On October 15, 2020, FERC issued a notice of proposed policy statement on state-determined carbon pricing in wholesale markets that clarified the agency’s jurisdiction over wholesale market rules incorporating state-determined carbon prices and encouraged regional market operators to consider establishing such rules. FERC is seeking comment on the type of information it should consider when reviewing any such filings. While the Commissioners agree that FERC has jurisdiction to review these issues under 205 with respect to organized markets, they have signaled a divide with respect to the best course of action for addressing carbon pricing.

FERC held a technical conference on September 30, 2020 to explore issues pertaining to state-determined carbon pricing in organized wholesale electricity markets operated by regional transmission organizations (“RTOs”) and independent system operator (“ISOs”) (see October 8, 2020 edition of the WER). A major topic of conversation at the technical conference was FERC’s jurisdiction over RTO/ISO market rules that may seek to incorporate a state-determined carbon price.

FERC noted in its proposed policy statement that 11 states already impose some version of carbon-pricing, including the ten-state Regional Greenhouse Gas Initiative (“RGGI”) in the Northeast and the cap-and-trade program administered by the California Air Resources Board (“CARB”), and that numerous entities (including RTOs and ISOs) are examining similar programs. The policy statement acknowledges that although FERC is not an environmental regulator, the agency may be called up to review proposals that address rules that incorporate state-determined carbon prices, which could directly affect wholesale rates or improve the efficiency and transparency of wholesale markets. FERC provided a list of considerations that it believed may be germane to any such evaluation, including:

  • How do the relevant market design considerations change depending on the manner in which the state or states determine the carbon price? How will that price be updated?
  • How does the FPA section 205 proposal ensure price transparency and enhance price formation?
  • How will the carbon price or prices be reflected in locational marginal pricing?
  • How will the incorporation of the state-determined carbon price into the regional market affect dispatch? Will the state-determined carbon price affect how the regional market co-optimizes energy and ancillary services?
  • Does the proposal result in economic or environmental “leakage,” in which production may shift to more costly generators in other states, without regard to their carbon emissions? How does the proposal address any such leakage?

FERC is seeking comment on whether this is the appropriate information to consider if/when any such section 205 filings are made. Comments are due November 16, 2020; reply comments are due December 1, 2020.

Commissioner James Danly issued a separate statement describing the decision to encourage RTO/ISO filings accommodating state carbon pricing as “unnecessary and unwise” due to potential jurisdictional concerns. Although Danly concurred with the part of the policy statement describing FERC’s jurisdiction to entertain any such 205 filings, he explains it is easy to imagine any number of RTO/ISO filings that would violate the FPA by impermissibly invading authorities reserved for the States.

A copy of the proposed policy statement is available here.