The battle between federal regulators is about to begin, and the nation's electric utilities may be in the crossfire. On one side is the Environmental Protection Agency (EPA) and the other side is the Federal Energy Regulatory Commission (FERC). The issue is how best to manage the national mission of providing safe, economic and reliable energy.
In the case of the EPA, last week I described how two new EPA rules will effectively shutter 30,000 to 50,000 megawatts worth of coal-fired power plants. This unexpected loss of capacity is the equivalent of dropping approximately 30 nuclear power plants from the nation's fleet. Then, this past week, I described the effect of the EPA's three proposed rules. These rules effectively prohibit the construction of new coal plants unless the industry finds a silver bullet that miraculously takes carbon out of carbon-based coal.
Even before the EPA acted, the nation was becoming critically short of power plant capacity. Texas, for example, did not have enough power plants to meet this summer's demand. Out of concern that there would not be enough power, the Electric Reliability Council of Texas (ERCOT) lifted its price cap on wholesale power to $5,000 per megawatt-hour (or 500 cents per kilowatt-hour). The Council also requested utilities to restore mothballed power plants and to put those units back in service in order to meet anticipated summer peaks.
It's not just Texas. The Mid-Atlantic has similar challenges. PJM Interconnection instructed First Energy (FE) that three of their plants have been designated as "must-run." These plants were to be retired and removed from service.
Today, ERCOT and PJM can make these decisions because most of the EPA's new rules won't take effect until around 2014. But when and if those rules hit, the nation will likely find there won't be enough power generation to support the economy.
All that said, questions are growing as to whether the EPA's new rules will stick. The rules are not balanced, and they are not good policy. The Agency focused on only one element of the utility's mission -- environmental safety -- while completely ignoring economic and reliability impacts.
Thank goodness for FERC, as they are keenly interested in reliability. As with the EPA, the FERC promulgates regulations that govern how power generators operate. The foundation for those regulations is in statutes passed by various Congresses. But, unfortunately for utilities, FERC's reliability regulations are incompatible with EPA's safety regulations.
FERC Commissioner Philip Moeller said it best when he testified before the House of Representatives Committee on Energy and Commerce, Subcommittee on Energy and Power. He said, "The law should not require citizens to violate the law."
FERC is focused on Section 202(c) of the Federal Power Act, a law that authorizes the federal government to require a power plant to run in certain circumstances, even if the owner of that power plant would rather not run the plant. Congress found that the security of the nation depends on reliable power, and Section 202(c) addresses the need for the nation to have a reliable system.
This is not the first time generating companies found themselves cross-threaded with federal regulators. In the aftermath of the Three Mile Island incident and during the Reagan Administration, federal regulators promulgated a series of inconsistent rules that were impossible for utilities to implement. After negotiated rulemakings with utilities, regulators backed off and modified their regulations.
The same is likely to occur with the EPA: The Agency will likely back off some of its rules.
Congress is not waiting. The House has already introduced H.R. 4273, "Resolving Environmental and Grid Reliability Conflicts Act of 2012." All four FERC Commissioners testified, and all four fully support this bill.
It may not be a good idea to rush into a firm judgment about the future of the U.S.'s coal and coal-fired power plants. Believe it or not, there are some adults working in Washington.
We've already heard the worst, so the news can only get better for coal companies and coal utilities. The pronounced demise of Peabody Energy (BTU), Consol Energy (CNX), Alliance Resource Partners (ARLP), Arch Coal (ACI) and other coal companies has clearly been premature. The future loss of earnings for coal-fired power plant operators such as the Southern Company (SO), American Electric Power (AEP), Duke Energy (DUK), FirstEnergy and GenOn Energy (GEN) has been exaggerated -- not as bad as what was first reported.
Nevertheless, it may be a long and difficult process as Washington learns about the energy industry. It is about safety. It is also about reliability. Moreover, for most Americans, it is about economics. Washington needs to strike a balance.
