FERC issues policy statement on carbon pricing in organized wholesale markets

by Paul Ciampoli
APPA News Director
April 20, 2021

The Federal Energy Regulatory Commission (FERC) last week issued a policy statement clarifying how it will consider market rules proposed by regional grid operators that seek to incorporate a state-determined carbon price in organized wholesale electricity markets.

“Carbon pricing has emerged as an important market-based tool in state efforts to reduce greenhouse gas emissions, including in the electricity sector,” FERC noted in a related news release.

The policy statement, which was released at FERC’s April 15 monthly open meeting, takes effect immediately.

FERC in October 2020 proposed a policy statement to clarify that it has jurisdiction over organized wholesale electric market rules that incorporate a state-determined carbon price in those markets. The proposed policy statement also sought to encourage regional electric market operators to explore and consider the benefits of establishing such rules. In September 2020, FERC convened a technical conference at which panelists expressed support for the idea of a carbon dioxide pricing regime for organized wholesale power markets.

Twelve states now impose some version of carbon pricing, with numerous additional states considering them, the final policy statement said. Various entities, including regional grid operators, are examining approaches to incorporating state-determined carbon prices into wholesale electricity markets.

The policy statement explains that wholesale market rules incorporating a state-determined carbon price can fall within the Commission’s jurisdiction under section 205 of the Federal Power Act (FPA).

The policy statement presents a framework for the Commission to exercise its jurisdiction when it reviews any future proposals under FPA section 205 while making clear that the Commission will evaluate any proposal based on the facts and circumstances presented in each proceeding, FERC said.

At the same time, the policy statement does not indicate a preference for carbon pricing over any other state policy. It affirms that whether and how a state chooses to address greenhouse gas emissions is a matter exclusively within that state’s jurisdiction, FERC said.

Danly, Christie weigh in

FERC Commissioners James Danly and Mark Christie concurred in part and dissented in part from the policy statement.

Commissioner Danly noted that any party with a rate on file can submit a Federal Power Act section 205 filing at any time. “I therefore cannot oppose the policy statement’s effective acknowledgement that section 205 has yet to be repealed and thus the Commission is obligated to consider such filings, including those related to carbon pricing initiatives,” he wrote.

“So, as seemingly unnecessary as it may be to announce a policy of ‘non-binding . . . potential considerations,’ I see no basis upon which to oppose that aspect of the policy statement.”

He noted that “non-binding” is the majority’s view of FERC’s jurisdictional powers as they memorialize them in the policy statement. 

“I accordingly dissent from the policy statement to the extent it attempts to prejudge the jurisdictional merits of any future section 205 proposals. Congress grants our jurisdiction, and the courts decree its limits when we overstep it. Anyone considering a section 205 filing following this issuance would be well-advised to read the courts’ decisions in order to inform themselves as to the proper bounds of a legitimate tariff proposal; interested parties should do the same when formulating protests,” he said.

Christie concurred that any filing under section 205 proposing some form of carbon pricing will be evaluated on the facts and circumstances attendant to that filing.

“I dissent from those parts of the Policy Statement to the extent those provisions may be interpreted to appear to invite proposals for carbon pricing that are inconsistent with the following general principles,” he wrote.

He said it is important “to be straightforward with the public about what is being considered in this proceeding. For a government to retain the trust of the people, it is imperative to avoid what George Orwell criticized as language that disguises the truth about government actions behind euphemisms and other distortions.”

Christie said the term carbon “price” as used in this docket “and by many commenters advocating for it, is a carbon tax. This is not just a matter of semantics. Using terms accurately will not only better serve and inform the public, but is essential to clarify, and avoid obfuscating, the legal – including constitutional – questions regarding this Commission’s authority.”

Christie emphasized “that simply labeling a carbon tax proposal accurately does not determine whether it is good or bad public policy, at either federal or state levels. Indeed, that’s not for an administrative agency to decide.”

He said that the broader question providing context for this and future proceedings goes to the heart of democratic government itself and, that is — Who should have the power to tax? 

“And we don’t have to answer that question because the Constitution already has. It makes it clear that only those elected by the people to the legislative branch have this power. Congress can legislate to grant this power to an administrative agency through a clear and specific statute – and take accountability for its decision – but in the case of taxing carbon no one has made a convincing case that Congress has granted this power to FERC,” he wrote.

Christie outlined general questions that he said are pertinent to the proceeding and implicitly raised by the Policy Statement and which have been alluded to by the many commenters:

• Can states impose carbon taxes? “As the Policy Statement notes, the answer is clearly yes, under their plenary police powers, as long as they don’t attempt to tax transactions where federal law has explicitly pre-empted them. They don’t need FERC’s permission to impose carbon taxes on retail sales or energy production, if they choose; they can do it now.”
• Can FERC impose a carbon tax at the wholesale level through its power to regulate RTOs/ISOs? Congress would have to empower FERC by a clear and specific statute to impose carbon taxes in RTO/ISO markets “and no one in this record has presented a convincing argument that Congress has done so,” Christie said.

Another question is whether FERC can allow an RTO/ISO to impose a carbon tax on wholesale sales of power.

“To a certain extent, this question implicates the broader question about the nature of RTOs/ISOs. Some argue that they are merely private utilities and FERC’s only role is to review a rate filing from an RTO/ISO and to approve the filing unless FERC finds it to be ‘unjust, unreasonable or unduly discriminatory,’” Christie said.

“Rather than being little more than private utilities, however, RTOs/ISOs in their present incarnation were essentially created by FERC, as part of the ‘restructuring’ era of the late 1990s/early 2000s, to carry out FERC-driven rate policies,” he said. 

RTOs and ISOs “have evolved to resemble somewhat more the hybrid entities that the British not so lovingly call ‘QANGOs’ (quasi-autonomous non-governmental organizations) than they do purely private utilities. This is especially true with regard to multi-state RTOs/ISOs, in which utilities from many different states participate and in which the interests and policies of those multiple states are implicated. Over the past two decades these organizations have taken on various regulatory roles that are more governmental in nature than private, in some cases literally displacing state regulatory authority,” wrote Christie.

“So, just as FERC cannot directly impose a carbon tax without a clear grant of congressional authorization, arguably it would be a distinction without a difference for FERC to approve a proposal from an RTO/ISO to impose a carbon tax.”

This would include efforts by a multi-state RTO/ISO and its market participants to address “leakage” by penalizing resources in states within the RTO that have not imposed a carbon tax, such as, for example, attempting to levelize the costs of state-imposed carbon taxes by imposing a higher offer floor on untaxed resources from the non-conforming “leakage” states in the RTO/ISO, he said. 

A fourth question is whether FERC can allow an RTO/ISO to recognize carbon taxes imposed by one or more states.

“If a state has used its sovereign authority to impose a carbon tax, directly or indirectly, and that tax is simply incorporated into the production costs of a resource from that state offered into the RTO/ISO markets, there is no reason for FERC to intervene. State-imposed regulatory costs, which of course differ from state to state, are already “baked in” to a bidder’s costs and present no cause for FERC’s concern,” Christie said. 

“Just as with proposals to accommodate other state policies, however, consideration of each specific proposal will be highly fact-intensive and one key question will be to determine whether the line has been crossed between simply recognizing an individual state’s carbon tax versus imposing that state’s tax on generating resources – and consumers – in other states that have not consented to be taxed, an especially salient question in multi-state RTOs/ISOs.”

All future proceedings under Section 205, 206 or other statutory provisions “will, of course, come with their own individual evidentiary records and will be judged individually at that future time. To the extent, however, the Policy Statement may be interpreted to invite proposals inconsistent with the general principles stated above, I respectfully dissent.”