DOE Spotlight: Federal Energy Regulatory Commission
The Federal Energy Regulatory Commission, or FERC, is an independent agency charged with specific regulatory oversight in the energy industry, specifically the interstate trade of energy (i.e., natural gas, oil, and electricity) and reviewing proposals for certain energy infrastructure, including liquefied natural gas (LNG) terminals, interstate natural gas pipelines, and hydropower projects. Since its inception, FERC has played a critical role in the regulation (and deregulation) of the energy industry, though its public profile has varied between somewhat in the background, where only those in the industry ever paid it attention, to a notable political presence in the news, when the issues at hand became more mainstream.
Recently, FERC has made headlines after being tasked by the Trump Administration to investigate grid reliability concerns and whether coal and nuclear plants should be propped up monetarily for their ability to store fuel on site. While that proposal was ultimately rejected (as will be discussed later), it did bring FERC to the forefront of many headlines and debates, while also illuminating how little FERC is really understood in the mainstream.
With that in mind, what follows is a primer on what you need to know about FERC to understand its history and role in energy markets for the next time the Commission pops up in a front page news article.
History of FERC
In its current form, FERC was established in 1977, the same year as the Department of Energy (DOE). However, the Commission traces its lineage back to the 1920s with the establishment of the Federal Power Commission (FPC). The federal government established the FPC as an independent commission to oversee hydropower dams that were located on federally owned land or affected federal waters. Hydropower, which had been around in the form of rudimentary water wheels for over 2,000 years, had started to become more industrialized and critical in the United States with the increased demand for wartime electricity, so the FPC was the first government regulatory agency of energy in the United States, seeking to encourage hydropower projects while protecting federal lands, waterways, and water sources.
In the next decade, President Franklin Roosevelt took on the cause of dismantling the monopolies of the electric companies. With that goal, Congress passed the Federal Power Act in 1935. This legislation expanded the power of the FPC, which was still composed of the Secretaries of War, Agriculture, and Interior, to set wholesale electricity prices at levels they deemed ‘just and reasonable.’ President Roosevelt’s next legislative push was the 1938 Natural Gas Act, giving the FPC the additional authority to regulate the sale and transport of natural gas.
Source: US News
FDR’s initial plan to expand the regulatory power of the FPC and neutralize the monopolies in the electricity sector continued on for the next few decades after he left office, with FPC’s role gradually expanding to include regulation of natural gas facilities, transmission of power over state lines, and more. The next instance of drastic change came in the wake of the oil crisis of 1973, which highlighted the need to consolidate the energy functions in government, which were at that time being conducted by over 30 different government agencies, under one umbrella. That umbrella was the U.S. Department of Energy, formed in 1977 by the Department of Energy Organization Act. Included in this establishment of DOE was the founding of the Federal Energy Regulatory Commission to replace the FPC. The mission of FERC was very similar to the mission that evolved at the FPC: to ensure the wholesale prices being paid for electricity were fair.
Following in the footsteps of its predecessor agency, FERC continued to gather new responsibilities over the years:
The Public Utilities Regulatory Policy Act of 1978 tasked FERC with the responsibility of managing a program to develop new co-generation and small power production, as well as the regulation of wellhead gas sales;
In the 1980s, FERC began to deregulate the natural gas markets;
The Energy Policy Act of 1992 attempted to liberalize the electricity market and gave FERC the ability to oversee wholesale competition in the newly open energy markets; and
The Energy Policy Act of 2005 also expanded FERC’s responsibilities to include power regulation in interstate commerce of energy, i.e. the transmission of electricity through power lines and oil and gas that crossed state lines via pipeline.
As energy markets, have gotten more and more deregulated in the 20th century, FERC’s powers and responsibilities to oversee those deregulated markets have grown to meet the additional complexities of such markets. This gradual evolution of responsibilities of FERC explains why the Commission has increasingly found itself and its decisions a topic of debate in the public sphere, where initially the work being done was niche and mundane enough that it did not cause many waves.
Purpose
As stated on FERC’s website, the mission of FERC is to ‘assist consumers in obtaining reliable, efficient and sustainable energy services at a reasonable cost through appropriate regulatory and market means.’ This mission is achieved through the guiding principles of organizational excellence, due process and transparency, regulatory certainty, stakeholder involvement, and timeliness.
FERC, after the decades of evolution, has come to have a litany of responsibilities working towards that main mission. However FERC does not simply have carte blanche for all energy and electricity oversight in the United States. The Commission instead gradually gained certain powers, while others were intentionally left to the states or to the open market. As a guide, the below table identifies what FERC does and what FERC does not do:
How FERC works
Given the variety of responsibilities that fall under FERC, understanding how the Commission actually works is critically important to understanding its place in the energy industry. In terms of makeup, FERC is composed of up to five Commissioners who are all appointed by the President, with one of the Commissioners serving as the Chairman (also designated by the President). Of the five Commissioners, no more than three may belong to the same political party, and each Commissioner is appointed for a five-year term (the Commissioners’ terms are staggered so they don’t all need to be replaced at once). Each Commissioner of FERC has an equal vote on regulatory issues, with the Chairman being the one to break any ties.
Despite being under the DOE umbrella, FERC operates independently and its decisions are not subject to further review by DOE– a vital component of it functioning as it is intended. The requirement that no more than three Commissioners come from one party is to keep it independent from politics. Despite the individuals being nominated by the President and confirmed by the Senate, FERC operates independently from the influence of the Executive and Legislative Branches, as the courts are the only entities that can review FERC decisions.
Beyond the five Commissioners, FERC is a large operation with over 1,200 employees and an agency budget of over $300 million. These figures may sound like a lot, but the process appears remarkably efficient when considered in the context of FERC’s responsibilities for an electricity industry worth $250 billion and tasked with regulating the electricity used by 73% of Americans.
Source: NPR
FERC’s regulatory review can be kicked into gear in a couple of different ways. For issues with lots of stakeholders and public impact, FERC will use the rulemaking process to ensure the ability to gather information, comments, and other input before making a ruling. The notices of these rulemakings will be posted publicly in the Federal Register so the question at hand and the intended pathway is in the public record for all to read, comment on, and follow. These rulemaking processes can be initiated by a petition from the energy industry, specific companies, stakeholders, or anyone in the public . DOE can even initiate a FERC rulemaking, as it did recently with the grid resilience Notice of Proposed Rulemaking (NOPR), but FERC comes to the conclusion of that rulemaking independently, without being subject to DOE review.
For more specific topics undertaken by FERC, such as licensing of a hydropower project, FERC will also post notices of this activity in the Federal Register (in fact, this type of licensing proposal is among the most common notice FERC, or DOE as a whole, will post in the Federal Register– see graphic below). These actions are initiated by the entity looking for a license or other approval that FERC is authorized to give. For any stakeholders who seek to participate in FERC’s processes, these notices also provide an opportunity for any stakeholders to review the action and participate through protesting or filing a complaint.
Outside of a rulemaking from FERC requested by an outside entity, FERC also continually reviews the aspects of the energy industry of which it has oversight, such as interstate electricity transmission and wholesale electricity sales, and can initiate investigation and action against any utility found to be in violation of any regulations. In the event of a violation, FERC has the authority to impose fines and other punitive measures. While these violations can also be flagged by outside entities (e.g., states, customers, companies), FERC alone has authority to determine fault and punishment, subject to review only by the courts.
FERC in the news today
As previously noted, FERC oversees an electricity industry worth hundreds of billions of dollars, and as the energy industry becomes increasingly in the focus of politicians and large corporations, so too do the collective actions of FERC. Below are several of the higher profile incidents that brought FERC to the front page of newspapers in recent years.
California utilities overcharging customers
In 2001, California began scrutinizing its power prices that had recently skyrocketed after the state electric grid was deregulated and opened up to competition. The state accused wholesalers of overcharging customers by $6.2 billion for electricity sold during acute power shortages, and California filed charges with FERC. As a result, FERC ordered refunds, though for only $124 million. The issue did not end there, with California then accusing FERC of stripping billions of dollars from potential refunds and failing to properly ensure that prices set in California were ‘just and reasonable.’ Much has been written about this event, deemed California’s energy crisis– read about the entire timeline and actions surrounding the crisis here. While FERC faced criticism for potentially not doing enough, a 2016 federal court decision upheld FERC’s findings and actions.
Role in approving pipelines
A recurrent theme that brings FERC into the thick of controversy is its role in approving certain pipelines, as these projects are typically protested and strongly opposed by environmental groups. All major natural gas pipelines FERC has approved are listed on the Commission’s website (remember that while FERC regulates interstate commerce of gas and oil through pipelines, it only approves the siting and construction of natural gas pipelines and not oil pipelines). Such involvement in the approval of pipelines leads to FERC being a lightning rod for criticism by pipeline opponents of any environmental incidents and accidents that may occur. FERC sees numerous protests when it is debating the approval of specific pipelines by citizens who oppose the building of pipelines in their regions (such as the Transco pipeline in New Jersey, the Millennium Pipeline in New York, and the Marc 1 Hub Pipeline in Pennsylvania, just to name a few). Opponents of gas pipeline projects accuse FERC of approving too many pipelines, issuing approvals too easily without enough environmental analysis, and not taking opposition of locals seriously enough. On the other hand, those supporting natural gas infrastructure point out that FERC is required to allow developers to build gas pipelines as long as they comply with laws and regulations, and even stress that ‘it’s harder to build a pipeline today than it was 10 years ago…it takes more time and it’s more expensive.”
Source: DC Media Group
These type of projects inspire such passion on both sides, but assuming FERC works as intended then the Commission is independent of partisan causes and political leanings. Instead, FERC accounts for all public comments and stakeholder concerns and ensures their rulings are based on existing laws, regulations, and stipulation.
Trump’s FERC without quorum
When President Trump took office in January 2017, he expressed a desire for Cheryl A. LaFleur (a sitting Commissioner and former Chairman of FERC) to be elevated to Chairman. However, this snub of the sitting Chairman, Norman Bay, led to Bay’s resignation from the Commission altogether. As FERC already had two vacant seats at this time, the resulting third vacancy left FERC with only two Commissioners and thus a lack of a quorum with which to take any action. For an administration that had promised to be a friend to the oil and gas pipeline industry, this sudden non-quorum meant that all pipeline projects that needed approval from FERC remained at a standstill until a quorum of Commissioners could be nominated and approved. While the three Commissioners Trump nominated were awaiting Senate confirmation, a fourth Commissioner announced her imminent departure and left FERC with just one sitting Commissioner.
The lack of a FERC quorum lasted six months, ending in August with the swearing in of two newly confirmed Commissioners. Those six months left various infrastructure and energy projects in limbo, the first time FERC had been without a quorum in its history. Eventually all of President Trump’s nominees were confirmed, and the fiver-person FERC now consists of Kevin J. McIntyre (the Chairman), Cheryl A. LaFleur, Neil Chatterjee, Robert F. Powelson, and Richard Glick.
DOE Grid Resilience Proposal
In September 2017, DOE formally proposed that FERC take action to implement reforms that would provide a financial boost to power providers who kept on site a 90-day fuels supply. This proposal was intended to give an edge to coal and nuclear generation facilities to provide a baseline degree of resilience and reliability to the electrical grid, as those are the only fuel sources where such a fuel supply is readily able to be stored on site.
This proposal was met with intense opposition from providers of renewable energy and natural gas, as well as from grid operators and former FERC Commissioners from both political parties. Those opposed accused DOE of unjustly trying to pick winners and prop up coal and nuclear, citing authorities like the North American Electrical Reliability Corporation (NERC) that have found that the reliability of the bulk power system is not at risk due to the recent closures of coal and nuclear plants.
FERC ultimately decided in January 2018 that the actions DOE proposed failed to meet the requirement that such actions be just, reasonable, and non-preferential of specific fuel types, doing so with a unanimous vote. FERC explained their decision by noting that the proposal was not shown to ‘not be unduly discriminatory or preferential,’ and that the 90-day fuel supply requirement would ‘appear to permit only certain resources to be eligible for the rate, thereby excluding other resources that may have resilience attributes.’ The decision by FERC was celebrated by many in the energy industry as demonstrating the independence of FERC and the process working as it should, with the Commissioners not simply voting based on party-lines and implementing whatever the Executive Branch (through the President and DOE) wanted– no doubt an important reminder in the increasingly partisan environment of U.S. policy-making.
These are just some of the recent highlights, as FERC always has its plate full with issues that bring passionate debate from multiple sides. For a list of some more controversial issues FERC has been tasked with addressing, see the ‘Controversies’ section of this article on FERC.
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For other posts giving background of the institutions in the politics and industry of energy, see this post on ARPA-E, this post on the Strategic Petroleum Reserve, and this background of the Petroleum Administration for Defense Districts (PADD) system.
Sources and additional reading
Federal Energy Regulatory Commission (FERC): AllGov
Hydropower Regulatory History: U.S. Fish & Wildlife Service