FERC Authority over ERCOT
Updated: Feb 24, 2021
Recent emergency conditions in electric markets in the ERCOT (“Electric Reliability Council of Texas”) region of Texas have raised interest in FERC authority over the region. Below we briefly review the current state of that authority.
As has been widely discussed in the press, questions about the extent of FERC authority over ERCOT arise because ERCOT is located within a single state and is not synchronously connected to either the large electric grid operating in the Eastern part of the continent (“the Eastern Interconnection”) or the similarly large grid operating the Western part of the continent (“the Western Interconnection”). The lack of synchronous interconnection to states other than Texas has been held to mean that transactions entirely within ERCOT are not within “interstate commerce”, a key ingredient for FERC jurisdiction over electric ratemaking. Federal Power Act (“FPA”), Section 201(b)(1) (providing that key FPA provisions apply to sales in interstate commerce, but aside from specified exceptions “shall not apply to any other sale.”)
FERC Interconnection Authority
While the key ratemaking provisions of the FPA (that is, Sections 205 and 206) generally do not apply within ERCOT, other provisions of the FPA do indeed apply to ERCOT utilities. Importantly, FPA Section 210 (Interconnection), Section 211 (Wheeling), and Section 212 (Rates for Such Interconnection and Wheeling) can apply to requests for service in ERCOT. These sections of the FPA provide for case-by-case orders in which FERC can require a utility to interconnect a customer or provide transmission service. Outside of ERCOT, there is seldom a need to rely on these provisions, because the subject matter has been incorporated into the open access transmission tariffs of non-ERCOT public utilities and RTOs, and thus no longer requires case-by-case adjudications. But within ERCOT, these sections allow a form of FERC jurisdiction. (It should be noted that Section 212(k) specifically addresses ERCOT, requiring that rates for such service should be developed, to the extent “practicable” using Texas PUC ratemaking methodologies.)
FERC has used its authority under these provisions to require both interconnections and transmission service. Importantly, this authority includes not only the power to order service entirely within Texas, but also to issue orders directing the construction of “DC ties” that interconnect ERCOT and the other US interconnections or Mexico. See, e.g., AEP Energy Partners, 164 FERC ¶ 61,056 (2018); City of College Station, TX, 137 FERC ¶ 61,230 (2011); Brazos Elec. Power Coop., Inc., 118 FERC ¶ 61,199 (2007); Kiowa Power Partners, LLC, 99 FERC ¶ 61,251 (2002) (Kiowa); Central Power and Light Co., 40 FERC ¶ 61,077 (1987); Central Power and Light Co., 17 FERC ¶ 61,078 (1981). The DC ties operate by converting the alternating current on the ERCOT grid (or the abutting grid) to direct current, and then converting that direct current back to alternating current synchronized with the other interconnection (or ERCOT). A key element of each of these cases was a jurisdictional finding by FERC that such DC ties, while permitting some interstate power flows, did not sufficiently intermingle the power of ERCOT and the other interconnection to turn ERCOT utilities into “public utilities” generally subject to FERC oversight.
FERC Reliability Authority
Section 215 of the FPA, which provides FERC authority over electric reliability on the bulk power system, also includes authority over ERCOT. FERC exercises its reliability oversight in conjunction with the North American Electric Reliability Corporation (“NERC”) which has promulgated detailed electric reliability standards that apply nation-wide (with certain regional variations built into the standards).
If it is determined that ERCOT or entities within ERCOT violated NERC/FERC reliability standards, NERC/FERC have authority to investigate and address those violations.
While FERC has full authority over violations of existing reliability standards in ERCOT, to the extent that the emergency in ERCOT was caused by ERCOT’s resource adequacy mechanisms (or lack thereof) there are limits to FERC’s authority. Indeed, Section 215(i)(2) of the FPA includes a specific “savings” provision intended to limit such authority, providing: “This section does not authorize the ERO or the Commission to order the construction of additional generation or transmission capacity or to set and enforce compliance with standards for adequacy or safety of electric facilities or services.” That savings clause creates a tension in FERC’s reliability regulation, because, as FERC has held in Order No. 672, “Resource adequacy is a fundamental aspect of reliability.” FERC has clarified some of the borderlines of its authority in Order No. 747, where it found that it did have jurisdiction over rules requiring resource adequacy assessments and reporting, regardless of the 215(i)(2) savings clause.
FERC Manipulation Authority
FERC has broad authority to investigate and punish electric market manipulation, pursuant to Section 222 of the FPA. That said, FERC manipulation authority over ERCOT is currently limited by that portion of Section 222 which provides that the FERC authority extends to: “the purchase or sale of electric energy or the purchase or sale of transmission services subject to the jurisdiction of the Commission”. In Order No. 670, FERC ruled that it would interpret the phrase “subject to the jurisdiction of the Commission” as applying both to transmission services and energy sales, which would mean that transactions in ERCOT that are not subject to FERC’s FPA ratemaking authority are generally also not subject to its manipulation enforcement authority.
Issues for the Future and Conclusion
FERC does have authority in ERCOT – to order interconnections and wheeling and to enforce electric reliability standards – but FERC authority is circumscribed because ERCOT is not synchronously operated with either of the interstate electric grids. For FERC to gain more authority, one of the following would likely have to happen:
(1) statutory changes expanding FERC authority
(2) if ERCOT were to synchronously interconnect (that is, a direct connection rather than through a DC Tie) with one or the other continental electric interconnections, FERC would likely conclude that its full authority now extends to ERCOT
(3) FERC could revisit its prior legal rulings such as its ruling that DC Ties do not bring ERCOT transactions into interstate commerce, or its conclusion that FERC electric manipulation enforcement authority extends only to electric energy transactions that are otherwise FERC jurisdictional
One suspects that any of these options would be hotly contested.