Pushing through a record hurricane season has tested the resiliency of the human spirit, as well as that of the energy infrastructure we so heavily rely upon. In the last month, we have seen efforts on multiple fronts with a focus on ensuring the reliability and resiliency of the nation’s electric grid. In mid-September, the U.S. House Energy & Commerce Committee’s Subcommittee on Energy commenced a two-part hearing to gain insight from regulatory agencies and industry participants on the impact that various generation sources, policies, and changes in the electric system have on grid reliability. The following week, the Federal Energy Regulatory Commission (FERC) issued final rules and a notice of proposed rulemaking regarding mandatory standards for grid resiliency and reliability. And shortly thereafter, the U.S. Secretary of Energy took uncommon steps to require FERC to develop a resiliency pricing rule to protect traditional sources of baseload generation, including coal and nuclear power, on an expedited 60-day timeline. We highlight each of these efforts below.
U.S. House Hearings – “Powering America: Defining Reliability in a Transforming Electricity Industry”
As part of its “Powering America” series, the House Energy & Commerce Committee’s Energy Subcommittee set out to explore several issues through a two-part hearing on grid reliability, including (1) how reliability attributes of various types of generation sources ensure electric system operators can meet reliability requirements; (2) how and whether existing electricity market rules, State policies, and Federal policies are encouraging a reliable electricity system; and (3) how the evolution of our electricity system is changing the way States and regulators ensure reliability. The first hearing was held on September 14, 2017 against the backdrop of Hurricanes Harvey and Irma, which were branded as “le[aving] the electric industry with one of the largest and most complex power restoration efforts in United States history.” The second hearing was held on October 3, 2017, not long after Hurricane Maria left 100% of Puerto Rico without power and Energy Secretary Perry’s proposed grid resiliency rule urged that the “recent Polar Vortex, as well as the devastation from Superstorm Sandy and Hurricanes Harvey, Irma, and Maria, reinforces the urgency that [FERC] must act now.”
The first hearing panel offered perspectives from the primary regulatory bodies with oversight of the national power grid. Witnesses represented the North American Electric Reliability Corporation (NERC), which is responsible for the development of reliability standards for North America, the U.S. Department of Energy’s Office of Electricity, and FERC. Subcommittee members were interested in probing near-term and long-term approaches to ensuring that the grid remains reliable for decades to come. Cybersecurity and grid resiliency were among the topics raised at the hearing, and given the impact that severe weather events have had on the grid in recent years, NERC identified resilience as a priority moving forward. The second hearing panel consisted of a broad spectrum of energy industry representatives, including clean coal, nuclear, petroleum, wind, hydropower, solar, and energy storage, as well as a representative from the non-profit Natural Resources Defense Council. The Subcommittee hoped to gain an understanding of how the mix of generation sources interact to ensure adequate power and grid reliability services are available. Witnesses emphasized the difference between reliability and resiliency – resilience being the “ability to maintain service or restore supply during and after a disruptive external event” or to maintain a reliable grid in the face of “low probability disturbances that have catastrophic consequences such as a polar vortex.” Witnesses noted that there are no agreed upon standards and metrics for resiliency, and addressing grid resilience is more complicated than just addressing fuel supply mix. In addition to video, rough transcripts of the hearings are available here and here.
FERC Grid Reliability Final Rules and NOPR
On September 20, 2017, FERC issued two final rules and a Notice of Proposed Rule Making related to grid reliability. FERC Order No. 836 approves revised reliability standards on Balancing Authority Control (BAL-005-1) and Facility Interconnection Requirements (FAC-001-3) that are meant to clarify and consolidate current frequency control requirements. Control of frequency in an Interconnection is considered critical to maintaining reliability. As long as customer demand and resources are balanced, frequency remains stable. As explained by NERC:
Failure to maintain a balance between load and resources causes frequency to vary from its target value. Other problems on the grid, such as congestion or equipment faults which dictate rapid unilateral adjustments of generation or loss of load cause changes in frequency. Frequency can therefore be thought of as the pulse of the grid and a fundamental indicator of the health of the power system.
The revised FERC standards are designed to facilitate increased accuracy and comprehensive calculation of Reporting Area Control Error, which can be described as “a real-time value” that reflects the “mismatch in meeting a Balancing Authority’s internal obligations [to balance customer demand with generation], along with the small additional ‘bias’ obligation to maintain frequency.” This Rule is set to become effective November 27, 217.
FERC Order No. 837 approves a revised reliability standard on Remedial Action Schemes (PRC-012-2), which is meant to prevent the introduction of unintentional or unacceptable reliability risks to the grid. Remedial Action Schemes are defined by NERC as “a scheme designed to detect predetermined System conditions and automatically take corrective actions that may include, but are not limited to, adjusting or tripping generation (MW and Mvar), tripping load, or reconfiguring a System(s).” They are designed to “accomplish objectives such as: Meet requirements identified in the NERC Reliability Standards; Maintain Bulk Electric System (BES) stability; Maintain acceptable BES voltages; Maintain acceptable BES power flows; and Limit the impact of Cascading or extreme events.” The revised reliability standard sets forth nine requirements for RASs in a “continent-wide Reliability Standard to address all aspects of remedial action schemes.” This Rule also is set to become effective November 27, 2017.
The NOPR proposes to approve revised Emergency Preparedness and Operations reliability standards covering Event Reporting (EOP-004-4), System Restoration from Blackstart Resources (EOP-005-3), System Restoration Coordination (EOP-006-3) and Loss of Control Center Functionality (EOP-008-2). The comment period for the proposed rule ends November 27, 2017.
Energy Secretary’s Proposed Grid Resiliency Pricing Rule
At the end of September, Energy Secretary Perry submitted a grid resiliency pricing rule proposal to FERC that seeks to ensure that traditional baseload resources are fully valued for their resiliency attributes and can recover their costs through appropriate pricing mechanisms. Setting forth an expedited 60-day timeline, Secretary Perry asserted in a Letter to FERC that the “premature retirements” of “fuel-secured traditional baseload resources” is threatening the resiliency of the U.S. electric grid. Secretary Perry urged that Superstorm Sandy, the Polar Vortex, and Hurricanes Harvey, Irma and Maria put the spotlight on the urgency of this matter. He proclaimed that “it is time for [FERC] to issue rules to protect the American people from the threat of energy outages that could occur,” and any “[f]ailure to act expeditiously would be unjust, unreasonable, and contrary to the public interest.”
Secretary Perry’s Proposed Grid Resiliency Pricing Rule was published in the Federal Register on October 10, 2017, with a 45-day comment period that ends on November 24, 2017 and final FERC action required by December 11, 2017. Secretary Perry pointed to the 2014 Polar Vortex as a warning that the reliability and resiliency of the grid would be threatened if coal and nuclear resources continue to be retired. The rule is based on the premise that the organized wholesale markets do not properly value the resiliency attributes of these traditional resources and therefore fail to fully compensate them. The rule requires that a just and reasonable rate be set for “eligible grid reliability and resiliency resources” 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 outlines compensable costs, including, but not be limited to, operating and fuel expenses, costs of capital and debt, and a fair return on equity and investment.
Senator Lisa Murkowski, Chairman of the Senate Energy & Natural Resources Committee, noted that while the law allows the Energy Secretary to submit a notice of proposed rulemaking to FERC, it is within FERC’s purview to carry out the rulemaking process, as Congress intended. Congressional hearings held in October sought input on the proposed rule from industry stakeholders, as well as Secretary Perry. Senator Murkowski further noted the void of FERC Commissioners that needs to be filled, given the pressing issues facing the agency: “This rulemaking is another reason why we need a full complement of commissioners at FERC, including both Kevin McIntyre and Rich Glick, whose nominations have been favorably reported by the Energy Committee and await consideration by the full Senate.”
In response to Secretary Perry’s NOPR, FERC set forth its comment deadlines to comply with the 60-day timeframe – comments due October 23rd and reply comments due November 7th – and published questions to be addressed in comments. Energy industry groups pushed back on Secretary Perry’s “aggressive” timeline, which would allow FERC to implement the NOPR as an Interim Final Rule or require a final rule be issued by FERC within 60 days of the NOPR’s publication in the Federal Register. That 60-day period would include only 45 days for public comment and 15 days for finalization of the Rule thereafter. The industry groups challenge the notion that an emergency exists such that the use of an interim final rule would be warranted, especially in light of findings presented the August 2017 DOE Staff Report on Electricity Markets and Reliability. As “one of the most significant proposed rules in decades related to the energy industry,” the importance of the proposed rule warrants sufficient time for public comment, the industry groups argued. The associations also requested that FERC hold a technical conference to facilitate the thorough analysis of the complex proposal.
FERC denied the industry requests to extend the comment period, sticking with the original deadlines. However, the timeline set forth by Secretary Perry may be insufficient to accomplish more than a clear rejection of the proposal. FERC Commissioner LaFleur reportedly stated “[a]nything other than ‘let’s end the discussion entirely’ would require more work, because if you look at how we operate, we usually take comment on things and think things through.” Initial comments on Secretary Perry’s NOPR have been received, and the 2017-2018 Winter Energy Market Assessment released by FERC staff on October 19, 2017 concluded that “at this time we do not see major risk factors that would likely lead to significant market disruptions during this winter,” causing some to question the urgency driving the Secretary’s NOPR.
FERC Chairman Chatterjee noted during comments at the recent Energy Bar Association Energy Forum that he “believe[s] there’s real value in Secretary Perry initiating a conversation regarding whether FERC-jurisdictional organized markets adequately compensate certain generators for their contribution to the reliability and resilience of the nation’s grid.” Yet, he made it clear that he “remain[s] committed to upholding the Commission’s independence on this, and the many other issues that may come before us.” Chatterjee has indicated that the agency has several options, including rejecting Secretary Perry’s NOPR, seeking additional comments, or issuing a notice of proposed rulemaking that would supersede Secretary Perry’s NOPR. We will keep you posted on developments.