CERAWeek 2014 - Electric Policy Agenda: Market Rules and the GHG Management

The North American power sector will be shaped profoundly by the policy and regulatory rules in play at both the regional and national level. Policymakers and utility stakeholders are grappling with a wide array of issues that are complex and far-reaching, ones that will impact investment decisions, environmental outcomes, and the reliability and affordability of electricity to consumers for years to come. Panelists discuss how they see elements of the electric policy agenda unfolding, including greenhouse gas management, rules and requirements on supply sources, reliability standards, technological innovations, and more.

Sharon Reishus, Senior Director, North American Power, IHS, chaired the Strategic Dialogue on "Electric Policy Agenda: Market Rules and GHG Management." The session addressed a wide array of regulatory and policy challenges facing the US power sector, including greenhouse gas management, reliability standards, technological innovations, and more. Cheryl LaFleur, Acting Chairman, Federal Energy Regulatory Commission (FERC); Colette Honorable, President, National Association of Regulatory Utility Commissioners (NARUC), and Chairman, Arkansas Public Service Commission; and Raymond Kopp, Senior Fellow and Director, Center for Climate and Electricity Policy Resources for the Future, shared their views on these topics.

With respect to carbon emission regulation, Ms. LaFleur said that FERC is working with the Environmental Protection Agency (EPA) on a draft rule, due in June 2014, that states will have to meet. She explained that one of the challenges that regulation needs to take into account is that electric power in the United States is dispatched over regions larger than states. Another important policy question is whether carbon control should done at the power plant level or if it should be looked at more broadly. Ms. Honorable said that the Clean Air Act's 111(d) regulation is the most important topic the commission is working on right now. NARUC encourages EPA to engage energy efficiency initiatives that already exist within the states and to allow flexibility in state efforts to meet regulations. She echoed Ms. LaFleur's point that the diversity of states' energy efficiency programs and fuel mixes adds to the complexity of regulation when EPA is looking to come up with consistent and sufficient measurements. Mr. Kopp emphasized the difficulties of controlling greenhouse gas (GHG) emissions via 111(d) and said that it is vital to understand the level of stringency EPA rules will require, asking whether reduction will be defined in terms of marginal cost controls, rate reductions, or actual tons of gas reductions. Stringency will shape how states design their programs, she noted.

The panel discussed the issue of reliability in the industry as well as physical and cyber security risks. Ms. LaFleur said that everything done at FERC is driving toward reliability in some way. Since 2005, FERC has been responsible for a large part of the electric system, ensuring that market participants can attract capital and that pipelines are built and environmental standards implemented. Cyber security is high on the agenda, and FERC is assessing the need for physical standards as well, she said. Ms. Honorable said that in Arkansas they are very focused on responding to attacks and disruptions, and preparing for them as well. "Superstorm Sandy" made us reevaluate our work, she stated. Weather events such as hurricanes, flooding, and tornados are increasing in frequency and severity; this requires an unprecedented level of coordination among utilities from coast to coast. Mr. Kopp pointed out the need to coordinate the private and public sectors in emergency situations to bring facilities back online.

There was consensus among the panelists that technological innovation is both a wonderful achievement and a regulatory challenge. These new technologies are not free, and policy is vital in driving their implementation. The technological pace is not slowing down, so there is a lot of work for regulators to create smart policies that do not impede employment of energy sources, but instead support it. The panelists agreed that small-scale distributed generation is changing the distribution business and putting utilities at financial risk. Policymakers are looking into ways to address this challenge, including by changing the electric rate tier structure. The question is who bears the cost of integration and how to set the price for selling power into the grid.

The rise in domestic supply of gas in North America increased integration between the gas and power sectors. Ms. LaFleur listed three challenges for their integration that FERC is actively working to resolve: the communication between the gas and power sectors to foster asset reliability, timing and scheduling of the how electricity and gas markets work (electricity is a round-the-clock operation while gas markets are open 9:00 am to 7:00 pm), and differences in payment terms for these resources (day-ahead reservation for power and long-term commitments for gas deliveries). Mr. Kopp said that fuel diversity is important and that focusing on one fuel is not a good strategy for long-term planning. However, low-cost natural gas is pushing out not only coal but also nuclear. Implementation of renewables is an opportunity, but costs are a challenge, noted Ms. Honorable. She also expressed concern for the rising costs required to supervise the industry, ensure infrastructure safety, keep records, perform maintenance, train personnel, and other necessities.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.