FERC issues policy statement regarding state-determined carbon pricing in wholesale electricity markets

The Federal Energy Regulatory Commission (FERC) recently issued a policy statement directed towards carbon pricing. This policy statement, issued April 15, 2021, clarifies how FERC will evaluate Federal Power Act (FPA) section 205 filings that seek to incorporate state-determined carbon prices in organized wholesale electricity markets operated by regional transmission organizations and independent system operators (RTOs/ISOs).^[1]

States are increasingly addressing climate change through policies aimed at reducing greenhouse gas (GHG) emissions. For example, as FERC notes, 13 states and the District of Columbia have adopted clean energy or renewable portfolio standards of 50 percent or greater, and 12 states impose some version of carbon pricing. As RTOs and ISOs incorporate state-determined carbon prices into wholesale electricity markets, FERC observes that such adoptions may impact how electrical resources participate in such markets, how market operators dispatch these resources, and the compensation for these resources.

As FERC explains, following the EPSA decision,^[2] incorporating a state-determined carbon price into RTO/ISO markets may not, in and of itself, diminish state authority to establish a carbon price or modify an existing price, even if wholesale market rules would affect retail rates in the states. Instead, as FERC comments, wholesale market rules that incorporate a state-determined carbon price into the applicable RTO/ISO market can exclusively govern such market for the purpose of improving it. Accordingly, the policy statement allows FERC to avoid the restriction imposed by EPSA, which reserves certain matters under FPA section 201(b) exclusively for the states.

Renewed scrutiny

The interaction between state jurisdiction and RTO/ISOs has come under renewed scrutiny as the Texas legislature and power companies operating within the jurisdiction of the Electric Reliability Council of Texas (ERCOT) continue to respond to the effects of Winter Storm Uri. During the February storm, ERCOT, under direction from the Texas Public Utilities Commission (PUC), set wholesale electricity rates at their statutorily determined ceiling of $9,000 per MWh, and prices remained at that level from February 18 to 19. Analysts commented that, as a result, $16 billion of costs would be passed on to electric providers, and that costs created by the pricing pushed several providers to petition for bankruptcy.

Accordingly, there may be concerns that allowing RTO/ISOs to incorporate state-determined carbon pricing could result in pricing mechanisms similar to those of Texas, thereby incorporating the state-determined price into, and thereby affecting, the entire RTO/ISO. However, three key factors may alleviate these concerns: (1) FERC’s jurisdiction; (2) the nature of the product at issue; and (3) the considerations used to determine carbon pricing.

The reach of FERC’s authority

Under the FPA, FERC is charged with, among other things, determining whether rates or charges received by any public utility in connection with the transmission or sale of electric energy are just and reasonable, and ensuring that no public utility grants an undue preference or advantage to any person or subjects any person to undue prejudice or disadvantage.^[3] As FERC explains, the transmission grid administered by the ERCOT independent system operator is located solely within the state of Texas and is not synchronously interconnected to the rest of the United States. Therefore, the transmission of electric energy occurring wholly within ERCOT’s operations means ERCOT (and prices charged by ERCOT for wholesale electricity) is not subject to FERC’s jurisdiction under section 205 of the FPA.^[4]

Furthermore, while state-determined carbon pricing generally could be subject to FERC jurisdiction, electricity rates subject to ERCOT are not.  Wholesale electricity rates in ERCOT are not subject to FERC’s jurisdiction and therefore not subject to FERC’s judgment on whether prices are just and reasonable.

Different standards

Still, the PUC’s February 15, 2021 order – which allowed prices to increase to $9,000 per MWh – was based on scarcity. It may then be argued that scarcity justified the rates, but the distinction does show how FERC and ERCOT may use different standards to set pricing.

Indeed, the policy statement makes clear that FERC will determine whether a filing meets the FPA section 205 just and reasonable standard based on the particular facts and circumstances of each case. The policy statement also offers a non-binding list of potential considerations that it may use to evaluate such filings. Among these are:

• “How would the FPA section 205 proposal provide adequate price transparency and enhance price formation?”
• “Would any reforms to other market design elements be necessary, such as to market power mitigation rules or other rules that affect whether the market produces just and reasonable rates?”
• “Would the filer’s proposal result in economic or environmental leakage? If so, how might the proposal address any such leakage?”

The underlying nature of the product

Apart from these considerations, the underlying nature of the product at issue may also prevent similar pricing results. During Winter Storm Uri, for example, the Texas PUC’s order regarding wholesale electricity prices was based on a scarcity of supply. But carbon pricing, in contrast, may work on a different market model.

To illustrate, under the multi-state cap-and-trade carbon pricing model administered by CARB, the costs of emissions to fee payers is calculated by multiplying the fee payer’s total emissions subject to regulation by the Common Carbon Cost. Therefore, instead of fee payers purchasing a product such as electricity which may be priced based on scarcity, they may face costs based on production.  This eliminates the possibility of pricing based on resource scarcity.

As states continue to consider and adopt carbon-pricing models, companies are encouraged to actively monitor legislative and regulatory developments to ensure they satisfy the applicable rules governing their operations.

Learn more about this evolving issue by contacting the authors or your regular DLA Piper relationship attorney.