The Federal Energy Regulatory Commission (FERC) has released a policy statement declaring it has jurisdiction to “incorporate a state-determined carbon price in [wholesale] markets.”
FERC released the policy statement following a virtual technical conference it held on September 30 on the subject of carbon pricing in wholesale electricity markets. The conference covered a range of topics, including an overview of current carbon pricing mechanisms used by states and regional coalitions, as well as operational and design issues that may arise when incorporating a carbon price into a wholesale market structure.
The conference also featured a panel on the legal implications of integrating carbon pricing into wholesale markets. There, as is so often the case with a novel legal issue, the threshold question was one of jurisdiction—specifically whether and under what authority FERC has jurisdiction to implement carbon pricing. Answering that question in the affirmative, FERC has taken a significant step by signaling it will not reject carbon price proposals brought by states “out of hand.”
To better understand the implications of the policy statement, the following explains why states are pursuing carbon pricing and how the jurisdictional divide between states and FERC informs the issue.
State-based carbon pricing
A carbon price can come in many forms. At base it is a mechanism designed to incentivize carbon emitters to reduce their emissions and to spur the deployment of cleaner forms of energy by internalizing the social costs of those emissions. Two of the most common examples of carbon pricing are: (1) a flat carbon tax setting a price on the production of harmful greenhouse gas emissions, and (2) cap-and-trade, a market-based system under which a government sets a “cap” on the total emissions that can be produced, and emitters then may buy and sell permits to produce emissions within the limit.
As FERC recognizes in its policy statement, many states have adopted laws or regulations setting firm goals for the significant or total decarbonization of their electricity sector. FERC also sees carbon pricing as an increasingly effective option for states developing policies to achieve those goals. Carbon pricing is occurring at the individual state level, such as California’s cap-and-trade program, as well as in regional programs, such as the Regional Greenhouse Gas Initiative in the Northeast.
FERC’s jurisdiction over state-based carbon pricing
FERC cannot dictate how a state implements its energy and environmental goals, but as the issue of carbon pricing shows, a state’s policy preferences can impact FERC’s regulatory authority. This balance reflects the allocation of jurisdiction between FERC and the states.
The Federal Power Act (FPA) draws a bright jurisdictional line between state and federal regulators in the electricity sector. FERC, as the federal regulator, is vested with the authority to oversee “the sale of electric energy at wholesale in interstate commerce” as well as “the transmission of electric energy in interstate commerce.” A “wholesale sale” occurs when a generating resource sells power into regional energy markets so that providers can purchase the power before distributing it to local consumers. These markets are known as regional transmission organizations (RTOs) and independent system operators (ISOs). The Chicago region, for example, is part of the PJM RTO, while the rest of Illinois is tethered to MISO, an ISO.
On the other side of the line, the FPA vests states with the exclusive jurisdiction to regulate power generation, intrastate transmission, and the retail sales of electricity—i.e., the sale of electricity from a local provider directly to the consumer. This basic jurisdictional divide has remained in place since congress enacted the FPA in 1935, even as the electricity sector has grown in complexity.
State-based carbon pricing mechanisms affect the price of power generating resources in their jurisdiction. But those same generators may also sell power into FERC-regulated RTO and ISO markets. Thus, resolving the jurisdictional question is necessary to determine whether a state’s chosen carbon pricing mechanism can be integrated into the RTO/ISO market rules regulated by FERC.
Taking its cue from the Supreme Court’s decision in FERC v. Electric Power Supply Association (EPSA), FERC determined that it indeed has jurisdiction under the FPA to integrate state-based carbon prices into RTO/ISO markets as a “practice affecting wholesale rates.” In EPSA, the Court held that the FPA vests FERC with broad authority over wholesale markets in two key ways. First, the Court affirmed that FERC’s jurisdiction extends to activities that “directly affect” wholesale rates. And second, the Court clarified that as “a fact of economic life,” wholesale and retail markets (i.e., at the federal and state level) are not “hermitically sealed from one another.” So long as FERC “regulates what takes place on the wholesale market, as part of carrying out its charge to improve how that market runs, then no matter the effect on retail [electricity] rates, [the FPA] imposes no bar.” In other words, when FERC acts to improve the competitiveness and efficiency of wholesale markets it is acting within its jurisdiction.
Though EPSA considered the scope of FERC’s jurisdiction in the context of demand response, legal experts at the technical conference, as well as FERC itself, believe EPSA’s holding extends naturally to carbon pricing. In its policy statement, FERC reasoned that a state-based carbon price could “directly affect” wholesale market rules, and, that any action FERC takes to incorporate a carbon price into wholesale market rules would be for the purpose of improving the overall efficiency of the market. FERC framed the integration of state-based carbon pricing into RTOs/ISOs as “another example of the type of ‘program of cooperative federalism’ the Court noted with approval in EPSA” as well as a way to incorporate state efforts to reduce greenhouse gas emissions without impeding the “efficiency and transparency” of the organized market structure.
 Policy Statement, Carbon Pricing in Organized Wholesale Electricity Markets, 173 FERC ¶ 61,062, Docket No. AD20-14-000 (issued Oct. 15, 2020), https://www.ferc.gov/media/ad20-14-000-0 (“FERC Policy Statement”).
 FERC Conferences and Seminars, Technical Conference regarding carbon pricing inorganized wholesale electricity markets, https://www.ferc.gov/news-events/events/technical-conference-regarding-carbon-pricing-organized-wholesale-electricity (last visited Oct. 15, 2020).
 S&P Global, What is Carbon Pricing? (Feb. 25, 2020), https://www.spglobal.com/en/research-insights/articles/what-is-carbon-pricing.
 Tax Policy Center, Briefing Book: What is a Carbon Tax (May 2020), https://www.taxpolicycenter.org/briefing-book/what-carbon-tax.
 Environmental Defense Fund, How cap and trade works, https://www.edf.org/climate/how-cap-and-trade-works#:~:text=Cap%20and%20trade%20reduces%20emissions,pollution%20and%20creating%20a%20market.&text=It’s%20a%20system%20designed%20to,cap%20gets%20stricter%20over%20time (last visited Oct. 15, 2020).
 FERC Policy Statement, supra note 1, ¶ 2.
 Id. ¶ 3.
 See FERC Policy Statement, supra note 1, ¶ 4.
 16 U.S.C. § 824(b)(1) (2020).
 ISO New England, Wholesale vs. Retail Electricity Costs, https://www.iso-ne.com/about/what-we-do/in-depth/wholesale-vs-retail-electricity-costs (last visited Oct. 15, 2020).
 FERC, Power Sales and Markets: RTOs and ISOs, https://www.ferc.gov/industries-data/electric/power-sales-and-markets/rtos-and-isos (last visited Oct. 15, 2020).
 PJM, Territory Served, https://www.pjm.com/about-pjm/who-we-are/territory-served.aspx (last visited Oct. 17, 2020);
 § 824(b)(1).
 Jeffery S. Dennis et al., Federal/State Jurisdictional Split: Implications for Emerging Electricity Technologies, Lawrence Berkeley National Laboratory (Dec. 2016), https://www.energy.gov/sites/prod/files/2017/01/f34/Federal%20State%20Jurisdictional%20Split–Implications%20for%20Emerging%20Electricity%20Technologies.pdf.
 FERC Policy Statement, supra note 1, ¶ 4.
 Id. ¶ 9; see Fed. Energy Regulatory Comm’n v. Elec. Power Supply Ass’n, 136 S. Ct. 760 (2016).
 FERC Policy Statement, supra note 1, ¶ 8.
 EPSA, 136 S. Ct. at 776.
 Id. at 774.
 Id. at 776.
 Id. at 776.
 FERC Policy Statement, supra note 1, ¶ 12.
 Id. ¶ 10.
 Id. ¶ 12.
 Id. ¶ 12.
 Id. ¶ 17.
 Id. ¶ 17.