In this episode I speak with Jon Wellinghoff, former FERC Chairman and Principal at Policy/DER consulting. We discuss the DOE NOPR and the FERC docket that is now open to review the proposal to subsidize coal and nuclear plants. Full transcript available below.
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YANN BRANDT: [00:00:01] Today I’d like to welcome Jon Wellinghoff to the show. Jon is the principal at policy DER consulting. He spent a year as a chief policy officer SolarCity but most importantly for this conversation was, he was a commissioner at FERC from 2006-2013 and the chairman for the last four years of his tenure. Welcome to the show Jon.
JON WELLINGHOFF: [00:00:24] Thank you all. It’s great pleasure to be here.
YANN BRANDT: [00.00.27] Absolutely so we wanted to have you on because on September 28th; energy secretary Perry proposed a rule for final action to the Federal Energy Regulatory Commission, FERC, as we will refer to it. Under the proposal and I quote “FERC will impose rules on the Commission– will impose rules to the approved ISOs and RTOS to ensure that certain reliability and resilience attributed of electric generation resources are fully valued”. Can you translate this for us?
JON WELLINGHOFF: [00.01.00] Well it’s actually a mischaracterization and misinterpretation by the secretary of energy. I mean first of all he issued it in a letter as a directive to FERC. He directed FERC to issue the rule based upon the language that he submitted to them in his proposed notice of rulemaking NOPR and the thing that I guess the secretary forgot to read in the federal Power Act– you know he was acting under. I’m going to forget the sections here. I think it was 403 at the federal Power Act Subsection B if you read subsection C, he finds that the jurisdiction for the determination of whether or not this rule goes forward– what happens to this rule and whether it’s appropriate is entirely within the purview of FERC. So, what that means is he issued in essence an extra– what I would call an extra Vilas order. An extra Vilas order means that in essence he issued something that he had no authority to issue and direct it to FERC. The Secretary of Energy has no statutory authority whatsoever to issue a directive to the Federal Energy Regulatory Commission. Federal Energy Regulatory Commission is an independent body, independent regulatory body with five commissioners who are all nominated by the President and confirmed by the Senate and so as such; now the only authority that Secretary of Energy has is this extremely limited authority to propose a rule to FERC which he did do but again in language it seemed as if he was directing them to do something which he did not do which he does not have that authority. That is sort of procedural structure of it so once it goes over to FERC as a proposal then it’s like any other proposal. That’s like I could submit a proposal to FERC, you could submit proposal to FERC, anybody could and once FERC assumes jurisdiction by opening the docket, opening those proposed rulemaking which they did do; they did utilize the Secretary’s language in that proposed rulemaking as the proposal that comments would be made up to. But once that is done FERC has the complete authority to reject it, to modify it, to amplify it, to do anything that they deem to be appropriate in the context of their rulemaking authority and their rulemaking authority of course is not unlimited. It’s not without boundaries. FERC administrative a procedure act and in doing so they have to ensure that the rules that they promulgate are based upon substantial evidence of record. So, they have to take up evidence into the record which they’re doing now based upon comments that are being submitted. I submitted comments along with the seven other former commissioners including I think three or four other former chairs of FERC asking the rule be rejected, the proposed rule be rejected basically but again FERC will take these comments in and then they’ll make a decision as to what to do. So that’s the whole procedural aspect but now the substantive part of it if we want to talk about the substance of what secretary Perry was proposing substantively, that gets a little bit more difficult because on its face what the (05.03) the secretary Perry said over says is that anything that has a 90-day fuel source and organized wholesale market and they were looking at nearly the ISOs and RTOs is not outside of those areas and there’s only six of them that are under Burke’s jurisdiction and there are large parts of the country that does not have an organized source of marketing including most of the western United States and most of the southeastern part—
YANN BRANDT: [00.05.34] We’re talking about mostly like ERCOT (05.36) and the Midwest ISO and PJM those examples—
JON WELLINGHOFF: [00.05.42] ERCOT is not under full jurisdiction so this rule couldn’t apply to ERCOT. You would hear we have no applicability to ERCOT whatsoever because ERCOT is not part of FERC’s jurisdictional Authority. They are not interconnected into the rest of United States and as such their transmission grid is not considered to be in interstate commerce and therefore they’re not in their jurisdiction. So, we’re only talking about PJM, (06.07), New England, New York, SPP in California; I think I got them all. Those are the only areas that this rule could potentially apply to if it was promulgated by FERC, if it was enacted so you have to have a 90-day supply and show the ninety days supply. Well, so number one I don’t even know what that means. I mean first of all I’m sure there are multiple gas plants and natural gas plants in this country that could show that they have 90-day contracts and a contract for supply for over 90 days and I can tell you I don’t have little weight in front of me; so, I’m not sure if there’s any qualifying language about fuel has to be on site or something not sure if that’s a requirement. But someone could argue that there may be instances where a gas plant has 90 days for the fuel or certainly could the extent that this rule was particularly economically advantageous. I’m sure there’re a lot of gas plants to build on site and they did fuel on site so that would negate whatever the whole intent of the rule is really.
YANN BRANDT: [00.07.27] One of the interesting things and we’ll get into what the intent of this (07.36) or this request order from the secretary actually means; the comments came back and as far as I could— I mean layman’s point of view a lot of negative responses including the letter that you wrote with your FERC former commissioners. This is what the Department of Energy’s press secretary said about the comments that came back and it was said, “As intended, the proposal has jump-started a long overdue conversation about grid resiliency.” How would you respond to the comments that you’ve seen and kind of characterize those and what makes up a resilient grid? I mean what—there is this new word that we’ve been studying and you know what is the resilient grid?
JON WELLINGHOFF: [00.08.34] First of all I don’t think the comments did jumpstart any conversation about clearly resiliency. I think they jump-started a conversation about whether or not it makes any sense to subsidize nuclear power plants in this country because that’s really what the entire intended rule seemed to be. It was to provide rate based constant service treatment that is out of market, subsidy payments to plants that are no longer competitive in the markets so you’re going to prop up plants that can’t make in the markets and you’re going to give them billions of dollars. I think the last estimate I saw was 10 billion dollars annually—you’re going to give these plants 10 billion dollars annually out of our pockets, out of consumers’ pockets so these plants can continue to run where there are a more cost competitive, more cost-effective ways to produce power in this country. So, it had nothing to do with resilience. You only want to talk about resilience; resilience really is all about how you deliver that last mile of power. There’s nothing to do with the Central Station power plant that may be located 50, 100, 200 miles away. That’s to do with whether or not you’re going to have a tree touch the last mile or two miles away because we have a windstorm in Santa Rosa, we have a hurricane in Puerto Rico and all the plants in Puerto Rico that were the Central Station plants there are still operable but you can’t get the power to anybody because the resilience was not there in the system in the sense that the distribution systems were too brittle to maintain the ability to deliver and distribute power to residents and businesses in the last mile. So, you have to start looking now at how you make that system more resilient and the most effective way to make them system resilient in my opinion is to start looking at micro grids, start looking at island beam systems in regional grid areas where you can pull apart systems more quickly that have substantial outage problems because of either chronological event, high-impact weather events or other events that may impact the ability of the grid at a local level to deliver power to customers.
YANN BRANDT: [00.11.01] Right, so I hear where you’re going with this and having– I mean I lost power for a week from hurricane (11.09) and it had nothing to do with generation but everything to do with my tree falling down—
JON WELLINGHOFF: [00:11:15] [chuckles] Exactly.
YANN BRANDT: [00:11:16] And a pole snapping a half but– so if the secretary were to call you and said, “Jon, what’s the biggest threat to grid resiliency? Is it not enough base load? Is it too much solar? Is it stronger weather or really has it come down to the fact that we have a bunch of wood poles across this country that are susceptible to breaking, falling etcetera and then you can’t get the power that you’re generating to the consumer.”
JON WELLINGHOFF: [00:11:46] Yeah, it’s the latter. If you do analyses of the reasons for grid outages 99%– now the outages in this country are at the distribution level and I’m not suggesting that we bulk up the distribution system so that we have steel poles, where we underground the whole thing. I mean I think there’s much cheaper ways to do it and those cheaper ways to do it are in essence provide for Island beam and separating of systems from each other and allowing for, within those islands, self-sufficiency in aggregated distributed energy resources; rooftop solar, demand response, battery storage, improved levels efficiency and control systems that can sense these outages and in sensing them virtually instantaneously separate from that area that has been out, been put out by the weather (12.48) maybe and ensure that other parts that are not affected can stay up. I mean ultimately that’s what we need to do. The military is going to figure this out. The military is not stupid. They are doing whatever they can to build micro grids with every– on continent military facility in the US and certainly foreign facilities as well to ensure that they have micro grid sustainable systems. They don’t have to rely on an out-power source from some utility company that relies on wooden poles put up 40 years ago that may or may not be maintained that could be subject to all kinds of damage and destruction based upon the kinds of weather events that were saying now; the fires the Hurricanes and the other things that we’re all experiencing throughout this country.
YANN BRANDT: [00:13:49] Would you say that the word resiliency is being overused given the fact that the US generally speaking has, as you and I would describe it, probably the most resilient grid in the world?
JON WELLINGHOFF: [00:14:08] Well, not entirely true. From an outing standpoint, the outages in Europe are much, much less than the outages in the US so in my opinion almost the order of mileages so—
YANN BRANDT: [00:14:21] But would you describe that as a– I mean yeah, I lost power for a week because of a hurricane but I hadn’t lost power in ten years for more than 30 minutes and maybe someone like me in Europe would have lost power for five minutes. We are not talking about a—
JON WELLINGHOFF: [00:14:41] Yeah now that’s true. It’s not long-duration outages. It’s a minute here, two minutes here, five minutes their kind of saying over a year period and how do we stack up against Europe? Europe does much better than we do but overall if you’re looking in the larger context of things like the level of outages of power that they have in developing countries, in Sub-Saharan African countries, in Southeast Asia etcetera you certainly have a much, much stable resilient reliable grid in this country and in Europe than you do anywhere else in the world. There’s no question about that.
YANN BRANDT: [00:15:32] So I mean at the end of the day I want to talk about this letter you wrote because you wrote– you and seven others wrote an 11-page memo so these are former FERC commissioners and many of you were chairs. I want to read a couple of things from the letter. You write, “One critical aspect of competitive wholesale markets is that the risk of generation investments has been shifted from captive customers to market participants who could better manage the risk and some who have not been successful doing so.” The some who have not been successful doing so, is that who this proposed rule is really for that they’re “Seeking some sort of market subsidy bail out”?
JON WELLINGHOFF: [00:16:22] That is what market is all about. That you’re supposed– everybody talks about we’re not supposed to pick winners and losers; that’s right. We’re not supposed to. The markets are supposed to do that. Ultimately what the markets are about; the markets are supposed to determine who can compete and who can’t compete and in our capitalist system which we utilize markets to drive down prices and drive in innovation. We should be embracing that rather than rejecting it. It seems to me that this Republican administration is rejecting markets and rejecting the ability of those markets to successfully choose those technologies and those companies who can be the most efficient, the most effective and delivering services to the end-user.
YANN BRANDT: [00:17:15] But we’ve also seen this– I mean you also write in a letter about the power plant industrial fuel use act of ‘78 which then under Reagan was repealed that talks about being fuel agnostic and refraining from favoring one fuel over another but haven’t we also seen in New York, in Illinois with the use of nuclear or Xerox the bailout of nuclear power plants. Why do you think states and now the administration– what do you think they’re afraid of If these power plants were to actually close because they just don’t make economic sense?
JON WELLINGHOFF: [00:17:51] Well that’s a good question because if the ultimate fear is the lights are going to go out because the plant closed, that’s never happened yet. We’ve never seen a situation where because of markets working correctly above market participant that could not effectively compete and therefore had to close their facility resulting in the lights going out and there is market fix for that problem. If in fact a plant that is going to shut down is essential for reliability, FERC has in the past and on a regular basis authorized the independent system operators in these markets to put in place what we call reliability (18.44) RMR units that are recognized for short term reliability purposes; they need to continue to stay in the market and they’re allowed to but that’s for identified reliability problem. There’s no blanket problem at any one of these or ISOs and RTOs with respect to reliability or resilience. It’s never been identified and there’s no evidence of any blanket problem that would justify doing this for the massive amounts of coal and nuclear power plants that would be covered under the (19.26) as proposed by secretary Perry. So again, even if– the worst-case scenario i.e. a plant going out of business would result in some of these lights going off were about to happen. There’s a mechanism to take care of that and that mechanism has worked for many, many years so we don’t need a rule. We don’t need any changes in the rules to ensure that we can maintain reliability in the system. There is a method to do that (19.58) got it covered, the markets have got it covered; we don’t need to change the rules to worry about that.
YANN BRANDT: [00:20:06] Just a few years ago Rick Perry was the governor of Texas and just last week Texas utility that’s I believe now owned by Vistra called Luminant announced that they were going to close. In the next few months we’re going to close two coal plants one in Houston and one between Dallas and Houston. Assuming if Rick Perry was governor of Texas and (20.39) comes to CNN and says, “Listen, you know I got to shut these things down because the markets tell– I’m just not getting my return on this and I’m better off closing these plants.” From a political standpoint, what kind of reaction would Governor Rick Perry have to that compared to what he’s having as a reaction as a secretary of energy today?
JON WELLINGHOFF: [00:21:04] His reaction should be that, “(21.08) if you have to close your plants I’m sorry but if in fact those plants can’t produce energy at market rates and can’t provide services to Texans within the market then that’s what the markets for me.” He should be supportive of the market that was the whole point of the 8-page letter that we sent to FERC was that FERC has a long-standing tradition; 25 plus years of developing and supporting markets in this country we shouldn’t start turning our backs on that now. So, Secretary Perry as governor in Texas should be extremely supportive of those markets as market to work very effectively (21.53) Texas as one of the robust, most robust wholesale and retail electric markets in the entire United States. They went to a restructured retail market back in the early 2000s or maybe it might even be in 1999 and that’s been very successful. We’re now in Texas. You can choose among 25 retail providers in most areas except for (22.20) like Houston and in San Antonio and in addition they’ve been extremely successful in driving innovation into their wholesale market by encouraging wind energy to site in that market because in fact Texas was a lot of the four states that had a renewed portfolio standard and as such had very high levels of wind energy. And then as those higher levels of wind energy came into the market, the ERCOT team at the operator level has been extremely competent in integrating that wind in a very smart way. They’ve done that by becoming much more sophisticated as Dallas. We will cast those very low resources forecasted in a timely fashion and ensuring that there are adequate resources to support the entire market at times when that wind energy may not be available now or seen in Texas because of prices again coming down on the overall prices of solar energy; as you’re seeing people starting to come in and build solar plants. In fact, we’ve even seen people build merchants solar plants in Texas for the first time
YANN BRANDT: [00:23:46] And that’s happening because they’re able to go to market traders and get enough of a hedge price by them that is able to pay for the construction and some of the financing for the solar plant. Is that not correct?
JON WELLINGHOFF: [00:24:04] That’s correct—
YANN BRANDT: [00:24:07] The market’s working incentivizing really the lowest cost solution available in the marketplace—
JON WELLINGHOFF: [00:24:15] Yes and I wouldn’t use the word incentivizing. I’d say compensating. They’re compensating the lowest cost provider toward the value that those providers are providing to the market for the market products that you’re able to provide. It’s adequately compensating them and enabling them to be able to develop those resources in those fully competitive markets that are working extremely well in Texas.
YANN BRANDT: [00:24:43] We’re seeing a two different Rick Perry’s these days so if– you mentioned that this would have astronomical cost to consumers because it’s shifting really bad business decisions on to consumers. Define how bad this would be for customers in picking sub-economic power plants as market winners.
JON WELLINGHOFF: [00:25:17] Well, again we know the preliminary estimates are at least ten billion dollars a year in higher market costs in those markets where these plants would be supported. What we don’t know when you talk about really bad as we don’t know what the unintended consequences would be of setting up the room with this 90-day provision and as I said, there may be at a market gas plant so all of a sudden you decide well it makes sense for me to build this diesel tank along the side my gas plant. I may never use it. The diesel may just sit there and it may never be of any real use whatsoever but what it does allows me to get all these above market rates for this clamp is really now is that connect inoperable to run in the market so I’m going to throw that one into the mix as well; and so, you don’t know how much additional flak and (26.17) could come into this whole system based upon this distortion that Perry’s trying to impose upon us and we don’t know the full consequences of that. The cost, the consumers could be much, much higher than this initial estimate that these 10 billion dollars a year.
YANN BRANDT: [00:26:36] I can think of a few ways that that money is better spent in terms of creating a more—
JON WELLINGHOFF: [00:26:44] But we all have to remember; we’ve talked about Rick Perry in Texas, you all have to remember Enron thought they were the smartest guy in the room and so if somebody develops a market distortion and embraces that market distortion, there’s going to be a whole group of other people who going to figure out how to take advantage of that market distortion. They’re going to be people. We’re going to figure out how to milk that for every single dollar the best work.
YANN BRANDT: [00:27:14] Yeah, I can imagine. I want to talk to you because just about as much as anyone about grids. Americans in Puerto Rico are without power I mean just a vast majority of them; we’re talking about a tropical climate, no air-conditioning, no– many of them without access to clean water which is tied to not having access to energy. It’s an islanded grid and a lot of sort of regulatory issues around PREPA but potentially the largest rebuilding in terms of capacity of a power market that at least in the last 30, 40 years in a developed nation. What the path forward for Puerto Rico today and how do we help them?
JON WELLINGHOFF: [00:28:08] Well certainly we have to get power up and delivered as quickly as possible and in part that is going to require sort of rebuilding the archaic systems they have there now in somewhat of a parallel manner; certainly, it is now built but hopefully we can do that in some mechanism it’s somewhat temporary so that also in parallel we go alongside of that and start putting in the grid 3.0 that they really should have because they have an opportunity to rebuild it overall again. I’m not sure that we’re going to get there. I see that there’s conflicting activities that the solar energy association is very involved doing things there; there’s Tesla’s, there’s (29.04), there’s Sunrun, there so a lot of renewable. FERC are trying to do everything they can to help with the sort of modernization process and put in place more robust and more innovative and advanced systems but at the same time I’m not sure those systems can be put in place quick enough to defer or alleviate the need to build up the old system sort of in a similar manner to its previous infrastructure being Central Station plants with though I understand one on the south side of the island, most of the population’s on the north side of the island with these transmission lines in between and all the distribution lines as well. If there’s some way we can circumvent then do an extensive parallel process, it would be ideal but I don’t see a path forward. I’m doing that right now and hopefully we can give as much support and as much financial assistance to those entities who are trying to do the sort of a grid 3.0 part of it right now but you kind of do that like one facility at a time and it’s really slow going. I think Tesla just completed a hospital. If they get down there I saw—
YANN BRANDT: [00:30:44] We’ve seen hospitals and we’ve seen fire stations. I agree with you there’s– we’re juggling grid 3.0 with people that just want to be able to turn their air conditioning on the grid looks like and—
JON WELLINGHOFF: [00:31:04] Exactly, they just want it done today whatever it is. They don’t care what it looks like. Whether it’s the old system or the new system; they don’t care and waiting for that newest best latest thing to be put in place is not an option, is not a realistic option. So we hopefully can put in enough of the new stuff to show people what the potential and possibilities are because up to this point I’m for whatever reason I also was the management of prep up. If it was some other issues related to prep-up of the utility, Municipal utility that oversees Puerto Rico or was some other factor but less than 2% of I understand of the island was powered by renewable energy which just seems ridiculous to me given its location and level of resources available to natural resources, renewable resources that would be available to it. So we need to somehow unleash from these people the potential and possibilities of a distributed, more advanced cleaner, locally sourced grid system that can provide them with a sustainable future but now it seems like there’s no question sort of both systems. We’re going to be moving forward.
YANN BRANDT: [00:32:32] Jon there are two seats open at the FERC, you going back?
JON WELLINGHOFF: [00:32:38] Actually that’s not true. Those seats have been taken [laughter].
YANN BRANDT: [00:32:43] Have never been confirmed?
JON WELLINGHOFF: [00:32:45] They have. Well, I’m not sure the Senate is actually voted on their confirmations yet but the Senate Energy Committee has voted them out of committee. I know that I’m sure. I don’t know—
YANN BRANDT: [00:33:01] They’re not on the website in my defense.
JON WELLINGHOFF: [00:33:03] Yeah McIntyre and I can’t remember the other gentleman’s name but McIntyre’s from Jones Day he’s sort of the new chairman designee although he doesn’t become chairman until the president says he is. Right now, Neil Chatterjee is a chairman of FERC. I had a great opportunity to meet with Neil on the west coast here a couple of weeks ago in fact we gave him a tour of the Tesla factory and also gave him a full briefing on all that Tesla had done with battery storage in Australia and in Hawaii and some of the other places where we’ve done large-scale protests and done large-scale battery work. He seemed to be very interested and engaged and that was very encouraging but no; I haven’t seen the other two get confirmed yet I don’t think.
YANN BRANDT: [00:34:01] We’re going to hold out hope. When you were on the Commission so speaking in terms of next steps on this proposed rule in this FERC docket, how political is the process? Is there a lot of political influence that’s coming your way as a commissioner or are you left alone to do what’s best and then figure out the intent of regulations?
JON WELLINGHOFF: [00:34:23] When I was there at zero, there was no political influence—
YANN BRANDT: [00:34:28] I mean you were originally appointed by the Bush White House, correct?
JON WELLINGHOFF: [00:34:32] I was nominated by George W Bush twice and so I served two terms and for both of those terms I was nominated by Bush and confirmed by the Senate but I was designated by President Obama as chairman. The president designates the chairman among the exceeding commissioners and that’s not a position that needs to be confirmed. You are not confirmed as chairman, you’re only confirmed as a commissioner and I went as a commissioner then the president sites who of the commissioners gets to be the chair of the Commission. So, I served under both administrations; both the Bush administration and the Obama administration. I never got called by the White House about anything ever. I went over to the White House to talk to them about things on occasion that relate more to federal agencies helping us out with sighting of transmission lines and the natural gas lines that kind of thing but we never ever had any political influence whatsoever and it was bipartisan Commission. I served initially with three Republicans and two Democrats and then Obama came in that flipped over to three Democrats and two Republicans. That whole time with the bipartisan Commission, there was no partisanship within the Commission either within the Commission itself. There was none which is good although the existing FERC I have some concerns about, not about the commissioner. I think the commissioners are all good and decent people ones that I know and have had interactions with but it’s my understanding that the Trump administration actually designated and chose for the chairman of FERC the person who’s going to be the chief of staff at FERC and the person who is going to be the general counsel at FERC. That’s never ever happened. I don’t know why there is wider reporting on that but that has never happened in my knowledge of the last 25,30 years at FERC. The chairman at FERC always, always got to choose their chief of staff and their general counsel.
YANN BRANDT: [00:37:07] That’s definitely concerning. Let’s leave it at that and we’ll see how these progresses. We would love to have you on again; always interested in having conversations about energy markets. Maybe next time we’ll talk about the role of utility monopolies and how that looks into the future. Jon, we appreciate you coming on and sharing your experiences and your expertise with us today.
JON WELLINGHOFF: [00:37:32] My pleasure; you’re on anytime. Thank you very much.