Metropolitan Corporate Counsel sat down before year’s end with McCarter & English, LLP partners Sean Beeny and John Gregg to discuss what lies ahead in 2016 for the nation’s energy regulator, the Federal Energy Regulatory Commission. FERC oversees the U.S. power grid and the system of interstate natural gas and oil pipelines, authorizing construction and setting rates and terms of service. Their remarks have been edited for length and style.
MCC: What does the 2015 United Nations Climate Change Conference in Paris mean for FERC’s agenda in 2016?
Gregg: The Paris agreement does not create a to-do list for FERC, but it informs U.S. energy policy broadly and has signaled to markets that the so-called era of decarbonization has begun. U.S. policy already had been established by targeting a 32 percent reduction in carbon emissions from U.S. power plants by 2030 under the EPA’s Clean Power Plan (CPP). The main method to meet that goal is to replace coal-fired electric generators with new natural-gas-fired generators. For the first time ever, during two months in 2015, we generated more electricity here with natural gas than with coal. FERC’s primary role in this is to approve the construction of new natural gas pipelines that serve new shale production regions. A major challenge for the agency will be timely approval of infrastructure development in the face of uncompromising environmental opposition to the expansion of any fossil fuel use.
MCC: What are the most difficult issues that the CPP creates for FERC?
Beeny: Provided that the CPP survives judicial review, the resulting shift in the country’s electric generation mix affects system reliability, and FERC has the ultimate responsibility to monitor that. It also creates a new economic justice issue for FERC because many generating plants will be “out of the money” in some markets. What, if anything, to do about these stranded assets will be more complicated in the “differently regulated” environment that FERC’s deregulatory agenda has helped to create. Presumably, ratepayers will be exposed to paying for such stranded assets that were built to comply with the obligation to serve under the regulated monopoly model. But what about investments made without the benefit of the regulatory compact that traded a monopoly right to serve for an obligation to serve? FERC will very likely face the task of reconciling claims for compensation by owners of those stranded competitive assets with ratepayer retorts that those sorts of assets have been allowed to provide service only if and as their owners wish and at prices set without regard to cost.
MCC: What about the terrorist threat to energy infrastructure? What is FERC’s role in ensuring the safety of U.S. grids?
Beeny: The need to develop methods to counter ever-evolving cybersecurity threats to the electric industry, among others, is only compounding the challenge of maintaining the reliability of the grid, which already is pressured by radical changes in the makeup of the power supply. The front-line responsibility for meeting these challenges lies with the North American Electric Reliability Corporation, but FERC has the ultimate responsibility to ensure that NERC-developed standards do, in fact, ensure the reliability of the system, and FERC has displayed fairly acute awareness of this responsibility. Congress has just amended the Federal Power Act to authorize the Department of Energy to order utilities, NERC and regional entities to implement emergency security measures for up to 15 days at a time if the president identifies a grid-security emergency, such as one that might be caused by a cyberattack. FERC is holding a conference this January on the risks of malicious software being introduced into control systems, software and network services that all affect the grid. I expect to see FERC be even more engaged with cybersecurity in 2016.
MCC: What new policy initiatives will FERC take up?
Gregg: FERC has no initiatives teed up right now, and we do not foresee any. Last year, the agency paved the way for interstate pipelines to add so-called “modernization” costs to their rates. Pipelines are facing rising costs of keeping systems operating safely and without excessive leakage. FERC just received its first contested request to do that and will receive more in 2016. This is part of a trend of increased infrastructure costs even as the cost of energy commodities are at historic lows.
MCC: Will FERC continue to focus on the New England market?
Gregg: The New England power market remains a challenge, especially with the closure of two of Entergy’s nuclear plants, but FERC has stepped away from directing any quick fix in the area of gas-electric coordination. The market is responding with about 19 proposed natural gas pipeline expansion projects across the Northeast, including the huge Northeast Energy Direct project. FERC’s staff has its hands full with the processing of pipeline prefiling applications, while also responding to local elected officials. The region remains split on more natural gas; environmental interests are pushing back hard against new pipelines and the use of federal eminent domain, and that includes the attorney general in Massachusetts. FERC, for its part, will certainly keep an eye on electric transmission planning in the region as well.
MCC: Do you expect any enforcement bombshells, especially because FERC’s chairman is the former director of the agency’s enforcement division?
Beeny: I suppose that you never “expect” a bombshell, but while there have been some big splashes in the past, we may not see that this year for a number of reasons. First, the agency has several very large cases on appeal in court, including its largest fine ever, levied against JP Morgan. For the first time, FERC has multiple serious fights on its hands where parties are challenging not just FERC’s authority but also factual and legal conclusions that the agency has made. Second, the industry has had several years now to adjust to FERC’s enforcement priorities. Last, there has been a falloff in energy trading activity overall, and those activities produced some of the most dramatic FERC enforcement actions in the past. Nevertheless, the enforcement activities of FERC are mature now, and all industry participants know that they must abide by the rules of the road or risk the consequences of FERC’s stiff fines.
MCC: Could the presidential election affect FERC?
Gregg: President Obama certainly has raised the profile of climate change and alternate energy, and those are getting increasing traction in the campaigns. The only FERC-related issue that has crept into campaigns thus far has been environmental opposition to pipeline construction, which has some residents of New Hampshire upset. If the election produces a change in the political party in the White House, the chair has tended to resign after the inauguration in deference to the new president, who can nominate up to three members of his or her party to the five-member FERC.
Sean Beeny, Partner, McCarter & English, LLP. [email protected]
John Gregg, Partner, McCarter & English, LLP. [email protected]
Published January 5, 2016.
