On April 15, 2021, FERC issued a long-awaited policy statement providing guidance on incorporating state-determined carbon pricing into organized markets operated by Regional Transmission Organizations (“RTOs”) and Independent System Operators (“ISOs”). The non-binding policy statement explains how FERC will review and consider rate filings submitted under section 205 of the Federal Power Act (“FPA”) to establish market rules for incorporating state-determined carbon pricing into RTOs and ISOs.

In response to states taking an increased role in addressing climate change impacts from the electricity sector, FERC convened a September 30, 2020 technical conference (see October 8, 2020 edition of the WER), which was followed by an October 15, 2020 proposed policy statement on how best to incorporate state-determined carbon prices into RTO/ISO markets (see October 22, 2020 edition of the WER). After reviewing comments received on the proposed policy statement, FERC concluded that “proposals to incorporate a state-determined carbon price into RTO/ISO markets could potentially improve the efficiency of those markets,” and that “it is the policy of this Commission to encourage efforts of RTOs/ISOs and their stakeholders . . . to explore and consider the value of incorporating state-determined carbon prices into RTO/ISO markets.” FERC clarified, however, that the policy statement does not require RTOs or ISOs to adopt state-determined carbon prices into its markets.

FERC explained that, generally speaking, wholesale market rules incorporating a state-determined carbon price can fall within FERC jurisdiction because of their ability to affect wholesale rates, but that it would also make individual determinations in each particular FPA section 205 filing as to whether each proposal is consistent with section 205. FERC also noted that its affirmation of the benefits of incorporating carbon pricing into the RTO/ISO markets does not indicate a preference for one state-determined carbon pricing approach over another, and clarified that states still have the authority to determine whether and how to address greenhouse gas emissions. Instead, the Commission clarified that the policy statement is intended to encourage discussion among RTOs/ISOs and their stakeholders regarding wholesale market rules and incorporation of state-determined carbon pricing.

The policy statement provides that, moving forward, FERC will review all FPA section 205 filings proposing to establish market rules that incorporate a state-determined carbon price into RTO/ISO markets based on the particular facts and circumstances presented in that proceeding. It also explains that the filer will bear the burden of demonstrating that the proposal meets the legal standard of FPA section 205 (i.e., that the adjustment is “lawful”).

While FERC noted that it would consider the facts and circumstances presented in each individual proceeding, it provided a non-exhaustive list of considerations that it believes may be relevant to its evaluation of FPA section 205 filings that seek to incorporate a state-determined carbon price in RTOs/ISOs.  These include:

  1. How state-determined carbon prices would be reflected in RTO/ISO tariffs or market designs?
  2. How the proposal would provide adequate price transparency and enhance price formation?
  3. How the carbon price or prices would be reflected in locational marginal prices?
  4. How the incorporation of the state-determined carbon price into the RTO/ISO market would affect dispatch?
  5. Whether reforms to other market design elements would be necessary.
  6. Whether the filer’s proposal would result in economic or environmental leakage?
  7. How does the proposal consider this impact and the impact on consumers overall?

Commissioners Danly and Christie both issued concurring statements, noting that FERC is obligated to consider any filings pursuant to section 205 of the FPA. Commissioner Danly dissented from FERC’s policy statement “to the extent it attempts to prejudge the jurisdictional merits of any future section 205 proposals.”

Commissioner Christie dissented to the extent that a “carbon price” is a euphemism for a carbon tax and that, under the Constitution, only the elected members of the legislative branch have the power to establish taxes.  Commissioner Christie noted that if Congress wanted FERC to have the power to impose a carbon tax, it would have to empower it to do so “by a clear and specific statute.”

Click here to read the policy statement.