U.S. Energy Secretary Rick Perry directed the Federal Energy Regulatory Commission (FERC) Friday to issue a rule to provide immediate cost recovery for power plants with extended on-site fuel supply. Read another way, the proposal is an arbitrary backdoor subsidy to coal and nuclear plants that risks undermining electrical competition throughout the United States.
The U.S. Energy Department proposal leverages a rarely used law that allows them to propose their own rulemaking to FERC. The DOE proposal, which is notable for its lack of detail, nevertheless calls for FERC to create a new final rule within 60 days. While DOE has the legal authority to initiate proposed rulemakings, FERC retains ultimate discretion as to how to respond.
DOE’s proposal marks a deeply troubling departure from the thoughtful recommendations in its August technical grid report. That report sought to enhance the performance of electricity markets, whereas this overtly political proposal inflicts an impossible timeframe and concocts a recipe for wounding competitive markets, while potentially imposing billions of dollars in unnecessary costs for consumers.
Proponents of markets, consumer choice and limited government should shudder. Consumers would ultimately bear a hefty and unnecessary bill from any such draconian intervention, which would also raise capital borrowing costs and have a chilling effect on new investment. Proponents of good governance should also cringe, as the proposal calls for an unnecessarily rushed response in a timeframe completely unrealistic to enact reforms through the proper channels. To craft and implement sophisticated market rules requires working through a robust development process, often over the course of two years or more. The 60-day timeframe called for in the proposal is unprecedented.
When it came to the DOE’s technical report, a solid effort by the department’s technical team muted external suspicion of pro-coal and nuclear bias. This DOE proposal instead validates that suspicion. It is neither technically nor procedurally sound and has political fingerprints all over it. Clearly, the thinking behind the proposal bypassed that of the department’s own technical experts. The political proposal does a disservice to prior DOE work, to consumers, to good governance and to competitive markets.
The DOE proposal is long on hyperbole and short on technical backing. It seeks “immediate action” to address the “crisis at hand” as the “loss of fuel-secure generation must be stopped.” Yet there is no crisis, as affirmed by recent electric performance metrics, the latest congressional testimony of the CEO of the North American Electric Reliability Corp. and even the DOE’s own technical report. Critically, motivations for market reforms should never aim to adjust compensation with a pre-determined result. The whole purpose of markets is to let competitive forces determine resource allocations, which lowers costs and allocates risk to the private sector, in contrast to government-determined investments.
Market failures for electric reliability and resilience justify a limited role for government intervention to facilitate competition. Experts traditionally considered grid reliability and resiliency as “common goods,” because suppliers cannot limit receipt of the product to those who pay for it. This will induce free ridership and cause chronic underinvestment. Thus, the fundamental issue is ensuring incentive compatibility, where market rules align the economic interests of participants with the efficient and reliable performance of the electric system.
Getting the incentives right begins with ensuring prices accurately reflect supply-demand fundamentals and that there are markets for discrete reliability and resiliency services. The DOE technical report hit this on the head, calling for improvements in energy price formation and valuation of essential reliability services (e.g., voltage support and frequency response), which does not include on-site fuel storage. An exercise that defines discrete products for reliability and resiliency to procure through fuel- and technology-neutral markets is fruitful. The DOE proposal does not call for that.
The proposal is incompatible with sound market economics. It actually promotes a gateway to expand cost-of-service regulation, where government substitutes for competition. Its definition of eligible units – those with a 90-day on-site fuel supply – is arbitrary and has no economic basis. Curiously, some coal plants wouldn’t even qualify. Some hold roughly 30 days of on-site fuel supply; however, many hold 70- to 100-day supplies.
With a splash of hyperbole, the proposal referred to the loss of “fuel secure” resources during the 2014 polar vortex as possibly “catastrophic,” by inaccurately citing the technical report. This doesn’t characterize the nature of temporary bulk power shortages correctly. When bulk demand exceeds supply, grid operators take emergency actions, the most severe being voltage reductions (brownouts) and rotating blackouts. Brief voltage reductions and even rotating 30-minute blackouts are not catastrophic, by any stretch. This is why economic studies reveal consumers would often rather have their power curtailed briefly than pay a hefty premium to keep the lights on.
Prolonged (multiday) power outages can be catastrophic, especially during severe weather. The predominant cause of these sustained outages is damage to transmission and distribution infrastructure – take the recent hurricanes, as an example. They rarely result from power plant outages, let alone those from lack of fuel. DOE’s proposal seeks to take emergency action on, at best, a low-to-medium level resiliency issue.
A resiliency initiative should prioritize mitigating transmission and distribution damage and accelerating restoration. The DOE technical report recommended that grid-resiliency efforts prioritize disaster-preparedness exercises and for NERC and grid operators to define resilience criteria and examine resilience impacts. That’s a thoughtful approach, and the exact opposite of the unrefined DOE proposal with a single DOE-determined criterion for resilience.
A thoughtful resiliency approach would take a market-compatible mindset and recognize that advances in technology have helped enable a degree of product differentiation, where consumers can pay for different levels of reliability and resiliency services. This creates the ability to cease treating aspects of reliability and resiliency as a “common good,” where a central authority substitutes their judgment on behalf of consumers. This prospect to “privatize the commons” creates a great opportunity for the Trump administration to reduce the role of government planning, not to deepen government’s dictation of private services.
Image by Christopher Halloran