By Rich Heidorn Jr. and Michael Brooks

President Trump directed Energy Secretary Rick Perry Friday to force grid operators to provide a lifeline to struggling coal and nuclear plants, saying their retirements threaten national security.

The Department of Energy had not issued an order as of Friday afternoon. But a 40-page draft memo described as an “addendum” includes a reference to the order and describes the department’s legal foundation, saying the closures threaten military bases and the nation’s nuclear workforce. The memo was first reported by Bloomberg, which said it was prepared for a Friday meeting of the National Security Council.

The memo said DOE would be directing RTOs and ISOs “to purchase or arrange the purchase of electric energy or electric generation capacity from a designated list of Subject Generation Facilities (SGFs) sufficient to forestall any further actions toward retirement, decommissioning or deactivation” for 24 months — the time it said the department and its and National Laboratories will need to identify “Critical Defense Facilities” served by “Defense Critical Electric Infrastructure (DCEI).”

“To identity DCEI facilities, additional analysis will be required to gain a more detailed understanding of location-specific security vulnerabilities in our energy delivery systems, including the interdependencies associated with electric generation and transmission, and natural gas and petroleum pipelines, as well as their supply chains,” the memo said. “In the meantime, DOE’s order provides a temporary stop-gap measure to prevent the further permanent loss of the fuel-secure electric generation capacity for the grid upon which our national security depends.”

DOE said it also is directing SGFs outside RTO/ISO territories “to continue generation and delivery of electric energy according to their existing or recent contractual arrangements with load-serving entities.” The draft did not identify the generators that would benefit from the order.

The president’s long-awaited and highly controversial action was announced by Press Secretary Sarah Huckabee Sanders. “Unfortunately, impending retirements of fuel-secure power facilities are leading to a rapid depletion of a critical part of our nation’s energy mix and impacting the resilience of our power grid,” Sanders said in a statement. “President Trump has directed Secretary of Energy Rick Perry to prepare immediate steps to stop the loss of these resources and looks forward to his recommendations.”

It is the administration’s second bid for a coal and nuclear bailout. In January, FERC rejected Perry’s Notice of Proposed Rulemaking to subsidize coal and nuclear plants with onsite fuel. The commission instead initiated a rulemaking on grid resilience (AD18-7). (See Don’t Rush on Resilience, Commenters Urge.)

‘Tipping Point’

DOE warns of a “tipping point” in the loss of “fuel-secure” generation, citing the retirements of 59 GW of coal capacity between 2002 and 2016, the loss of 15 nuclear plants since 1990 and announced retirements of 12 nuclear units representing 11 GW.

It cites a 2008 Defense Science Board report that concluded Defense Department installations are “99% dependent on the commercial power grid.”

In addition to the purported risk to DOD facilities, the memo also cited the need for a “robust civilian nuclear industry” to support the “entire U.S. nuclear enterprise — weapons, naval propulsion, nonproliferation, enrichment, fuel services and negotiations with international partners.”

“Without a strong domestic nuclear power industry, the U.S. will not only lose the energy security and grid resilience benefits but will also lose its workforce technical expertise, supply chain and position of clean energy leadership,” it said.

DOE said it supports FERC’s actions, including its opening of the resilience docket in January, but that “too little progress has been made, while the risk of high-impact events, especially those caused by intentional attacks, continues to grow.”

“Given the need to safeguard the existence of fuel-secure generation facilities to promote our national defense and to maximize domestic energy supplies, DOE is compelled to exercise its authorities to avert a serious supply disruption in the wake of a natural disaster, an adversarial attack or some combination of the foregoing.”

It quotes from a 2017 NERC report that said increased “reliance on natural gas exposes electric generation to fuel supply and delivery vulnerabilities” and that “premature retirements of fuel-secure baseload generating stations reduces resilience to fuel supply disruptions.”

It also cites NERC’s November 2017 report on potential disruptions to the natural gas system, which noted that some regions rely on gas for more than 60% of their peak electric demand.

DOE also cites the threat of cyberattacks on the grid, saying, “To avoid and recover from blackouts, it is essential that the system have adequate generation and transmission capacity broadly dispersed.” It notes that only nuclear generators maintain “the kinds of ‘guns, guards and gates’ and other physical and cyber-hardening measures that would be needed in the event of a major attack.”

Legal Challenges Likely

Observers Friday differed over whether the administration’s action will survive almost certain legal challenges.

In rebuffing Perry’s NOPR in January, FERC said DOE had failed to show that existing RTO tariffs were unjust and unreasonable under Section 206 of the Federal Power Act.

The DOE memo claims different legal authority, citing the Defense Production Act of 1950 (DPA) and Section 202c of the FPA, which allows the energy secretary to issue emergency orders during shortages of electric energy, facilities or fuel.

The memo cited DPA Section 101c, which gives the secretary authority to issue orders based on findings that energy supplies “are scarce, critical and essential” and needed for “maintenance of energy facilities [and] cannot reasonably be accomplished without exercising [this] authority.”

DOE said the legislative history of Section 202c shows that “Congress contemplated the use of the provision not merely to react to actual disasters, but to act in a preventive manner. A variety of man-made and natural threat conditions require … a federal agency ready to do all that can be done in order to prevent a breakdown in electric supply.”

The department says it has deployed FPA Section 202c on eight occasions. However, those were in response to regional energy challenges; it has not previously been applied nationwide.

During the Western Energy Crisis in late 2000, DOE issued an order to ensure gas supplies to Pacific Gas and Electric, then on the verge of bankruptcy. In several instances, the department has ordered temporary interconnections to provide supplies to regions following blackouts or natural disasters, including hurricanes Katrina and Rita.

The law was invoked on three prior occasions to require operation of generation facilities to prevent energy or reactive power shortages.

In 2005, DOE granted the D.C. Public Service Commission’s request to order Mirant Corp. to continue running its Potomac River Generating Station despite its inability to meet EPA’s National Ambient Air Quality Standards, finding that the region otherwise faces a “reasonable possibility” of extended blackouts.

Most recently, DOE granted PJM’s request to order Dominion Energy Virginia to continue running its Yorktown Power Station despite its violation of EPA’s Mercury and Air Toxics Standards, finding reliability could be at risk during summer peaks.

To minimize conflicts with environmental regulations, DOE noted, it limited its orders to having the generators serve only as backup power if other sources were unavailable.

ClearView Energy Partners analyst Christine Tezak noted in a bulletin to clients Friday that the DPA gives DOE “significant authority to determine and respond to national security impairments, even in peacetime, and thus far the courts have been reluctant to intervene.”

“Unless and until critics marshal counterarguments to the concerns DOE has presented in [its] memo, we will continue to assign low probabilities to successful judicial intervention or reversal,” she added.

Rabeha Kamaluddin, a partner at Dorsey & Whitney, predicted in an interview that the courts will reject DOE’s claim that the subsidies are justified by 202c. But, she said, “you can expect anything in today’s political landscape.” DOE “may have a leg to stand on” using the DPA in combination with the FPA, she added.

“Combining [202c with] the DPA provides more room for DOE to make creative legal arguments,” said Ari Peskoe, director of the Electricity Law Initiative at Harvard. “It’s still far from clear that the proposal would be upheld by a court.”

“There is no grid emergency that justifies this,” tweeted Joel B. Eisen, law professor at the Richmond School of Law. “Nor does the combo of two laws, neither of which is appropriate in its own right, add any further support.”

“202c gives pricing authority to FERC,” said Avi Zevin of the New York University School of Law’s Institute for Policy Integrity. “FERC has already said market rates are sufficient to meet reliability and resilience. So, I’m still not clear how we get around that even when you add DPA into the mix.”

FERC’s role in implementing the order is unclear. While 1977 amendments to the FPA transferred the emergency declaration authority under 202c to the energy secretary from the Federal Power Commission — FERC’s predecessor — the commission still has dominion over rates under FPA Sections 205 and 206, Kamaluddin said.

FERC declined to comment.

Bailout Costs

The bailouts could cost from $311 million to $900 million annually in PJM, ISO-NE, NYISO and MISO alone, according to Energy Innovation Policy & Technology, which supports policies reducing greenhouse gas emissions. The low estimate represents the out-of-market payments needed to bring units with negative net cash flows up to zero. The upper limit adds capital recovery and a rate of return on undepreciated capital and future capital expenditures.

The group compiled the estimates based on the rejected DOE resilience NOPR. “There are, of course, important differences between the resilience NOPR and the 202c actions being discussed by the Trump administration, but our study is a good rough estimate of the cost to keep the same group of uneconomic plants online,” said Robbie Orvis, director of energy policy design for the group.

More than 80% of the coal subsidies would go to five companies (NRG Energy, Dynegy, FirstEnergy, American Electric Power and Talen Energy), while 90% of the nuclear price supports would go to five companies (Exelon, Entergy, Public Service Enterprise Group, NextEra Energy and FirstEnergy), the group said.

Industry Reaction

The renewable energy and natural gas industries united with consumer groups to condemn the bailout.  Representatives of 10 trade groups — Advanced Energy Economy, the American Council on Renewable Energy, American Petroleum Institute, American Wind Energy Association, Business Council for Sustainable Energy, Electricity Consumers Resources Council, Electric Power Supply Association, Energy Storage Association, Natural Gas Supply Association and Solar Energy Industries Association — released a joint statement calling the move an unprecedented overreach that would distort competitive markets.

“There was no emergency when coal and nuclear interests sought federal relief, and there is none today that justifies such unprecedented executive branch intervention in the economic life of the country,” EPSA CEO John Shelk said.

“The administration’s plan to federalize the electric power system is an exercise in crony capitalism,” said Malcolm Woolf, AEE senior vice president of policy.

John P. Hughes, CEO of the Electricity Consumers Resource Council, which represents industrial consumers, said the threats cited are “phony” and that the costs could cripple U.S. manufacturers. “The federal government should not use the pretext of ‘national security’ to pick winners and losers in the energy markets, and it must certainly not treat U.S. manufacturing jobs as inferior to the jobs at uneconomic power plants,” he said.

The American Coalition for Clean Coal Electricity praised the action, noting that “almost 40% of the nation’s coal fleet has shut down or is expected to close.”

PJM said Friday that the grid is “more reliable than ever,” and that its recently announced fuel security initiative will ensure grid resilience without upsetting its markets. (See PJM Seeks to Have Market Value Fuel Security.)

“Any federal intervention in the market to order customers to buy electricity from specific power plants would be damaging to the markets and therefore costly to consumers. There is no need for any such drastic action.”

In response to an inquiry, ISO-NE spokeswoman Marcia Blomberg said “it’s too early to comment on a draft proposal that has just been revealed.”

“MISO is monitoring the reports of the potential Department of Energy action along with our ISO/RTO counterparts,” spokesman Mark Brown said. “At this time, we have seen no official communication from DOE.”

Other grid operators did not respond to requests for comment. DOE and NERC also did not respond to inquiries.

Requests from Murray Energy, FirstEnergy

Although Trump promised during his campaign to end the “war on coal” and put miners back to work, the Sierra Club says retirements have continued unabated since he took office. “In the first two months of 2018, we’ve already retired more coal that we did in three of the Obama years, and we’re on track for our second biggest year of coal retirements ever,” the group said in March.

Coal mining chief executive Robert Murray and FirstEnergy, his company’s biggest customer, have lobbied relentlessly for subsidies. (See Photos Show Murray’s Role in Perry Coal NOPR.) FirstEnergy asked Perry to invoke 202c in a letter in March. (See FES Seeks Bankruptcy, DOE Emergency Order.) FirstEnergy lobbyist Jeff Miller, who ran Perry’s unsuccessful 2016 presidential campaign, reportedly made the case to Trump over dinner in April.

Exelon, the nation’s largest nuclear generator, has largely focused its lobbying efforts on winning state subsidies for endangered reactors.

Despite news of the administration’s action, Exelon saw shares drop 1% Friday, while FirstEnergy was down 0.6% on the day.

Shares of mining company Peabody Energy rose 4.6%, while Arch Coal was up 2%.