‘Major investment cycle’ and rapidly changing U.S. energy markets pose fresh challenges for FERC — Chairman LaFleur

Source: Rod Kuckro, E&E reporter • Posted: Sunday, August 24, 2014

Prudent. That word might best describe Cheryl LaFleur’s approach to her job — and answering questions about it — as chairman of the Federal Energy Regulatory Commission.

President Obama named the Harvard University-trained attorney and former National Grid executive to lead the agency at the end of July. She had been acting chairman of FERC since November after Jon Wellinghoff left the post before his term was up.

LaFleur, 59, will serve as FERC chairman until April 15, 2015, when newly named Commissioner Norman Bay, the former head of FERC’s enforcement office, will step into that role.

While nursing coffee from her “lucky” mug with the inscription “sleep is for the weak,” LaFleur recently sat down in her office with EnergyWire to discuss some of the challenges facing the five-person commission.

Among those challenges is seeing to repairs in the nation’s regional transmission organizations (RTOs) that operate wholesale electricity markets, especially those with separate capacity markets, LaFleur said.

The need became even more urgent after the winter’s polar vortex, which blanketed the eastern United States with bitter cold, driving up electricity demand and pushing power prices to record highs because of insufficient generation capacity.

“In general, the energy markets have worked quite well,” LaFleur said. “But right now we have a significant staff effort ongoing, looking at the energy and ancillary services markets more holistically.”

In capacity markets, she said, “It’s harder to make adjustments. But I think we’ve stepped into the belly of the beast to start looking at them.”

In capacity markets, electricity generators are compensated for investing in power plants. Utilities that distribute power to customers pay generators to ensure the long-term availability of sufficient capacity for the reliable delivery of power. What they pay generators is set in an auction.

In the last two years, the low cost of wind power, efficiency resources and natural gas generation have knocked pricier nuclear power and coal-fired plants out of contention for future capacity supply by bidding into auctions and clearing at a lower price. Now, owners of nuclear, coal and even some gas-fired plants want reforms approved by FERC to help raise the amount of money market players can get to keep their power generation on line.

LaFleur and her colleagues on the five-member commission have been sorting through filings from different regions proposing changes to capacity markets since a technical conference on the issue in September 2013. Asked if she could envision FERC proposing solutions beyond just responding to regional proposals, she said, “I wouldn’t rule it out.”

Wrenches in the power mix

“Markets are being asked to do things they were not designed to do,” LaFleur said.

“The markets were set up to allocate resources more efficiently,” she said, “to shift investment risk from customers to investors, to run the grid across larger regions so that you’d get more redundancy and more efficiencies, and to reduce regulatory lag when prices came down. The markets have done all those things really quite well.”

What the regional markets weren’t created to do is “support meeting specific resource targets for specific types of resources,” she said, pointing to state renewable portfolio standards.

“Since they weren’t specifically designed with that in mind, it’s natural that you would need to step back and consider how they work for that, or how they work for the [U.S. EPA's] Clean Power Plan,” LaFleur said.

Wind and solar power are among the generation choices today that did not exist at an affordable price when regional markets such as PJM Interconnection, Midwest Independent System Operator and ISO New England were created in the late 1990s. Since then, the amount of wind and solar energy resources in the nation has exploded.

Regional markets in the form of RTOs were created in part as a response to overbuilding by regulated electricity companies, LaFleur noted.

“So we were very long on capacity going in, 40 to 45 percent long as a nation,” she said. “Now because of all the aging of the infrastructure and the new environmental expectations, the change to natural gas [supplies], with all the new extraction methodologies, we’re now seeing a real need for investment in capacity and asking something different of the markets.”

“Part of the debate on the role of the RTOs is coming from the fact that we’re now in a climate of needing resource investment rather than allocating money among generation resources that were built in the old system,” LaFleur said. “Now we’re really going through a major investment cycle, and that’s leading to debate about what should be built and where.”

In 1997, as the RTOs were getting established, there were 58 wind farms in the United States, most of them in California, with the capability of powering 361,000 homes. By the end of 2013, the number of wind farms had soared to 833, with the capability of powering 16 million homes. That translated into 61,110 megawatts of capacity, according to the American Wind Energy Association.

Wind generation — which has no fuel cost — is often dispatched into a market before nuclear, coal and even natural gas-fired power because it’s the least expensive source of electricity. It has the effect of restraining wholesale power prices at a time when more generation is needed. “And the way markets call for investment is by higher market prices that give the investment signal,” LaFleur said.

FERC, a cautious actor in carbon debate

For FERC, there’s no easy, federally mandated fix to the challenges regional markets face in integrating renewable power into systems still dominated by baseload coal, gas and nuclear generation.

Still, it could fall to the agency indirectly as states and regions implement EPA’s Clean Power Plan, which would use Section 111(d) of the Clean Air Act to regulate greenhouse gas emission from existing power plants. Some critics of the EPA proposal assert that closing some power plants to comply with the rules will threaten reliability.

“We need to give [the public] the confidence that we’re on the job and we’re focused on what we need to do to ensure reliability,” LaFleur said. “Not meeting the reliability need is not an option.”

“The Clean Power Plan relates to power and we regulate power, so we’re already engaged in what’s going to happen to the energy infrastructure. Where I’ve been resistant is for us, FERC, an economic energy regulator, to be actually presuming to be an environmental regulator,” LaFleur said.

“The EPA clearly has the authority under their enabling statutes to make environmental rules,” she said. “We have the authority and the responsibility to make rules about reliability standards, transmission, gas pipelines and all the things that keep the lights on.”

“The primary role for FERC will be in making sure that the energy infrastructure and energy markets make any adaptations that are needed to ensure that reliability is absolutely sustained as any new resource choices are made to comply with the Clean Power Plan,” LaFleur said.

One of EPA’s “building blocks” for setting state standards is “greater utilization of renewables.” That’s alongside state targets that are in place and that in some instances requires transmission development.

“That’s going to potentially be a significant driver of projects that come to FERC,” she said. “To the extent that building blocks contemplate that states will be utilizing their resources differently, that could require a real look at whether that’s makes any changes in the way the competitive markets deploy resources. So I think that’s our key role.”

On other issues, LaFleur defended the agency’s refusal to analyze life-cycle greenhouse gas emissions from proposed gas pipelines and export infrastructure, despite unrest among climate advocates. She doesn’t think FERC has the authority or should play the role under federal environmental laws of analyzing “cradle-to-grave, molecule-by-molecule” greenhouse gas emissions from proposed gas projects.

“We don’t believe that’s in our authority or in our role under [the National Environmental Policy Act],” she said. The courts agree with that interpretation, she added.

In the event of a threat to the grid from a cyberattack, physical attack or act of nature, “I have advocated for somebody to be clearly given emergency authority,” LaFleur said. “It does not necessarily have to be FERC, it could be the secretary of Energy, but someone has to have emergency authority to make decisions about the grid. It’s not clear to me that we do have that emergency authority.”

FERC would give “very serious consideration” to a plan under development by New England’s governors to stimulate the construction of new natural gas pipeline infrastructure in the region by billing electric customers through the ISO New England tariff, LaFleur said (EnergyWire, Aug. 11). “I think the issue that I’ve raised at least conceptually is to think through jurisdictionally how you finance a gas pipeline through transmission rates,” she said.

For the foreseeable future, FERC will be operating with just four commissioners since John Norris, as expected, resigned last week. That doesn’t faze LaFleur.

“We’ve had four commissioners for my entire time as acting chairman, and I think we’ve gotten out a large number of cases,” LaFleur said. “We did not in any way reduce the number of orders we were issuing, including significant things. So we’ve shown we can operate with four commissioners.”