The Electricity Reality Report provides readers like you with news and timely analysis on policies, markets, and technology trends that affect our nation’s ability to power American homes and businesses with reliable low cost energy.
In today’s issue:
- Chairman Manchin calls recent FERC decisions ‘a shortsighted attack on fossil fuel resources’ at a Senate hearing on new policy provisions for pipelines.
- The debate continues over whether FERC is raising climate change above its mission priorities of reliability and affordability.
- An exploration of why two FERC policy statements, passed 3-2, are raising concerns.
- Under new rules, pipeline projects will have to consider mitigation not just of “fugitive” gases but of emissions generated downstream by businesses and consumers.
- FERC Commissioners and Senators worry that the new policies will deter natural gas investment at a critical time for national security, reliability and consumer welfare.
- The CEO of Southern Company writes a letter to the editor of the Wall Street Journal that appears short on facts and long on rhetoric.
- A legal analysis charges that Virginia is managing electricity resources backwards.
- The latest on the long-running Commonwealth Edison scandal, a lesson in how the relationship between politicians and monopoly utilities can endanger consumers.
- In Arizona, an attempt to squelch competitive electric power passes a hurdle – just as much of the West is moving in toward joining RTOs.
Fireworks Erupt at a Senate Hearing on FERC’s New Guidance for Gas Pipelines
Sen. Joe Manchin (D-WV), the chairman of the Energy and Natural Resources Committee, gaveled the hearing to order at 10 a.m. on March 3, in Room 366 of the Dirksen Senate Office Building. Sitting across from him were the five members of the Federal Energy Regulatory Commission, or FERC. Chairman Manchin started by praising two departing staffers.
Then the fireworks began.
Chairman Manchin blasted FERC for recent decisions that represented “a shortsighted attack on fossil fuel resources without recognizing the heavy lifting they have done and continue to do – and the integral role they play in our economy going forward.” He added:
In my view, there is an effort underway by some to inflict death by a thousand cuts on the fossil fuels that have made our energy reliable and affordable while also providing us countless products and a vast strategic advantage over our adversaries and to the benefit of our allies and trade partners.
He cited Russia’s invasion of Ukraine as what he called an “energy war” and continued:
“We sit on an ocean of energy in West Virginia with nearly 214 trillion cubic feet of untapped natural gas in the Appalachian Basin…but we can’t get our abundant natural gas out of West Virginia with the roadblocks being placed in the way of…project developers, and the impacts are felt by the construction workers and energy communities who need the jobs and tax revenues. It’s just ridiculous.”
The hearing’s purpose was “to review FERC’s recent guidance on natural gas pipelines” – specifically, two policy statements issued last month. Manchin and others on the committee – including Sen. John Barrasso of Wyoming, the ranking member of the panel and the chair of the Senate Republican Conference – criticized the Commission for overstepping its legal authority and downgrading the priorities of its mission in favor of addressing climate change.
In Issue No. 9 of this newsletter, we quoted Barrasso’s Feb. 15 letter to FERC that warned about a shift of focus to climate-change objectives, specifically noting that the Commission’s recent actions would harm consumers with even higher energy prices.
“Moreover,” he wrote, “a failure in the reliability of natural gas or electric service can quickly become a matter of life and death.”
Barrasso’s letter was prescient, coming two days before FERC issued its new guidelines.
While climate change is an important issue (Chairman Manchin: “I am in no way saying that we should throw our efforts on climate change to the wayside”), it is not FERC’s primary responsibility, these critics said. In addition, FERC’s policy statements came into effect without comment periods and have created enormous uncertainty, according to many of the Senators, who were particularly irked by the “case-by-case” FERC decision-making process.
Some were downright angry. “I am now starting to think we’d be better off without FERC,” said Sen. Mike Lee (R-Utah)
Is FERC Elevating Climate Change Over Its Mission Priorities of Reliability and Affordability?
Over the past several months, this newsletter has reported on the controversy surrounding FERC’s moves to elevate climate change considerations, which, as Chairman Manchin pointed out, are the concern of other agencies, including the Environmental Protection Agency, the Army Corps of Engineers, the U.S. Fish & Wildlife Service, and more. FERC’s mission, by contrast, is the following:
Economically Efficient, Safe, Reliable, and Secure Energy for Consumers. Assist consumers in obtaining economically efficient, safe, reliable, and secure energy services at a reasonable cost through appropriate regulatory and market means, and collaborative efforts.
Reliability and affordability are supposed to be paramount for the Commission, but in the two new policy statements of guidance, climate change takes a role that can supersede these other priorities.
In his prepared statement for the hearing, FERC Chairman Richard Glick said that the new guidelines were necessary because the Commission has to “provide a framework for considering reasonably foreseeable greenhouse gas emissions in our analysis under NGA [Natural Gas Act] sections 3 and 7 that is consistent with binding court precedent.” The courts, he said, had required FERC to act “without undue delay.”
The two Republican appointees on the Commission, James Danly and Mark Christie, disagreed, with Christie stating in his dissent that it is a “false narrative” to contend “that the courts are ‘telling us to do this.’” In his opening statement for the hearing, Chairman Manchin said:
While I am aware of the fact that the DC Circuit ruled that FERC needed to “adequately” consider greenhouse-gas emissions, I believe the new policy statements overshoot what was necessary and in the national interest. I believe you all took the direction from the court and applied it far more broadly than you needed to, setting in motion a process that will serve to further shut down the infrastructure we desperately need as a country and further politicize energy development in our country.
Glick’s argument contends that moving now with interim guidance gives investors and project managers assurance so they can proceed quickly. But Danly replied that the effect will be just the opposite:
We leave the public and the regulated community — including investors upon whom we rely to provide billions of dollars for critical infrastructure — with profound uncertainty regarding how the Commission will determine whether a proposed project is required by the public convenience and necessity. With that uncertainty comes reliability concerns.
He added that “the North American Electric Reliability Corporation (NERC) recently highlighted just how important natural gas is to our electric system when it explained in its most recent Long Term Reliability Assessment that “[n]atural gas is the reliability ‘fuel that keeps the lights on,’ and natural gas policy must reflect this reality.” The new FERC guidance is “unlikely to allay NERC’s reliability concerns,” said Danly.
The Two FERC Policy Statements That Are Raising Concerns
So what are these new FERC pronouncements that are generating so much concern? On Feb. 17, FERC issued an “updated certificate policy statement,” the first revision since 1999 of the approval process for new natural gas pipelines. While the statement reaffirmed many of the previous certification goals, it also called for a robust consideration of “impacts to any environmental justice communities.”
In addition, the statement said:
“Precedent agreements between non-affiliates remain important evidence of need but will no longer be the sole factor the Commission considers.” In the past, FERC relied on these earlier agreements in its decision-making, but now, creating a more arduous process, the Commission will consider “evidence of need, including demand projections underlying the capacity subscribed, estimated capacity utilization rates, potential cost savings to customers, regional assessments, and statements from state regulatory commissions or local distribution companies.”
The second piece of guidance, “Consideration of Greenhouse Gas Emissions in Natural Gas Infrastructure Project Reviews,” also issued Feb. 17 and described as an “interim policy statement,” is even more controversial.
On the day the policies were released, Chairman Manchin stated, “Today’s reckless decision by FERC’s Democratic Commissioners puts the security of our nation at risk. The Commission went too far by prioritizing a political agenda over their main mission — ensuring our nation’s energy reliability and security.”
At the hearing, Senators agreed that FERC had a responsibility for limiting “fugitive” gases, which escape by accident from a pipeline. But in this new policy statement, FERC makes clear that it wants mitigation considerations that go well beyond such emissions
Beyond the Fugitives
An article from March 14 in the National Law Review explained that in the greenhouse gas (GHG) policy statement, FERC says that “to determine whether to prepare an Environmental Impact Statement (‘EIS’) or an environmental assessment (‘EA’) in conducting its NEPA review, FERC will quantify the proposed project’s emissions under an assumed 100 percent utilization rate (i.e., the ‘full burn’ rate).” An EIS imposes a much greater burden on the project manager than an EA.
If the “full burn” rate indicates that the project might produce 100,000 or more metric tons per year of carbon dioxide equivalent, then “FERC will presume the project to have a significant effect on the environment and, therefore, will prepare an EIS — unless record evidence, including mitigation measures proposed by the project sponsor, refutes that presumption.” FERC says that the 100,000-metric-ton threshold “will cover the vast majority of potential GHG emissions from natural gas projects authorized by the Commission” and likely will “include projects…involving the operation of one or more compressor stations or LNG [liquefied natural gas] facilities.”
Here is the key: The GHG emissions that get counted are those that “have a reasonably close causal relationship” to the project. That includes emissions resulting from “construction and operation of the project as well as, in most cases, GHG emissions resulting from the downstream combustion of transported gas.”
In other words, as several Senators pointed out, the project manager is responsible for mitigating the emissions not just of the pipeline itself (those fugitive gases, for instance) but also of activities that are powered by the natural gas that moves in the pipeline. “It seems,” said Sen. Lee during the March 3 hearing, “the majority [Democrats] wants to halt new natural gas projects.”
Certainly, as the Senate critics argued, investors will be more reluctant to back those projects. But, according to a Bloomberg Law article, “It remains to be seen exactly how FERC applies the new guidance. At least two dozen natural gas projects are in some stage of FERC review, according to the commission.
‘Profound Implications’ on Securing Capital, Timelines, and Costs to Customers
The Commission approved the new guidance by a 3-2 vote, along party lines. Commissioner Danly said in his dissent that the certification and GHG policy statements would “have profound implications for the ability of natural gas companies to secure capital, on the timelines for NGA section 7 applications to be processed and on the costs that a pipeline and its customers will bear as a result of the potentially unmeasurable mitigation that the majority expects each company to propose when filings its application and the possibility of further mitigation measures added unilaterally by the Commission.”
Danly also objected to the change in the use of precedents:
In my view, precedent agreements are strong evidence of need and the Commission need not look further in most circumstances. As my colleagues acknowledge, courts have upheld on numerous occasions the Commission’s application of its Original Policy Statement and the Commission’s reliance on precedent agreements to support multiple findings of market need.
In his own dissent, Commissioner Christie wrote, “What the majority does today is essentially assume it has the power to rewrite both the NGA and the National Environmental Policy Act (NEPA), but that is a power that we do not have; only the elected legislators in Congress have that power and they have not delegated it to us.”
He went on:
And the result, especially the greenhouse gas policy that purports to address climate change, is such a confusing mess of a policy that the majority sticks an “interim” label on it. But don’t be fooled by the “interim” label. This new policy – confusing as it is – applies right now, not only to new applications, but to all pending applications, and it will inflict material harm on all pending applications right now. Changing the rules in the middle of the game violates any serious principle of due process, regulatory certainty, and just basic fairness.
“These policies are going to make it next to impossible to build any new natural gas infrastructure or upgrade our existing facilities in the United States,” said Barrasso, calling FERC’s Democratic members who voted for the new policies “radical, extreme and dangerous.”
Although the debate at the hearing was certainly heated, it was evident that members of both parties understood what was at stake. As Chairman Manchin put it, American needs to “strengthen our ability to use energy as a geopolitical tool to fight for our values abroad and support our strategic partners…. It is critical for the security of our country that we strike the right balance and that environmental factors be given consideration, but that must be weighed in the broader context.
A Controversial Letter to the Editor From the Southern CEO
On March 1, the Wall Street Journal published a letter to the editor from Tom Fanning, the CEO of Southern Company, the Atlanta-based giant that operates monopoly electric utilities. Many of Fanning’s contentions don’t stand up to the data. He wrote, for example, that states that have “suffered the most” from extreme weather “have pursued market structures such as Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs), which treat electricity as a commodity instead of a necessity.”
Let’s ignore that last bit of rhetoric. More important, Fanning offers no actual data to back up this statement. Those who prefer numbers might want to read the study by Wayne Winegarden, released Sept. 28 by the Pacific Research Institute (PRI), publisher of this newsletter. The original research, which also cited other studies, compared states with retail competition and states dominated by monopoly providers:
Two common measures of reliability are the system average interruption frequency index, or SAIFI (a measure of the frequency of a sustained interruption), and the system average interruption duration index, or SAIDI (a measure of the duration of a sustained recovery). A lower SAIFI/SAIDI measure indicates greater reliability.
Based on these metrics, the 14 jurisdictions with retail electricity competition have more reliable distribution than the monopoly states. The SAIFI in the jurisdictions with retail competition was 10.4 percent lower than the SAIFI in the monopoly states and the SAIDI in the jurisdictions with retail competition was 6.5 percent lower than the SAIDI in the monopoly states.
Those results stand to reason. As the PRI study says, “Due to the wider geographical coverage, increased generation options, and market-established prices, competitive wholesale markets managed by RTOs or ISOs create reliability benefits.” The study referred to 2019 Brattle Group research by Judy Chang, et al., which noted that these efficiencies arise because “the regional scheduling and dispatch of the transmission and generation allow the RTO or ISO to improve transmission availability and better manage unexpected facility failures on the system. This results in higher reliability without the need for increased investment in additional transmission or generation assets.”
In a tweet responding to the Wall Street Journal letter, Jeff Dennis, managing director and general counsel of Advanced Energy Economy, points out that Fanning gives no examples of states suffering from extreme weather. The Southern CEO seems to be referring to Texas and California, whose markets are not expansive RTOs but state-centric islands that have so far rejected regional integration.
Fanning also wrote, “While some argue that deregulation or market structures like RTOs and ISOs are necessary for decarbonization, Southern Co. has reduced our emissions nearly in half with plans to achieve net zero by 2050. Our state-regulated, vertically integrated market structure and robust wholesale energy competition make rapid decarbonization possible without government mandates and without sacrificing safety, reliability or affordability.”
While Fanning does not explicitly state that monopoly utilities do better at reducing emissions, he certainly implies as much. But, again, research by Winegarden and others finds the opposite. Says the PRI study:
Carbon-dioxide emissions in the competitive jurisdictions declined on average 12.1 percent between 2008 and 2018 (the latest data available) compared to an average decline of 7.3 percent in the monopoly states. These faster declines are consistent with the positive incentives created by competitive markets that empower consumers to express their electricity preferences that include receiving power from lower-emission sources.
Fanning also celebrates his regulatory relationship: “In state-regulated, vertically integrated markets, companies like ours are accountable to regulators for balancing clean, safe, reliable and affordable energy. We work with regulators and other stakeholders to make grid investments that will serve customers for decades.”
There’s an implication here that competitive energy providers aren’t regulated. But they are. FERC and NERC (the North American Electric Reliability Corporation) set standards, and state regulators play roles as well. The difference is that regulators of monopoly utilities – and politicians (as we can see below) – set prices, so those companies depend on them for their well-being, a situation that can be fraught with danger to consumers.
For a final fatal flaw in Fanning’s letter, he stated, “Our state-regulated, vertically integrated market structure and robust wholesale energy competition make rapid decarbonization possible…” He’s wrong when he contends vertically integrated markets involve competition. As we have pointed out consistently, the vertically integrated model is based on a monopoly structure where there is no competition among power generation assets; the monopoly utility runs the whole power generation supply chain. For Fanning to suggest otherwise simply defies the facts.
Virginia’s Regulatory Model – ‘The Exact Opposite of WhatShould Have Happened’
A JD Supra piece on March 9, headlined “Virginia Needs to Have Its Regulator Back,” exposes the sad reality of monopoly utility regulation in Virginia. The author, Michael Quinan, an attorney with the firm ThompsonMcMullan, begins by reminding us of the classic rationale behind utility regulation of distributors – that it “would not make sense to run multiple sets of wires down the street just to allow customers to choose from a number of different distribution providers.”
Instead, “A single electric utility company is given the exclusive right to provide distribution service to customers located within its defined service territory. In order to prevent that company from overcharging its customers and making excessive profits, its rates are regulated. Well-established rate-making principles exist to ensure the utility’s rates create a fair opportunity to recover the costs it incurs in providing a service, plus a fair margin.”
But innovation in the late 20th century has changed that environment:
Technological developments allowed certain aspects of…vertically conglomerated utility services to be supplied by multiple providers, giving customers the ability to choose the precise services they wanted at prices established by competitive markets…. After all, few people today would want to be limited to a corded land-line telephone mounted to the kitchen.
In these circumstances, “what should happen,” writes Quinan, is that services available from multiple suppliers “ought to be released from monopoly limitations and rate regulation. This would foster innovation and allow fair rates to be set by a competitive market. Those aspects of utility business that are not suited to competition should remain subject to regulation by a disinterested and apolitical regulator.”
This is precisely what happened in the telecommunications industry, and customers themselves choose their cell phones and software. “However,” writes Quinan, “what has actually happened in the electric utility industry in Virginia has been the exact opposite of what should have happened.”
He continues:
Competition for electric supply service, which is broadly available elsewhere, has been greatly restricted and mostly proscribed by statute. And oversight over regulated services has, to a large extent, been removed from the jurisdiction of the utility regulator, the SCC [State Corporation Commission].
Instead of well-principled cost-of-service regulation, rates and services are to an alarming degree being dictated by legislation. As a result, customers are being denied services they could obtain from competitive suppliers or charged too much to obtain them from incumbent utilities. At the same time, customers are also being required to pay exorbitant rates for services that properly should be regulated, resulting in excessive profits for monopoly providers.
The legislative process, writes Quinan, is “highly politicized,” and legislators aren’t equipped with the technical expertise to be principled regulators. Virginia has an opportunity, with its new administration, to adjust its system and get regulation right. Will it happen?
Developments in the Long-Running Commonwealth Edison Scandal
The tight relationship, often inimical to the public interest, that can develop between politicians and monopoly utilities is illustrated by the long-running Commonwealth Edison scandal in Illinois. In the latest development in the case, on March 10, Michael Madigan, the former Speaker of the state’s House of Representatives and once the “most powerful politician” in Illinois, pleaded not guilty to racketeering and bribery charges.
According to a press release from the Office of the U.S. Attorney for the Northern District of Illinois, “The 22-count indictment accuses Madigan of leading for nearly a decade a criminal enterprise.” The charges allege that Madigan and a co-defendant “allegedly caused various businesses, including the utility company Commonwealth Edison, to make monetary payments to Madigan’s associates as a reward for their loyalty to Madigan, at times in return for performing little or no legitimate work for the businesses.”
The co-defendant, Michael McClain, who also pleaded not guilty, is a former state legislator and lobbyist for ComEd, a subsidiary of Exelon that agreed to pay $200 million in July 2020 to “resolve a federal criminal investigation into a years-long bribery scheme,” according to the U.S. Attorney’s Office.
An announcement of that settlement by the U.S. Attorney said that between 2011 and 2019, “the Illinois General Assembly considered bills and passed legislation that had a substantial impact on ComEd’s operations and profitability, including legislation that affected the regulatory process used to determine the electricity rates ComEd charged its customers.
“Public Official A controlled what measures were called for a vote in the Illinois House of Representatives and exerted substantial influence over fellow lawmakers concerning legislation affecting ComEd,” said the U.S. Attorney for Northern Illinois. “The company admitted that it arranged for jobs and vendor subcontracts for Public Official A’s political allies and workers even in instances where those people performed little or no work that they were purportedly hired by ComEd to perform.
Madigan, now identified as Public Official A, issued the following statement on March 9: “I was never involved in any criminal activity. The government is attempting to criminalize a routine constituent service: job recommendations. That is not illegal, and these other charges are equally unfounded.”
Without prejudging the guilt of Madigan or McClain, one can say with confidence that a monopoly utility model presents the opportunity for inviting corruption – for the simple reason that what consumers pay is ultimately decided not through market forces but by politicians, political appointees, and regulatory capture.
The Battle in Arizona Over Opening Power Provision to Competition
In recent months, we have written about the drive in many Western states to join or initiate RTOs. In Issue No. 8, we discussed the “much-needed debate” on the subject in Arizona. “The goal,” said Lea Marquez Peterson, chair of the Arizona Corporation Commission (ACC), is “to allow utilities to focus on providing safe and reliable service, while supporting least-cost planning principles…and injecting competition into the overall procurement process.”
That process will allow “independent power producers (such as wind, solar, and natural gas) to compete on equal footing for utilities’ business, helping to keep costs affordable for Arizona consumers,” Peterson said. “I believe Arizona’s utilities and consumers will get the best and most competitive deal possible for their money, while maintaining Arizona’s reputation as being one of the most reliable states in the nation.”
The discussion was especially important because, as Josiah Neeley of the R Street Institute, a Washington-based think tank, wrote on March 7:
Twenty years ago, the Arizona legislature passed the Energy Competition Act [ECA], which provided that “a competitive market shall exist in the sale of electric generation services” in the state. For two decades the Arizona Corporation Commission, which oversees the state’s electricity market, refused to implement the law, which nonetheless remains on the books.
But as the ACC began to consider a true competitive market, the incumbent monopoly providers mounted a campaign in the legislature to portray competition as scary. As usual, the Texas freeze in February 2021 was raised as evidence of the danger of competitive markets even though the state, as we noted earlier, is far from a classic RTO. The utilities’ allies moved to repeal the competition provisions of the ECA with a bill called HB 2101, which would “also hamper the development of rooftop solar in the state,” wrote Neeley.
The bill initially failed in the House, but it was brought back and passed, 37-21, on Feb. 23. The Senate will now vote on the legislation, if it passes, Gov. Doug Ducey could sign it into law or veto the bill. Gov. Ducey has a reputation as a strong believer in free markets; we can only hope Gov. Ducey’s support for market competition prevails.