Fundamentals should guide FERC on PJM’s misguided state policy proposal

Federal regulators are currently considering a proposal that could fundamentally alter how our nation’s power markets work in tandem with state-crafted public policies.

The change being considered, submitted by the nation’s largest grid operator, PJM, would increase electricity prices and undermine state policies in the 13 states and D.C. where PJM operates. Today, Environmental Defense Fund (EDF), alongside other clean energy advocates, filed in opposition to this proposal.

PJM’s proposal before the Federal Energy Regulatory Commission (FERC) is dense and complex (for a great primer on the universe of issues surrounding a similar proposal, see this blog post by NRDC and this article by Vox’s David Roberts). At its core, however, PJM’s proposal centers on a subject that is elemental to the electricity sector: the interplay and interaction between states and federal regulators. PJM should not thrust itself into a public policymaking role, nor should FERC become judge and jury of state policies. Instead, PJM and FERC should facilitate state policy choices.

How states and FERC work together

Traditionally, states and FERC have worked together to oversee the electricity sector. FERC regulates the ‘interstate’ electric grid, and states regulate the ‘intrastate’ electric grid. Ideally, this working relationship should be mutually reinforcing, where actions by one agency considers and supports the actions of the other.

PJM’s proposal before FERC is an obstacle because it seeks power and authority to undermine state policies.

For example, states, with authority over generation portfolios (that is, what is built) can support and be supported by FERC’s authority over just and reasonable wholesale electric rates (that is, what generation facilities are chosen to run at any given time). FERC and states are required to consider their authority on the basis of ‘public interest’, and tandem oversight is meant to uncover multiple customer benefits.

If this complementary state-federal relationship is the goal, PJM’s proposal before FERC is an obstacle because it seeks power and authority to undermine state policies.

PJM’s proposal in a nutshell

How would this new proposal work? PJM wants to create a new market construct, where only certain resources would be allowed to fully participate.

PJM seeks to prohibit some resources supported by state policies – like those included in a renewable portfolio standard (RPS) – from taking part in the new market construct when prices for electricity are determined. For example, if solar from a state with a RPS were cheaper than other sources of electricity bidding into the capacity market, PJM would ignore that price signal when determining how much to pay all generators for providing electricity. By ignoring the low-cost solar resource, the price of electricity would thus be higher for all customers.

Because a smaller pool of resources is allowed to participate in setting the market price, families and businesses will pay more for electricity.

Later, in a second stage of the market construct, the prohibited resources would rejoin the others, but at this point the price would be set. Because a smaller pool of resources is allowed to participate in setting the market price, families and businesses will pay more for electricity.

This sets a dangerous precedent in which a regional grid operator (PJM) seeks the authority to police state policies, picking and choosing based on its own criteria.

State policies are a feature, not a flaw

PJM argues that the new market construct effectively rids power markets from the impact of state policies. Fundamentally, however, state policies are a feature, not a flaw of our system.

State policies are a feature, not a flaw of our system.

Numerous inputs can impact prices in wholesale markets, from the cost of fuel, to weather, to state labor laws. FERC has no authority over inputs into the market; those are economic conditions that impact the competitiveness of each and every generation resource. Reaching outside the market and instead into state policies to account for these economic shifts frustrates the complementary state-federal relationship foundational to the energy sector. It’s for this reason, among others, that the majority of PJM’s own stakeholders voted against PJM’s proposal.

The proposal before FERC thus isn’t only bad for anyone who pays an electricity bill. It’s a short-sighted response that leads to unworkable outcomes.

Putting PJM – itself not a private entity, not a governmental entity – in charge of picking and choosing between state actions, only amplifies conflict between FERC and the states. The logic underlying the proposal, that state policies are concerns to be dealt with, rather than valid state preferences that have always been part of the energy sector, turns complementary actors into structural adversaries. Indeed, state policies like renewable portfolio standards existed prior to, or in some cases were passed in conjunction with, PJM’s original grant of authority at issue in this proposal.

FERC at a crossroads

Headaches are not solved by cutting off the head. Likewise, market interaction and design concerns should not be solved by reinterpreting foundational aspects of the energy sector, but instead by identifying ways to better amplify and implement those foundational aspects.

Proposals like the PJM filing risk losing sight of this critical element and subvert the complementary roles of each level of government into conflicting ones. As our filing makes clear, shifting roles and responsibilities only sets the sector on a collision course that puts its very underpinnings at risk. This federal-state relationship underlying the energy sector should weigh heavily as FERC considers its determination.

Photo source: istock/RomanBabakin

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