Editor’s note: On or before Dec. 11, the Federal Energy Regulatory Commission is expected to take action on a controversial proposal by Energy Secretary Rick Perry that seeks to prevent noncompetitive coal and nuclear power plants from retiring prematurely. Depending on how such a rule is structured, analyses have estimated that it could cost ratepayers in affected regions up to several billion dollars yearly. Energy scholar Joshua Rhodes explains what FERC is and why it has so much power over energy markets and (indirectly) the prices consumers pay.
Why is this proposal so controversial?
Secretary Perry has asserted that “the resiliency of the electric grid is threatened by the premature retirements of…fuel-secure traditional baseload resources.” While exact details are not known, the rule Perry has proposed would “make whole” electric generators that can store 90 days of fuel on-site.
This means that even if those plants cannot make money in their respective markets (because other generators can provide electricity more cheaply), they will receive extra payments from the grid operator to recover their operating costs and provide a “fair” return on equity to plant owners. According to FERC Chair Neil Chatterjee, the extra money to keep those plants running will come from electricity customers in the affected areas.
Perry’s rationale is that by storing 90 days’ worth of fuel on-site, these plants make the power system more reliable, because they can run even if emergencies or disasters affect other fuel sources such as natural gas pipelines. Therefore, they should receive support that enables them to keep operating.
However, because this policy would benefit only coal and nuclear power plants – the only types that store fuel on-site – it has been interpreted as an excuse to subsidize plants that are struggling to compete. No shortage of ink has been spilled on this proposal, most of it very critical.
The counterview is that our electricity system is changing. The average U.S. coal plant is 45 years old, which is near the end of its expected operating life, and the average age of our nuclear fleet is 37 years old.
Some experts point to an analysis by the Rhodium Group that shows fuel supply to be responsible for only 0.00007 percent of electricity disruptions. Opponents of Perry’s proposal argue that other available options, such as wind and solar power, are cheaper and cleaner than coal, and will produce power at more stable prices.
Moreover, under the Federal Power Act, FERC is not supposed to favor one form of generation over another. The Heritage Foundation, a conservative think tank, has called the proposal “a massive subsidy.” Other critics say the way to promote reliability and resilience in a competitive energy market is to create a new market for that service and let everyone bid to supply it.
What does FERC do?
FERC is an independent federal agency that regulates rates for cross-state transmission of our main energy sources: oil, natural gas and electricity. It also is responsible for reviewing siting for natural gas pipelines; creating and enforcing reliability standards for interstate electricity transmission networks; and monitoring and investigating energy markets. Most local aspects of the energy system, such as retail sales and billing, are typically overseen by state public utility commissions.