Does the Federal Energy Regulatory Commission (FERC) Have Authority To Regulate the Climate?

Ryan Lacey:  Hello, and welcome to this Federalist Society’s webinar. This afternoon, June 8, 2022, we discuss whether the regulatory -- Federal Energy Regulatory Commission (FERC) has authority to regulate the climate. My name is Ryan Lacey, and I’m an Assistant Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of our experts on today’s program. Today, we are fortunate to have an excellent discussion led by Ken Davis, whom I will introduce very briefly.

 

J. Kennerly Davis is a member of the Regulatory Process Working Group of the Regulatory Transparency Project and a member of the Executive Committee at -- of the Administrative Law and Regulation Practice Group here at The Federalist Society. He has over 40 years of experience in corporate executive management, public service, and the private practice of law, almost all of which has involved some aspect of the continually evolving electric power industry. In 2012 and ’14, Davis served as Deputy Attorney General of the Commonwealth of Virginia.

 

After our speakers give their remarks, we will turn to you, the audience, for questions. If you have a question, please enter it into the Q&A feature at the bottom of your screen, and we will handle questions as we can towards the end of today’s program. With that, thank you for being with us today. Ken, the floor is yours.

 

J. Kennerly Davis:  Thank you, Ryan. Well, as the title suggests, we have a very important program today, covering the question, trying to help you understand the significance of the question and answers to the question of whether the Federal Energy Regulatory Commission, in fact, has authority, statutory authority, to regulate the climate. Now, climate change, of course, is an all-encompassing, significant issue that ranges across the political landscape. The Biden administration, for one, has pledged to meet what it calls “the accelerating threat of climate change.” [Inaudible 00:02:26] the wide-ranging campaign to discourage the production and use of fossil fuels in order to control the emission of carbon dioxide and other greenhouse gases said to be the principal cause of adverse global warming. The White House has directed regulatory agencies and departments all across the Executive Branch to do what they say.

 

“Tackle,” as they say, “Tackle the climate crisis.” The administration has, in fact, as a part of this goal -- set a goal to eliminate carbon dioxide emissions from the electric power section by 2035. Part of the -- an important part, critically important part of the agency and departmental landscape in Washington is the Federal Energy Regulatory Commission or FERC. FERC is an independent regulatory agency whose enabling statutes include the Federal Power Act and the Natural Gas Act. FERC’s statutory responsibilities include regulation of the transmission and wholesale sale of electricity in interstate commerce and authorization of proposals for the construction and operation of interstate natural gas pipelines. Doing its part to tackle the climate crisis, FERC in the last several months has proposed new positions, new policy initiatives that will greatly expand the scope of its climate-related activities, both as to the regulation of the wholesale interstate electric system and the interstate natural gas pipeline system. The question before us in the program is whether FERC has the legal authority to implement the particular steps and changes involved in its tackling of the climate crisis.

 

To explore this important topic and the related issues, we are extremely important -- as we look at this thing, we are extremely fortunate to have with us this afternoon Bernard McNamee, Former Commissioner at FERC and currently a Partner at McGuireWoods Law Firm and Senior Advisor at McGuireWoods Consultant. Commissioner McNamee’s practice includes providing clients with legal and strategic and policy advice across a whole range of energy and environmental issues. During his time at the Commission, Commissioner McNamee participated in more than 1,700 published orders on a wide range of issues, including numerous consequential, extremely important orders relating to wholesale electricity markets and natural gas pipelines. Before his appointment by the president and confirmation by the Senate to be a commissioner on FERC, McNamee served as a policy advisor and senior attorney in the Department of Energy. He’s Deputy General Counsel for energy policy. But even beyond that, Commissioner McNamee’s career and public service includes leadership positions under attorneys general in Virginia and Texas and important policy advisor roles for a US Senator in Texas and a governor of Virginia.

 

And in private practice, he has a long career representing energy clients before state utility commissions in a variety of important proceedings. Commissioner McNamee, we are extremely, extremely fortunate to have you with us this afternoon.

 

Bernard L. McNamee:  Well, thank you so much, Ken, and, obviously, call me Bernie. As you know, we’ve been friends for many years, and I’ve always looked to you for guidance, and I’ve always known you as a leader in the energy area, so it’s great to be sharing this with you and to be joining The Federalist Society and its members to talk about these important energy issues. I have to give the standard disclaimer that the views I express are my own. They’re not views of the firm or of the any of the firm’s clients or my clients. And I’m looking forward to this discussion.

 

J. Kennerly Davis:  Great. Well, Bernie it is and certainly Ken. Well, let’s look first at the gas sector. Now, anyone proposing to construction and operate pipeline facilities for the transportation and wholesale sale of gas and interstate commerce must first obtain approval from FERC, authorization in the form of a -- what’s called a certificate of public convenience and necessity. Now, when acting on applications for those certificates, what are the statutory obligations of the Commission?

 

Bernard L. McNamee:  Well, when the -- when Congress passed the Natural Gas Act in 1938 and a variety of amendments since then, the -- Congress stated in, actually, Section 1, referencing a study done by Congress, that really its purpose is to ensure that the American people have access to affordable and reliable natural gas and to prevent monopolistic pricing. If you recall, during the era in which natural gas pipelines were being developed and in which utility regulation was beginning was the era in which that we -- that there was a recognition that certain utilities were providing a public service, that there could be tendencies -- monopolistic tendencies that could either restrict access to natural gas, and that you wanted to prevent the duplication of natural gas pipelines, and you wanted to make sure that people had access to the resource. And, so, the Natural Gas Act provided what was then the Federal Power Commission with the authority to consider applications for the siting and permitting for the operation, construction of natural gas pipelines. And for 70, 80 years, that process has worked in order to build out our natural gas pipeline system to ensure that people had access to natural gas. And during the times, there’s been a variety of deregulatory processes.

 

When the Natural Gas Act was originally enacted, Congress actually gave the Federal Power Commission and some related commissions that became the Department of Energy the authority to actually regulate the sale of the natural gas commodity. And over time, particularly during -- towards the end of the energy crisis in the ‘70s with the Natural Gas Policy Act, Congress actually, in the Wellhead Decontrol Act in 19 -- in the 1980s, actually stripped FERC from the authority to regulate the commodity. And that’s going to become very important in our discussion today about why FERC doesn’t have the authority to regulate greenhouse gas emissions from upstream or downstream use of natural gas.

 

J. Kennerly Davis:  Well, you refer to the purpose — the fundamental, statutory purpose — of the Natural Gas Act as to ensure that the American people have adequate access to reasonably priced natural gas, that we have access to reasonably priced natural gas. Now, I think — and we’re sure to come back to that — but I think the purpose of the statute helps people, I think, understand the appropriate and inappropriate interpretation of some of the details in -- within the statute, some of the detailed provisions that are so frequently debated now. But there has, in fact, been increasing debate about what sort of factors FERC can and should consider in determining whether a project is required for the public convenience and necessity and, also, whether the environmental effects of the upstream production and downstream use of natural gas are indirect effects of the construction and operation of the project that need to be evaluated as a part of FERC’s consideration of the application for certification. So environmentalists certainly want the certification process to be as broadly defined as possible to consider greenhouse gas emissions from the facility and also the upstream production and the downstream use.

 

And if I understand the recent news reports correctly, FERC, in fact, this spring has proposed a policy that will result in them doing this, that is including an evaluation of the climate impact of upstream production and downstream use of the natural gas that’s being transported as a part of the consideration of the project and whether it does, in fact, meet public convenience and necessity without undo adverse effects. Now, would -- how does this upstream/downstream scope of analysis -- this is new, isn’t it? And how is this different from the kind of environmental impact that the Commission has considered for the project when it gets a certification application?

 

Bernard L. McNamee:  Well, I think it’s helpful to start with the Natural Gas Act itself and then talk about some aspects of it and then, also, the role of NEPA in the courts and how we’re getting to what FERC has recently done. The Natural Gas Act, when you certificate -- get a certificate of public convenience and necessity to build a pipeline, you go through a long process at FERC, pursuant to Section 7 in the Natural Gas Act in which you go through a process where you explain where you’re going to site the project, how you’re going to acquire land, who’s going to use the gas, is there a demand for the gas, and you’re basically establishing, ultimately, that there was a need for the -- for natural gas and that the pipeline is needed to deliver it. There is another part of the Natural Gas Act, Section 1, that basically declares Congress’s perspective that providing natural gas service is in the public interest. Now, what’s happened is there’s been a use of the phrase, “public interest,” that used in Section 1, and it’s been twisted to, in my opinion, by a number of people, to expand beyond what it means, which is the public interest is for the access to natural gas. And it’s being used to -- as an interpretation in a statutory basis to say, “Well, public interest is much broader than the need for the gas. We need to look at all factors in the public interest.”

 

And, of course, there were Supreme Court cases on the Natural Gas Act that talked about broad public interest factors, but they were always tied to whether there was a need for the natural gas and what was the impact of the actual natural gas pipeline. And what’s been happening is it’s been -- there’s been arguments made that, well, public interest actually is something much broader, and that we can interpret the Natural Gas Act from 1938 to now encompass climate change and that the -- and that FERC ought to consider climate change issues from a natural gas pipeline, including the gas that would be produced and that would facilitate its production and its end use. And, so, part of that has been driven also by NEPA, the National Environmental Policy Act, which requires federal agencies to consider the environmental impacts of their major federal actions and significant federal actions. And all these things are getting jumbled together to -- along with a decision by the DC Circuit called Sabal Trail -- to basically say that because it is reasonably foreseeable that, if you burn natural gas, that it’s going to emit natural -- greenhouse gases. Therefore, it is foreseeable for the purposes of NEPA, which, therefore, means that FERC should be considering it as part its analysis in whether or not to grant a certificate to build a pipeline. There’s a significant argument about whether or not that is a correct interpretation, both of Sabal Trail but also whether determination in NEPA, which is a procedural statute, can be used to change the Organic Act, which is the Natural Gas Act, and expand its purpose.

 

So all this has come together in FERC, issuing in February what’s called a certificate policy statement. FERC has issued over time, including most recently in 1999, what’s called a certificate policy statement, saying it’ll look at issues as it considers natural gas pipelines. And those issues will consider a variety of things: impact on land users, noise issues, environmental justice issues, and environmental issues in general. But one of the key things to that is the difference between looking at the impact of the natural gas pipeline itself, the emissions that will occur from leakage from the pipe. There’s things called compressor stations, which also emit greenhouse gases among other emissions. Those are properly within the scope of a review by FERC under NEPA and under the NGA about the impacts of the natural gas pipeline because it’s related to the pipeline itself, not to the commodity that’s being used on that pipeline that FERC has no actual jurisdiction over.

 

Think about it. The production of natural gas, the states regulate along with the EPA emissions for the production of natural gas at the wellhead. For the combustion of natural gas, local distribution companies that serve your heating and your stoves, they’re regulated by the state level about whether they can even provide that service, and emissions are also regulated there. For power plants that use natural gas, they need to get permits for their air emissions. So what FERC has done is started to insert itself into making decisions about whether or not, regardless of whether there’s a demand for the natural gas, they’re going to be -- they’re proposing to this federal -- this -- these policy statements — I’ll go in a little more detail in a moment — they’re going to be making decisions about, well, even if the gas is needed, we think the impact of that gases can be so harmful to the environment and to climate change that we’re going to deny people access to the natural gas. And, so, FERC, in February, issued new policies proposed — well, at the time, they were new — interim policy statements, effective immediately, even to pending projects in how they would analyze greenhouse gases and how that they would determine whether to approve natural gas pipeline, including how they would review demand and need for that.

 

There was a huge outpouring and outcry about this, including from many in Congress, including Chairman Manchin of the Senate Energy and Natural Resource Commission -- Committee, which, unprecedently, within two weeks of FERC on a 3-2 vote issuing the interim policy statements were called before the Senate, grilled pretty hard, and by the next meeting of FERC, they made -- they suspended the policy -- the new policy statements, made them draft, and asked for comments be filed by stakeholders. And those comments and reply comments have all been filed, and now, FERC is considering them. But the endpoint of this is is that it clearly looks like FERC is looking to expand its jurisdiction, to deny access to natural gas, even if it’s needed, based on their determination that the greenhouse gas emissions will be too harmful to the environment.

 

J. Kennerly Davis:  Well, they -- the general invocation of the concept, public interest, and all the assertions and position statements that it must be obvious to any reasonable person that it’s in the public interest to prevent climate disaster by addressing climate change, etc., etc. The -- surely, the statutory text of the Natural Gas Act doesn’t provide FERC authority to address anything that it conceives to be in the public interest. The purpose of the statute bounds the activity of the Commission and the statutory text describing its authority. Isn’t that right? It’s not just anything that’s conceivably in the public interest.

 

Bernard L. McNamee:  Yeah. You’re absolutely right. And that’s where, I think, a textual approach demonstrates its purpose. Congress specifically said what its purpose is, is to provide access to reasonable, affordable natural gas and prevent monopolistic pricing. And that’s what it’s meaning by -- and that’s in its public interest section, the Section 1. And the -- here’s what the twist is happening. The Act itself and what a certificate of public means, necessity means, helps inform what public interest.

 

But it’s being twisted to say that public interest is a very broad word, and therefore, that informs what the public convenience and necessity is. And that’s just not a way that you can accurately read the statute, both from an originalist approach, a textualist approach, or even, if you wanted to take a look at legislative history, that’s not what its purpose is. And I think what the fundamental issue is — and the Supreme Court has been clear about this in other cases — is that when there’s broad areas of -- when a statute doesn’t address a broad change in public policy of grant -- great economic significance, you can’t read it into the statute, especially an administrative agency, like FERC. Justice Scalia, I think, famously said that Congress doesn’t “hide elephants in mouseholes.” And, so, climate change is an issue that a lot of people are concerned about, various people in Congress. As I’ve pointed out, there’s -- for over 15 years, Congress had submitted over 70 bills to try and address climate change, and they haven’t been able to agree anything.

 

So, for FERC to suddenly determine, “You know what? Congress has failed to do anything, but we’ve suddenly discovered we have the authority to address climate change through our 70, 80-year statutes,” just doesn’t seem possible and doesn’t seem like a legitimate reading of the law. And it also is, I would argue, a threat to the rule of law because then it’s just whatever a majority on FERC thinks ought to be the policy. And that’s just not how our system is supposed to work. If Congress wants FERC to address climate change, they can amend the Natural Gas Act.

 

J. Kennerly Davis:  Right. I think, as Justice Gorsuch observed in a case involving another subject, the need for Congress to address a lack of -- a possible lack of statutory authorities in the legislative process, and that’s not a flaw in the system; that’s a key essential part of the system. Now, you mentioned a minute ago that, under NEPA, FERC is required to address reasonably foreseeable impacts of the project, if I’ve -- if I’m following that correctly. Now, if the impact is -- the impact of concern is climate change, adverse climate change. It seems that there are a lot of steps, a lot of analytical steps that have to be taken to get from the application filed by one particular pipeline project and to determine that that one project has an adverse effect on global warming.

 

And to make that determination — to have the analytical tools and information — to make that determination, you have to look at each one of those steps and, if the methodology doesn’t exist and -- or the data doesn’t exist, then it’s hard for me to say the Commission could possibly have a responsibility to mix -- try to make studies and so forth as to the climate impact of one particular project. Yeah, there’re certain methodologies around, like methodology to calculate social cost of carbon, but the methodologies that do exist are the subject of much continuing, unresolved debate. And, again, those social cost of carbon climate change models are macro. They don’t provide a link from one project to the climate. Is that a problem for people who say the Commission should do this, and they have the tools?

 

Bernard L. McNamee:  Yeah, it is. They -- As you point out, the -- there is no direct link that can be demonstrated for each molecule of greenhouse gas (CO2) that’s emitted with the actual climate impact. So that’s the first problem. So it’s -- from an actual direct causation standpoint, it’s very hard to do that, and there’s no demonstrated methodology to show that. That’s why social cost of carbon has been developed; it’s trying to come up with an idea of, well, how can you measure something. But social cost of carbon made up of three complex models that vary dramatically in how they calculate impacts, and it’s really an economic model.

 

And, so, even that’s based on a lot of assumptions, and it’s very difficult. And regardless of whether the Intergovernmental Climate Panel comes up with a -- the working group comes up with the social cost of carbon, there’s still significant questions to it. But the bigger question is a legal one. Well, I’ll [inaudible 00:27:51] at least one thing is that FERC is not an economic -- is not an environmental regulator. It’s an economic regulator, so it doesn’t have the expertise to figure out these climate models, to establish what is too much greenhouse gas, what’s significant. And yet, FERC seems to be -- at least in these draft policy statements, has been trying to assert that they can determine what’s significant and that they can make judgments about what is too significant and what’s too harmful to the environment, whereas, Congress designated EPA as the environmental regulator along with the states and the Clean Air Act as the primary vehicle in which to make these determinations.

 

So you have an issue, one, of FERC not having the statutory authority or the expertise to do these things. You have another agency that Congress has designated to take the lead on this, and it would seem to make sense that, if any action was going to be taken, that you’d wait for EPA to do that and see how FERC can implement that. But there’s also another legal issue that we need to address is that — NEPA and the case law with it — you have to be the legally relevant cause of whatever the environmental impact is. And as the Eleventh Circuit had pointed out in a case called Biodiversity, the Sabal Trail case that FERC has been hanging its hat on for why it now has the authority to regulate greenhouse gases upstream and downstream was an outlier. FERC is not the legally relevant cause of the gas being burned. The pipeline -- it only regulates whether the pipeline is to be approved, but the demand for the gas is being driven by industry or by a certificate granted by a state public utility commission.

 

The wellhead is being driven by demand, and its emissions are being regulated by the state or by EPA jointly. And, so, merely approving the pipeline is facilitating exactly what the -- what Congress wanted in the Natural Gas Act: facility access to natural gas. And, so, from a legal perspective, FERC is not the legally relevant cause of the greenhouse gas emissions. It’s the actual use of the gas. And what we have had is the twisting of, well, because you couldn’t get the gas without the pipeline, therefore, you’re the cause, the foreseeable cause — kind of a Palsgraf sort of way of what’s happening. But that’s not how NEPA and the Natural Gas Act are supposed to be working together.

 

And, so, this is one of the problems I see about the way FERC’s pursuing this. Above and beyond the very practical problems that you point out, which is that there’s really no -- there’s a general sense that greenhouse gases, hence its name, can affect the climate, but making a direct correlation between every molecule and every impact is very hard. And that becomes, I think, a real problem for FERC in making a determination that an actual demonstrated need for natural gas to either provide electric power to provide electric heat to people and to promote economic development is offset by the -- these indirect, very amorphous ideas of how greenhouse gases impact, on a global level, impact the climate.

 

J. Kennerly Davis:  Well, as you imagine, the production facilities and the use facilities, like a gas-fired electric power plant, they’re all, themselves, each of them, regulated. Their emissions and impact is assessed as a part of their permitting process. And, so, for FERC to also assess -- try to assess, try to evaluate and count the emissions impact from a power plant, that seems like those emissions — and as well as the emissions of the production — are going to be double counted. And that is, perhaps, what some would like, but, again, you point out there’re significant statutory issues as well as methodological, technological, practical issues. Now, you refer to court cases, and some have provided some support for the environmentalist’s position in the DC Circuit. Maybe some haven’t. Is there any pending case that’s in the system anywhere that’s likely or has even some potential to resolve the scope of -- the question about the scope of FERC’s authority under the Natural Gas Act? Anything headed up?

 

Bernard L. McNamee:  Nothing comes to mind, but that doesn’t mean that there’s not. I just haven’t looked lately. I think, though, one thing that’s been the big debate, and I think really is the fulcrum of all this, is what is the meaning of Sabal Trail, which is the -- this was a case in which FERC had granted a natural gas pipeline to serve an electric generation facility, and it didn’t calculate the greenhouse gases from that facility, and therefore, it was told it had to relook at it and recalculate and consider those greenhouse gases. And there was some language saying that because it has — it was a case really about what does NEPA mean — but because it had a line in there saying that, because FERC could deny a pipeline due to greenhouse gas emissions, that, therefore, it is a cause that can be considered under NEPA. So, if you already see the trick there, it really wasn’t an analysis of what does the Natural Gas Act allow them to a decision. It was trying to figure out what does NEPA allow for at least the consideration or the calculation.

 

And then, that premise became interpreted as a holding. And that was a real problem, and that’s created, I think, a lot of havoc. And, so, the big fight is really going to be about what does NEPA require. And if NEPA requires you to calculate, which there’s a number of DC Circuit cases to say that FERC is now required to calculate the downstream greenhouse gas emissions, what is FERC obligated to do with that information? And, so far, the courts have said all they’re required to do is calculate the downstream emissions. It doesn’t say what they have do with the information.

 

But I think that’s going to be the next big fight. And these are fights that are also going to be going on with, to a certain extent, with the LNG export facilities. Even though, there are DC Circuit law about how FERC is not the relevant cause of the burning of the gas used by LNG exports, there are still issues about the emissions that occur from the LNG facilities themselves.

 

J. Kennerly Davis:  Yeah. Well, calculating the emissions from a gas pipeline is -- and -- or taking the position that those emissions are foreseeable and can be calculated, that’s not the foreseeable event or foreseeable effect that — that’s the key issue, is it? — because it’s climate change. Calculating the emissions still leaves the gap, the methodological gap, between the emissions and whether those emissions are any kind of climate negative or climate positive. They might be positive, if they’re replacing coal, for example. Well, what’s the status, then -- you said that the comment period on the proposed FERC policy is closed. Are they under any kind of time limit to respond to the comments and come to a final position, or not?

 

Bernard L. McNamee:  They’re not. They’re currently still operating under the 1999 policy statement, which doesn’t have this. They’re -- you’ve seen in some of the orders that they’ve issued since they’ve paused the policy statements where there’s -- there’s technically a majority order, and then, there’s a bunch of concurrences or dissents, basically saying, well, the greenhouses gases aren’t that significant, so this isn’t a problem, or that the need is overcoming any of the impacts. And, so, it looks like they’re trying to get some orders out to keep things moving and to not fully address the issue until they’re able to issue a new policy statement. Of course, I think, besides the sheer volume of comments that have been filed, obviously, we’re seeing some big problems. There was -- part of the challenge when they issued these policy statements, they were issued a week before Putin invaded the Ukraine, and, so, the timing was particularly bad with world events.

 

Of course, natural gas prices have been skyrocketing, which means that having more access to natural gas is going to be important. We’re also seeing -- we’re seeing reports from reliability entities, such as NERC and from various RTOs that regulate the electric markets that there’s worries about blackouts coming this summer and this winter. Of course, New England’s always constrained for having enough natural gas, and you can’t build a pipeline through New York. And even if you could get it through New York, most of New England doesn’t want a new natural gas pipeline. And, so, there’s really a big problem coming ahead where there’s not going to be enough pipelines to support the demand for electricity, especially as you need more natural gas to generate electricity with the shutdown of coal, with rising intermittent renewables that need gas to keep the grid operating when the winds not blowing and the sun’s not shining. So everybody’s, I think, has seen the energy crisis at the gas pump, but what we’re seeing is we’re going to have a severe electricity crunch across this nation in this summer and this winter. And it’s going to be a big problem.

 

J. Kennerly Davis:  A dose of reality. Let’s turn to electricity. In the electric sector, a Federal Power Act gives FERC exclusive jurisdiction over the transmission of electric energy and interstate commerce and the sale of such energy at wholesale and interstate commerce. Within that defined jurisdiction, statutory jurisdiction, out of Section 201 of the Federal Power Act, what are the responsibilities of FERC regarding that -- those wholesale transactions?

 

Bernard L. McNamee:  Well, I think it’s helpful to recognize that the electricity that we ultimately receive out of our sockets really is -- you can put it in three different buckets. You have the generation of electricity, which are power plants, which wholesale sales of that electricity. You have transmission, the big transmission lines that you see. And then, you have the distribution system. And the jurisdiction over those is separate, but I’m going to give even a little more detail, a little bit of history about the development of electric -- so-called electric markets. When -- before, really, then in the 1990s, early 2000s, we all had what we remember as our electric utility.

 

It would -- was the utility would build the power plants, build the transmission lines, and sell us the electricity and deliver it into our home, and it was really altogether. FERC would regulate the rates for the sale of wholesale generation of electricity between entities and certain transmission rates, but FERC’s role was somewhat more limited. But then, we had the idea of developing more competition for the generation of electricity and transmission. And one thing that’s important, FERC does not have jurisdiction over where a power plant gets sited and who decides to build a power plant, same with the transmission. They’re only dealing with the financial transaction of the sale of the electricity and the transmission of the electricity. But we got in this somewhat of a fiction of creating open access to transmission, meaning we wanted to competition and independent power producers versus your traditional utility to be able to build a power plant and sell the electricity.

 

And then, we started -- we created what are called electric markets. Now, I don’t actually think that’s a proper name. It’s more of a regulatory construct. And -- but, when they were developed, the idea was every electron is fungible, meaning you could dispatch it. You burned something. You burn coal. You burn gas. You ran hydro, or you had nuclear.

 

And an inherent aspect of that is you had reliability. And as everybody knows, you -- at night, not as many people are using electricity. But, as people wake up, they turn on their appliances. It gets hot; they turn on the AC. And, so, the load curve looks much like a sine wave during the day and, so, the same for during winter versus summer, sometimes. So what you would do is you would -- you created a market where people would bid in to serve that load, and you’d get the most efficient resource to do it.

 

And it seemed to work, generally. There were some issues with it. But you had marginal pricing, meaning that the last resource bid in set the price that everybody was paid. Well, we started then having concerns about climate change, and we’d have these renewable portfolio standards. And we started having mandates and tax credits and everything else for preferred resources, like wind and solar. And they started doing two things.

 

One, they had some financial benefit. They were driving down the marginal price of energy, which was helpful to an extent. But they were intermittent. So sometimes, when you needed the energy, they weren’t available. At the end of the day, 4:30 in the afternoon, when the sun’s going down, you suddenly need a lot of energy, that so-called duck curve out in California, coming in the rest of the country. And, so, you started having resources, like coal and nuclear, going out of business and not enough other resources available to serve load, and, so, we’re having reliability problems.

 

Well, FERC’s role is to regulate those RTOs, those Regional Transmission Organizations, Independent System Operators that operate in large swarths of the country but not in areas like the Southeast and part of the Northwest. What’s happened is these RTOs that FERC regulates become barnacled with tariffs, regulations. And there’s been constant fights about how are we going to have just and reasonable rates? How are we going to accommodate subsidized state resources, and how are we going to keep reliability going? And as we’ve gone on, reliability is becoming more and more a problem for these electric markets. And as we’re seen in California in August of 2020, in ERCOT in the winter storm in 2021, even though they’re not regulated by FERC, we’ve seen reliability has become a real problem. And now, we’re hearing that, according to the reliability entity, NERC, that’s going to be a big power for large swathes of the country this summer and then also into the winter.

 

J. Kennerly Davis:  FERC has responsibility under the Power Act for reliability or to participate in the reliability assurance process, doesn’t it? It works with NERC. Or could you briefly describe that?

 

Bernard L. McNamee:  Sure. Progress -- it used to be that NERC was an entity sponsored by the electric industry but not really government designated to try and -- to help the industry provide for reliability. Congress required FERC to designate a reliability organization. NERC is it, and, so, NERC works to develop reliability standards that FERC then will enact as a regulation. And there are penalties for failure. But it’s still a kind of an indirect requirement that you have cybersecurity standards. They have projections for reliability requirements. But FERC does not have the authority to require a certain sort of resources to be developed.

 

It doesn’t have the authority to designate, except as backstop authority with the Department of Energy for certain transmission to be developed. So reliability is -- where it used to be you had state utilities that were responsible. Their public utility commission, they do Integrated Resource Planning, and they explain, “This is how we’re going to keep the lights on,” and they were accountable. Now, particularly with these RTOs, nobody’s really accountable for keeping the lights on. We’re hoping that market forces work, but we’re seeing more and more that when you start having -- you start interfering with supply demand and price through subsidized resources, reliability starts to decline. So NERC’s trying. FERC has its eye on it, but I’m worried.

 

J. Kennerly Davis:  Yes. Well, looking at FERC’s core responsibility in the electric sector under Section 205, you look at these markets or constructs that have been developed, often referred to as wholesale markets. What’s the statutory responsibility of FERC regarding the prices for -- the wholesale prices electricity and the related services?

 

Bernard L. McNamee:  Well, it used to be, before these markets were created, that -- it was traditional regulation, Cost of Service, where you’d have -- basically, you have to demonstrate what your costs were and the utility under Supreme Court precedent, like Hope and Bluefield, that they’d get a -- an authorized rate of return, mimicking, supposedly, what the market would produce. Well, the theory under the RTO was that competition would inherently set just and reasonable rates, the [inaudible 00:48:14], and rates that are not unduly discriminatory. And the theory was -- and arguably when these wholesale markets were established, you would have supply demand and price, which would all come together and create an equilibrium that established “a just and reasonable price.” So it was an indirect regulation of both the tariff and rates by which service would be provided, and the price paid for that service. But the -- there’s constant intervention by FERC to require -- under the theory that, oh, something is creating a barrier to new types of resources, so they have to modify their tariff in order to let some new resource have access to the market.

 

And then, there’s, well, the market -- there’s other pushes, like, well, the market’s not producing rates sufficient to cover the cost for resources needed for reliability, hence the original creation of capacity market. There’s energy and capacity markets, and then, there’s ancillary markets. There’s constant building of, well, how are we going to solve this problems, and we need to use a “market solution,” so we’ll create a new product in these markets that people can compete to serve. And it just keeps on building and building, and the question is are we actually producing the resources we need for reliability. And second, if we keep on adding all these new products and resources, are we actually producing a system, especially with marginal pricing, that’s actually benefiting customers and providing the lowest cost service that they can get for their energy.

 

J. Kennerly Davis:  Well, the subsidies for renewable resources — solar, wind, that sort of thing — that the environmentalists call for, those subsidies seem that they may, under the general requirement that the price is produced by the markets, a just and reasonable and not unduly discriminatory -- subsidies are, by their nature, discriminatory, in this case, in favor of the renewables at the expense of the -- all the other sellers in the market. So that seems like a potential issue. And the rules, and they’re -- you and I know, they’re so complex. The market rules were constructed initially with a certain kind of system and certain kind of producer and transmission technology. In mind, that is a dispatchable, synchronous generator into a transmission system that provided for the dispatch, the control of those synchronous generators, fossil fired or nuclear, to meet the sine wave the load and follow the load through the day.

 

And, so, when they — advocates, investors, and proponents of these new technologies — look at this system of traditional rules and they say, “Oh, this is a barrier. That’s a barrier. We need to change this so that I can deploy my new technology.” That may be fine, but I think people -- we must now lose sight of the fact that you have, in the electric system, an instantaneously balanced system that can easily lose that stable balance and collapse and go black if this kind of rule is tweaked or that kind of production asset is allowed to take up x percent of the supply curve. And, so, there are a lot of issues that have to be resolved, and many more issues than we have time. We’ve got a little bit of time left, and, so, let’s ask Ryan if we have any questions pending from the audience.

 

Ryan Lacey:  Yeah, absolutely. Thank you so much, Ken. And to start things off, first of all, everyone, if you have questions, please put them in the Q&A feature in the bottom of the screen. We already have a few, but I’d like to give people a chance to put more in if they have them. I’ll start off with a question of my own, Bernie. How do you think -- with this announcement, it came very soon, either after or before the Russian invasion of Ukraine, and with the energy implications about Russia being a huge exporter of energy, of course, how has FERC -- how has this -- that invasion affected this policy?

 

Bernard L. McNamee:  Well, I think it -- there was -- the invasion had a huge impact. The -- FERC issued on the Thursday before -- the invasion, I think, was the next Monday or Tuesday, so just a few days before the invasion, they had issued this interim policy statement, and the timing couldn’t have been worse because there was a recognition of the need for natural gas and the need also to export natural gas. One thing that I was most proud of when I was on FERC, when I got there, for two years, no LNG export facility had been approved. And I was able to work with one of my Democratic colleagues and the chairman to get a compromise, and we got 14 LNG export projects approved in a little over 12 months. And one of them’s already come online, and it’s been making a huge difference in helping fill the gap for Europe of the lack of natural gas that has come from having to cut off the Russian natural gas.

 

Ryan Lacey:  Understood. And moving on to audience questions, the first one’s from Gerard Sullivan (sp). As citizens and taxpayers lack standing to challenge FERC’s exercise of authority beyond its enabling acts, who does have standing? Do those who have standing have an interest in challenging expansion of FERC’s aggrandizement in this role?

 

Bernard L. McNamee:  A great question. There’s a couple points with that. One, number of trade associations tend to participate in these INGAA, which represents [inaudible 00:55:20] pipelines. On the other side, the Natural Resource Defense Fund, or Council—NRDC—EDF, Public Citizen, there’s a number of environmental groups. Congress also funded what’s called the Office of Public Participation, which is going to help individuals participate in FERC proceedings. And I think that there’s opportunities not just for opponents of projects to participate but proponents. But standing is always going to be a challenge.

 

We used to have -- in FERC proceedings, there needs to be -- you need to show an interest, at least for rule makings, in particular, you don’t have to have Article 3 standing. Of course, if you’re going to go into a court, you do. So the best thing that was to get folks to be active and participate as much as they can, even if it’s just by link comments.

 

Ryan Lacey:  Next question’s from Mia Webber (sp). How does your interpretation square with some of the recent holdings of the DC Circuit in FERC’s certificate policy challenges?

 

Bernard L. McNamee:  Well, Mia, I appreciate the question. There’s a real big distinction between the way cases like Sabal Trail and Lori Birckhead and others have been described as saying that FERC has the authority to deny a pipeline based on its downstream GHGs versus what they actually said, particularly Sabal Trail and, as clarified by the other cases, including that most recent one, Water Watch, I think it was, and that it’s that it’s -- they’re all NEPA cases. It’s saying that FERC has to calculate the downstream gases. It doesn’t that it has the authority to deny a pipeline because of it, and that one line in Sabal Trail was merely a statement in dicta to set up for why there’s authority under NEPA, but it really isn’t a holding that gives FERC the authority.

 

Ryan Lacey:  All right. And we have time for about one, maybe two more questions. This one from John Melco (sp). If FERC is found not to have jurisdiction to analyze environmental factors, does that make the pipelines and transmission lines subject to the tender mercies of the EPA. If so, how do you reconcile the obligation to provide power with EPA’s current objectives?

 

Bernard L. McNamee:  Well, I guess – two issues.  One, FERC does have the authority and should consider the environmental impacts of the pipeline itself but not the upstream or downstream greenhouse gas emissions, or, at least, that’s my reading of the law. And subjecting it to the authority of EPA, whether or not you like what EPA does or what it comes up with, that’s the entity that Congress designated to regulate emissions along with the states. And I fundamentally believe that I want Congress to make these decisions, and, if Congress put that authority in -- under the Clean Air Act and EPA, then that’s the entity that should make those decisions. And, if EPA does not do so or has failed to do so, that doesn’t give FERC the authority to fill the gap.

 

Ryan Lacey:  All right. And one last question we have time for. Has FERC painted itself into a corner where the taxpayers should -- would be justified in telling Congress to cut their budget and downsize the agency?

 

Bernard L. McNamee:  Well, a lot of the agency budget comes from filers. Of course, for -- Congress always has the authority to regulate its budget, and it does provide authority for certain aspects of it. But, I think, the best thing to do is -- of course, the power of the purse is extremely powerful, but, I think, the best thing to do is for Congress to make a decision or make its decision by not making a decision about what the authority of FERC is. And currently, FERC’s authority is defined by the current Natural Gas Act and its obligations under NEPA, and that’s the extent of it. And until Congress expands its authority, FERC shouldn’t act -- should do what its required to do under the Act but not do more.

 

Ryan Lacey:  And I’ll hand it back over to Ken for any last words.

 

J. Kennerly Davis:  No, I just want to thank Bernie, again, for making your time available and providing the audience with such a thorough, substantive discussion of this important topic.

 

Bernard L. McNamee:  Well, thank you for having me and appreciate spending time with all of you.

 

Ryan Lacey:  And thank you both. On behalf of The Federalist Society, I want to thank Bernie and Ken for the benefit of their valuable time and expertise today. And I want to thank you, our audience, for joining us and participating. We welcome listener feedback by email at [email protected]. And as always, keep an eye on our website and your emails for announcements about upcoming webinars and other programming. Thank you all for joining us today. We are adjoined.