FERC proposes policy on state-set carbon pricing in organized wholesale electricity markets

U.S. electric utility regulators have proposed adopting a policy statement asserting jurisdiction over organized wholesale electric market rules that incorporate a state-determined carbon price in those markets. As proposed, the Federal Energy Regulatory Commission's draft policy statement would also encourage operators of regional electricity markets to "explore and consider the benefits of establishing such rules."

As the Commission noted in its press release, "States are taking the lead in efforts to address climate change by adopting policies to reduce their GHG emissions. Currently, 11 states impose some version of carbon pricing, and other entities, including the regional markets, are examining this approach." In a statement, Commission Chair Neil Chatterjee said that "carbon pricing has emerged as an important, market-based tool that has wide support from across sectors", and that while the "Commission is not an environmental regulator, ... we may be called upon to review proposals that incorporate a state-determined state carbon price into these regional markets.”

Under the proposal, the Commission asserts that it can have jurisdiction over regional market rules incorporating a state-determined carbon price, but that it will make a case-by-case determination of jurisdiction based on the based on the specific facts and circumstances of each proposal. The Commission asked for public comment on how it should review proposed wholesale market rules which include a state-set carbon price, including: 

• How do the relevant market design considerations change depending on the manner in which the state or states determine the carbon price? How will that price be updated?
• How does the FPA section 205 proposal ensure price transparency and enhance price formation?
• How will the carbon price or prices be reflected in locational marginal pricing?
• How will the incorporation of the state-determined carbon price into the regional market affect dispatch? Will the state-determined carbon price affect how the regional market co-optimizes energy and ancillary services? 
• Does the proposal result in economic or environmental “leakage,” in which production may shift to more costly generators in other states, without regard to their carbon emissions? How does the proposal address any such leakage? 

The Commission has docketed the proceeding as Docket No. AD20-14-000, with public comments due within 30 days of its issuance, and reply comments due after another 15 days.