Carbon Tax Update, November 2020

This month’s update will focus entirely on the Federal Energy Regulatory Commission’s October 15 notice of proposed policy statement on carbon pricing. FERC will accept comments on this proposed policy statement through November 16 at ferc.gov. Comments can be identified by Docket No. AD20-14-000.

The commission seeks to clarify jurisdiction
FERC, October 15, 2020

The Federal Energy Regulatory Commission (FERC) today proposed a policy statement to clarify that it has jurisdiction over organized wholesale electric market rules that incorporate a state-determined carbon price in those markets. The proposed policy statement also seeks to encourage regional electric market operators to explore and consider the benefits of establishing such rules.

“As states actively seek to reduce greenhouse gas emissions within their regions, carbon pricing has emerged as an important, market-based tool that has wide support from across sectors,” FERC Chairman Neil Chatterjee said. “The Commission is not an environmental regulator, but we may be called upon to review proposals that incorporate a state-determined state carbon price into these regional markets. These rules could improve the efficiency and transparency of the organized wholesale markets by providing a market-based method to reduce GHG emissions.”

Today’s proposal finds that regional market rules incorporating a state-determined carbon price can fall within the Commission’s jurisdiction over wholesale rates. However, determining whether the rules proposed in any particular Federal Power Act (FPA) section 205 filing do fall under FERC jurisdiction will be based on the specific facts and circumstances.

Danly dissents in part
American Public Power Association, October 16, 2020

FERC Commissioner James Danly concurred in part and dissented in part from the policy statement.

“I dissent in part because I believe that the issuance of a policy statement on this subject—a wholly discretionary act—is unnecessary and unwise,” wrote Danly.

He said he was concurring “with that part of the policy statement noting that we have jurisdiction to entertain section 205 filings that seek to accommodate state carbon-pricing policies, which is a fundamental principle that cannot be doubted.”

With respect to his concern that the Commission should not exercise its discretion to issue a policy statement, Danly noted that he expressed similar concerns in his recent dissent to FERC Order No. 2222 requiring RTOs/ISOs to promulgate rules to accommodate distributed energy resource aggregators.

In that dissent, he questioned the Commission’s seizure of authority at the expense of the states and advocated that FERC should allow RTOs and ISOs to develop their own DER programs in the first instance. “[T]hen the question of the Commission’s jurisdiction will be ripe,” he wrote in the Order No. 2222 dissent.

Danly noted that FERC’s proposed policy statement does not mandate that RTOs/ISOs adopt carbon-pricing accommodation regimes, saying he agrees that the Commission should not issue such a mandate.

“Instead, the policy statement ‘encourages’ RTO/ISO rule changes. Without seeing a proposal, the Commission predetermines that any such proposal will be within the Commission’s jurisdiction and ‘would not in any way diminish state authority,’” the Commissioner wrote.

“That may well turn out to be true, but I would have waited until we had an actual 205 filing before us rather than pre-judging the issue based on unstated assumptions about how such programs might work,” Danly said.

“It is easy to imagine any number of RTO/ISO carbon-pricing proposals that would violate the Federal Power Act by impermissibly invading the authorities reserved to the states.”

Danly also took issue with the policy statement’s assertion that incorporating a state-determined carbon price into RTO/ISO markets could represent another example of the type of program of cooperative federalism that the Supreme Court noted with approval in FERC v. the Electric Power Supply Association.

“There is no program. This is instead a non-binding, blanket dismissal of potential jurisdictional concerns,” Danly said.

As to the substance of the policy statement, Danly concurred. “I cannot do otherwise. The policy statement amounts to little more than a statement of fact: section 205 of the Federal Power Act has not been repealed and the Commission therefore has jurisdiction to entertain section 205 filings that seek to accommodate state carbon-pricing policies. Surely, that need not be stated.”

And to the extent the Commission “feels the need to ‘clarify’ the fact that we have the power to accept just and reasonable tariff revisions that are designed to include mandatory state charges in energy and capacity market offers, I am hard-pressed to identify a more settled area of Commission law.”

IER’s Take

Read in the most optimistic light, this statement establishes that FERC will respect the authority of the states to determine their own environmental policies, that FERC will not proactively institute carbon prices, and that it will reject rules that amount to cross-border taxation.

But read in a more pessimistic light, this statement is an invitation to a back-door carbon tax. What else are we to make of FERC choosing to “encourage RTO/ISO efforts to explore and consider the benefits of potential Federal Power Act (FPA) section 205 filings to establish (carbon pricing)”?

This does not bode well for electricity users.

“The commission’s press release includes five questions about what information FERC should consider if a carbon pricing rule is proposed under Section 205 of the [Federal Power Act],” said Travis Fisher, president of the Electricity Consumers Resource Council. “Not one question is about impacts on consumers, and that is unfortunate, given that the FPA is fundamentally a consumer protection statute.”

Left unclear is what will happen when states don’t want other states’ carbon taxes affecting their electricity markets. Utah, for example, has already expressed this concern. If states start withdrawing from interstate markets, will that not undermine FERC’s mission of promoting interstate wholesale markets?

The statement raises more questions than it settles, which is why Commissioner Danly rightly implied it adds little value.

For more context, read last month’s update here and the JD Supra recap here.

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