November 17, 2017 Articles

Where to Regulate Electricity? Energy Secretary Rick Perry’s Proposed Rulemaking

The FERC attempts to avoid "blowing the market up."

By Jeff D. Makholm, Ph.D – November 17, 2017

In a letter to the Federal Energy Regulatory Commission (FERC) on September 28, 2017, U.S. Energy Secretary Rick Perry called on that agency to consider a proposal that would essentially return to cost-of-service regulation coal and nuclear power plants that serve regions with wholesale power markets. From the day that Perry sent his letter to the FERC, the industry has been abuzz. Former FERC chair Jon Wellinghoff said that it would “blow the market up”—a phrase that has stuck with Neil Chatterjee, the current FERC chair, who pledged to avoid such a result however the FERC deals with the proposed rule.

In short, the proposed rule permits traditional regulated cost-of-service recovery for “certain eligible” power plants located in regions with FERC-approved wholesale power markets. Eligibility depends on having a “90-day fuel supply on site in the event of supply disruptions caused by emergencies, extreme weather, or natural or man-made disasters.” See Letter to the FERC from Secretary Perry, Sept. 28, 2017, p. 7. The 90-day on-site rule effectively applies only to coal and nuclear plants—gas plants, served by pipeline from distant underground gas fields, cannot qualify.

By the time this short note appears, the FERC will be deep into its work on the subject (perusing 300 written comments from industry, interest groups, and others). It would be easy to frame the proposed rule as simple protectionism for the coal and nuclear industries in a power-supply sector increasingly dominated by modern gas-fired plants drawing from a technologically advanced and highly competitive U.S. gas market. But there is more to the issue than protectionism. Competitive wholesale power markets in the United States have persistent problems squaring competitive principles with industrial and financial realities. These problems lie at the heart of what ails wholesale power markets in the United States—where power and gas markets intersect.

Secretary Perry invoked both the polar vortex and recent hurricanes as justifications for the proposed rule. See Letter to the FERC from Secretary Perry, Sept. 28, 2017, p. 1. Cold winter weather and hurricanes are two different sorts of problems for energy markets generally. Both highlight persistent shortcomings in wholesale power markets.

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