By Rich Heidorn Jr.

ALBANY, N.Y. — NYISO’s plan to integrate carbon into its markets will test the independence of FERC under President Trump, speakers told the Independent Power Producers of New York’s 31st Annual Spring Conference last week.

The IPPNY gathering came one week after a FERC technical conference at which NYISO CEO Brad Jones outlined plans to respond to the state’s zero-emission credits for its upstate nuclear plants. Jones told FERC that the ISO has hired the Brattle Group to develop a plan that would incorporate the social cost of carbon into generation offers and reflect it in energy clearing prices. PJM also is considering a similar mechanism for some of its states. (See NYISO Sees Carbon Adder as Way to Link ZECs to Markets.)

Speakers at the IPPNY conference disagreed over whether FERC under President Trump would approve the ISO’s proposal.

In a keynote speech, acting FERC Chair Cheryl LaFleur, a Democrat, indicated she was open to the idea. But she would need to find allies among Trump’s four appointees to the commission to prevail.

Pushing the Boundaries

One IPPNY speaker, Romany Webb, a fellow at Columbia Law School’s Sabin Center for Climate Change Law, outlined a recent paper she coauthored that concludes FERC has the authority to approve a carbon charge adopted by a wholesale market operator such as NYISO.

“Obviously, the Federal Power Act doesn’t authorize FERC to price carbon, and it sort of approaches an area of environmental regulation that has traditionally been considered outside of FERC’s authority,” she conceded. “So it would really push the boundary of what has to date been the limit of FERC’s authority. But it would do so in ways that are consistent with that authority.”

She noted that FERC has traditionally shown deference to grid operators’ market designs, requiring only that they be just and reasonable. “When an ISO makes changes, it doesn’t have to show that the old rules were somehow deficient or the new rules are somehow superior.”

Webb said NYISO could argue that a uniform carbon adder is needed to “rationalize” New York policy because the ZEC program doesn’t apply equally to all generators. It could also say that the current markets are skewed by their failure to capture carbon externalities, including the risks severe weather from climate change poses to the grid.

“The validity of that kind of charge comes down to how it’s structured,” she said. Using the federal government’s social cost of carbon — calculated using a discount rate of 5% to limit the cost impact — would produce an initial carbon price of $12.82/ton.

‘Never Going to Happen’

“I agree with Romany that the most elegant solution is you price carbon into the market,” responded former Colorado regulator Raymond Gifford, a partner with Wilkinson Barker Knauer. “It’s never going to happen. … A fully constituted FERC is not going to sign off on a carbon imposition.”

In addition to being in conflict with Trump’s pledge to bring back coal jobs, Gifford said, a carbon price would be difficult to sell politically.

“If you look through our regulatory history, the best subsidies are the hidden subsidies. … Once you make that price signal transparent … the politics of sustaining it become damn near impossible. That’s where the elegant, economists’ solution runs into the political economy of regulation. And in that fight, the political economy of regulation will win 99 times out of 100.”

Reregulation

A more likely outcome, Gifford said, is a return to some form of reregulation by the states, “maybe continuing to exist uncomfortably in a regional wholesale market.”

“What we have now is an engineering model of the market that has been stressed past the breaking point,” he said. “When this many states are doing versions of the same things and some of them are red states and some of them are blue states, you clearly don’t have a consensus that markets are the way to do this.”

Gifford said he is hopeful that courts will rule on challenges to the state actions in a way that provides clarity to the markets and states — even if prior state-federal jurisdiction rulings have not done so. (See Court’s Reticence Frustrates Energy Bar.)

“Our best hope for a categorical and clear answer going forward is for a court to tell us whether or not these state actions are permissible,” he said. “Now, I know courts don’t always give you a categorical answer, but I think anything is better than the regulatory muddle that we have right now.”

Carbon Price a Political Question

The Brattle Group’s Sam Newell, who is leading the ISO’s effort to develop a carbon adder, said he’s “hopeful” that the ISO’s effort will win FERC approval. But determining the size of the charge is anything but straightforward, he acknowledged.

“The costs of carbon [are] not easily boiled down to a number. It’s not like we’re talking about a very simple externality where you’re harming somebody else’s property and its very immediate and quantifiable,” he said. “You have questions like, how do you deal with the global impact? How do you deal with impacts over centuries and discount them? Most importantly … how do you deal with if there’s a 10% chance of catastrophic outcomes? It becomes almost entirely a political question of how willing are people to support and pay for decarbonization?”

Trump Nominees Will Decide

Last week, Trump nominated Pennsylvania Public Utility Commissioner Robert Powelson and Neil Chatterjee, senior energy policy adviser to Senate Majority Leader Mitch McConnell (R-Ky.), to fill two Republican vacancies on FERC.

The president can also nominate a third Republican and a replacement for Democrat Colette Honorable, who announced last month she won’t seek a new term when hers expires in June. Numerous reports have identified Kevin McIntyre, co-head of the energy practice at law firm Jones Day, as the third Republican nominee and likely chairman. (See Trump Nominates Republicans Powelson, Chatterjee to FERC.)

In a 2015 interview with Bloomberg Government, Chatterjee said that as the majority leader’s aide, he viewed all legislative proposals based on the impact on Kentucky, a coal state that is his home as well as McConnell’s.

“For anyone coming to our office to raise a policy issue, the first thing they have to explain is how this will affect Kentucky,” Chatterjee said. “Is this a proposal that will lead to job creation or economic growth in the commonwealth? Or is it going to adversely affect people in the Bluegrass [State]?”

McConnell bitterly opposed the Obama administration’s Clean Power Plan and urged state officials to refuse to comply with it.

Whether Chatterjee will carry his Kentucky-centric view to FERC is an issue Democrats will likely raise at his Senate confirmation hearing.

They also may challenge Powelson, who has been criticized by environmentalists as beholden to the natural gas industry in Pennsylvania, home of the Marcellus Shale.

“As to the political likelihood that FERC [under Trump] is going to approve carbon pricing, that is above my pay grade,” LaFleur told the IPPNY audience. “On a good day, I know what Cheryl LaFleur thinks. I don’t pretend to know what anyone else thinks. And I also don’t prejudge what individuals are going to come in and decide after they get there.  But I do think a single-state ISO should have the best chance of reaching a negotiated solution … and I encourage the continuing efforts by the ISO and others to work on that effort.”

LaFleur said a carbon adder would be on firmer legal ground if it resulted from a Federal Power Act Section 205 filing by the ISO.

“I’m fairly certain that our ability to approve a proposal and prevail on appeal would be stronger if a proposal was brought to us under Section 205 and it was agreed upon and proposed by stakeholders in a region,” she said. “I can’t guarantee that would prevail, but I think that would put us in a much stronger position than if we imposed carbon pricing under Section 206, [which] I think would be far more vulnerable on appeal.”

FERC’s Independence

Former FERC and New Mexico Public Service Commissioner Suedeen Kelly said she saw a big difference between the independence of the two agencies.

“The concept of an independent commission … didn’t exist in New Mexico. And so the politics of the governor’s office and the Legislature have a lot of effect,” she said. “But FERC, historically has … been very independent.”

Gifford agreed that FERC has been “relatively insulated” from politics. “It’s certainly not the basket case of the [Federal Communications Commission], which is the prototypical lawless agency.

“But it is, I think, going to be very difficult for this — I know two of the folks who are headed [to FERC] pretty well — I think it’s going to be really tough in this kind of polarized environment for FERC to say to New York: ‘You want a carbon tax? Go for it.’”