GRID

DOE's resilience proposal: The looming legal assault

Troves of recent comments from supporters and critics of a Trump administration plan to support coal and nuclear power generation are just the beginning of what promises to be a bitter battle over the future of electricity markets.

As the Federal Energy Regulatory Commission sifts through arguments over a Department of Energy proposal to prop up "fuel-secure" generators to boost the grid's resilience, one thing is clear: The embrace of any approach that appears to favor coal and nuclear over other fuel sources will spark a mad dash to the courtroom.

Critics of the plan are ready to file challenges if FERC adopts anything close to Energy Secretary Rick Perry's vision. For now, it's a waiting game to see exactly how the commission moves forward.

"The proposal was vague and sometimes contradictory, and it's not really clear what DOE was really asking FERC to do," said Avi Zevin, an attorney for New York University School of Law's Institute for Policy Integrity, which submitted comments critical of the plan. "And so you could imagine a pretty wide range of actions that FERC takes."

In a recent interview with E&E News, FERC Chairman Neil Chatterjee noted that the commission could take a few different paths from here: adopting DOE's proposal as is, rejecting the plan, or commencing a new round of study and public engagement to consider whether or how to address resilience and reliability concerns.

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"The key there is whatever action we take, I want to be absolutely certain that it will withstand legal scrutiny, and that takes time," he said.

Many FERC watchers expect the agency to opt for the third approach: conducting a longer deliberation process. That means the 1,000-plus comments submitted on DOE's proposal over the past month will primarily serve to build a record for the next phase at FERC and for eventual litigation, if needed.

"You will have a massive coalition of folks, if they simply adopted what DOE has proposed, who would be challenging this," said Earthjustice lawyer Kim Smaczniak, who is representing a dozen environmental groups against the plan.

In the likely litigation mix: power companies, states, environmental groups, trade organizations, natural gas firms, pipeline developers and more. Experts say the fated legal battle may not quite reach the levels of the Clean Power Plan, which attracted hundreds of litigants, but it could be close.

Hundreds of parties have already submitted comments on DOE's proposal. Scores of utilities, grid operators and regulators oppose the plan, alongside industry groups ranging from the American Petroleum Institute to the Solar Energy Industries Association.

In the camp supporting Perry's vision (though differing on how it should be implemented) are many of those that stand to cash in: FirstEnergy Corp., Murray Energy Corp., Exelon Corp., the Nuclear Energy Institute, West Virginia and more — plus local organizations that benefit from nearby coal and nuclear plants.

Some other companies that could benefit have criticized the proposal.

'We simply cannot wait any longer'

Many critics argue that if FERC adopts anything resembling Perry's plan, resulting litigation will be relatively cut and dried.

That's because, they say, DOE's proposal is missing a key element needed to support a FERC rule that would change how power markets operate: a threshold determination that the current approach isn't working.

"It doesn't use the magic words about existing rates being unjust and unreasonable," Zevin said. "And more importantly, it doesn't provide enough record as it is that would support that finding."

Zevin was referring to the "just and reasonable" standard that governs much of what FERC does in electricity markets. The Federal Power Act sets out two steps for FERC to take action on wholesale rates: First, the agency finds that current rates are "unjust, unreasonable, unduly discriminatory or preferential." Then it proposes a just and reasonable fix.

"FERC can only order a change in rates if it first concludes that current rates are unjust and unreasonable," said Harvard Law School electricity expert Ari Peskoe, who noted that FERC's previous proposals for market rules through the years have included such a finding. "That's fundamental to the Federal Power Act. It's to protect utilities and the public from arbitrary rate changes."

DOE's proposal calls for compensating certain generators for keeping fuel reserves that Perry argues will make the grid more resilient. But critics say it never actually makes a formal determination about the current system. Peskoe says that's a fatal flaw.

"It's an insurmountable problem," he said. "FERC can't correct it with a final rule."

Proponents of DOE's proposal paint a different picture, one of glaring injustices that threaten both energy companies and the American public. According to Exelon, whose nuclear fleet stands to benefit from Perry's plan, the way power markets currently function runs afoul of the Federal Power Act because they're not protecting customers from "catastrophic risks."

"The organized markets were not designed to address resilience to fuel supply interruptions, and as a result customers have been left exposed to catastrophic risks," the company wrote in comments. "As a result, the organized markets are no longer producing just and reasonable market outcomes, and they need modification in order to comply with the Federal Power Act."

Murray Energy put it another way: "We simply cannot wait any longer."

Chatterjee, the current FERC chairman, has gotten the message loud and clear. He stopped short of calling the current market structure unjust and unreasonable, but he argued that the commission must take a long view to ensure that the markets do not evolve into a broken system.

"I would say that in the short term, I think the markets are working well, but the question that we have to answer is one for the long term," he said. "There are consequences to the current market pressures that we're facing, and if the end result of that is baseload units retiring prematurely because of the short-term pressures they're facing in the marketplace, we need to understand what the long-term implications of that would be."

The Nuclear Energy Institute expanded on that point in a filing to FERC last week. The organization, which largely supports the proposal, wrote that the Federal Power Act's just and reasonable standard applies to both current and future market conditions.

"The Commission's responsibility to ensure just and reasonable rates is not limited to the next month, year, or planning cycle," NEI wrote. The group pointed to Supreme Court precedent to support its point: The high court in 1968 emphasized that the agency must consider future interests when deciding rates under the Natural Gas Act, which largely parallels the Federal Power Act.

But critics maintain that DOE's plan never spelled out legal deficiencies in the current system, leaving FERC with no legal foundation for a rule — or even for the proposal. Indeed, many refuse to even use the word "NOPR," the regulatory parlance for the notice of proposed rulemaking DOE is pushing. They say it's not a proper proposal and shouldn't be recognized as such.

"Our filing didn't call it a 'NOPR' because it is legally deficient," Smaczniak said. "It's in quotes."

'Patently unreasonable'

Opponents of the plan say their threshold complaint — the absence of a FERC finding that current markets are not just and reasonable — is compounded by the breakneck speed of the public comment process for the proposal.

DOE sent the directive to FERC in late September, and stakeholders on all sides have been working overtime to craft detailed input. Initial comments were due less than a month after DOE issued the proposal, and replies were due two weeks later. FERC has until Dec. 11 to decide whether to adopt or reject the plan or study the issue further.

The Electric Power Supply Association, which represents competitive generators, railed against the expedited process last week, noting that FERC had received nearly 500 initial comments totaling more than 21,000 pages as of Oct. 27, and stakeholders had just two weeks to reply.

"It is patently unreasonable to expect EPSA and other interested parties to review and respond fully to this much material in just 15 days, as required by the October 2 Notice," the group wrote. "For its part, EPSA has suffered tangible prejudice as a result of the highly compressed period allowed for reply comments."

EPSA noted that with more time to respond, it could have prepared detailed testimony and analyses from experts.

Lewis & Clark Law School's Green Energy Institute argued that the constrained comment period violates the Administrative Procedure Act and the Department of Energy Organization Act, which requires that changes to rates "assure full consideration of the issues and an opportunity for interested persons to present their views."

The threshold "just and reasonable" issue and complaints about the hurried comment period are intertwined. Although FERC could beef up a final rule with a detailed determination that current markets aren't working fairly, commenters would not have had a chance to weigh in on that finding, Peskoe said.

"The only hint that there's any problem with current rates is this discussion of a lack of resiliency pricing in the NOPR," he said. "But the problem with that is it's just a totally meaningless statement. It doesn't define how resilience relates to wholesale rates. FERC itself has never even suggested a connection.

"It really leaves commenters just guessing as to what DOE means, and that's really not how federal rulemaking works," he said.

Smaczniak said the structural concerns are enough to sink the proposal: "In the end, any single one of those is enough to basically send it back to the drawing board in the court."

Supporters of Perry's plan took aim at the critiques in reply comments last week, calling them "procedural nitpicks." Murray Energy countered that DOE's proposal included exhaustive detail about problems with today's grid, meeting the requirement that FERC first determine that current rates aren't just and reasonable.

Plus, the coal company said, the many in-depth comments submitted to FERC show that the quick comment period was manageable, not to mention necessary for such an urgent issue.

"The weight of the record undercuts those who argue that the Commission's timeline for comments is too short," CEO Bob Murray wrote. "The renewables industry, among others, asserts that the comment period fails to provide 'adequate time' for comment under the Administrative Procedure Act, asserting that the timeline should be 60 days is most cases.

"But this is not most cases," he continued. "As is described above, there is an urgent issue that warrants immediate action — the near upcoming risk of premature retirement of dozens of generating sources."

Murray referenced legal precedent supporting quick comment periods. A 1996 decision from the U.S. Court of Appeals for the District of Columbia Circuit, for example, upheld a 37-day comment period for a federal order affecting broadband technology. The court ruled that the duration was sufficient given the urgency of the issue the order addressed.

Is the plan fair?

The meat of DOE's plan has attracted even more criticism than the alleged procedural deficiencies.

To start, the power industry and other parties do not even agree on whether there is a problem with the electric grid that FERC needs to address.

DOE's proposal warned that premature retirements of coal and nuclear plants — often less cost-competitive than facilities powered by natural gas and other fuels — could leave the grid vulnerable during extreme weather events and emergency situations.

Critics question DOE's basis for that conclusion, noting that recent reports from the North American Electric Reliability Corp. and from DOE itself do not show a grid in crisis.

If FERC adopts a rule based on DOE's proposal, challengers will use these arguments to attempt to persuade judges that the agency's decision has no reasoned basis and is arbitrary and capricious — in violation of the Administrative Procedure Act.

"I'm pretty confident that any judge would look at that and say, 'What are you guys talking about? This doesn't make any sense,'" said Center for Biological Diversity attorney Howard Crystal, part of the environmental coalition opposed to the plan.

Challengers also argue that adoption of Perry's proposal would flout the Federal Power Act by creating unjust, unreasonable and discriminatory wholesale power rates. In comments last month, the watchdog group Public Citizen argued that the plan would result in unfair costs to consumers.

"It is not just and reasonable to allow unregulated profits when market conditions are conducive for it, and then force ratepayers to fund expensive 'market fixes' to shoulder these same companies' risks," Public Citizen told FERC.

The Green Energy Institute said the plan also discriminates against other fuel sources, including natural gas and renewables, and gives an unfair advantage to coal and nuclear operators in the narrow area covered by the rule — primarily those in the PJM Interconnection, which oversees the grid for 13 states and Washington, D.C.

A cross-section of industry groups representing renewables and gas have raised similar concerns, arguing that the plan would unfairly distort markets.

But if FERC adopts the proposal and gives a decent explanation for why it considers resulting rates to be fair, experts say challengers may have an uphill battle on those arguments in the courtroom.

"As long as FERC explains its reasoning in the order and can point to some evidence in the record, even if there's evidence on the other side, courts are unlikely to reweigh the evidence and rule against FERC," Harvard's Peskoe said.

Indeed, courts have previously upheld FERC orders that treat fuel sources differently. For example, the D.C. Circuit earlier this year upheld the commission's approval of PJM capacity market rules that incentivize the type of continuous generation provided by fossil fuels and nuclear power.

FirstEnergy, which would benefit from DOE's proposal, highlighted that case and other precedent in comments last week. The company noted that FERC has authority to "reasonably distinguish between resource types" when those resources provide different value.

"That is the case here," FirstEnergy wrote. "Not only do fuel-secure resilient generators have different costs than other generators, they also provide different services — namely, resiliency services — to customers."

Still, Peskoe warned, DOE's proposal is unusual enough that it could yield different results in court: "This is a unique circumstance because there is so much evidence against the rule and very little in favor of it, at least as I see it, so maybe a court would say, 'This is an unusual situation.'"

A long fight

For now, litigation prospects depend on a series of ifs.

If FERC moves to address the resilience issues raised by DOE and if the commission's path mirrors Perry's approach in boosting nuclear and coal, a legal brawl will follow.

Some critics of the proposal are hopeful that FERC will reject the plan, and a courtroom showdown won't be necessary in the end.

"There are a number of folks at FERC's offices who understand the legal standards, and they will have seen the large number of comments pointing out the basic threshold deficiencies with this," said Smaczniak, the Earthjustice lawyer. "Without speculating on what they're intending to do, I'd be surprised if the staff did not take notice of that and take that into account."

She and other opponents of the plan acknowledge that some issues raised in the proposal are worth further conversation, including how FERC can ensure the electric grid is prepared for extreme weather.

Zevin likewise noted that while he disagrees with Perry's proposal and the quick rulemaking process, he welcomes the conversation.

"The idea that FERC can make the markets work better with respect to reliability or resilience or certain types of generation is important for them to be thinking about, and they have been thinking about it," he said. "To the extent they take this as an opportunity to really seriously think hard about those questions, I think that's good.

"FERC now has the opportunity to turn that into something useful if it wants to," he added.

If Perry's proposal does make it to the finish line, a courtroom fight would likely begin sometime next year at the earliest.

FERC is expected to decide on a path forward by Dec. 11. If it adopts the DOE plan, challengers will have a month to ask the agency for a rehearing. Commissioners can take months to give a final answer to such a request. If FERC ultimately denies it, challengers then have 60 days to head to the courtroom.

Zevin noted that when FERC issued a high-profile transmission planning measure known as Order No. 1000 in July 2011, it did not issue a rehearing order until May 2012. Litigation began in the D.C. Circuit that month and was not resolved until August 2014.

In other words, anyone with a stake in potential litigation over DOE's plan can settle in for a long fight.

Twitter: @ellengilmer Email: egilmer@eenews.net

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