UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION
Carbon Pricing in Organized Wholesale Electricity Markets | Docket No. AD20-14-000
COMMENTS OF THE NEW ENGLAND STATES COMMITTEE ON ELECTRICITY
The New England States Committee on Electricity (“NESCOE”) submits these comments pursuant to the Notice of Proposed Policy Statement issued by the Federal Energy Regulatory Commission (“Commission” or “FERC”) on October 15, 2020. The stated purposes of the Proposed Policy Statement are to encourage efforts to incorporate state-determined carbon prices in organized wholesale electricity markets administered by regional transmission operators (“RTOs”) and independent system operators (“ISOs”) and to clarify the Commission’s jurisdiction over wholesale market rules that incorporate state-determined carbon prices.
I. DESCRIPTION OF COMMENTER
NESCOE is the Regional State Committee for New England. It is governed by a board of managers appointed by the Governors of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont and is funded through a regional tariff that ISO New England Inc. (“ISO-NE”) administers. NESCOE’s mission is to represent the interests of the citizens of the New England region by advancing policies that will provide electricity at the lowest possible price over the long-term, consistent with maintaining reliable service and environmental quality. These comments represent the collective view of the six New England states. NESCOE filed comments earlier this year in response to the Technical Conference Notice.
The New England States have a long history of taking a lead on developing and implementing ways to address environmental objectives and support clean energy through legislation, regulations, and other means. Carbon pricing is just one mechanism among many to achieve state legal requirements. To the extent the Commission provides guidance on incorporating carbon pricing in wholesale markets through a policy statement, it is critical that such federal guidelines not impede state-led efforts to work with RTOs/ISOs to develop and implement other mechanisms to support or advance state energy and environmental laws and objectives. NESCOE appreciates the Commission’s attempt in the Proposed Policy Statement to clarify the division of authority between the Commission and states in connection with carbon pricing. Any guidance that the Commission ultimately issues should affirm the central role that states occupy in connection with carbon pricing.
For over a decade, the New England States have been on the forefront in using a market-based mechanism to reduce greenhouse gas (“GHG”) emissions from the power sector. Joining with states in the Northeast and Mid-Atlantic to implement a cap-and-trade system through the Regional Greenhouse Gas Initiative (“RGGI”), the New England States helped create the nation’s first power sector carbon pricing program. In addition to participating in RGGI, three New England States (Maine, Massachusetts, and Vermont) have adopted clean energy or renewable portfolio standards of 50 percent or greater, and Massachusetts has developed and implemented its own cap-and-trade carbon pricing program. Five of the New England States are committed to cost-effectively reducing economy-wide greenhouse gas emissions by at least 80 percent below 1990 levels by 2050.
The New England States remain steadfast and resolute in these efforts today. Last month, five of the New England Governors joined together in a statement to emphasize that they “are deeply committed to addressing climate change and cost-effectively reducing economy-wide greenhouse gas emissions by at least 80 percent below 1990 levels by 2050, recognizing some states have higher goals.” NESCOE subsequently released a six-state Vision Statement for the region’s electric grid. That statement confirmed NESCOE’s “opposition to an additional, separate carbon pricing-style mechanism through the current ISO-NE wholesale markets.” However, NESCOE expressed a commitment from all six states “to pursu[e] a new, regionally-based market framework that delivers reliable electricity service to homes and businesses,” with that framework “account[ing] for and support[ing] States’ clean energy laws in an efficient and affordable manner.”
This last point is critical. While NESCOE generally supports the non-prescriptive approach in the Proposed Policy Statement—reserving judgment for any Federal Power Act (“FPA”) section 205 filing—NESCOE emphasizes that the lens through which the Commission views future filings must put consumer costs at the forefront of its inquiry into just and reasonable wholesale rates. ISO-NE’s wholesale energy market already allows generators to recover the costs of RGGI compliance. Depending on the magnitude of an incremental carbon-pricing mechanism that ISO-NE would administer, consumers could be exposed to costs exceeding several billions of dollars each year—costs that would not be offset through rebates of carbon fees. NESCOE respectfully requests that the Commission include in any guidance it provides in a policy statement addressing carbon pricing in wholesale markets that consumer costs must be a key consideration in evaluating the justness and reasonableness of any proposal that comes before the Commission.
Indeed, carbon pricing is one of a number of tools states use to achieve decarbonization compliance and, as discussed below, details matter in designing a cost-effective means of doing so. NESCOE appreciates that the Proposed Policy Statement encourages and does not seek to mandate that RTOs/ISOs incorporate new forms of carbon pricing into wholesale electricity markets. Importantly, through its proposed policy of “encouraging” consideration of carbon pricing, the Commission does not identify carbon pricing as a preferred or optimal solution to addressing intersections between the requirements of state laws and wholesale markets. In the NESCOE Vision Statement, among other potential mechanisms “capable of achieving the requirements of state clean energy and carbon emissions reduction laws,” NESCOE expressed interest in exploring the viability of some form of a forward clean energy market (“FCEM”). NESCOE has subsequently supported various New England stakeholders’ request to ISO-NE to conduct analysis of a variation of the FCEM, known as an Integrated Clean Capacity Market (“ICCM”). In finalizing any policy statement related to carbon pricing in wholesale markets, the Commission should ensure that its guidelines do not have the effect of impeding or delaying efforts to develop mechanisms states and stakeholders in New England have expressed interest in exploring and assessing.
The integration of state-determined carbon pricing into wholesale markets also implicates foundational jurisdictional issues, as the Commission recognizes in the Proposed Policy Statement. NESCOE has expressed reservations about achieving the requirements of state laws through wholesale markets that are administered by an entity without direct accountability both to state officials charged with implementing state laws and to the consumers they serve. As NESCOE stated earlier in this docket: “[T]he current federal jurisdictional framework . . . accords certain legal authority to ISO-NE over the administration of its markets and oversight to FERC,” leaving “no meaningful role to the New England states in monitoring, effectuating, modifying, or preventing modifications to the market rules governing the pricing of carbon pursuant to state mandates.” NESCOE shares the concern articulated in the dissent that a policy statement not prejudge any proposals—proposals that may, in fact, unlawfully intrude into the authority of states. While the Proposed Policy Statement appears to affirm the central role that states occupy in setting any carbon price pursuant to their mandates, making clear that it is not the role of an RTO/ISO to set that price, it is critical for the Commission to clarify this division of authority in any policy statement.
A. The Commission’s Guidance Should Make Clear that When Evaluating FPA Section 205 Proposals to Incorporate a State-Determined Carbon Price in Wholesale Markets, It Will View Consumer Costs as a Key Factor.
The Commission identifies certain considerations it proposes to take into account in evaluating whether an FPA section 205 filing proposing to establish market rules incorporating a state-determined carbon price in a wholesale electricity market is just, reasonable and not unduly discriminatory or preferential. The Commission seeks comment on whether its list is appropriate and whether there are different or additional considerations that should be taken into account in evaluating a section 205 filing.
While the Commission must, of course, consider consumer interests in evaluating whether a proposal is just and reasonable, the considerations enumerated in the Proposed Policy Statement do not explicitly include consumer cost implications as a key factor in the Commission’s decision-making on this issue. That factor is critical, particularly given the potential costs at play if carbon pricing were to be implemented through a uniform-clearing price market such as ISO-NE’s. In such a market, “the price of each product is set by the marginal resource, and that marginal resource earns zero net revenue supplying it.” Resources that have “lower costs, superior facilities, or greater efficiency will receive positive net revenues (also called ‘inframarginal rents’ in economics).” Carbon pricing increases consumer costs in the energy market because “resources setting the price in the electricity market are often carbon-emitting and must increase their supply offers to cover their anticipated cost of carbon.” NESCOE is not through these comments calling into question the efficacy of the uniform clearing approach as a market design tool. Rather, NESCOE describes the mechanics of that market-clearing feature to bring attention to the multiplier effect that an incremental carbon price adder will have on energy prices, an issue that received little, if any, discussion at the Technical Conference.
The Exeter Carbon Pricing Analysis illustrates why the Commission must closely scrutinize costs in connection with filings to implement a new carbon pricing program. The analysis evaluates the impacts of such a potential program in the ISO-NE energy market and highlights the potential consumer cost impacts of certain carbon pricing approaches not fully explored at the Technical Conference. Exeter provides a high-level assessment of and a simple approach to analyzing carbon pricing impacts on the New England power sector based on scenarios reflecting incremental increases to those prices outside of RGGI and the MA Generator Emissions Limits Program. Using recent ISO-NE analyses and other relevant studies, Exeter “analyzed the anticipated consumer cost and emissions reduction associated with a new, incremental carbon pricing mechanism” implemented through the ISO-NE wholesale energy market. The results of Exeter’s analysis raise critical questions about the material net costs in ISO-NE’s energy market that consumers would be charged in connection with such an incremental carbon pricing mechanism—costs that would not be fully offset from rebated carbon fees.
The Exeter report underscores the need for state officials to assess any potential incremental carbon price against the benefits received and other possible mechanisms to promote the development of clean energy resources. This is critical as New England continues on its path toward decarbonization in a manner that enables the New England States to meet their carbon-reduction mandates and objectives at the lowest possible costs to consumers. Exeter’s assessment of other studies suggests that adopting an incremental carbon pricing program would result in lower emissions and reduce the need for mechanisms outside the ISO-NE markets, but this would come at a significant price to consumers, with potential net costs to consumers in the energy market of at least one, if not several, billion dollars each year. Understanding how to most cost-effectively reduce economy-wide emissions to meet state clean energy mandates and goals is critical to developing appropriate mechanisms to achieve these objectives.
NESCOE emphasizes that the findings of the Exeter Carbon Pricing Analysis are very much dependent on the input assumptions and expectations of the future and are not intended to be taken as dispositive of the anticipated consumer cost of carbon pricing. The point is that depending on the type of carbon pricing and the manner in which it is implemented, the net wholesale market costs of any RTO/ISO-administered carbon pricing program could be significant. NESCOE asks the Commission to make explicit in any policy statement that such costs would be a key consideration in its evaluation of a section 205 filing to incorporate a carbon-pricing mechanism into an RTO/ISO’s wholesale market rules.
The Commission must also examine the full range of consumer cost impacts in assessing any RTO/ISO-administered carbon pricing program. In a state-administered program, the states determine and oversee three elements that affect the range of costs consumers incur: (i) the carbon price, (ii) the entity administering the carbon pricing program, and (iii) the disposition and allocation of revenues generated through the carbon price. For example, RGGI features an emissions limit (or cap) that becomes an input to a market-based carbon price. State-administration of RGGI enables each state to determine what is done with the carbon allowance auction proceeds. In contrast, in an RTO/ISO-administered carbon program, such as the “net carbon pricing” approach that ISO-NE has described, the RTO/ISO would rebate carbon revenues back to load-serving entities. For the Commission to examine fully the overall consumer costs of an RTO/ISO-administered carbon pricing program, the filing that comes before the Commission must closely detail how proceeds would be distributed and how the RTO/ISO proposes to administer the program effectively and efficiently.
Finally, consideration should be given to potential unintended consequences. At least in New England, decarbonization is an economy-wide endeavor. Increasing the cost of electricity may impede the migration of heating and transportation demand to the decarbonized electricity sector. Such economy-wide spillover effects throughout the region need to be considered in the incorporation of any carbon pricing program in wholesale markets, since reducing emissions solely from electric generation is only one element of carbon-related state law mandates and objectives.
B. The Proposed Policy Statement Appropriately Acknowledges the Central Role that States Occupy in Setting a Carbon Price—A Division of Authorities That the Commission Should Reaffirm in any Future Policy Statement.
The Proposed Policy Statement appropriately recognizes that it is not the role of an RTO/ISO to set a carbon price arising from the requirements of state law: “Wholesale market rules that incorporate a state-determined carbon price into RTO/ISO markets would not regulate a matter reserved exclusively to the states under the FPA, or otherwise displace state authority” and “the state would retain authority over that carbon price as well as other measures for regulating generation facilities.” However, NESCOE echoes the concern expressed in the Dissent that there could be “any number of RTO/ISO carbon-pricing proposals that would violate the Federal Power Act by impermissibly invading the authorities reserved to the States.” The Commission should continue to remain mindful of the need to respect the jurisdictional authority of states over generation facilities and the implementation of state laws and policies.
NESCOE appreciates the Proposed Policy Statement’s assurance that the Commission is “not ‘pre-judging’ particular matters or preemptively ‘dismiss[ing]…potential jurisdictional concerns.’” Any final policy statement should reaffirm this approach. Similarly, NESCOE understands the Commission’s reference to a “program of cooperative federalism” as a recognition of the division of authorities reflected in the FPA, under which states are reserved exclusive authority over regulating generation facilities. The Commission should clarify that its policy guidance is not what the Dissent fears—“a non-binding, blanket dismissal of potential jurisdictional concerns.”
NESCOE also refers the Commission to ISO-NE’s Pre-Technical Conference Statement in which it stated that “ISO New England believes that, even if it is legally possible, it may not be prudent for [ISO-NE] or the Commission to unilaterally set the fee on carbon emissions. Instead, we look to policymakers to set that rate.” NESCOE agrees. Recognition that state officials would exclusively occupy that position is not dependent on a legal conclusion. State officials exercise judgment in implementing state laws, and they are ultimately accountable to their states’ end-use consumers.
C. Any Policy Statement Should Not Require Carbon Pricing or Otherwise Mandate Any Particular Approach to the Intersection of State Policies and Wholesale Markets.
In addition to addressing jurisdictional issues that may arise when an RTO/ISO incorporates a state-determined carbon price into its wholesale market, the Commission proposes to make it the Commission’s policy “to encourage efforts by RTOs/ISOs and their stakeholders—including States, market participants, and consumers—to explore establishing wholesale market rules that incorporate state-determined carbon prices in RTO/ISO markets.” NESCOE agrees with the approach of not prescribing such filings. There are many ways in which regions can work to account for state energy and environmental requirements in the wholesale markets. State-determined carbon pricing is, indeed, one potential approach, but it is not the only one.
As discussed above, the New England States have participated in RGGI for more than a decade. NESCOE reiterates its view, articulated in its earlier comments, that RGGI continues to be the most appropriate venue for implementing any carbon pricing mechanism intended to meet the clean energy requirements of New England State laws. NESCOE has repeatedly communicated that it does not support a new, incremental carbon pricing mechanism (beyond RGGI) to execute the requirements of various New England State mandates that would be administered by ISO-NE and, to the extent incorporated into wholesale market rates, subject to Commission oversight.
It is critical that the Commission allow state and regional stakeholder processes to proceed as appropriate to their unique circumstances. In July 2019, NESCOE requested that ISO-NE plan to dedicate market development and planning resources in 2020 to support states and stakeholders in analyzing and discussing potential future market frameworks that contemplate and are compatible with the implementation of state energy and environmental laws. ISO-NE has made such a commitment. In so doing, ISO-NE stated that it “respects the environmental policy objectives of the New England states,” and that “[b]y working with the states and other industry stakeholders, we together will determine if there are better market design solutions or needed adjustments to the markets.”
Separately, New England State officials are convening online technical conferences in the coming months, open and accessible to the public and interested stakeholders, to discuss the vision they set forth for a clean, affordable, and reliable regional electric grid. The questions presented for public input include how to transition wholesale markets in light of the requirements of state laws and mandates. NESCOE asks the Commission not to create any barriers that could inhibit these collaborative processes.
NESCOE believes it is more constructive to put resources in New England toward exploring market frameworks such as an FCEM and ICCM, for example, rather than replay continued advocacy for an ISO-NE administered incremental carbon pricing program in which the New England States have, since at least 2017, expressed consistent, uniform disinterest to ISO-NE and regional stakeholders. NESCOE reads the Proposed Policy Statement to represent the Commission’s general receptiveness to other market rule changes designed to account for and accommodate the requirements of state laws. It respectfully asks the Commission to make this clear in any final policy statement.
For the reasons discussed above, NESCOE respectfully requests that the Commission consider its comments in developing any final policy statement on carbon pricing in organized wholesale electric markets.
/s/ Jason Marshall
Senior Counsel & Analyst
New England States Committee on Electricity
424 Main Street
Osterville, MA 02655
Tel: (617) 913-0342
/s/ Phyllis G. Kimmel
Phyllis G. Kimmel
Phyllis G. Kimmel Law Office PLLC
1717 K Street, NW, Suite 900
Washington, DC 20006
Tel: (202) 787-5704
Attorneys for the New England States Committee on Electricity
Date: November 16, 2020
Exeter Associates – Analysis of Carbon Pricing Impacts to the New England Power Sector