Coal and Nuclear Plant Bailout Would Be Unjustified Use of DOE's Emergency Authority

by Joel Eisen

March 30, 2018

It's no secret that the Trump administration and coal companies have drawn a bullseye on reversing coal's declining fortunes in wholesale electricity markets, where competition and inexpensive natural gas have driven coal's market share down from 50 percent in 1990 to about 30 percent today. Feeling bullish about their prospects in a sympathetic administration, owners of coal and nuclear plants have tried to extract subsidies to prevent what they view as premature retirements of large power plants. 

This January, the Federal Energy Regulatory Commission (FERC) rejected the most overt bailout grab, a proposed rule originating from the Department of Energy (DOE) under an unusual process provided for in section 403 of the DOE Act. That proposal would have allowed plants that can store 90 days of fuel onsite (principally coal and nuclear plants) to recover all their costs – not normally the case in wholesale electricity markets that sell at market prices – on the theory that they are indispensable to keeping the grid operating reliably. FERC rejected the DOE notice of proposed rulemaking (NOPR) for numerous reasons, including failure to develop a proper record that existing market prices are not "just and reasonable" under the Federal Power Act (FPA). 

The NOPR's demise failed to deter FirstEnergy, a large utility that owns numerous coal plants and would have benefited from the rule. On March 29, it requested an emergency order from the DOE directing PJM (the mid-Atlantic regional grid operator) to provide for full cost recovery for its power plants to compensate for benefits "including fuel security and diversity." While FERC has primary responsibility for administering the interstate electric grid, the DOE has limited authority under FPA section 202(c) to step in during emergencies. It has only used this authority eight times since 2000, two of them in 2017. 

In keeping with the DOE's limited role in the grid, its emergency authority is also limited. The narrow statutory definition of "emergency" focuses on wars, natural disasters, and increased energy demand that require immediate intervention. The DOE's regulations cite "unexpected" events that "may be the result of weather conditions, acts of God, or unforeseen occurrences not reasonably within the power of the affected 'entity' to prevent." As the D.C. Circuit Court of Appeals has said, "[Section 202] speaks of 'temporary' emergencies, epitomized by wartime disturbances." Thus, the DOE used its authority in 2005 in Hurricane Katrina's aftermath and in 2008 after Hurricane Ike to get essential electric facilities back on line. 

In its 2017 orders, the DOE acted to relieve power constraints involving individual utilities. The order affecting an Oklahoma utility, for example, required one plant to keep running even though it was about to shut down. The utility had planned to get power from two other plants, but a lightning strike put one out of commission and flooding in Louisiana delayed construction on the other. In keeping with the statute, the order was temporary, lasting only until the emergency ended. 

The FirstEnergy request, by contrast, is about compensation and not threats to grid reliability. It states, "PJM's power markets . . . consistently fail to compensate nuclear and coal-fired generators for the full value of the benefits that they provide." Thus, the "emergency" is that FirstEnergy's coal plants are losing money in the wholesale markets and may be forced to retire. FirstEnergy claims that reliability on the PJM regional grid would be undercut if its plants continued to retire. PJM has ample evidence to the contrary and elaborate plans to stave off reliability concerns in light of expected plant retirements over the next few years. Moreover, FirstEnergy's claim that the grid might be jeopardized if its plants don't run does not justify a Section 202(c) order. There must be a specific emergency, not a hypothetical prospective one. 

There's nothing "unexpected" about coal losing out in the marketplace, as it has been happening for some time. As the D.C. Circuit has stated, changes in fuels used to produce electricity do not justify emergency orders. Rejecting a claim that the 1973 oil embargo warranted an order, the court said that Section 202(c) is "aimed at situations in which demand for electricity exceeds supply and not at those in which supply is adequate but a means of fueling its production is in disfavor." That's a terrific summary of why the DOE's authority is ill-fitting here, and even a DOE official has admitted that Section 202(c) is not warranted for economic reasons. 

The DOE's emergency authority does not authorize it to reverse the fact that wholesale power markets increasingly disfavor coal and nuclear power. To put it plainly, the DOE can intervene with respect to acts of God, not acts of markets. As Section 202(c) does not justify the type of bailout FirstEnergy requested, the unmistakable conclusion is that FirstEnergy is asking DOE to override the decision of an independent regulatory agency – FERC – and give it the same relief. FirstEnergy is explicit about this, warning that the bailout is necessary because FERC failed to act. But this is a false narrative, and the DOE should reject it.

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Joel Eisen is a professor of law and an Austin Owen Research Fellow at the University of Richmond School of Law.

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