On September 28, 2017, the Department of Energy ("DOE") issued a Notice of Proposed Rulemaking ("NOPR") for the Federal Energy Regulatory Commission ("FERC") to direct regional grid operators to revise their rules to pay nuclear and coal-fired power plants for contributing to grid reliability.

As detailed in a Cadwalader memorandum, the rule would amend FERC regulations to allow for the "full recovery of costs for certain eligible units" that keep a 90-day supply of fuel onsite. To qualify, units (i) must be located within the market areas of FERC-approved regional transmission organizations ("RTOs") or independent system operators ("ISOs") and (ii) must not be subject to cost-of-service rate regulation by state or local authority. Under the proposed rule, ISOs and RTOs would file tariff amendments to establish cost-based rates for eligible power plants. The recoverable costs would include operating and fuel expenses, costs of capital and debt, and a return on equity.

According to the DOE, the proposed rule was issued to "protect the American people from energy outages" that may result from "premature retirements of power plants that can withstand major fuel supply disruptions."

Further, the DOE asserted that the NOPR should not necessitate an Environmental Assessment or an Environmental Impact Statement since it requires "an exercise of FERC's authority under Sections 205 and 2016 of the FPA."

The DOE directed FERC to (i) take final action on the proposal within 60 days of the proposal's publication in the Federal Register or (ii) issue the rule as an interim final rule immediately, with the ability to make modifications after receiving public comments. The DOE also directed that the final rule should become effective within 30 days of publication in the Federal Register.

Commentary / Mark R. Haskell

The regulatory model embedded in the notice of proposed rulemaking would, if adopted and widely deployed, represent a fundamental shift in the design of wholesale power markets in the United States. In effect, the rule suggests (at least for some coal and nuclear facilities) a great leap backwards into the era of regulated cost of service ratemaking and a retreat from competitive market principles that have been ascendant for many years.

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