On October 15, 2020, the Federal Energy Regulatory Commission (FERC) issued a proposed policy statement clarifying that it has jurisdiction over rules incorporating state-determined carbon pricing in wholesale electric markets, while also encouraging regional electric market operators to consider establishing carbon pricing rules. Comments on the proposed policy statement are due on or before November 16, 2020.

FERC issued the proposed policy statement after hosting a technical conference in September 2020 where attendees discussed state-determined carbon pricing and the potential benefits of incorporating state-determined carbon pricing into regional electricity markets. The proposed policy statement addresses a topic of ongoing controversy – how to reconcile FERC’s authority to regulate wholesale power market prices with the states’ authority to promote renewable energy generation. This controversy has, to date, resulted in one Supreme Court decision, at least two decisions from the U.S. Courts of Appeal, and threats from at least five states to withdraw from the PJM organized wholesale market because they view FERC’s actions, particularly on the Minimum Offer Price Rule, as creating artificial barriers to state goals for greatly expanding renewable energy.

Proposed Policy

The proposed policy statement recognizes that many states have adopted regulations that require decarbonization of the electricity sector to varying degrees. Many states use carbon pricing mechanisms to achieve these policy goals. However, efforts to reduce emissions by implementing a carbon-pricing mechanism could overlap with FERC’s jurisdiction over wholesale electricity rates. In FERC’s view, both state programs directly placing a price on carbon, including the “social cost of carbon” constructs that are gaining traction in a number of states, as well as costs associated with cap-and-trade programs, such as those arising under the Regional Greenhouse Gas Initiative in the northeast and mid-Atlantic states, could potentially implicate FERC’s wholesale rate jurisdiction. Given the increase in states looking to place a price on carbon, FERC observed that under section 205 of the Federal Power Act (FPA), it “may be called upon to review future proposals that incorporate a state-determined state carbon price” into regional organized markets such as PJM, Midwest Independent System Operator (ISO), and the California ISO. FERC concluded that, at least in some circumstances, it would permit state-mandated carbon pricing to be incorporated into FERC-regulated wholesale prices. While the proposed policy statement attempts to set forth some general standards for how FERC would review such state policies, final determinations would be made on a case-by-case basis.

Comments on Proposed Policy

FERC is seeking comment on the appropriate information to consider when it reviews a filing under section 205 of the FPA. Specifically, FERC seeks comments that address a number of questions, such as “how, if at all, do the relevant market design considerations change depending on the manner in which the state or states determine the carbon price (e.g., price-based or quantity-based methods)? How will that price be updated?” Comments are due on the proposed policy statement by November 16, 2020, and reply comments are due by December 1, 2020.

Broader Impact of Proposed Policy

Importantly, FERC notes that it is “proposing to issue a policy statement to encourage efforts to incorporate a state-determined carbon price in organized wholesale electricity markets.” FERC’s proposed policy statement provides an opening for states that want to introduce a carbon pricing proposal with less concern that such a plan would meet opposition from FERC. To some, the proposal may be viewed as an olive branch extended by FERC to the states that have called into question many of its recent initiatives because they are viewed as interfering with state climate goals. This proposed policy could spur additional states to consider incorporate a carbon price into their regional markets.