Challenges to the bailouts: An interview with Jason Johns of Stoel Rives

On September 29, U.S. Energy Secretary Rick Perry sent an order to the Federal Energy Regulatory Commission (FERC) to alter wholesale markets to protect “fuel-secure generation”, which is code for coal and nuclear power plants. Today we caught up with Stoel Rives Partner Jason Johns to talk about the details of FERC’s Notice of Proposed Rulemaking (NOPR), how this will affect markets and what sort of legal challenges it may engender.

 

pv magazine: FERC has agreed to process the NOPR on a very compressed timeline, over protests. Is this a potential violation of FERC’s rules for making these sorts of decisions?

Jason Johns: The potential is there. The requirement under Section 403 of the DOE Act, which is the section that gave Secretary Perry the authority to issue this notice, requires only that he give FERC a “reasonable period of time” in which to respond to this proposal.

Section 403 has only been used a handful of times since it was put in place in the 1970s, and I am not aware of any decision off-hand that defines what any “reasonable” period of time is for that particular statute.

Practically speaking, a 45-day comment period for a proposal as significant as this is very aggressive and may in fact not be reasonable. But that will be for the courts to determine.

So yes, I think there is a potential for challenge, because I don’t think this is a sufficient amount of time for the industry to comment or for the commissioners to render a well-reasoned decision. It’s just too little time.

 

pv magazine: While the NOPR speaks of “fuel secure generation”, you have stated that this is a means to subsidize coal. How and why is this rule crafted for coal?

Johns: If you read the notice in detail, the justification that it provides for creating this new category of generation focuses specifically on certain characteristics that coal facilities have.

It layers in nuclear on top of that. But a lot of the factual basis that the DOE purports to give as a foundation for notice comes from coal facilities.

They cite different materials for support for their proposal. And many of those materials are addressing the benefits of certain baseload facilities, and often those faccilities are coal facilities in their examples. Renewables get no mention of course in the notice. Natural gas facilities are carved out, with references to the polar vortex and shortages of natural gas supply. And that leaves only very few facilities left.

The only facilities that are spoken of in a positive light in the notice are nuclear and coal, with coal certainly getting most of the attention. So that’s why I think this was specifically crafted for coal facilities. There are only a handful of nuclear facilities complaining that the markets can’t support their economics, but coal facilities have been shutting down across the country, so I think there is a concerted effort here to lift them back up.

 

pv magazine: At pv magazine we’ve covered in detail why it is that baseload generation is not necessary for reliability. But for our readers who are less familiar with this, can you briefly go over why this fuel secure generation is not terribly relevant for issues of reliability and resiliency?

Johns: Resiliency seems to be the new buzzword. This is a term that has been thrown around, primarily since the DOE grid reliability report was released this summer. So this word was slipped into that report, and has become the basis for the DOE notice. And resiliency has been defined in this way as to mean the ability of our power plants to and our power system to remain online during emergencies and other natural disasters.

So the polar vortex is an example, hurricanes are an example. I think, however that the claim that there is some benefit to this kind of resiliency and that resiliency is the result of fuel secure resources lacks any basis in fact.

There is a statement released by the Rhodium Group. The Rhodium Group had released a statement in response to this proposal to DOE. This was just yesterday. They had done an analysis of outage reporting to the DOE that utilities had done between 2012 and 2016, and over the course of those four years, only 0.0007% of the customer-hour outages were due to fuel supply shortage. And so if that is true, it would seem that the DOE’s notice is attempting to solve a problem that doesn’t exist.

 

pv magazine: What effect do you expect this rule to have on wholesale power markets, and what are the implications for renewable energy?

Johns: Let’s say that this rule goes into place, and there becomes a payment to fuel secure generation from the organized markets, and that payment is only available to certain kinds of generation. That payment in a way is a subsidy to that type of generation, and depending on how it is crafted by each market, it may be done differently in every market, to the extent that it is ever done.

That payment will allow that type of generation to participate in the market a little differently. They could use that subsidy to lower their bid into the market, and therefore potentially price out other generation from clearing in the market. And that is the way it could indirectly affect renewables or natural gas. It may make the market clearing prices lower in organized markets and therefore preclude resources that can’t bid as low as nuclear and coal are now bidding as a result of the subsidy.

 

pv magazine: What is the prospect of a legal challenge not on the process of crafting the rule, but on the rule itself, if FERC attempts to impose this on RTOs and ISOs?

Johns: The chances of a legal challenge are high. FERC has to determine that the markets as they currently operate are not “just and reasonable” in how they are compensating these types of resources. And to do that FERC would need to determine that these resources are in fact providing a product that is valuable.

That resiliency itself is the value. And the facts don’t seem to support it at this point in time.

 

pv magazine: Do you expect these legal challenges from individual states, RTOs and ISOs, or do you expect a national challenge?

Johns: I think it will be regional at its broadest. This is going to affect different regions in different ways, and there is a large part of the country that is not covered by ISOs or RTOs, and therefore would not be required to implement this proposal.

 

pv magazine: That’s an interesting wrinkle. What portions of the United States will not be affected by any such rule?

Johns: The entire west, with the exception of California. And the entire southeast as well. And then Texas, because Texas falls outside of FERC’s jurisdiction. Geographically speaking, most of the Western U.S., the Southeastern U.S. and Texas are unaffected.

 

Interview conducted by pv magazine Americas Editor Christian Roselund