In Search of Middle Ground Between State Public Policy and Federal Regulation

The tension between state and federal lawmakers is ages old, with a history marked by periods of outright assault or relative peace. On Dec. 19, 2019, the quiet in the energy sector was broken by an order from the Federal Energy Regulatory Commission (FERC), in a docket implicating the capacity market operated by PJM Interconnection. The declarations about the boundary between federal and state jurisdiction have been flying since.

COMMENTARY

FERC’s order was issued in a docket that initiated in 2016, as the result of a complaint asserting that a specific portion of PJM’s tariff—the Minimum Offer Price Rule (MOPR)—was unjust and unreasonable, because it failed to account for the price-suppressive impacts of state subsidies on PJM’s capacity market. By October 2018, PJM had offered to FERC its stakeholder-vetted solution to the issues in the complaint, proposing a tailored solution for addressing out-of-market factors that might suppress capacity prices. Stakeholders widely anticipated that FERC would act on the filing by January 2019, but as months passed without any indication of movement from FERC, the expectation became that something more dramatic was ahead.

FERC came through in that regard. Its December 2019 MOPR order constituted a sua sponte reinvention of PJM’s proposal for addressing out-of-market factors that may impact capacity prices. Perhaps more important, it represented a clear declaration by FERC that its authority under the Federal Power Act (FPA) may be wielded to counteract state public policy. FERC’s authority does not enjoy supremacy over federal legislation, but the states—which for years have maintained leadership on climate change legislation—were in the crosshairs. The result, which has yet to fully play out in PJM, is that FERC drew clear jurisdictional lines that permit it to frustrate the primary originators of climate change legislation—state governments.

In September 2020, FERC again used its authority to dismantle state public policy goals. In a proceeding with similarities to the MOPR, FERC considered a proposal by the New York ISO (NYISO) that would allow certain new entrants to the capacity market in the state to avoid being subject to a minimum offer price floor. NYISO said its proposal was designed to account for the expected transition to cleaner energy resources as required by New York state laws and policies.

Without the reforms, NYISO estimated that “Public Policy Resources” in particular would experience difficulties with clearing in the market, preventing the state from achieving its energy resource portfolio goals. FERC swiftly rejected NYISO’s proposed market enhancements on the basis that prioritizing the evaluation of Public Policy Resources before non-Public Policy Resources was facially discriminatory. However, in this case, FERC reached no conclusions about whether that discrimination resulted in any negative impacts to the market.

The problem with these two notable decisions is that neither reaches a result required by the FPA; instead they seem to reach the preferred result. The FPA does not require FERC to centralize generation planning in Washington, D.C., nor does it require FERC to neutralize the preferences states may show for different resource types of generation as policy goals, technologies, and administrations change over time. In fact, the FPA only requires that FERC approve tariffs and contracts that are “just and reasonable” and “not unduly discriminatory or preferential”—an ambiguous standard that, since 1935, has permitted substantial flexibility and adaptation to accommodate and even facilitate state policymaking.

Indeed, in 2011, FERC accepted a categorical exemption for renewable resources from PJM’s MOPR, under a rationale that “according different treatment to different classes of entities subject to our jurisdiction does not amount to undue discrimination under the FPA when the classes are not similarly-situated. Here, wind and solar resources have different characteristics than [combustion turbines] and [combined cycles] and thus cannot always be regarded as interchangeable, and we continue to find PJM’s proposal to exempt certain resource types from MOPR to be a pragmatic and reasonable approach.” But two years later, in 2013, FERC rejected a complaint seeking an exemption for state-sponsored renewable resources from ISO-New England’s own MOPR bidding rules, stating that it “must balance two considerations. The first is its responsibility to promote economically efficient markets and efficient prices, and the second is its interest in accommodating the ability of states to pursue other legitimate state policy objectives.”

The point here is that integrating state public policy into wholesale markets does not necessarily require sharp elbows (all the time), and that the FPA contains the legal latitude necessary to translate state public policy into justifiable resource discrimination in the wholesale markets. It is also possible that FERC’s actions to counteract state public policy violate the exclusive authority left to the states over generation decisions. In any event, the fact is that wholesale markets cannot be washed of the impacts of state public policy, and FERC need not endeavor to do so in search of “just and reasonable” rates. ■

—Jason Johns is a partner at Stoel Rives LLP, where he focuses on power markets, and state and federal energy regulatory arenas. Jessica Bayles is an associate in Stoel Rives LLP’s Energy Development group.