By Jennifer Chen, Natural Resources Defense Council
NRDC, Sierra Club, Union of Concerned Scientists, and Earthjustice on Friday filed a legal brief in federal court explaining why certain electricity market rules that are harmful to consumers and the environment are illegal and should be invalidated. The rules were proposed by PJM (the electric grid operator serving 13 Mid-Atlantic and Midwestern states and the District of Columbia) and approved by the majority of the commissioners at the Federal Energy Regulatory Commission (FERC), the agency charged with regulating PJM. The FERC Chairman dissented, pointing to the rules’ high costs and uncertain benefits.
Paying for the new rules are the 61 million electricity customers in PJM’s service territory, and hundreds of thousands of these customers are members of NRDC, Sierra Club, and UCS. At stake in this case is our members’ interest in and access to affordable clean energy.
Legally at issue is whether FERC’s approval was based on rational decision-making supported by substantial evidence, and whether FERC violated the Federal Power Act (the Act) in allowing PJM to adopt rules that result in unreasonable electricity rates and disadvantage seasonal or variable clean energy without good reason.
We argued that FERC’s decision-making process did not pass legal muster—FERC failed to engage in the required analysis to show that the rules are reasonable. Evidence submitted to FERC demonstrates that the rules drive up costs to consumers in the billions of dollars but completely lacking is the evidence indicating that the rules would confer benefits justifying these costs. FERC’s support for its approval of the rules under the Act (which requires that rates be reasonable) then essentially boiled down to a talismanic invocation of electric reliability improvements with no explanation of when, how often, or the degree to which customers could expect to see this alleged benefit. A reasoned decision-making process, we believe, would have led FERC to conclude that the rules’ resulting rates were unreasonable and in violation of the Act.
We next argue that FERC’s approval also violated the Act because the rules unquestionably exclude most clean energy resources from participating in the nation’s largest “capacity” market (operated by PJM) without good reason. FERC’s finding that there is no undue discrimination under the Act again lacks analysis.
To provide a bit of background, PJM operates a market that currently allows various energy resources (such as coal, gas, nuclear, wind, and solar power, as well as customer promises to reduce electricity consumption) to sell commitments to supply power or curtail use in the future. These future commitments (or “capacity”) and the revenue from their sales inform resource investment and retirement decisions.
PJM’s new rules require all resources participating in this capacity market to be available to deliver electricity for 12 months at a time. This all-year availability requirement is superficially resource-neutral, but it disadvantages or excludes resources that perform reliably and cheaply in the winter (like wind) and the summer (like solar and smarter use of air conditioning) but not necessarily all year-round at the same levels. PJM will fully implement its new rules in 2017, and this will largely eliminate resources with seasonal or variable attributes from this market.
The annual availability requirement clearly has a discriminatory effect, and FERC has a duty under the Act to ensure that the market rules do not confer “undue prejudice or disadvantage.” But FERC, without much explanation or analysis, seemed to think any discrimination was not undue. Essentially, FERC engaged in incomplete and circular reasoning in finding that certain seasonal resources were of lesser quality than annual resources, without establishing what qualities are important in capacity resources other than that they must be annual.
Had FERC questioned the annual requirement, it could have found that there is nothing magical about 365-day availability—in fact, PJM could ensure year-round reliability with seasonal resources by procuring capacity for four, six, or eight months at a time—that is, by covering the year with commitment periods that more closely track the seasons. This would enable solar, wind, and customers’ smarter use of air conditioning to participate in the capacity market.
Had FERC considered cost-effectiveness as a desirable quality in capacity resources, it could have found that seasonal resources tend to bring down capacity prices for consumers. In fact, completely eliminating seasonal resources to only procure annual resources could further inflate costs to consumers by up to $5 billion more per year, as shown by our analysis based on PJM’s 2015 auction results and PJM’s market monitor’s analysis of the 2016 results.
Had FERC considered performance during extreme weather when fuel shortages, fuel price spikes, and fuel delivery can be problematic, it could have found that wind, solar, and customer curtailment are sure bets compared to relying entirely on fuel-burning annual resources. Notably, some seasonal resources played a critical role in keeping the lights on during the 2014 Polar Vortex while many fossil power plants were unable to deliver electricity in the extreme cold despite being paid for their capacity commitments (which was the impetus for PJM rushing to develop the new rules in the first place). PJM’s new rules effectively punish the very resources that helped keep the lights on when the grid was stressed and reward the annual resources that failed to deliver electricity when needed by now allowing them to earn even more than they could before under the old rules.
Thus, a more thorough consideration of important capacity resource qualities could have led FERC to conclude that seasonal resources can contribute to cost-effective, year-round reliability and help the grid in times of stress. PJM’s rules disadvantaging them without good justification is therefore “undue,” and FERC’s approval violates the Act for that reason.
The brief was written in collaboration between the environmental groups and associations representing public power, rural electric cooperatives, and demand response providers as well as a state regulatory agency, who all “petitioned” the D.C. Circuit Court of Appeals to overturn the new rules. Representatives of renewable energy and consumer interests plan to support our position with intervenor and amicus briefs to be filed soon. This coalition has diverse interests, but we all share the same goals of affordable and reliable power and therefore jointly advocate that the Court invalidate FERC’s decision.