The polar vortex and the Perry NOPR

As a polar vortex (shades of 2014) grips much of the U.S., challenging the U.S. electricity system, the Federal Energy Regulatory Commission is scheduled Jan. 10 to reveal its views on the notice of proposed rulemaking it published last year at the behest of Energy Secretary Rick Perry. The proposal would essentially kill existing wholesale power markets in order to accommodate out-of-market nuclear and coal plants, claiming that they have inherent but unrecognized values of undefined “resilience” crucial to keeping the grid running.

Nuclear and coal interests (and they are the only ones in the industry supporting the DOE position) are pointing to the latest deluge of cold air from the arctic (which has resulted in snow flurries in the Gulf of Mexico) as evidence of their claim. But the wholesale markets so far have responded well, including calling on coal-fired generation to offset spiking natural gas prices.

A recent Bloomberg article said, “The arctic blast that’s turning the northern half of the U.S. into a giant icebox this week has been good news for oil and coal.” The Bloomberg article noted, “In the PJM market, which stretches from Illinois to Washington, D.C., coal has once again surged past natural gas to become the biggest fuel for power generation. Oil demand has also shot up.”

Overall, said Bloomberg, “As of Friday morning, utilities and grid managers including PJM, the Midcontinent Independent System Operator and New England’s system operator had reported none of the gas pipeline freeze-ups that plagued plants during the vortex. Coal stocks also froze in 2014. One of the nation’s biggest coal generators, American Electric Power Co., said it had seen no curtailments due to the weather affecting supplies.”

In New England, where natural gas pipeline capacity is insufficient to supply both its traditional home heating market and the new electric generation market, and there is no political will to build new pipelines, ISO-New England has turned to old, inefficient, and polluting oil-fired capacity as the cold weather drives up natural gas prices. A Forbes article quotes Stephen Leahy of the Northeast Gas Association, “Customers who heat, cook, or manufacture with natural gas are insultaed from the sudden price impacts that power generators experience,” because they have firm gas supply contracts not available to generators.

ISO-NE is also buying generation from liquefied natural gas during the deep freeze, and some gas-fired merchant generators have added oil-fired capacity that burns less polluting fuel oil than the legacy units in New England.

EDF’s Mark Brownstein

Burning oil has raised the ire of some environmentalists because of its pollution. But Mark Brownstein of the Environmental Defense Fund commented in a recent tweet, “Actually, relying on oil (or LNG) sporadically might actually be the most economically rational thing to do to meet discrete periods of peak demand, rather than incur the cost of high fixed cost solutions (pipes or nukes) with limited/uncertain future life.” Burning oil for a few weeks every few years hardly seems like a major environmental threat.

Should FERC adopt the Perry proposal, which seems unlikely, it will set off a tumult of litigation. The DOE plan faces numerous legal problems, according to an analysis this week in the legal website Law360. The article quotes Ari Peskoe, an electricity law specialist at Harvard Law School’s Environmental Policy Initiative, “The NOPR is rich with opportunities for legal challenges. The NOPR didn’t come from FERC and DOE has really provided opponents an opportunity to litigate this by doing such a shoddy job.”

Among the many legal targets of opportunity for opponents of the plan to blow up competitive markets, here are two potential show-stoppers:

* The Administrative Procedures Act. The APA requires feds to base decisions on reasoned deliberation. Problems in the Perry plan, as highlighted by the Electric Supply Association and others, include a failure to define “grid resiliency,” why 90-days of on-site fuel instead of 60 days or 120 days or any other arbitrary figure is necessary, how the coal and nuclear plants awarded special prices in the wholesale markets would interact with the rest of the market.

* The Federal Power Act. The law requires that FERC to ensure that rates it sets are “just and reasonable,” so when it changes rates it must show that the prior rates were not just and were unreasonable. The Perry NOPR, according to the Law360 analysis, nowhere contains an assertion that existing rates are “unjust and unreasonable.” The analysis says, “That tees up a surefire FPA claim that court if FERC adopts the NOPR in its current form, experts say.”

While DOE and the coal and nuclear industry may view the current coal wave as positive for their case, veteran FERC reporter Glen Boshart of S&P Glogbal Market Intelligence has a different take. He says in a tweet, “And if the grids hold up well? Even if there are issues, the lessons may be different than DOE might expect. The timing of this cold spell couldn’t be better for @FERC.”