FERC Chair Neil Chatterjee said the commission’s technical conference on carbon pricing Wednesday would not be an academic exercise.

Although the commission “is not an environmental regulator,” he said, “our complex energy markets cannot be hermetically sealed from state environmental policies. … And it’s evident to anyone who’s watched us over the past several years [that] we’ve grappled with the thorny issues that arise at the intersection of state policies and our markets. We’re at a pivotal point when it comes to these discussions — a point that, I think, will ultimately lead to action in some shape or form.”

FERC heard from 32 industry officials, economists, lawyers, RTO executives and others during the daylong conference, which Chatterjee scheduled in response to a petition by a broad coalition of independent power producers and renewable energy trade groups in April (AD20-14). (See IPPs, Renewable Groups Seek FERC Carbon Pricing Conference.)

Most of the panelists urged the commission to support state and RTO efforts to introduce carbon pricing, although they said a uniform national price regime authorized by Congress would be preferable.

Here are the highlights of what we heard.

‘Crash Warnings’

Sen. Sheldon Whitehouse (D-R.I.) opened the conference with a list of potential bad outcomes if the U.S. and other industrialized nations fail to curb emissions linked to increasingly severe weather.

“These crash warnings focus separately on a coastal property value crash, a separate carbon bubble crash and insurance failure as risk becomes too unpredictable to value. But nothing says all three can’t happen,” said Whitehouse, co-founder of the Senate Climate Action Task Force and the ranking Democrat on the Senate Environment and Public Works Committee. “The warnings are many, clear and well founded. … When you are facing the risk of an economic crash, it’s hard to anticipate when the avalanche will start. It could be soon. It could be devastating.”

Legal Authority

Speakers on the day’s first panel agreed that the commission has the legal authority to approve a carbon price submitted by an RTO or ISO.

David Hill, a member of the NYISO Board of Directors and an adjunct senior research scholar at the Columbia University Center on Global Energy Policy, went further. “I believe the authority and jurisdiction exist under Sections 205 and 206 of the Federal Power Act for an ISO or RTO tariff and market design to integrate state carbon pricing and carbon-control policy. And it potentially could be unjust, unreasonable or unduly discriminatory for it not to do so,” Hill said.

Kate Konschnik, director of the Climate & Energy Program at Duke University’s Nicholas Institute for Environmental Policy Solutions, said carbon pricing could “potentially reduce state policy proliferation.”

She ended her opening remarks by chiding FERC for failing to invite any state regulators or more women to the conference; all but five of the 32 panelists were men. “I hope there will be an opportunity to solicit a broader sampling of views for the record and in future conferences and dockets,” she said.

Ari Peskoe, director of the Harvard Electricity Law Initiative, said that “the Supreme Court’s most recent decision [FERC v. EPSA] about the scope of the commission’s authority teaches that when the commission does ‘no more than follow the dictates of its regulatory mission to improve the competitiveness, efficiency and reliability of the wholesale market,’ courts will be reluctant to cut off the commission’s jurisdiction in the absence of a clear statutory bar. Integrating a carbon price can fit well within the commission’s mandate as a market regulator.”

Attorney Matthew Price, of Jenner & Block, said that by accepting such an RTO filing, the commission does not impose any federal policy on unwilling states.

“States have allowed load-serving entities to join an RTO, understanding the RTO will make market design decisions governing the footprint. Many decisions will affect different states differently. Indeed, the status quo affects states that can’t do so in the most efficient manner, an inevitable consequence of being part of an interstate market,” Price said.

Vanderbilt University School of Law professor Jim Rossi said that both courts and FERC have recognized that many state clean energy programs are beyond FERC’s jurisdictional reach, including zero-emission credits and unbundled renewable energy certificates.

“It would exceed the commission’s jurisdiction to use a carbon price in a wholesale tariff to pass judgment on existing state programs favoring clean energy resources, unless a state explicitly chooses for carbon pricing to apply to or supersede specific programs,” Rossi said.

Independent consultant Roy Shanker said that while the commission has authority to approve carbon pricing in RTOs, doing so might be counterproductive absent a nationwide and economy-wide carbon price that eliminates “leakage” concerns.

“Notions presented by parties that try to suggest that such segmented approaches to carbon pricing policy convey a societal benefit by internalizing carbon-related emission costs are simply incorrect,” Shanker said. “The reality is that they may be making things actually worse.”

One Wholesale Market, One Carbon Price

States should strive for agreement on a single carbon price across a wholesale market’s footprint — if not nationwide — experts stressed during the second panel of the day.

Stanford University’s Frank Wolak said a “stable, predictable price of carbon into the distant future” could function like fuel prices in wholesale electricity markets.

“Simply subsidizing green is a much more expensive way to reduce greenhouse gas emissions than taxing brown,” he said.

PJM Independent Market Monitor Joe Bowring said a single carbon price for the RTO could simply become part of the marginal costs of generators, with states controlling the resulting revenues. If multiple states can’t settle on a single carbon price, he said, revenue redistribution mechanisms can be used.

NYISO CEO Rich Dewey said current compliance costs for environmental obligations, including the Regional Greenhouse Gas Initiative, are simply incorporated into suppliers’ offers and are subject to review from the ISO’s Market Monitoring Unit in a “fairly seamless” manner.

New York is relying on decarbonization to target a 70% renewable energy supply by 2030, a full renewable energy supply by 2040 and carbon neutrality by 2050, Dewey said.

“Achievement of those outlying goals will require significant investment in innovative technologies and commercialization of emerging new innovative choices which otherwise, absent a carbon price, would be very challenging to bring to market,” he said.

R Street Institute’s Devin Hartman argued for a universal carbon price from the federal level.

“Carbon pricing is, at least on paper, the least-cost solution to reducing emissions but also something that’s fully compatible with wholesale electric competition,” he said. “There’s a subset of states that do not want to pursue carbon emission reduction yet but may in the future. And then in the other camp, you have some that have really thrown a variety of policies at this issue. As we move forward in carbon pricing dialogue, the former camp will conform.”

Hartman said the longer states are left to pursue individual and uncoordinated pricing plans, the more “unnecessary risk” is introduced into investment decisions and wholesale markets.

“Whereas, if we start to have more long-term pricing stability on this front, then that lets markets go to work more efficiently,” he said.

ISO-NE CEO Gordon van Welie said there’s “obviously a big political dimension” surrounding how states pursue decarbonization and allocate carbon pricing revenues. He predicted that different approaches and discrepancies across states will create inefficiencies and distort wholesale markets until FERC is forced to act.

“I don’t think the commission can escape making a decision,” van Welie said, predicting that the issue will come to “a head more quickly in PJM, New England and New York,” whose capacity markets employ minimum offer price rules that make it difficult for state-subsidized resources to clear.

Arne Olson, senior partner with Energy and Environmental Economics, said the lack of a nationwide carbon price may be more detrimental to carbon-cutting goals than no carbon pricing at all.

“So the challenge is when [you] apply 50 carbon prices within interstate markets, where there is no ability to control or even measure the carbon content of imports … you could end up in a situation where piecemeal carbon pricing ends up with a worse result than no carbon pricing,” he said. “People want to do things now; they want to take early action to address this problem that is so glaringly obvious. Where we need to get is a societal agreement on what the price of carbon ought to be, so we can get electrification of vehicles and buildings, [and] emission reduction in the industrial sector.”

Panelists also conceded that carbon leakage is unavoidable when one geographic area of a wholesale market uses a carbon price and another doesn’t. “I think of it as trying to push water into one corner of a bathtub,” Olson said.

Leakage Concerns

Solving the leakage issue was a primary topic for Wednesday’s afternoon panel of market design experts.

“It’s not an intractable problem, but you have to manage leakage,” said Rana Mukerji, senior vice president for market structures at NYISO. “There’s not a politically perfect way of managing leakage, but you can minimize the effect of leakage at your borders.”

Anthony Giacomoni, senior market strategist for PJM, noted the distinctions between inter- and intra-market leakage.

Because PJM covers 13 states and D.C., he said, “you have this added complexity between the intra-ISO and inter-ISO leakage, and both have to be handled differently because of the nature of the economic dispatch. We dispatch across the entire RTO in one integrated dispatch. We do not handle external transactions in the same manner, and so a different mechanism is needed for leakage between ISOs.”

Chairman Chatterjee asked what role carbon pricing could play in investment decisions, including entry and exit of resources.

Matthew White, chief economist for ISO-NE, said carbon pricing would benefit the region’s flexible resources. As more renewables come onto the system, he said, there’s a need for more “balancing resources” that will be able to meet consumer demand when the weather is uncooperative and renewable resources can’t provide energy.

“We do not have the benefits of the sunshine of Southern California,” White said. “We live in a place where it is cold and dark for much of the year. And while I love to ski, it does mean we face a difficult challenge ensuring that the balancing resources can be there as much as we need them.”

Role for Nukes, Gas

In the closing session, Exelon CEO Christopher Crane lamented the increased emissions resulting from the shuttering of money-losing nuclear generators. He said Illinois will see a 70% increase in electric sector emissions if Exelon shuts its Byron and Dresden plants, which are scheduled for retirement in 2021, and the Braidwood and LaSalle plants, which he said are “showing increasing signs of financial distress.”

Crane said Exelon did not fully support the petition seeking a technical conference because it included a sentence saying the petitioners were not asking the commission to institute a rulemaking or direct implementation of carbon pricing.

“Continued talk about the benefit of placing a meaningful price on carbon emissions, uncoupled from concrete and immediate action to do so, while simultaneously acting to undermine state-led emission-reduction efforts, serves only to prolong emissions output from fossil generation, force more nuclear into early retirement and put the nation farther away from meeting our decarbonization goals,” Crane said. “Discussion at the commission and RTO/ISO level must evolve into action that is commensurate with the urgency of the climate crisis. Until then, states seeking to preserve and expand emissions-free electricity have only the second-best tools available. If the commission is serious about the virtue of wholesale markets and the efficiencies they bring, it will insist that those markets be used to help states achieve their carbon goals, rather than undermine them.”

Calpine CEO Thad Hill and Dena Wiggins, CEO of the Natural Gas Supply Association, expressed support of carbon pricing but lobbied for a continued role for natural gas-fired generation, saying it is essential to supplementing intermittent resources. “Natural gas generation is an enabler of economy-wide decarbonization, not an inhibitor,” Hill said.

Brett Mattison, CEO of American Electric Power’s Kentucky Power, said FERC must be cognizant of the economic hardship facing ratepayers in his company’s service territory. “In evaluating carbon pricing and other mechanisms designed to incentivize the participation of renewable resources in organized markets, it is important to consider the impacts of such mechanisms on our customers,” he said. “AEP recognizes and is committed to transformation to a greener economy; we cannot, however, overlook issues of cost and reliability as we realize this change. We must promote a diverse supply mix that can lower emissions while preserving cost and reliability goals.”

Chris Parker, executive director of the Utah Department of Commerce, said his state would “resist any direct, pre-dispatch carbon price mechanism in RTO/ISO markets because state policies should not have such a direct effect on wholesale markets.”

“FERC has no authority to tax resources in its markets. States have no authority to set a carbon price that directly changes dispatch and prices in wholesale electricity markets,” he continued. “The fact that states’ resource decisions will affect the wholesale markets does not license direct intervention in dispatch and pricing outcomes in wholesale markets. This would leap the boundaries of state authority, exporting state policies to the entire market. Federal market regulation does not license extraterritorial state taxation.

“There’s a lot of fear among states like Utah that we’re going to end up with other states’ policies rammed down our throat,” he added. “We’re going to be wary of participating in those markets.”

Chatterjee Responds

Speaking to reporters via teleconference the next day, Chairman Chatterjee acknowledged “there seems to be a basic, foundational agreement that FERC has the legal authority to evaluate” a state-imposed carbon price in an RTO’s or ISO’s tariff. Whether the tariff revisions pass the just-and-reasonable standard of the FPA would depend on their details, he said.

In his opening remarks Wednesday, Chatterjee warned that “some of the proposals that have been floated — while presumably well intentioned — could actually bring with them more harm than good.” When asked what these proposals were, he alluded to state subsidies.

“I believe in markets and market mechanisms, and the landmark actions we have taken bear that out,” he said, noting Orders 841 and 2222, which directed RTOs to open their markets to energy storage and aggregated distributed energy resources, respectively. “Out-of-market payments are less efficient toward” decarbonization of the electricity sector, he said.

Chatterjee also said it would not be “appropriate for the commission to act proactively” and find an RTO’s Tariff unjust and unreasonable because of its lack of a price on carbon, “absent a congressional mandate.”

The chairman also was asked about the potential impact of the presidential and congressional elections on federal carbon policy. Regardless of the election results, he said, “the commission is going to have to confront these issues, as states are going to continue to take it upon themselves to push for these policies.”

Michael Brooks contributed to this report.