Saving Coal: A Tale of Two Agencies By CU Law Professor Sharon B. Jacobs

This post originally appeared on the Harvard Law Review Blog

Generating electricity from coal is a dirty business. Coal mining and power production release toxic heavy metals like mercury, respiratory irritants like sulfur dioxide and particulates, and large volumes of heat-trapping gases like carbon dioxide and methane. Nevertheless, the current administration has made no secret of its desire to “save” coal. Its latest effort involved a little-used statutory provision that allows an executive agency to dictate the focus of an independent regulator.

The effort began this past fall when Secretary Rick Perry’s Department of Energy (DOE) issued a Notice of Proposed Rulemaking (NOPR) that would provide guaranteed payments in wholesale energy markets to “fuel-secure” power plants. “Fuel-secure” plants were defined as those with a 90-day supply of fuel on-site, a requirement that only coal and nuclear power can satisfy. Troublingly, the DOE provided no legal justification for its proposed rule. Instead, it argued that the “resiliency” of the nation’s power grid was “threatened” by what it called the “premature retirement” of these power plants. Even that claim is vulnerable to critique. As the Rhodium Group has shown using the DOE’s own data, only 0.00007% of major electricity disruptions nation-wide from 2012–2016 were in fact caused by fuel supply problems.

Curiously, the DOE itself has no authority to finalize such a rule. Instead, its proposed rule directed the Federal Energy Regulatory Commission (FERC) — the ostensibly independent regulatory agency that oversees wholesale electricity markets — to finalize the proposal. So how can the DOE tell FERC what to do? It all goes back to the Department of Energy Organization Act of 1977. That Act created the DOE and transformed the Federal Power Commission into FERC. The Act placed FERC within the DOE but labeled it an “independent agency” and made its commissioners removable by the president only for “inefficiency, neglect of duty, or malfeasance in office.”

Section 403 of the Act, codified at 42 U.S.C. §7173(a), gave the Secretary of Energy authority “to propose rules, regulations, and statements of policy of general applicability with respect to any function within the jurisdiction of [Federal Energy Regulatory] Commission . . . .” The DOE first invoked this authority in 1979 during the nationwide fuel oil shortage, proposing a rule that would allow one-year authorizations to transport natural gas if the DOE certified the gas would be used to displace fuel oil. FERC issued a final rule based on this proposal. While the recent NOPR asserted that the DOE has “subsequently acted under section 403 on several occasions by publication of a NOPR in the federal register,” it did not elaborate. My search revealed only one additional invocation of the provision: in 1985, the DOE proposed a rule setting certain natural gas prices (which also resulted in publication of a final rule). Additionally, in 2000, the DOE considered invoking its authority to propose a rule imposing mandatory electric reliability standards. However, it did not ultimately propose such a rule.

According to 42 U.S.C. §7173(b), once the DOE proposes a rule, FERC must “consider and take final action” on the proposal “in an expeditious manner in accordance with such reasonable time limits as may be set by the Secretary for the completion of action. . . .” In this case, the DOE ordered FERC to take final action on the rule within 60 days. FERC subsequently sought, and the DOE granted, a one-month extension of the deadline.

The statute does not require FERC to adopt the Secretary’s proposal–only to take “final action.” This “final action” could be the adoption of the proposed rule without modification, adoption of a modified form of the proposal, or a decision not to adopt the proposed rule in any form. The DOE has limited recourse if FERC elects not to finalize its proposed rule. Pursuant to another section of the statute, “[t]he decision of the Commission involving any function within its jurisdiction . . . shall not be subject to further review by the Secretary or any officer or employee of the Department [of Energy].” On January 8th, two days before its deadline, FERC respectfully declined to finalize the DOE NOPR. There was no way FERC could have adopted this proposed rule with a straight face. FERC needs a reason to intervene in competitive power markets. Under the Federal Power Act, it must find that the existing market rules are unjust, unreasonable, discriminatory or preferential in order to invalidate them. Not only did the DOE fail to invoke any part of this triggering language, the defenses it did offer of its proposal rang hollow. Commissioner Richard Glick, in his concurrence, noted that the DOE’s “own staff Grid Study concluded that changes in the generation mix, including the retirement of coal and nuclear generators, have not diminished the grid’s reliability or otherwise posed a significant and immediate threat to the resilience of the electric grid.”

Importantly, however, FERC did not frame its response as a loss for the DOE. While it declined to adopt the DOE’s proposed rule, it simultaneously initiated a new proceeding to look at resilience in wholesale power markets. In fact, the Commission seemed to go out of its way to placate the DOE. It stressed in the decision’s first paragraph that “we appreciate the Secretary reinforcing the resilience of the bulk power system as an important issue that warrants further attention.” Only a few sentences later, it assured the DOE that “[t]he resilience of the bulk power system will remain a priority of this Commission.” Commissioner Neil Chatterjee went further in his concurrence, “applaud[ing] Secretary Perry’s bold leadership in jump-starting a national conversation on this urgent challenge.”

What was FERC’s strategy in responding to the NOPR? Perhaps the Commission’s Republican majority, all of whom are recent appointees of President Trump, share Secretary Perry’s concerns about coal and nuclear retirements (or at least about wholesale market “resiliency”). While this particular proposal was indefensible, they might ultimately seek to adopt a better-considered, better-defended rule that identifies an actual problem with wholesale market pricing mechanisms and seeks to remedy it.

A second possibility is that none of the five FERC commissioners (with the possible exception of Commissioner Chatterjee) wish to adopt a rule pricing the “resiliency” attributes of power plants in wholesale markets. Despite this, they may want to keep on the DOE’s good side. FERC must have been aware that the media would characterize its failure to adopt the DOE’s proposal as a loss for the administration. Here are just a few of the headlines that followed FERC’s denial: “Perry says NOPR; FERC Says Nope (To Propping Up Coal) (Forbes); “Rick Perry’s Proposed Coal Bailout Just Died an Unceremonious Death: FERC says “nope” to the NOPR” (Vox); “Critics slam Perry after FERC blocks his ‘crazy Hail Mary’” (Greenwire). FERC may have softened its denial in an effort to mitigate this negative coverage. As I have written elsewhere, even independent regulatory commissions must conserve political capital. FERC may be exercising what Alexander Bickel called the “passive virtues” — placating the DOE in order to shield itself from greater scrutiny and interference.

Secretary Perry has already threatened to pursue other options under the Department of Energy Organization Act, the Federal Power Act and other authorities to support coal plants. Consider this scenario: nothing technically prevents the DOE from invoking Section 403(a) over and over again, monopolizing FERC’s agenda and preventing it from getting any other work done. Although the provision has been invoked infrequently in the past, this is an administration that seems determined to buck convention. The prospect of the provision’s more regular use, coupled with DOE’s abuse of its 403(a) authority in issuing this legally indefensible proposal, suggests that 403(a) has outlived its usefulness. While it may have been helpful as the fledgling agencies sought to understand and clarify their respective powers in the aftermath of reorganization, today its risks outweigh its benefits. It permits an executive agency headed by a member of the president’s cabinet (DOE) to set the agenda for an independent, expert regulator (FERC). Let us hope this is the last we will see of it.

Sharon B. Jacobs is a Professor at CU Law and a member of the GWC Board.