in power prices within those states that are in the program and similar pricing mechanisms can be adopted for carbon, panelists said. By acting on carbon pricing plans submitted by an ISO, FERC could address provisions “while remaining in its lane as an economic regulator,” said Kate Konschnik, director of climate and energy at Duke University’s Institute for Environmental Policy Solutions. Peskoe agreed, adding that courts would be hesitant to cut off FERC’s ability to address an ISO tariff that includes a carbon price.

The average electric utility customer may not care where its power comes from, but a growing number of consumers and companies do care about the environmental attributes, and FERC has the ability to set a value for those attributes, Konschnik said.

While FERC, states and ISOs all have roles when it comes to pricing carbon, FERC should not turn away from the issues because it believes it is someone else’s job, Peskoe said. There may be disagreements about the best approach, but FERC has the authority act on an FPA Section 205 filing from an ISO that includes a carbon price, said Matthew Price, attorney with Jenner & Block LLP.

Other speakers picked up on the theme that the stakeholder process and governance within ISOs presents some problems for various parties. States should have more of a say in ISO and RTO matters and there are mechanisms to pursue cooperative federalism with state interests, said Travis Kavulla, vice president of regulatory affairs at NRG Energy and a former state regulator from Montana.

Section 209 of the FPA allows for a federal advisory committee with state and federal representatives, Kavulla pointed out. When Glick asked about the rarely used provision, Kavulla noted that the CFTC report brought it up and the committee approach can be used to have more of a direct dialogue between FERC and state policymakers. The FPA Section 209 steps for joint federal and state input are often overlooked when people talk about the tensions between federal and state policies in power markets. “It’s something that’s worth considering,” Kavulla told Glick.

How the revenue generated from a carbon fee is handled and how much is used to offset costs to consumers will be very important, said Michael Mager, one of the only consumer representatives among the speakers. Mager is an attorney with Couch White LLC and counsel for Multiple Intervenors, a collection of about 60 commercial and industrial consumers participating in the NYISO carbon pricing plan.

The manner in which revenue is allocated back to consumers should be examined, Mager and others said. “Consumers must be the beneficiary” and receive carbon fee revenue in some fashion, said Joseph Wadsworth, head of energy market affairs at energy trading company Vitol.

The revenue generated by carbon pricing can help those affected by the prices, and “this needs to be a partnership” between consumers, power suppliers and others in energy markets, added Wiggins of NGSA.

Wiggins said there seems to be quite a bit of momentum on the carbon pricing discussion. She urged parties to work together to keep the momentum going.

In a brief interview after the technical conference, Tyson Slocum of Public Citizen said the political composition of Congress and who sits in the White House in 2021 will be a factor for any legislative plan on carbon pricing.

“I’m uncomfortable with RTOs taking the lead on this given their lack of full representation of all parties,” said Slocum, director of the energy program at Public Citizen. An RTO or ISO can only dedicate proceeds from a carbon fee within the RTO and ISO framework, and they need to have more affected stakeholders — including low-income customers – as part of that framework, he said.

Slocum praised Chatterjee for holding the session, but said he would like to see all affected stakeholders at the table for future discussions.

By Tom Tiernan ttiernan@fosterreport.com

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