FERC on Thursday proposed a policy statement inviting states to introduce carbon pricing in wholesale electricity markets but said it had no authority to initiate such programs itself (AD20-14).

Chairman Neil Chatterjee, a Republican, called the proposal — coming just two weeks after the commission’s technical conference on carbon pricing — a “landmark action.”

But Democratic Commissioner Richard Glick said that although the proposal is a “positive step forward,” the commission “consistently turns a blind eye” to climate change by refusing to assess whether new natural gas pipeline projects it has approved have a significant impact on greenhouse gas emissions. He noted that he was dissenting on several pipeline certificate orders Thursday, saying the commission’s position ignores a D.C. Circuit Court of Appeals order requiring such assessments.

“I wouldn’t describe this draft policy statement as groundbreaking, but if it is finalized, it does provide the states some confidence that the commission will accommodate state carbon pricing decisions,” Glick said in remarks during the commission’s virtual open meeting. “There is an obvious opportunity for consensus here, but we can’t move forward if the commission continues to treat climate change differently than all other environmental impacts.”

Republican Commissioner James Danly dissented in part on the proposal, calling it “unnecessary and unwise.”

Jurisdiction

The statement would assert that the commission has jurisdiction over organized wholesale electric market rules that incorporate a state-determined carbon price and “also seeks to encourage regional electric market operators to explore and consider the benefits of establishing such rules,” FERC said in a press release.

The commission said the Sept. 30 technical conference highlighted the potential benefits of carbon pricing, including “technology-neutral, transparent price signals … and providing market certainty to support investment.” (See FERC Urged to Embrace Carbon Pricing.)

“As states actively seek to reduce greenhouse gas emissions within their regions, carbon pricing has emerged as an important, market-based tool that has wide support from across sectors,” Chatterjee said in a statement. “The commission is not an environmental regulator, but we may be called upon to review proposals that incorporate a state-determined state carbon price into these regional markets. These rules could improve the efficiency and transparency of the organized wholesale markets by providing a market-based method to reduce GHG emissions.”

In a teleconference with reporters, Chatterjee rejected the notion that the proposal represented an evolution in his thinking on climate change, saying he has been consistent since he joined the commission: that it is a real and existential threat and human-caused, and that “decarbonization should occur through market-driven” solutions.

FERC defined carbon pricing to include both “price-based” methods that directly establish a price on GHG emissions as well as “quantity-based” approaches under a cap-and-trade system.

The commission noted that 11 states — California and the 10 New England and Mid-Atlantic states in the Regional Greenhouse Gas Initiative — use a form of carbon pricing. PJM, NYISO and ISO-NE are also investigating it.

FERC said regional market rules incorporating a state-determined carbon price are within the commission’s jurisdiction over wholesale rates under Federal Power Act Section 205. “Whether the rules proposed in any particular FPA Section 205 filing do, in fact, fall under commission jurisdiction is a determination we will make based on the facts and circumstances in any such proceeding.”

The statement noted that FERC “has long permitted generating resources to recover through wholesale rates the costs of complying with environmental regulations, including the costs of emissions pricing regimes,” citing its approval of the CAISO Energy Imbalance Market’s incorporation of a carbon charge on EIM imports into California.

The commission also cited the Supreme Court’s EPSA decision, which said the commission has jurisdiction over practices that “directly affect” wholesale rates as long as it doesn’t cover matters the FPA reserves for exclusive state jurisdiction. The court ruled that FERC’s actions under Order 745, which covers demand response compensation, “meet that standard with room to spare.”

“Because the decision about the carbon price would be determined by the state — which could select a price of zero, should it choose — state authority would be unaffected, further removing any doubt that rules that incorporate such a state-determined carbon price would comply,” the commission continued.

“Incorporating a state-determined carbon price into RTO/ISO markets could represent another example of the type of ‘program of cooperative federalism’ that the court noted with approval in EPSA,” FERC said.

Comments Sought

The commission will accept comments on the proposed policy statement until Nov. 16 with reply comments due Dec. 1.

FERC said it seeks comment on what information it should consider when reviewing such a filing, including:

• How do market design considerations change based on how the state or states determine the carbon price? How will that price be updated?
• How does the proposal ensure price transparency and enhance price formation?
• How will the carbon price or prices be reflected in LMPs?
• How will the incorporation of the carbon price affect generation dispatch? Will it affect how the market co-optimizes energy and ancillary services?
• Does the proposal result in economic or environmental “leakage,” allowing production to shift to more costly generators in other states, without regard to their carbon emissions? How does the proposal address such leakage?

A Marker

Chatterjee said the proposal is a “marker signaling that this commission encourages efforts” to introduce carbon pricing in RTO/ISO markets.

“When it comes to our markets, fuel-neutral carbon pricing stands in stark contrast to other state policy tools, like subsidies, which can amount to hidden costs that degrade market efficiency and skew price signals, ultimately hurting the consumer,” he said. Glick and the chairman have battled over the commission’s orders setting price floors on capacity resources that receive subsidies, including over PJM’s expanded minimum offer price rule (MOPR), which was the subject of a compliance order Thursday. (See related story, FERC Acts on PJM MOPR Filing.)

“If states continue to pursue carbon pricing … they should have confidence that those proposals will be not be a dead letter on our doorstep, confidence that we recognize the benefits that such proposals, if properly designed, could bring to our markets, and confidence that we will bring our pragmatic, market-based lens to this conversation,” Chatterjee continued.

He cautioned that FERC would not take proactive action to set a carbon price, however. “I’ll say it again: The FPA does not give us authority to act as an environmental regulator. We have neither the expertise nor the authority to drive emissions policy in this space. So that is not the objective here today.”

The chairman praised Glick for working with him “to find common ground. It enabled this commission to provide bipartisan leadership and bring clarity to a difficult issue. That’s so crucial here where a broad set of voices have called on us to do just that.”

Danly: ‘Better to Wait’

“It’s better to wait to be in receipt of a plan rather than to issue this kind of a policy statement when we haven’t actually seen the kinds of programs that could be developed or proposed,” Danly said. “It’s certainly premature to opine on jurisdictional questions when we are denied the benefit of actually seeing details of what might be proposed.”

He said he concurred in part “because the substance of the policy statement really boils down to little more than an affirmation that utilities still enjoy the rights to file under Section 205 to propose tariff provisions.”

Danly noted that he also dissented on Order 2222 over similar concerns. “There I questioned the commission’s seizure of authority at the expense of the states and advocated that ‘we should allow the RTOs and ISOs … to develop their own DER programs in the first instance.’ Then the question of the commission’s jurisdiction will be ripe.” (See FERC Opens RTO Markets to DER Aggregation.)

“Without seeing a proposal,” Danly wrote, “the commission predetermines that any such proposal will be within the commission’s jurisdiction and ‘would not in any way diminish state authority.’ That may well turn out to be true, but I would have waited until we had an actual 205 filing before us rather than prejudging the issue based on unstated assumptions about how such programs might work. 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. This policy statement is not, as the majority’s order characterizes it ‘another example of the type of “program of cooperative federalism” that the court noted with approval in EPSA.’ There is no program. This is instead a nonbinding, blanket dismissal of potential jurisdictional concerns.”

Chatterjee and Glick rejected that characterization. “We are proposing a framework for applying our jurisdiction, not ‘prejudging’ particular matters or pre-emptively ‘dismiss[ing] … potential jurisdictional concerns.’”

Reaction

The American Wind Energy Association and the Electric Power Supply Association — two of the organizations that urged the commission in April to hold the technical conference — were quick to applaud the commission’s action. (See IPPs, Renewable Groups Seek FERC Carbon Pricing Conference.)

“An overwhelming consensus emerged at the [FERC technical] conference that carbon pricing in markets is a powerful and cost-effective tool to drive down emissions and achieve state policy goals while preserving the benefits of competition. The policy statement reflects this consensus,” said Amy Farrell, AWEA’s senior vice president for government and public affairs.

“We are pleased to see that FERC is continuing to dig into the challenging but important issue of carbon pricing and seeking to meaningfully advance the conversation,” said EPSA CEO Todd Snitchler. “EPSA supports market-based tools including an economy-wide or regional price on carbon that would allow all power providers to compete to reduce emissions at the least cost to consumers while meeting reliability needs.”

“This is a constructive signal but has no immediate applicability since it was not adopted as official policy,” said the American Council on Renewable Energy, which was also among the groups seeking the conference. “Unfortunately, however, FERC acted with more force with regard to a compliance filing from wholesale power market operator PJM Interconnection on FERC’s minimum offer price rule order, which imposes new costs on ratepayers to subsidize fossil generation at the expense of more cost-effective renewable power.”

“While we’ll need to see future orders on compliance to determine the precise severity of this action, renewable energy investment decisions in the Mid-Atlantic region are already impacted by the MOPR, and preferential treatment for fossil fuel generators will only grow in subsequent auctions as costs for renewable power continue to decline,” added ACORE CEO Gregory Wetstone. “These policies take us in the wrong direction from where we need to be to address our climate imperatives and grow the renewable energy economy, and are being challenged in court by ACORE and allied groups.”