Energy Policy in the Age of Emergency Governance: New White Paper from Sharon Jacobs and Ari Peskoe

By Ari Peskoe, Sharon Jacobs

See the full white paper here: Energy Emergencies vs. Manufactured Crises: The Limits of Federal Authority to Disrupt Power Markets by Ari Peskoe and Sharon Jacobs

We live in an age of governance by emergency. In February, President Trump declared a national emergency to build a wall on the southern border after lawmakers repeatedly denied his funding requests. Next, he declared a national economic emergency to prevent U.S. firms from doing business with the Chinese technology company Huawei. Most recently, he invoked a national emergency to sell arms to Saudi Arabia, the UAE, and Jordan without Congressional authorization.

These invocations are each significant. But they are also piecemeal, making them even more dangerous than a more comprehensive power grab. Each individual emergency declaration may appear justifiable, or at least insufficiently threatening to warrant dramatic response. Before long, however, we may find that the executive has come to rely on emergency invocation as a tool of governance in peacetime.

We fear that the electricity industry may be next in line for governance by emergency. Since early 2017, the Administration has sought to support certain unprofitable coal (and sometimes nuclear) power plants. The Administration’s justifications for bailing out decades-old power generators are a moving target, and have included reliability, a nebulous concept called “resilience,” and, most recently, national security.

Make no mistake: power system reliability is vitally important, and the electric system must be able to recover from both routine and extraordinary shocks. We do not deny that natural disasters and physical- or cyber-attacks are real threats. Our disagreement is with the Administration’s flirtation with statutory emergency authorities to remake the energy system.

In a jointly authored paper released today, we make two primary arguments. First, the electric power sector is not in crisis. Despite recent closures of coal-fired power plants, interstate power networks operate reliably, and the nation has more than enough generation capacity to meet demand. A mix of federally regulated market rules and reliability standards, including standards related to physical and cyber security, as well as industry protocols and state oversight, keeps the system in balance.

Second, we argue that statutory emergency authority in the energy space is highly circumscribed. We look at four statutes: the Federal Power Act, the Fixing America’s Surface Transportation Act, the National Energy Act of 1978, and the Defense Production Act. With respect to the first three statutes, emergency authorities may only be invoked in the face of an actual threat to the grid. These statutes permit a narrow range of actions tied to the particular emergency, and their authorities terminate upon the emergency’s end (or, in some cases, sooner). The Defense Production Act enables government subsidy of private sector goods and services, but only where deemed critical to national defense.

One thing is clear: these statutes are not roving licenses to advantage particular types of generation. Over the past two years, the Trump Administration has attempted to invent a crisis in order to funnel support to ailing coal-fired generators. Its rationales are unrelated to the public interest and unsupported by the government’s own research. Most recently, Secretary Perry has suggested that multiple statutory authorities might be combined to achieve these ends. But as we explain in the paper, addition of these statutory authorities does not create anything greater than the sum of their parts.

Lawmakers, regulators, and industry actors are confronting genuine questions about adapting the power system to modern challenges, from introducing greater levels of renewable generation to mitigating climate impacts. These complex challenges are properly dealt with in the context of existing reliability frameworks and established stakeholder processes. They are not the sort of questions that lend themselves to effective resolution by reflexive reaction to imagined emergencies.

Sharon Jacobs is an Associate Professor, University of Colorado School of Law and Board Member Getches-Wilkinson Center

Ari Peskoe is the Director, Electricity Law Initiative, Harvard Law School Environmental and Energy Law Program

Colorado’s Responsibility to Protect the Public and the Environment from Adverse Impacts of Oil and Gas Development By GWC Senior Fellow Robert Hallman

Oil and gas (O&G) production in Colorado is growing largely through development of wells using hydraulic fracturing (pumping millions of gallons of water, sand and chemicals under high pressure) coupled with horizontal drilling at distances extending one to three miles from the wells. (The entire process in now commonly referred to as “fracking.”)

The search for the most productive areas increasingly involves proposals to locate multiple well pads in urban, suburban and exurban areas exposing communities to industrial-scale operations and related environmental, public health and safety, economic, and social impacts.

In response, various impacted parties have urged the Colorado Oil and Gas Conservation Commission (the Commission) to expand and/or strengthen its environmental, safety, siting, and public participation rules applicable to O&G projects; and many local governments have sought to ban or otherwise regulate fracking through home rule and/or land use/zoning authority.

The Law

The Colorado Oil and Gas Conservation Act (the Act) established the Commission to regulate O&G operations “so as to prevent and mitigate significant adverse environmental impact on the air, water, soil, or biological resources resulting from oil and gas operations to the extent necessary to protect public health, safety, and welfare, including protection of the environment and wildlife resources, taking into consideration cost effectiveness and technical feasibility.” It also directs the Commission to promulgate rules “in consultation with the department of public health and environment [DPHE]…, to protect the health, safety and welfare of the general public in the conduct of O&G operations.”

The Act further states that it is in the public interest “to foster the responsible, balanced development, production and utilization of… oil and gas… in a manner consistent with the protection of public health, safety and welfare, including protection of the environment and wildlife resources….”

The current Commission interprets the Act to mean it is required to balance a number of competing policies with protection of the environment, public health, and safety. The Commission’s “balancing test” has come under increasing scrutiny as environmental and safety issues have increased. The effects of climate change, explosions and leaks caused by pipelines, and a variety of community impacts associated with industrial-scale fracking have grown in number and intensity. In January, the Colorado Supreme Court agreed to review whether the balancing test satisfies the requirement to protect public health, safety and the environment in Colorado Oil and Gas Conservation Commission, American Petroleum Institute, and Colorado Petroleum Association v. Xiuhtezcatl Martinez, et al, 17SC297 (the Martinez Case).

The Martinez Case

In November 2013, a group of concerned citizens requested that the Commission adopt a rule to suspend issuance of permits for O&G projects until it determined, based on the best available science and independent third-party confirmation, that drilling can be done without impairing Colorado’s atmosphere, water, wildlife and land resources, adversely impacting human health, and contributing to climate change.

After holding a hearing and receiving an opinion from the Attorney General (AG) that found the proposed rule was beyond the Commission’s “limited statutory authority,” the Commission denied the request. A key reason was its conclusion that the proposed rule would require the Commission to “readjust the balance crafted by the General Assembly” under the Act. The Commission cited the AG’s opinion as “the primary basis of the Commission’s denial.”

Petitioners appealed and in February 2016, the Colorado District Court (Denver) affirmed the Commission’s denial. In March 2017, the Colorado Court of Appeals, in a two to one decision, held that the Commission erred in construing the Act to require a balancing test and reversed the District Court’s decision.

The Appellate Court did not address the merits of the proposed rule and remanded the matter for further proceedings consistent with its opinion.

The majority acknowledged the Act’s intent to foster “balanced development, but held that the statutory language, “ ‘in a manner consistent with’ does not indicate a balancing test but rather a condition that must be fulfilled.” Additionally, the majority found that the Commission’s obligation to prevent and mitigate significant adverse environmental impacts “to the extent necessary” to protect the public “evidences a similar intent to elevate the importance of public health, safety and welfare above a mere balancing….”

In May 2017, six of the seven Commission members voted to appeal the Appellate Courts ruling to obtain clarity. The Governor opposed an appeal, claiming the ruling was not a significant departure from current practice. The AG disagreed and sought review by the Supreme Court, arguing that the Appellate Court adopted a novel view of the Act by rejecting the Commission’s balancing test in favor of mandating that development be regulated subject to protection of the environment, public health, and safety.

The AG’s issue for review by the Supreme Court was stated as follows: “When the Commission engages in rule-making, is it permitted to disregard the Act’s policy of fostering O&G development in Colorado?” However, in granting review the Supreme Court reframed the issue asking whether the Appellate Court erred in determining that the Commission misinterpreted the Act as requiring a balance between O&G development and public health, safety, and welfare.

Discussion

Based on the plain language of the Act, its legislative history, and established principles of statutory construction, the Appellate Court’s decision appears sound. For example, the word “balanced” appears once in the legislative declaration and only modifies development, production and utilization of O&G. Balanced O&G activities are declared to be in the public interest only if they proceed in a manner consistent with protection of public health, safety and welfare, and the environment. Treating such protection as one of many policies to be weighed, as opposed to a mandate applicable to O&G operations is unwarranted. Moreover, the AG’s opinion relied on by the Commission to support a balancing test is conclusory at best and circular at worst, including citing the Commission’s use of the balancing test in a 2008 rulemaking to implement 2007 amendments to the Act for support of the balancing test in the Martinez Case.

In any event, no matter how the legislative declaration is interpreted, the Act’s substantive provisions, set forth above, establish a clear mandate for the Commission, in some cases in consultation with the Colorado Department of Public Health and Environment (CDPHE), to develop environmental, public health, safety, and welfare protections for O&G operations without reference to fostering development or any other competing policies.

This mandate authorizes the Commission—as the expert agency regarding O&G operations—to supplement and expand the array of requirements to protect the environment, and public health, safety, and welfare applied to the O&G industry by other responsible federal and state agencies. It would be unreasonable at best to conclude that, having granted such powers to the Commission, the legislature intended the Commission to weaken or even avoid adopting such measures that it deems necessary to “foster” development. It would also fly in the face of established environmental protection, public health and safety policy and practice.

Claiming, as Judge Booras does in her dissenting opinion, that the direction to the Commission in one substantive provision to consider cost effectiveness and technical feasibility supports a general balancing test is unpersuasive. Cost effectiveness and technical feasibility are required considerations only to the extent they relate to assessing proposed environmental protection measures and do not encompass the broad economic implications and “many other factors” (largely unspecified) that the Commission claims it must consider. Also, as the Appellate Court noted, the statutory direction for the Commission to prevent and mitigate environmental impacts “to the extent necessary” to protect the public and environment belies any intent to mandate a regulatory balancing test.

The AG and the Appellate Court minority opinion argue that the Supreme Court’s 2016 decisions determining that local fracking bans and moratoria were preempted by state law support the view that the statewide interest in developing O&G resources trump or at least must be balanced against any environmental, public health and safety concerns. This claim is baseless. The issue in those cases was the extent to which local governments can regulate adverse impacts of O&G projects. The court did not address the nature and extent of the Commission’s authority to promulgate regulations, including whether it is required to balance protections with fostering development.

Whatever the Supreme Court holds in the Martinez case, its decision may be significantly affected by the results of the November 2018 elections for Governor, AG, and state legislature, each of which has a variety of opportunities to impact actions by the Commission. Earlier this year, for example, a bill to codify the Appellate Court decision passed by the House of Representatives died in the State Senate.

Robert Hallman is a GWC Senior Fellow, and a Fellow at the Center on Global Energy Policy at Columbia University. The author includes his thanks to GWC Student Fellow – Griffin Hay – for his research assistance.

Navajo Generating Station: An Opportunity for Renewable Energy Project Finance By CU Law Student Gregor McGregor

Immensity is the abiding feature of the Colorado Plateau. During this year’s Advanced Natural Resources Seminar, our group was struck again and again by the sheer magnitude of the region’s features. Sleeping Ute Mountain, Shiprock, and Bears Ears greeted us outside Durango. These figures remained our companions on the horizon as we travelled vast distances through New Mexico, Arizona, and Utah. In a topography of deep canyons, sheer cliffs, and broad skies, the size of Navajo Generating Station (NGS) seems almost appropriate as it towers above Page, Arizona.

Everything about NGS is immense: its gas stacks reach 775 feet into the sky; it has a nameplate capacity of 2,250 MW; it uses 50,000 acre-feet (over 16 billion gallons!) of water annually; consumes 8 million tons of coal annually; and its construction included 800 miles of new 500 kV transmission lines. The NGS was constructed to pump 500 billion gallons of water uphill from Lake Havasu to Phoenix and Tuscon through the Central Arizona Project.

Yet, this 44-year-old vestige of the Plateau’s “big build-up” is about to fall prey to the changing economic realities. In 2015, the utilities who operate the plant voted to end operations. The cost of retrofitting the plant to meet environmental standards was no longer economic. A regional drop in the price of electricity on the spot-market, driven by cheap natural gas-fired electricity, meant the operators were losing tens of millions of dollars by continuing operations. Despite some investment group interest, and hearings on the Hill, the NGS will likely close in December of 2019.

Continued operation of the NGS is economically and environmentally unadvisable. Renewable energy development offers an alternative in line with the Navajo land ethic and conception of intergenerational responsibility. As Nicole Horseherder, a Navajo activist, said during hearings in Washington D.C., “burning coal is uneconomic and can no longer compete against cleaner, cheaper and far more culturally appropriate sources of power, such as the solar and wind resources that are plentiful on the Navajo Nation.”

Positive Developments in Indian Law for Investment

The closure of the NGS may also mean the closure of the Kayenta Mine, which is the dedicated fuel source for the plant. Together, these sites provide millions of dollars and between 700 and 3000 jobs to the Navajo and Hopi Nations. The environmental benefits from closing the plant and the economic advantages reaped by the utilities will come at a deep cost to the surrounding communities and tribal governments. However, developments in Indian law and the remaining infrastructure present are a major opportunity for renewable energy development.

Anyone who works in Indian law, energy law, or project finance knows how complex each of these fields are independently. This complexity only increases as you mix and match topics. What the NGS site provides, besides abundant solar potential, is a simplified route around many of the typical requirements for developing energy projects on Tribal lands.

Since 2000, Federal Indian law has been steadily empowering tribes to make their own decisions on leasing and developing their own lands. These acts permit tribes with adequate environmental and procedural safeguards to make contract and leasing decisions for themselves. Previously, leases were subject to approval by the Secretary of the Interior under the Federal Government’s trust responsibility to the tribes, adding as much as two years to the typical leasing process. 

The ability of the Navajo to approve their own leases greatly reduces the complexity involved in partnering with the nation to build a renewable energy plant. Because a renewable site does not implicate the removal of minerals, these leasing decisions are the major bureaucratic hurdle to project developers. Renewable energy also circumvents three major legislative acts and the up to eighteen Bureaus and offices within the Department of the Interior that are involved in mineral development on Indian land. All of this means reduced costs and more profitable future projects.

NGS Site Advantages for Site Control and Access, Permitting

Depending on the terms of agreement to reclaim the NGS site, the Navajo Nation will control access to the facility site, the electric railway to the Kayenta Mine, and lands encompassing the mine. The area is already developed with the necessary easements and physical infrastructure for future projects, and the Navajo Nation is a single entity to negotiate with. The water, and water-bearing infrastructure, needed to construct and operate a renewable energy site are already available, and transmission infrastructure already exists and capacity is secured by the tribe for 35 years in the current operating lease. These assets amount to $121 million of already-existing and necessary infrastructure for energy projects in the area.

Permitting is simplified by developments in Indian law, but also by the existence of the NGS. The current lease provides that the site will be remediated for industrial use. The much-less intensive infrastructure of a renewable energy-site is also unlikely to trigger any new environmental controls against the backdrop of 44 years of coal operation. Pre-existing transmission capacity is also a major boon to re-development. Generally, each locality transmission lines pass through must issue an individual permit before a company can approach the state utilities commission for final approval and begin construction. The Power Company of Wyoming has been working since 2005 to permit 730 miles of transmission for its own 3,000 MW wind project. This is added time and money a new project could avoid by using the NGS site.

A Chance for Reclamation and Future Development

When a project company seeks financing for a new facility at the NGS site, it will benefit in myriad ways from the prior existence of the coal plant. Reduced project and transaction costs will drive down the price of doing business, giving a project a better chance of profitability in the future.

A shift to renewable energy at the NGS site is unlikely to match the coal plant and mine in megawatts, jobs, or income. However, it does present an incredible opportunity for development companies and the tribes to reclaim economic benefits and contribute to a clean-energy future. The Navajo already operate the first tribally-owned solar facility, a 27.3 MW solar array, outside the town of Kayenta. Installing panels at the NGS site would continue Navajo leadership in renewable energy, and set conditions for increased energy development on tribal lands.

Gregor MacGregor is an active-duty Captain in the United States Army attending law school through the Funded Legal Education Program. All views contained in this post are his own and do not reflect the position of the U.S. Army, Department of Defense, or Federal Government of the United States. Gregor McGregor is a rising 3L at Colorado Law. 

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.