Protecting State Clean Energy Rights at FERC
Attorneys general have also challenged proposals by the Federal Energy Regulatory Commission (FERC) and regional grid operators, known as regional transmission organizations (RTOs) and independent system operators (ISOs), to design energy markets to unlawfully penalize states that exercise their rights under the Federal Power Act (FPA) to promote clean energy development.
PJM Interconnection’s Capacity Market
PJM Interconnection (PJM) is an RTO that operates the wholesale electricity market in all or parts of 12 states and the District of Columbia. The RTO ensures that there is sufficient electricity to meet future needs through a competitive auction process – the wholesale capacity market – in which energy providers promise to supply a specified amount of electricity at a specified price.
In April 2018, PJM advanced two costly proposals to FERC for reshaping the wholesale electricity capacity market. If approved, the proposals would have increased consumers’ utility bills for all consumers in the PJM territory, especially impacting those states that have proactively supported clean energy development through state programs – such as renewable portfolio standards – without improving reliability. In May 2018, three attorneys general submitted comments to FERC asserting their opposition to PJM’s proposals.
In June 2018, FERC issued a decision rejecting PJM’s proposals, but found that PJM’s capacity market violates the FPA as it fails to account for “price suppression” caused by “out-of-market” state clean energy preferences. FERC ordered PJM to submit within 60 days a proposal to reshape the capacity market by forcing electricity produced through state-supported clean energy programs to be subject to PJM’s minimum price mechanism, and by allowing electricity generated with state assistance to exit the capacity market.
The FERC order provides no evidence that state clean energy programs distort the competitiveness of the capacity market, and tramples on the lawful prerogatives of states to regulate electricity generation facilities and to compensate resources for producing electricity with environmental attributes. FERC’s decision also requires PJM to fundamentally redesign its capacity market with no stakeholder input.
The attorneys general of Illinois and Kentucky filed separate requests in July 2018 for rehearing on the June 2018 order with FERC. The Illinois request argued that FERC was incorrect in concluding that PJM’s capacity market is unjust and unreasonable and that out-of-market payments are driving capacity prices to unjust and unreasonably low levels. The Kentucky request, filed with state ratepayer advocates, argued that the decision relied on theoretical harm to the capacity market and that the necessary work to develop a finished and workable proposal to redesign the capacity market cannot take place under the limited review and time frame prescribed by FERC. FERC has not yet ruled on the rehearing requests.
In October 2018, PJM submitted to FERC two proposals for redesigning its capacity market rules in response to FERC’s June 2018 order. The proposals would remove state-supported clean energy from the capacity market and would institute a strict price floor for the remaining resources, which could significantly increase consumers’ costs.
Illinois Attorney General Lisa Madigan submitted comments on PJM’s proposals, requesting that FERC institute a minimum price mechanism in a manner that does not raise capacity market prices to unjust and unreasonable levels. The comments also urged FERC to provide states with sufficient time to adjust state-level policies in response to the finalized capacity market rules. Final comments on PJM’s proposed capacity market rules were due to FERC on November 6, 2018.
On November 6, 2018, several state attorneys general filed final comments opposed to PJM’s proposals that would penalize state clean energy policies in the PJM region. Washington, D.C. Attorney General Karl Racine filed comments that objected to FERC’s conclusion that state clean energy programs are “out-of-market” forces that distort the capacity market and urged FERC to adopt capacity market rules that do not improperly blunt and intrude upon state clean energy preferences. Similarly, New Jersey Attorney General Gurbir Grewal filed comments on behalf of the New Jersey Board of Public Utilities demanding that FERC not discriminate against valid state policies in support of clean energy development and adopt market rules that do not attempt to mitigate the economically efficient effects of clean energy generation. Once again, Illinois Attorney General Madigan requested that FERC take steps to guard against increases in the clearing price of capacity market auctions.
In July 2019, when it still had not ruled on the two proposals that PJM had submitted for the Commission’s consideration in October 2018, FERC took the unprecedented step of instructing PJM to not conduct its planned August 2019 capacity market auction. FERC concluded that delaying the auction to a yet-to-be determined date would provide greater certainty than holding the auction under the existing market capacity rules that it rejected in June 2018.
In December 2019, FERC acted on PJM’s 2018 proposals by issuing an order that drastically alters the capacity market rules for the RTO. The order subjects state-supported clean energy resources to an administratively-determined price floor, thereby largely preventing these resources from participating in PJM’s capacity market. The order undermines states’ authority to determine their electric generation mix consistent with the FPA; will likely increase consumers’ utility bills; and unduly discriminates against clean energy resources. PJM was provided 90 days to make a compliance filing to implement the changes to the capacity market. To learn more about the order and guidance the State Impact Center is providing states that are considering opting out of PJM’s capacity market visit here.
State attorneys general are opposed to FERC’s December 2019 order. Following the release of the order, D.C. Attorney General Racine and Maryland Attorney General Brian Frosh stated their opposition to FERC’s action and indicated that they would fight the order that undermines their jurisdictions’ preferences for clean energy and will be costly for consumers in their jurisdictions.
The December 2019 order did not clearly address the many requests for rehearing of FERC’s June 2018 order finding PJM’s existing market rules unjust and unreasonable, including requests from the attorneys general of Illinois and Kentucky. Illinois Attorney General Kwame Raoul, representing the Illinois Commerce Commission, filed a protective petition for review in December 2019 with the Seventh Circuit Court of Appeals of FERC’s order to the extent FERC is addressing the pending request for rehearing.
In January 2020, Attorney General Raoul, on behalf of the ICC and with the agreement of FERC, moved to dismiss its petition for review at the Seventh Circuit. The motion explained that after communication with FERC’s counsel, the ICC understood that the December 2019 order did not represent a ruling on the ICC’s request for rehearing of the June 2018 order. The Seventh Circuit granted the motion for voluntary dismissal of the appeal without prejudice.
Also in January 2020, the attorneys general of Illinois, Maryland and the District of Columbia each requested rehearing of the December 2019 FERC order. The attorney general of New Jersey also requested rehearing as counsel for the New Jersey Board of Public Utilities (NJBPU). These filings challenged FERC’s order as arbitrary and capricious as well as unjust and unreasonable and unduly discriminatory against state-supported clean energy resources in violation of the FPA.
In April 2020, FERC issued an order denying the rehearing request brought by the Illinois Attorney General on the June 2018 FERC PJM capacity market order and issued an order largely denying the rehearing requests brought by Illinois Attorney General Kwame Raoul, D.C. Attorney General Karl Racine and New Jersey Attorney General Gurbir Grewal (on behalf of NJBPU) on the December 2019 PJM MOPR order. Parties to the proceedings can now pursue challenges to the June 2018 order and the December 2019 order in court.
Later in April 2020, Illinois Attorney General Raoul filed a petition for review in the Seventh Circuit challenging both of FERC’s orders and New Jersey Attorney General Grewal, on behalf of NJBPU, filed a petition for review in the D.C. Circuit. In October 2020, the D.C. Circuit issued an order transferring the litigation to the Seventh Circuit.
State Net Metering Programs
Over 40 states have state-designed net metering programs that allow retail residential and commercial customers who generate their own electricity – distributed generation – to sell surplus electricity back to the grid and to receive credit for doing so on their utility bills. Under these programs, customers’ meters operate in a manner that only bills customers for their net energy use.
State net metering programs have helped millions of retail customers to invest in rooftop solar and other distribution generation resources. These investments have lowered consumers’ monthly electricity bills, created thousands of jobs in the solar industry and helped states meet state clean energy goals.
In April 2020, despite the significant economic and environmental benefits of state-jurisdictional net metering programs, an organization calling itself the New England Ratepayers Association (NERA) filed a petition for declaratory order with FERC asking FERC to assert federal jurisdiction over net metering. The petition called on FERC to reverse its prior caselaw and find that the retail billing practice of net metering is a sale of electricity at wholesale subject to FERC jurisdiction.
Attorneys general were quick to challenge NERA’s attack on state authority to design state- specific net metering programs that provide financial and environmental benefits to their residents. In June 2020, Massachusetts Attorney General Maura Healey led a coalition of 31 bipartisan attorneys general in filing a letter in opposition to the petition, requesting that FERC deny the petition. The attorneys general noted that their states have adopted net metering programs consistent with the powers explicitly reserved to the states under the FPA to regulate retail sales of electricity.
Attorney General Healey also led a coalition of 16 attorneys general in filing more detailed comments opposing the petition for declaratory order. These comments, also filed in June 2020, noted that not only is the petition inconsistent with the division of federal-state authority over wholesale and retail sales of electricity, respectively, under the FPA and the Energy Policy Act of 2005, but it also is inconsistent with two decades of FERC decisions recognizing that retail net metering bill practices fall under the domain of states. The coalition of 16 attorneys general also explained the negative consequences that would flow from granting the petition: nationwide uncertainty regarding net metering programs; undermining states’ clean energy initiatives, many of which are required by state law; financial harm to the millions of retail customers who relied on existing net metering programs in investing in rooftop solar; and putting thousands of solar industry jobs at risk.
Virginia Attorney General Mark Herring submitted his own Virginia-specific comments in opposition to NERA’s petition. The comments stated that the petition should be denied because Congress has confirmed state authority over net metering service, the FPA does not bar state jurisdiction over net metering service, and the petition would upend Virginia’s 21-year old net metering program, impermissibly intruding on the state’s regulatory authority over net metering activities. Connecticut Attorney General William Tong, who joined the two coalition filings, also submitted state-specific comments, and Pennsylvania Attorney General Josh Shapiro, who joined the 31 attorneys general letter, also submitted Pennsylvania-specific comments in opposition to NERA’s petition.
In July 2020, FERC sided with the attorneys general in dismissing the petition for declaratory order. FERC found that NERA had made general assertions about state net metering policies that did not warrant a general statement from FERC.
State Energy Storage Programs
Energy storage infrastructure, such as batteries, helps balance the difference between the electricity grid’s demand for and supply of electricity. When there is more supply than demand, excess electricity generation can be stored for later discharge to the grid when demand outstrips supply.
As some clean energy sources, such as wind and solar, are intermittent, storage can ensure that more renewable energy can be delivered to the grid. Many states have adopted energy storage programs and goals as they have realized that energy storage represents an opportunity to integrate increasing levels of clean energy into the electricity grid.
In February 2018, FERC issued Order 841 that instructed RTOs and ISOs to amend their rules to enable storage resources to participate fully in the wholesale electricity market under the FPA. The National Association of Regulatory Utility Commissioners (NARUC), as well as several utility- and electric cooperative groups, challenged FERC’s order in the D.C. Circuit as unlawfully violating states’ rights under the FPA to determine how the local electricity distribution system is used because it applied to storage resources connected to the state-jurisdictional distribution grid.
In February 2020, Massachusetts Attorney General Healey led a coalition of five attorneys general in filing an amicus brief in support of the order in the D.C. Circuit. The brief noted that FERC’s order lawfully affects wholesale electricity rates while appropriately recognizing states’ rights to regulate the electricity distribution system. The attorneys general also pointed out that FERC’s order would allow the electricity grid and its users to benefit from the capabilities of storage resources in integrating greater levels of clean energy into the grid.
In July 2020, the D.C. Circuit issued a decision, siding with the attorneys general. The decision denied the petitions challenging Order 841, concluding that FERC’s regulation directly affects wholesale rates and does not directly regulate distribution in accordance with FERC’s authority under the FPA. The court preserved states’ ability to challenge the order as applied to their own state regulations.
State Carbon Pricing Policies
A number of states have put a monetary value on the cost of carbon emissions to reflect the negative externalities associated with climate change-causing pollutants. For example, California’s cap and trade program folds the price of greenhouse gas emissions into the cost of power by putting decreasing annual limits on greenhouse gas emissions. The Regional Greenhouse Gas Initiative in the northeastern and mid-Atlantic states takes the same approach for the power sector.
In September 2020, FERC held a technical conference with stakeholders to discuss issues related to state-based carbon pricing mechanisms in FERC-jurisdictional wholesale electricity markets. The following month, FERC released a proposed policy statement on carbon pricing. The statement acknowledged state authority to design and implement carbon pricing policies and confirmed that FERC has the authority to approve rules for RTOs/ISOs that can and should accommodate state carbon pricing policies.
In November 2020, Massachusetts Attorney General Healey led a coalition of 11 attorneys general in filing comments on the carbon pricing statement. The comments noted the states’ appreciation for FERC’s recognition of state authority to act in the carbon pricing arena and FERC’s authority to regulate carbon pricing rules in wholesale electricity markets. The attorneys general urged FERC to go further and refrain from adopting positions on acceptable design elements of state carbon pricing programs. Additionally, the comments requested that FERC clarify that it will evaluate on a case-by-case basis any state carbon pricing rules for RTOs/ISOs that are presented to it for consideration. Attorney General Healey submitted Massachusetts-specific comments on the carbon policy statement, asking that FERC err on the side of restraint as ISO-New England considers wholesale market design changes that will advance climate goals.
Defending State Zero Emissions Credit Programs
Attorneys general have defeated challenges to state-created Zero Emissions Credit (ZEC) programs in Illinois and New York to compensate nuclear generators for keeping zero-carbon operations online. Without ZECs, there was a concern that natural gas generation would replace nuclear generation, increasing the states’ greenhouse gas emissions.
In Illinois, in April 2017, former Attorney General Lisa Madigan filed a motion to dismiss that convinced the federal district court in Illinois, in July 2017, to drop a challenge brought by fossil-fuel generators to the state’s ZEC program. The claim by the Electric Power Supply Association (EPSA) and others asserted the program was preempted by the FPA and the dormant Commerce Clause.
On appeal to the Seventh Circuit Court of Appeals, Attorney General Madigan, in October 2017, requested the Seventh Circuit uphold the lower court’s dismissal of the challenge. The attorney general noted that the state’s ZEC program does not impermissibly encroach upon FERC’s authority to regulate wholesale sales of electricity under the FPA as the goal of the program is to generate environmentally beneficial energy. Further, Attorney General Madigan pointed out that the program does not violate the Constitution’s dormant Commerce Clause because it does not discriminate against interstate commerce. The following month, California Attorney General Xavier Becerra led a coalition of seven attorneys general in filing an amicus brief in support of Illinois in the Seventh Circuit litigation, making similar observations about the lawfulness of Illinois’s program.
In September 2018, the Seventh Circuit sided with the attorneys general in upholding the federal district court decision and finding the ZEC program lawful. In March 2019, new Illinois Attorney General Kwame Raoul filed a brief with the Supreme Court requesting that the Court deny the petition for a writ of certiorari that had been filed by the twice vanquished challengers of the ZEC program. The following month the Supreme Court sided with Attorney General Raoul in denying the petition.
The attorneys general had a less active role, though no less essential, in litigation challenging New York’s ZEC program, which is administered by the New York Public Service Commission (NYPSC). The NYPSC successfully defended the program in federal district court in New York in July 2017 against a suit from various electric power suppliers.
On Appeal to the Second Circuit, California Attorney General Becerra led a coalition of eight attorneys general, including the attorney general of New York, in filing an amicus brief in support of the NYPSC-administered ZEC program in November 2017. The brief noted that the district court had properly held that the ZEC program is not preempted under the FPA as it is a lawful exercise of state authority to promote the generation of electricity untethered to FERC-jurisdictional wholesale market rates. Additionally, the attorneys general pointed out that the ZEC program passed dormant Commerce Clause scrutiny because it did not have discriminatory effects against interstate commerce. In September 2018, the Second Circuit ruled in favor of the attorneys general in upholding the district court’s dismissal of the claim challenging the ZEC program.
In January 2019, the challengers once again filed a petition for writ of certiorari for the Supreme Court to hear the complaint. But the Supreme Court denied the petition in April 2019 at the same time that it denied the petition to hear a challenge to Illinois’s ZEC program.