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FERC proposes policy statement on state-determined carbon pricing in wholesale markets

October 15, 2020

by Paul Ciampoli
APPA News Director
October 15, 2020

The Federal Energy Regulatory Commission on Oct. 15 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 seeks to encourage regional electric market operators to explore and consider the benefits of establishing such rules, FERC noted in a news release. The action took place at the Commission’s monthly open meeting.

In late September, FERC convened a technical conference at which panelists expressed support for the idea of a carbon dioxide pricing regime for organized wholesale power markets.

FERC noted that 11 states currently impose some version of carbon pricing, and other entities, including the regional markets, are examining this approach.

The proposal unveiled by FERC on Oct. 15 finds that regional market rules incorporating a state-determined carbon price can fall within the Commission’s jurisdiction over wholesale rates.

However, determining whether the rules proposed in any particular Federal Power Act (FPA) section 205 filing do fall under FERC jurisdiction will be based on the specific facts and circumstances.

The Commission is seeking comment on the appropriate information to consider when reviewing such a filing, including: 

  • How do the relevant market design considerations change depending on the manner in which the state or states determine the carbon price? How will that price be updated? 
  • How does the FPA section 205 proposal ensure price transparency and enhance price formation?  
  • How will the carbon price or prices be reflected in locational marginal pricing?  
  • How will the incorporation of the state-determined carbon price into the regional market affect dispatch? Will the state-determined carbon price affect how the regional market co-optimizes energy and ancillary services?  
  • Does the proposal result in economic or environmental “leakage,” in which production may shift to more costly generators in other states, without regard to their carbon emissions? How does the proposal address any such leakage?  

Comments on the proposed policy statement will be due in 30 days, with reply comments due 15 days after that. 

Both FERC Chairman Neil Chatterjee and Commissioner Rich Glick expressed support for the policy statement.

In a written statement, Chatterjee clarified that the policy statement is not an effort by FERC to take proactive action to set a carbon price, noting that the Federal Power Act does not give the Commission authority to act as an environmental regulator. He also explained that the statement addresses only consideration of proposals filed under FPA section 205, and not section 206.

FERC Commissioner James Danly concurred in part and dissented in part from the policy statement.

“I dissent in part because I believe that the issuance of a policy statement on this subject—a wholly discretionary act—is unnecessary and unwise,” wrote Danly.

He said he was concurring “with that part of the policy statement noting that we have jurisdiction to entertain section 205 filings that seek to accommodate state carbon-pricing policies, which is a fundamental principle that cannot be doubted.”

With respect to his concern that the Commission should not exercise its discretion to issue a policy statement, Danly noted that he expressed similar concerns in his recent dissent to FERC Order No. 2222 requiring RTOs/ISOs to promulgate rules to accommodate distributed energy resource aggregators.

In that dissent, he questioned the Commission’s seizure of authority at the expense of the states and advocated that FERC should allow RTOs and ISOs to develop their own DER programs in the first instance. “[T]hen the question of the Commission’s jurisdiction will be ripe,” he wrote in the Order No. 2222 dissent.

Danly noted that FERC’s proposed policy statement does not mandate that RTOs/ISOs adopt carbon-pricing accommodation regimes, saying he agrees that the Commission should not issue such a mandate.

“Instead, the policy statement ‘encourages’ RTO/ISO rule changes. Without seeing a proposal, the Commission predetermines that any such proposal will be within the Commission’s jurisdiction and ‘would not in any way diminish state authority,’” the Commissioner wrote.

“That may well turn out to be true, but I would have waited until we had an actual 205 filing before us rather than pre-judging the issue based on unstated assumptions about how such programs might work,” Danly said.

“It is easy to imagine any number of RTO/ISO carbon-pricing proposals that would violate the Federal Power Act by impermissibly invading the authorities reserved to the states.”

Danly also took issue with the policy statement’s assertion that incorporating a state-determined carbon price into RTO/ISO markets could represent another example of the type of program of cooperative federalism that the Supreme Court noted with approval in FERC v. the Electric Power Supply Association.

“There is no program. This is instead a non-binding, blanket dismissal of potential jurisdictional concerns,” Danly said.

As to the substance of the policy statement, Danly concurred. “I cannot do otherwise. The policy statement amounts to little more than a statement of fact: section 205 of the Federal Power Act has not been repealed and the Commission therefore has jurisdiction to entertain section 205 filings that seek to accommodate state carbon-pricing policies. Surely, that need not be stated.”

And to the extent the Commission “feels the need to ‘clarify’ the fact that we have the power to accept just and reasonable tariff revisions that are designed to include mandatory state charges in energy and capacity market offers, I am hard-pressed to identify a more settled area of Commission law.”

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