Week Ending June 8, 2018

Industry Eyeing DOE for Next Step on Grid Resilience; McIntyre Addresses Legal Authority

This Article Appears as Published in Foster Report No 3102
Industry Eyeing DOE for Next Step on Grid Resilience; McIntyre Addresses Legal Authority

With plenty of questions unanswered about the Trump administration’s plan to stem the retirement of coal and nuclear power plants, all segments of the energy sector are looking at the Department of Energy (DOE) to see if Energy Secretary Rick Perry will follow President Donald Trump’s directive to halt plant retirements.

With a few exceptions for companies that would benefit from such a move, many energy industry trade groups are blasting the proposal as a bailout for uneconomic generation facilities sought by political donors such as coal firm Murray Energy and utility parent FirstEnergy Corp. FirstEnergy Solutions, which owns coal and nuclear plants and recently filed for bankruptcy, has a request for an order from Perry pending at DOE.

The head of another utility that would benefit from the plan, Exelon Corp., did not endorse the actions laid out in a draft memorandum that was leaked to the media. According to media reports from the Edison Electric Institute annual meeting, Exelon CEO Chris Crane said there is not enough information in the draft memo to reach a judgment, but the company prefers market reforms to provide adequate compensation for its nuclear generation fleet.

The steps in the memo mark a heavy government intervention in the marketplace, which is among the criticisms coming from fossil fuel groups, renewable energy firms, competitive market supporters, consumer groups and one of the largest independent system operators (ISOs). Others have noted the political connections of former Murray Energy lobbyist Andrew Wheeler, who is now deputy administrator at the Environmental Protection Agency, and FirstEnergy officials who sought a meeting with Perry on issues related to the coal industry.

At a June 6 event at the Federal Emergency Management Administration, Trump encouraged Perry to make an announcement to support “clean coal” and nuclear companies. He said Perry needed to have a news conference on the idea.

In a June 1 statement from White House Press Secretary Sarah Huckabee Sanders on fuel-secure power facilities, the White House said impending retirements of fuel-secure generation facilities are leading to a “rapid depletion” of a critical part of the energy mix and affecting the resilience of the power grid. “President Trump has directed Secretary of Energy Rick Perry to prepare immediate steps to stop the loss of these resources, and looks forward to receiving his recommendations,” according to the statement.

The legal backing for such a plan is contained in the draft memo that was leaked ahead of a June 1 meeting of the National Security Council.

According to the draft memo, DOE would order ISOs and regional transmission organizations (RTOs) to buy power from coal and nuclear units to limit any future retirements for two years. The effort follows a plan by Perry to have FERC adopt a rule to provide additional compensation for coal and nuclear units. The proposed rule from Perry was rejected by the Commission in January, with FERC taking comments on the definition of resilience and other issues.

That proceeding (AD18-7) remains open and FERC staff is developing options for the Commission to consider based on the comments received, FERC staffer Deepak Ramlatchan said at a June 7 meeting among members of FERC, the Nuclear Regulatory Commission and a representative from the North American Electric Reliability Corp. FERC staff hopes to come up with some recommendations for commissioners to consider, said Ramlatchan, of the Office of Energy Market Regulation.

Power grid resilience, generally defined as the ability to withstand and reduce the magnitude or duration of disruptive events, is gaining more attention with the changing generation resources, several speakers at the meeting said. Fuel security is becoming a theme, and because nuclear reactors have fuel on site they have traditionally operated as baseload facilities with constant output at 100%, though some reactors in the Midwest are ramping output up and down to follow demand on the regional grid, staff from NRC and FERC said. Most reactors do not do that because of the wear and tear on the components of the facilities, explained Mark Lauby, senior vice president and chief reliability officer at NERC.

The June 7 meeting marked a continuation of previous meetings by NRC and FERC on the subject of grid reliability, cybersecurity, critical energy infrastructure and the different responsibilities of the agencies. All five commissioners from each agency were at the meeting, and when the public portion of the meeting ended FERC and NRC members went into a closed session.

The Trump administration memo was not discussed during the public portion of the meeting. That memo said DOE would be exercising its authority under the Defense Production Act (DPA) and Federal Power Act (FPA) to have ISOs and RTOs buy power from a list of generation facilities, establishing a Strategic Electric Generation Reserve. That generation reserve would promote the national defense and maximize domestic energy supplies, similar to the Strategic Petroleum Reserve that was created to address oil supply emergencies.

The generation reserve is needed to maintain power supplies in times of emergency, according to the memo. Perry is part of the National Security Council, and the memo discusses power supply reliability and resilience in support of Department of Defense facilities. It notes that during the winter storm in early 2018, coal and nuclear generation units accounted for a large segment of power supplies in PJM. Gas-fired generation use increased only slightly during that period “showing no resilience to increased demand,” the memo said.

DOE also could play a role in protecting the power grid from physical or cyber threats through the Fixing America’s Surface Transportation (FAST) Act, which amended FPA subsection 215A(b)(1) to enable the Secretary of Energy to issue an order upon declaration by the president of a grid security emergency, the memo noted. Such an order would protect or restore critical electric infrastructure as needed in response to a physical or cyber threat to the grid.

Large amounts of baseload generation capacity from coal and nuclear plants are being retired and “we’re trying to figure out what we can do about it,” Mark Menezes, under secretary of energy at DOE, said June 5 at the annual Energy Information Administration (EIA) conference. “We do have a problem” with the rate of baseload generation retirements taking place and DOE is examining the issues, Menezes said.

He said coal and nuclear plants are retiring at an alarming rate due to a combination of issues, including wholesale power market designs that have had unintended consequences. “We must secure a resilient and secure energy system,” as today there are unprecedented numbers of cyberattacks from entities and nations that do not share U.S. values, Menezes said. The question becomes not if there will be a successful attack, but how will the U.S. withstand and recover critical facilities, he told the EIA gathering.

Much like the memo, he told the EIA gathering that besides the loss of nuclear generation, the U.S. could lose technical expertise, supply chain components and the ability to influence international policy. For instance, Saudi Arabia intends to build nuclear generation to save their oil from being burned for power generation and compete against the U.S. in the global oil market.

As of press time June 8, DOE had not issued an order calling for ISOs to buy power from a list of generation facilities.

Among the questions floating around the proposal are who is producing a list of facilities, how would ISOs go about contracting with such generators, who would pay for any additional compensation, would the plan withstand legal challenges, and would FERC be involved.

FERC Chairman Kevin McIntyre addressed the latter question at the EIA conference and in speaking with reporters after his prepared remarks. When asked by EIA Administrator Linda Capuano how FERC might address the “dilemma” of a DOE order, McIntyre said he might not characterize the situation as a dilemma.

“I’m a rule of law guy” and there are legal principles laid out in the DPA and FPA that could be applied by Energy Secretary Rick Perry, McIntyre said. Just because authority under either statute is rarely used does not mean it is not a valid exercise of that authority, he said. FPA Section 202(c), the section covering emergency conditions that was at the heart of a request by FirstEnergy, does not have a clear linear path for use when it is invoked, McIntyre said.

An entity to be compensated can work out an arrangement or contract with a grid operator, similar to a settlement, that would not involve FERC, he explained. “If that effort should fail then the matter could well come to the FERC,” and the Commission would strive to work out a rate or economic compensation similar to a rate case that is a normal part of FERC’s duties. “It would require us to get the dollars and cents right,” he told Capuano.

Speaking with reporters, McIntyre said whether the DPA or FPA is invoked is a decision that is not for him or anyone at FERC to address. Under the FPA, there are different scenarios that could develop to address power plant compensation without involving FERC and the Commission is looking at such details now.

If some type of arrangement is worked out between a plant owner and grid operator, it would have an easier standard of review than going through a FERC review under which the Commission would have to determine that any rates are just and reasonable, McIntyre said. FERC may be called upon to mitigate any impact on consumers, but there are a number of different ways it could address such a situation, he said.

McIntyre said he has not seen any list of generation facilities and commented that the only document he has seen is the leaked memo in draft format.

In his comments to the EIA audience, McIntyre said simply because a statute has rarely been used does not mean it is invalid.

FirstEnergy made its request to Perry under Section 202(c) of the Federal Power Act, Section 301(b) of the DOE Organization Act, and certain DOE rules and practices. Shortly after that request was made, Trump administration officials indicated that they would consider use of the Defense Production Act (DPA), a Cold War era law that enables presidents to use the private sector in times of war or emergencies that threaten national defense capabilities.

The FirstEnergy request seeks intervention from Perry to find that an “emergency condition” exists in PJM such that additional compensation is needed to support coal and nuclear power plants at risk of retirement, which would diminish fuel security and diversity of generation in the PJM area.

The Trump administration plan as outlined in the memo has met resistance from a coalition of interests, including PJM, which on June 1 issued a statement that “any federal intervention in the market to order customers to buy electricity from specific power plants would be damaging to the markets and therefore costly to consumers. There is no need for any such drastic action.”

At the EIA conference, the head of ISO New England addressed the White House plan and said any order from DOE would have limited impact in New England due to the lack of coal-fired power plants in the region and that ISO New England relies on a three-year forward market for generation supplies. A DOE order would not help any plants in New England, Gordon van Welie, president and CEO of ISO New England, said June 4.

The problem with rules built around resilience is that the term is not clearly defined and the ambiguous nature of it allows parties to seek rules to meet their own interests, said David Patton, president of Potomac Economics, which is the independent market monitor for ISO New England, the New York ISO and others. Policymakers need to have patience to let the power markets work and respond with price signals to support infrastructure investment, Patton said at the EIA conference.

ISO market operations support power grid reliability, and almost all the blackouts or reliability challenges have been tied to transmission and distribution system operations, not generation or fuel supply issues, Patton said.

The coalition includes the American Petroleum Institute, the American Wind Energy Association, the American Council on Renewable Energy, the Electric Power Supply Association, the Electricity Consumers Resources Council, the Energy Storage Association, the Natural Gas Supply Association (NGSA) and others.

They dubbed the plan a bail out of coal and nuclear power plants, a federal intervention in competitive market operations that is not warranted, and a Trump administration measure to support political donors that would benefit from such a move. The plan is “an exercise in crony capitalism” and a command-and-control approach that would disrupt and undermine competitive markets that have improved reliability, resilience, and affordability, said Malcolm Woolf, senior vice president of policy at Advanced Energy Economy.

“As has been well established – by FERC, by grid operators, by industry experts – there is no emergency that would justify propping up uneconomic power plants that are superfluous in an over-supplied region,” Woolf said.

Use of the DPA and FPA to prop up uneconomic power plants would be a short-sighted action that drives up costs to consumers and an inappropriate use of federal government emergency authority when no emergency exists, said NGSA President and CEO Dena Wiggins. “We need to move away from a narrow focus on resuscitating individual projects and refocus the discussion on what lies at the heart of resiliency – the ability to reliably serve power customers in the most cost-efficient manner over both the short and the long-term,” Wiggins said.

PJM, where much of the coal and nuclear plant retirements have been taking place and where FirstEnergy sought its ruling from DOE, said in its statement that it has not received any official document from DOE. Its analysis of planned retirements determined that there is no immediate threat to grid reliability, and the recent results of its capacity auction for power supplies in the coming years shows a diverse mix of coal, nuclear, natural gas, and renewable resources along with demand response and energy efficiency resources.

The PJM grid “is more reliable than ever,” and PJM has begun a fuel security initiative to address resilience concerns, the grid operator said. “Our goal with that initiative is to ensure that the already reliable electric grid will continue to remain both reliable and resilient for years into the future without the need for government intervention in the marketplace,” it said.

ISO New England has more of a fuel security concern due to heavy reliance on gas-fired generation and deliverability constraints, van Welie said at the EIA conference. There is a disconnect between power generators’ fuel supply contracting measures and the power prices that do not send the best signals to generators for long-term fuel delivery capabilities, he said.

“Coal is no longer relevant” as the last coal-fired generation facility shut down in early 2017, van Welie said when speaking with reporters at the EIA conference.

The Natural Gas Council issued a June 7 statement touting the reliability of the gas industry’s ability to meet consumer demand and the Interstate Natural Gas Association of America issued a statement the same day taking issue with the draft memo. The memo used an analysis from the National Energy Technology Laboratory that concluded gas-fired generation showed no resilience to increased demand during the Bomb Cyclone winter storm.

INGAA “is deeply troubled by the Trump administration’s apparent move to scapegoat natural gas to prop up uneconomic coal and nuclear plants,” according to the statement.

“There is absolutely no justification for the extreme intervention in energy markets suggested” in the draft memo, and “such a move would be bad public policy, costly to American consumers and the economy, and legally questionable,” said INGAA President and CEO Don Santa.

Much of the rationale outlined in the draft memo is fundamentally flawed, particularly as it relates to natural gas pipelines, INGAA said, noting that unlike the power grid “pipeline incidents do not result in cascading outages and widespread losses of service. There is no natural gas equivalent to a rolling blackout.”

Pipeline operators have measures in place to protect pipeline infrastructure from cyber and physical security threats and mitigate the effect of a successful intrusion, the pipeline group said.

“INGAA firmly believes that natural gas provides a fuel-secure resource for electric generation and will continue to do so into the future.”

By Tom Tiernan TTiernan@fosterreport.com

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