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02 November 2020
Who is on FERC?
Taking Care of Business: Effects on FERC's Strategic Plan
Anchors Aweigh: Pipeline Challenges Will Continue Under Either President
Electricity - Renewables, States, Capacity Pricing, Transmission
The More Things Change…
With the 2020 voting set to be complete in less than a week and with a few months until the Inauguration, many in the energy sector are focused on how this year's election will influence the Federal Energy Regulatory Commission (FERC or Commission) – be it the reelection of President Trump or a new Biden administration. Our colleagues have discussed the impact of the elections on various agencies and industries. Here, we focus on FERC and provide an overview of some topics and issues that may be of interest to either a continued Republican-led FERC or a newly Democratic-led one. If one party controls the White House and both houses of Congress, there could also be a push for statutory changes affecting the industries regulated by FERC.
We highlight below some of the more central issues that touch on infrastructure development and related environmental concerns, as well as more esoteric issues like trader registration in FERC-jurisdictional markets and whether FERC's standards of conduct will be broadened, deepened, or differently enforced. We expect FERC to issue policies or orders addressing energy storage, capacity markets, the state and federal jurisdictional divide, and rate and tariff policy, including return on equity, creditworthiness, and bankruptcy. Watch for our updates and analyses on these and other important matters.
FERC has three sitting Commissioners: two Republicans and one Democrat. President Trump nominated Allison Clements (Democrat) and Mark Christie (Republican) for the two vacant seats. If these nominations are confirmed by the Senate before it adjourns in December 2020, the Commission could be comprised of three Republican members and two Democratic members, at least until Chairman Chatterjee's term expires on June 30, 2021. This outcome remains the same regardless of whether Trump or Biden is elected because neither the Chairman nor any other Commissioner is required to resign if a president from a different party is elected, nor can the president fire a sitting Commissioner without cause. See 42 U.S.C. § 7171(b). Historically, however, the Chair of FERC has typically resigned if a president from a different party has been elected. Either way, a change of administration would result in a new Chair of FERC because the president appoints FERC's Chair. Consequently, under the scenario that Clements's and Christie's nominations are confirmed by the Senate, a Democratic Chair, at least until Chairman Chatterjee is replaced, would have to compromise with the three Republican members to get orders issued and policies implemented. Even if Biden wins and Chairman Chatterjee resigns quickly, there could be a 2-2 tie until a replacement is confirmed. These factors suggest that any politically "hot" changes in a Biden administration may be incremental or slow to roll out.
On the other hand, if the Senate does not confirm Clements's and Christie's nominations prior to a second Trump term or a new Biden administration, those nominations lapse and the newly inaugurated president would be able to nominate his own choices. Would Trump renominate the existing candidates or would new names emerge? Who would Biden nominate? While campaigning, Biden has stated that his energy plan is not the Green New Deal, but would Democrats pressure him to pick Commissioners that support environmental policies informed by the Green New Deal? Would Biden look to elevate existing FERC Commissioner Glick to chair, as his dissents and separate statements seemingly highlight his priorities if he had the votes to change certain orders? In any event, if Biden is elected he may be able to appoint up to five FERC Commissioners if the two current FERC nominees are not confirmed by the Senate prior to a Biden inauguration because all of the sitting Commissioners' terms expire before the end of 2024.
FERC has jurisdiction over the interstate transmission and transportation of electricity and natural gas, and has jurisdiction over the rates, terms, and conditions of service for those entities as well as crude oil and refined product pipelines. It also has hydropower jurisdiction. FERC's 2018-2022 Strategic Plan indicates that FERC's Mission is to "[a]ssist consumers in obtaining economically efficient, safe, reliable, and secure energy services at a reasonable cost through appropriate regulatory and market means, and collaborative efforts." Fulfilling this mission involves three primary goals: (1) ensuring just and reasonable rates, terms, and conditions; (2) promoting safe, reliable, and secure infrastructure; and (3) mission support through organizational excellence. The reelection of President Trump or the election of Biden may have marked consequences on the Commission's strategic plan going forward. Namely, we discuss below whether a Democratic-led FERC would continue with the same strategic thrust and the same policies and initiatives as the current Republican-led FERC regarding enforcement, environmental, pipeline, or electric matters, and are left with more questions than answers.
On September 19, 2019, several Democratic senators wrote a letter to FERC expressing concerns over recent actions taken by FERC and questioning FERC's continued commitment to preventing fraud and manipulation in US energy and financial markets. Specifically, the senators expressed concerns related to: (1) the decline in the number of civil penalty actions initiated by FERC; (2) the closing of FERC's Division of Energy Market Oversight, and (3) the termination of FERC's policy on issuing Notices of Alleged Violations regarding investigations. The Chairman and each Commissioner responded to the senators' letter. Commissioner Glick agreed with the senators' assessment of FERC's waning commitment to preventing manipulation and wrote to Senator Cantwell that "I share your concern that the Commission's commitment to preventing manipulation and penalizing bad behavior appears to be waning." While enforcement continued under the current administration, we anticipate that a Biden administration might seek to overtly demonstrate that it shares Senator Cantwell's and Commissioner Glick's concerns and increase enforcement priorities and resources. The Commission usually issues its annual Enforcement Report in November; if it keeps to that schedule and prior formats, it will reveal some insights into where it closed matters with no action, what non-public actions it took during 2019, and where it saw its priorities. With the issuance of the 2020 Enforcement Report, we will have the third annual summary of enforcement data under a Trump administration.
A more esoteric issue that could have important implications is the Commission's order on market-based rate data collection and Commissioner Glick's dissent regarding trader registration. Commissioner Glick dissented, in part, to Order No. 860 that streamlined the collection of data needed to regulate market-based rates by creating a relational database and revising certain information requirements. Commissioner Glick's dissent was critical of the Commission's decision not to require certain sellers and entities that trade virtual products or that hold financial transmission rights to report information regarding their legal and financial connections to various other entities. Commissioner Glick characterized such information as "critical to combatting market manipulation." Would a FERC led by a Democrat argue that it has the statutory authority to impose such registration or would Congress call on FERC to demonstrate that it effectively continues to police markets?
One of the most significant areas that will be impacted by the election is environmental regulation. The Trump administration has significantly altered the environmental regulatory landscape. For example:
Most of these efforts have been challenged in court and the litigation remains pending.
If Biden prevails, it is expected that he would aggressively pursue climate change regulation, including rejoining the Paris Agreement that set international climate goals. We also expect that a Democratic-led FERC would continue to explore the issues raised during Chairman Chatterjee's and Commissioner Glick's recent carbon pricing plan in FERC-jurisdictional power markets technical conference. Indeed, FERC recently issued a proposed policy statement to clarify that it has jurisdiction over organized wholesale electric market rules that incorporate a state-determined carbon price in those markets. See Carbon Pricing in Organized Wholesale Electric Markets, 173 FERC ¶ 61,062 (2020). Comments are due on or before November 16, 2020; reply comments are due on or before December 1, 2020. We also expect that Commissioner Glick's dissents that the Commission has failed to comply with its obligations under the Natural Gas Act (NGA) and NEPA in certificate orders because he believes the majority has "ignore[d] the climate change implications of constructing and operating" natural gas projects, will be addressed in a Democratic-led FERC.
Natural gas pipelines are being buffeted at FERC and in the courts, Congress, and states. Before FERC, natural gas pipelines face regulatory uncertainty regarding how climate change should be considered by FERC. While the majority has remained firm on not expanding the scope of its environmental review to include climate impacts, Commissioner Glick contends that expansion is required. There are several cases before the appellate courts that will evaluate whether the majority's reasoning is consistent with the NGA and NEPA and supported by substantial evidence in those cases. If President Trump is reelected, the Commission's majority would arguably continue to evaluate certificate applications and the related environmental impacts on a case-by-case basis, as they have done to Commissioner Glick's consternation. If Biden is elected and Democrats come to hold a majority of Commission seats, however, natural gas pipeline infrastructure applications would likely face an environmental review that requires an examination of "whether the project's contribution to climate change from GHG emissions would be significant."
On the rate and policy front, during President Trump's administration FERC has initiated a number of rate actions pursuant to Section 5 of the NGA against natural gas pipelines. The catalyst for these actions was Trump administration tax changes that led the Commission and shippers to investigate whether pipelines were over-recovering. These challenges may continue in a Republican FERC, but a Biden tax overhaul to increase the corporate tax rate, for example, would likely lead to pipeline rate case filings to increase their rates because a Biden tax increase could lead to pipelines alleging that they are now under-recovering.
The Commission also modified its return on equity policy, but the impact of that change remains to be seen. In addition, the Commission issued a notice of inquiry as to whether it should change its Certificate Policy Statement, which details the framework used to evaluate certificate applications. The Commission issued several pronouncements that highlight its desire to prioritize landowner concerns. FERC acted on number of petitions for declaratory orders ruling that it has concurrent jurisdiction under sections 4 and 5 of the NGA, 15 U.S.C. §§ 717c and 717d, with United States Bankruptcy Courts with respect to natural gas pipelines' respective firm transportation service agreements. We can't predict whether a Democratically-led FERC would reach a different conclusion because Commissioner Glick voted in favor of these orders.
Oil pipelines also face headwinds at FERC, albeit to a somewhat lesser extent because FERC does not have jurisdiction over the construction of oil pipelines. FERC's jurisdiction over oil pipeline rates and tariffs is significant, however. During the Trump administration, FERC injected some uncertainty into the petition for declaratory process when it appeared to rule that a certain minimum barrel threshold was required for approval or that the rates of a project supported by only an affiliate shipper had to be established on a cost of service basis. Rehearing on the Commission's order on the Magellan "affiliate" petition remains outstanding, as does the petition for the Commission to impose its natural gas Standards of Conduct on oil pipelines. The election and resulting Commission will likely reach different outcomes on the affiliate issues.
FERC has been active on electric market and rate issues during Trump's term. Most significantly during this time, FERC issued Order No. 841, which was upheld by the DC Circuit, and constituted a victory for the energy storage industry by allowing RTOs and ISOs to open their markets to energy storage, including aggregated batteries connected at the distribution grid or behind customers' meters. FERC also issued Order No. 2222, which is broader than Order 841 because it opens the electric wholesale markets to distributed energy resources (DERs) like rooftop solar, behind-the-meter batteries, and electric vehicles. Order No. 2222, however, potentially raises questions for qualifying facilities. Biden has vowed to impose new emission regulations, and states are issuing various climate and generation pronouncements. This might also galvanize a Democrat-led FERC to expand the rules and policies established in Order Nos. 841 and 2222.
Shippers and others have argued that PJM's minimum offer price rule (MOPR) and similar wholesale market policies prevent subsidization of zero-carbon resources. In December 2019, FERC directed PJM to expand its MOPR to mitigate the impacts of state-subsidized resources on the capacity market. The order received immediate backlash from many groups, particularly environmental organizations, which claimed that FERC's order arbitrarily discriminated against clean energy resources in favor of incumbent fossil generation. Under these new rules, PJM must establish resource-specific MOPRs for new and existing resources that receive (or are eligible to receive) state subsidies, including renewable energy credits used to promote renewable energy and zero-emission credits (ZECs) that are intended to keep some existing carbon-free nuclear plants online. The order also required that new demand response, energy efficiency, and storage resources be subject to a MOPR as well, if they receive (or are entitled to receive) state subsidies. Will a Democratic-led Commission affirm the order on rehearing or will a new FERC rewrite the order on rehearing and address issues raised by environmentalists and others?
FERC also has been active on the electricity rate front. In March of 2020, it issued a NOPR proposing sweeping changes to its methodology for awarding return on equity incentives for new transmission projects. FERC also issued new return on equity standards. It's income tax allowance policy may also get a relook if the Biden or Trump administration issues new tax legislation.
In an odd marriage between infrastructure and renewables, some generators, transmission providers, and load have lamented the difficulty of moving renewable-generated electricity from geography of sun and wind to the population and load centers. This raises the question of whether a Democratic Senate and House would expand the limited "federal backstop siting authority" offered by section 216 of the Federal Power Act (FPA)? If so, FERC would likely be required to provide rules around implementation.
We don't attempt to predict who will win the presidential election or how the composition of Congress or the Commission may change, but FERC has evolved from a lesser-known federal agency to one that is in the public focus for its impacts on American's daily lives. Over the next few months, we plan to provide more analyses of issues that the energy industry may face in the next administration, whether Republican or Democratic.
For further information on this topic please contact Monique Watson, Daniel A Mullen, Marc Spitzer or Richard L Roberts at Steptoe & Johnson LLP by telephone (+1 202 429 3000) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org, email@example.com). The Steptoe & Johnson LLP website can be accessed at www.steptoe.com.
This article has been reproduced in its original format from Lexology – www.Lexology.com.
Jennifer L Key, partner, Donna Byrne, partner, Charles R Mills, partner, Wesley J Heath, of counsel, Cynthia L Taub, partner and Laura Swett, of counsel, contributed to the preparation of this article.
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