As if this week lacked enough excitement, yesterday President Trump removed Republican Neil Chatterjee as the chairman of the Federal Energy Regulatory Commission (FERC), passing the torch to Commissioner James Danly. Rumblings of Danly taking over the chair had been gaining steam over the course of the year. But it’s clear that Chairman Chatterjee’s pursuit of a carbon pricing posture and Order 2222—a rule that reduced barriers to distributed energy resources—was a bridge too far for the Oval Office. It’s yet another sign of executive politics interfering with FERC, an independent agency, as the degree of its politicization the last few years has alarmed its staff and stakeholders.

The fascinating thing is that Chatterjee’s ousting was on pro-market issues. On issues where he deserved the most conservative criticism, the Trump administration either praised him or let it fly. The starkest example was Chatterjee’s initial sympathy for the Trump administration’s pursuit to bailout unprofitable coal and nuclear units, which barely failed to materialize. The unanimous FERC vote opposing the Energy Department’s coal and nuclear subsidy proposal was a closer call than most realize.

The material FERC development that conservatives should have been most concerned about under Chatterjee’s watch was the legitimization of price controls as a tool to counteract state subsidies. If FERC decided to preempt a certain class of subsidy on anti-competitive grounds, economic outcomes would have improved by eliminating the root cause. But when it comes to mixing subsidies and price controls, two wrongs don’t make a right. The headliner case for this, the minimum offer price rule (MOPR), is neither economically sound nor politically savvy. This policy presented an unbearable ultimatum to states, several of which are looking to pull out of markets under FERC’s jurisdiction to bypass MOPR.

The portrayal of FERC’s MOPR as deliberately anti-clean energy or climate policy was inaccurate; it applies to all technology categories. But the political ramifications stood nonetheless. The Chairman then went to work to find a way to pivot state climate policy toward market compatibility. It was clear he took a liking to a strategy I elaborated upon in June; subnational carbon pricing as an off-ramp for MOPR.

When it comes to FERC’s carbon pricing posture, a degree of conservative skepticism is understandable, but the context is critical to appreciating Chatterjee’s pro-market intent and the implications of FERC’s actions. The Chairman decided to hold a technical conference in September in response to a broad industry petition, not his personal side agenda. He then quickly shuttled through a proposed policy statement on October 15, which was an idea publicly floated at the conference by the CEO of the Natural Gas Supply Association.

The expediency of the carbon pricing statement reflected a strategy by Chatterjee to juxtaposition FERC’s openness to carbon pricing with its opposition to state subsidies. He explicitly linked the two in FERC’s October open meeting. Remember, FERC has no control over whether states pursue either policy arena. Given Democratic Commissioner Glick’s opposition to portraying carbon pricing as a tradeoff for state subsidies, Chatterjee sought to send stakeholders a signal with the limited tools and time that he had. Had Chatterjee waited another month, he might have lost the ability to delineate the “carbon pricing only” pathway.

One downside of a rushed proposed statement is that the language was sloppy in parts, which stakeholders can urge FERC to remedy via regulatory comments. One area that jumped out is whether FERC is encouraging states to explore carbon pricing or encouraging them to develop proposals—language in the statement referred to both. The former would alleviate stakeholders’ concern that carbon pricing wouldn’t be dead on arrival at FERC, while the latter would be FERC overstepping its bounds. Another downside of a rushed process is that not all stakeholders had an opportunity to provide equal input. Although FERC’s conference showcased ample legal and economic expertise, it was woefully inadequate in hearing from consumers and states.

Nevertheless, FERC’s actions do not constitute a legally binding policy and, as indicated by Chatterjee, are intended to start a conversation on state-led carbon pricing while reducing the prospect of FERC-led carbon pricing under Section 206 of the Federal Power Act. If FERC elects to tighten the language in a final policy statement that limits FERC to its proper role while explicitly taking FERC imposed carbon pricing off the table, it’s hard not to see how that wouldn’t be a win for conservatives. It’d hedge against an activist FERC, ease state concerns on FERC overreach and signal states that emissions pricing is market compatible.

As for the other issue that doomed the Chairman, Order 2222, some legal critiques are fair but the policy is decidedly pro-market. The jurisdictional elements of the Order touch upon a longstanding fuzziness of the legal “bright line” with state authority, but the previous lack of clarity inhibited state and regulatory frameworks which would allow distributed energy resources (DERs) to have market access. On substance, the Order adopts rules for the participation of aggregated DERs to participate directly in wholesale markets. This is consistent with FERC’s mission to identify discriminatory barriers to entry for market participants and modify rules to lower or eliminate those barriers.

R Street’s own Chris Villarreal, a nationally recognized DER expert, says that the Order will enhance market performance and lower overall wholesale costs. He notes that the Order is a prime example of FERC encouraging competition, enabling greater participation from new resources which were previously unable to participate effectively (or at all) and provide benefits to customers.

Overall, Chatterjee’s legacy will be a mixed bag, but one that improved with time that highlights his personal and professional growth. It started with a scare, given his sympathy for the Trump administration’s bailout agenda for coal and nuclear plants—an unequivocally anti-conservative, disastrous policy—but later pivoted to a prudent agenda on removing regulatory barriers for clean energy and fossil fuels alike. He eased approvals for pipelines and LNG exports, while moving to overhaul regulatory architectures to let energy storage and distributed resources participate in wholesale markets. Based on recent technical conferences, he may have pursued additional actions to reduce regulatory barriers to hybrid resources—such as solar plus storage—and offshore wind developments. He hesitated to reform the structural flaws in transmission policy, however, which is a very difficult reform agenda but arguably the most important to lower costs and drive innovation in the power industry.

Regardless of the Presidential election outcome, FERC’s agenda will change drastically. Should President Trump win, Chairman Danly will implement a fundamentally different philosophy from Chatterjee, marked by a very strict view on FERC’s role initiating policy, and he may roll back areas of disagreement. Notably, Danly dissented on Order 2222 and FERC’s proposed carbon pricing statement. The pendulum would swing wildly in the other direction under Biden, where presumably Chairman Glick would likely prioritize reversing MOPR, taking on transmission policy, incorporating greenhouse gases into project certifications and pursuing market reforms that diminish the role of capacity markets and lower barriers to unconventional technologies.

Image credit:  Mark Van Scyoc

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