Energy Secretary proposes reliability and resiliency tariffs

Friday, September 29, 2017

U.S. Secretary of Energy Rick Perry has directed the Federal Energy Regulatory Commission to consider a proposed rulemaking to ensure that "traditional baseload resources, such as coal and nuclear" are rewarded for their reliability and resilience attributes.  The proceeding before the Commission will be on a fast track, and would restructure organized wholesale electricity markets.

Section 403 of the Department of Energy Organization Act authorizes the Secretary of Energy to propose rules, regulations, and statements of policy of general applicability with respect to any function within the Commission's jurisdiction.  Under that law, the Commission has exclusive jurisdiction with respect to any such proposals, "and shall consider and take final action on any proposal made by the Secretary ... in an expeditious manner in accordance with such reasonable time limits as may be set by the Secretary."

On September 28, 2017, Secretary Perry issued a letter to the Commission presenting a rulemaking proposal for consideration within 60 days from the proposal's publication in the Federal Register.  The letter cites the Department of Energy's January 2017 Quadrennial Energy Review as well as an August 2017 Department of Energy Staff Report to the Secretary on Electricity Markets and Reliability as demonstrating that market changes are resulting in a significant loss of traditional baseload generation.  It quotes electric reliability organization NERC as saying, "Premature retirements of fuel secure baseload generating stations reduces resilience to fuel supply disruptions." The letter points to the 2014 Polar Vortex as exposing "problems with the resiliency of the electric grid."  It cites a "growing recognition that Commission-approved organized markets do not necessarily pay generators for all the attributes that they provide to the grid, including resiliency."

Finally the letter calls upon the Commission to take action, exhorting "it is the Commission's immediate responsibility to take action to ensure that the reliability and resiliency attributes of generation with on-site fuel supplies are fully valued and in particular to exercise its authority to develop new market rules that will achieve this urgent objective. Failure to act expeditiously would be unjust, unreasonable, and contrary to the public interest."

Citing Section 403, the letter presents a proposed rulemaking for expedited consideration by the Commission.  According to the letter, "Distorted price signals in the Commission-approved organized markets have resulted in under-valuation of grid reliability and resiliency benefits provided by traditional baseload resources, such as coal and nuclear. The rule will ensure that each eligible reliability and resiliency resource will recover its fully allocated costs and thereby continue to provide the energy security on which our nation relies."

The proposed rule itself is relatively brief.  It defines an "eligible grid reliability and resiliency resource" as
any resource that: (A) is an electric generation resource physically located within a Commission-approved independent system operator or regional transmission organization; (B) is able to provide essential energy and ancillary reliability services, including but not limited to voltage support, frequency services, operating reserves, and reactive power; (C) has a 90-day fuel supply on site enabling it to operate during an emergency, extreme weather conditions, or a natural or man-made disaster; (D) is compliant with all applicable federal, state, and local environmental laws, rules, and regulations; and (E) is not subject to cost of service rate regulation by any state or local regulatory authority.
It requires each Commission-approved independent system operator or regional transmission organization to "establish a tariff that provides a just and reasonable rate for the (A) purchase of electric energy from an eligible reliability and resiliency resource and (B) recovery of costs and a return on equity for such resource dispatched during grid operations."  It requires that just and reasonable rate to:
include pricing to ensure that each eligible resource is fully compensated for the benefits and services it provides to grid operations, including reliability, resiliency, and on-site fuel assurance, and that each eligible resource recovers its fully allocated costs and a fair return on equity.
It specifically requires that compensable reliability and resiliency costs shall include, but not be limited to, operating and fuel expenses, costs of capital and debt, and a fair return on equity and investment.

The letter sets the proposed rulemaking on a fast track.  It directs the Commission "to consider and complete final action on the rule proposed therein within 60 days" from the date of the proposal's publication in the Federal Register. As an alternative, the Secretary urged the Commission "to issue the proposed rule as an interim final rule, effective immediately, with provision for later modifications after consideration of public comments."  He directed that any final rule adopting this proposal take effect within 30 days of its publication, and proposed that each Commission-approved RTO and ISO submit a compliance filing within 15 days of the rule's effective date.

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