A Road Paved with Good Intentions?: FERC’s Illegal War on State Electricity Subsidies

On December 19, 2019, the Federal Energy Regulatory Commission (FERC) issued an order dramatically expanding the Minimum Offer Price Rule in PJM’s capacity market. The order changes how electricity-generating resources that receive state subsidies are treated in federally regulated wholesale electricity markets. In short, a two-member majority of FERC commissioners, over the strong dissent of the third, decided that the Federal Power Act requires penalizing state-subsidized generation in order to “level the playing field” of wholesale competitive electricity markets. On its face, the goal of leveling a playing field is laudable. In actuality, however, FERC’s order does nothing of the sort. Instead, it creates numerous arbitrary distinctions, forces electricity customers to pay for excess capacity, and runs roughshod over the Federal Power Act’s apportionment of federal and state regulatory authority. Most initial reviews of FERC’s order have offered scathing criticism of its negative policy consequences, especially the adverse effects it will have on renewable energy development. Our critique, while not inconsistent with these other commentaries, adds two perspectives not represented thus far in the reaction to FERC’s order. First, even as we are critical of FERC’s conclusions in its order, we explain how the FERC majority got to the point where it felt compelled to take action against state subsidies and why that judgment, although understandable in some respects, is misguided. FERC’s action follows logically from a flawed policy adopted by a Democratic-majority Commission in 2011. Second, we explain why FERC’s order, in addition to creating poor policy consequences, also fails to create a mechanism for a just and reasonable price and violates both the Administrative Procedure Act and Federal Power Act.