Deep Dive Episode 242 – A Global Energy Crisis and the FERC [Panel Discussion]

[Music]

 

Introduction:  Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.

 

On October 19, 2022, The Federalist Society’s Regulatory Transparency Project hosted an in-person event featuring a panel discussion on energy regulation and reliability, “A Global Energy Crisis and the Federal Energy Regulatory Commission,” a discussion of challenges and opportunities. The following is the audio from the panel discussion. Please enjoy.

 

Steven Schaefer:  Now to introduce our panel, first our Moderator, Marc L. Spitzer. He is a Partner at Steptoe & Johnson. Marc’s practice extends to power, gas, and oil proceedings before FERC, and he has proven experience in all energy sources. Spitzer served as a former commissioner on the Federal Energy Regulatory Commission from July 2006 until December 2011. 

 

Next, we have Michael Buschbacher. Michael is Counsel at Boyden Gray & Associates PLLC. Before joining the firm, Mr. Buschbacher served as the U.S. Department of Justice as Counsel to the Assistant Attorney General for the Environment in the Natural Resources division where he advised senior department leadership on the division’s highest profile environmental and regulatory matters. He served as lead counsel in a number of lawsuits in negotiations and was the principal drafter of significant policy memos as set forth the proper scope and procedure for the enforcement of federal environmental law. Buschbacher earned his J.D. from Notre Dame Law School and his B.A. from Indiana University. 

 

Next, we have Jennifer Chen. Jennifer Chen is the Senior Manager on Clean Energy for the World Resources Institute. In this role, Jennifer works to help shape electricity transmission and governs policy with an eye towards modernizing grid infrastructure, scaling up clean energy, and driving cost effective electrification. She has written and presented on these topics including testifying before the U.S. Congress and the U.S. Federal Energy Regulatory Commission. Previously, Jennifer led federal electricity policy work at the Nicholas Institute, a think tank for environmental policy solutions at Duke University. She was an attorney with the Natural Resources Defense Counsel where she spearheaded environmental NGO coalition efforts to advocate for an efficient and flexible power system. She earned her J.D. from New York University and her PhD in Physics from the University of Chicago.

 

Next, we have Jim Wedeking. Jim is Counsel at Sidley Austin LLP. At Sidley, Jim is an environmental litigator representing large companies in the defense of criminal and civil enforcement actions, toxic tort defense, and complex civil litigation. These clients have included large companies in the oil and gas, electric, power, chemical, manufacturing, mining, and automotive industries. Selected representations include representing a natural gas pipeline company in a multi-forum Clean Water Act and NEPA litigation related to construction of an interstate gas pipeline. Jim’s work on environmental litigation has earned him recognition as a rising star in environmental litigation in 2014 and 2015 by Washington D.C. Super Lawyers Magazine. Jim earned his law degree from the Catholic University of America cum laude and a B.A. from the University of Maryland. 

 

Marc, over to you.  

 

Marc L. Spitzer:  Thank you very much, Steve. And I’d like to thank, again, The Federalist Society for this wonderful venue for this forum and for your hospitality. The other preparatory comment I’ll make is during my time in electro politics, I was advised, as we’re all budding politicos, not to follow a child act or a dog trick act. And given the introduction to FERC 101 by Commissioner Danly, I’d add don’t follow Commissioner Danly and try and talk about FERC. 

 

Well, I went to law school between the years of 1979 and 1982, which governs my world view. And in the discussion programs, challenges, and opportunities, I’m one who looks in the Reagan optimism view of the world, perhaps rose-colored glasses but perhaps not. I look for opportunities as opposed to challenges, and Commissioner Danly’s raised some issues with the current governance of FERC. I’m going to take a bit of a big picture view and then get more granular and then we’ll have our panelists also provide their overarching views for a few minutes. And then we’ll get into the Q&A. 

 

The opportunity arises from recent events. So the tragedies that occur every day commencing in February of this year are instructive in the transcendental and global significance of energy. I had a discussion with some folks from Europe earlier before lunch about the closure of the German nuclear fleet in the wake of Fukushima and that happened when I was at FERC during my tenure and the decommissioning of assets that had been paid for by the people of Germany. They were producing reliable energy at just and reasonable rates that happened to be zero emission. The closure of those facilities, to the detriment of Germany, ended up harming the rest of the world. And the consequences of that ill-considered decision persist to this day.  

 

My mentor in the state senate used to say legislate in haste, regret at leisure. And that’s instructive for the present times. So the international attributes of the production as well as the sources of energy and the consumption are now manifest to all, and the real world consequences can be dire if handled poorly. I’m going to make an optimistic argument in favor of the opposite that instead of a vicious cycle of energy poverty, we can have, through the know-how and technological supremacy of the United States in terms of energy, a virtuous cycle of energy abundance.

 

Now, as Commissioner Danly noted, energy has historically been produced through a hybrid of market forces and governmental regulation. And at the essence of it, government, particularly good government, is about the careful and considered balancing of competing interests. And Commissioner Danly alluded to the competing interests of the customers and of those who produce energy. And that balancing needs to be done based on a lawful record in accordance with the governing statutes, the Natural Gas Act and the Federal Power Act. And those statutes differ in material terms because the nature of the energy on the power side is demonstrably different from that on the gas side. And you would expect because of those differing forms of energy, in terms of their production, that the statutes would vary and the regulation would vary.

 

I know Commissioner Danly’s got a three-legged stool that he talks about. And for some of the veterans who’ve been around for a while that have heard my FERC speeches, please bear with me again as I discuss my view of the three-legged stool in terms of energy regulation. The first leg is infrastructure. Without energy infrastructure, we cannot accomplish our goals. The FERC cannot achieve its mandate of a reliable supply of natural gas and a reliable supply of electricity at just and reasonable rates. Without infrastructure, there can be no energy security. 

 

And in terms of challenges, increasingly over time and it got even more dicey after I left the commission, we are in a NIMBY world. And perhaps in the last century, NIMBY-ism protected those who were extremely well-connected politically and quite affluent to avoid having energy infrastructure in their back yards. But the proliferation of social media has led to NIMBY-ism being universal. It’s not just in the United States but it’s a particularly trenchant and particularly destructive problem in the United States in terms of difficulty of citing infrastructure. And Commissioner Danly alluded to the challenges on the natural gas side, but I would submit there are challenges as well on the electricity side. 

 

When I was a state commissioner in Arizona, I took office in the midst of the California energy crisis and our state was short on both transmission and generation. And I was an elected commissioner, so I had to seek public approval for my acts. And I was required, I felt, by the Constitution of Arizona to build power plants and transmission lines in peoples’ backyards, which tended to piss them off. And yet, having done that and secured reliable energy for my state at just and reasonable rates, I was able to successfully achieve re-election. So it can be done, but we need to understand the challenges both on the gas side and on the electric side. 

 

The second leg of the stool is markets, energy markets. And in the Reagan era, we transitioned to market rates, both for power and for gas. So there was a conversion and it was particularly manifest in FERC Order 636, which was a 5-0 vote from the commission that led to the creation of the natural gas markets in the United States as they presently exist. And the natural gas markets in the United States are the envy of the world. But it’s necessary to move methane from point A to point B, and that continues to be a challenge. 

 

We have wonderfully functioning markets. We’ve successfully moved from complete regulation of the commodity prices to a free market, but the free market can only exist with all three legs of the stool intact. And Commissioner Danly raised a number of issues that I’d like to — the balance of the panel to talk about in terms of how we optimize the value of the Shale Revolution, which was a product, again, of bipartisan legislation in the 1990s that created, in my judgment, trillions of dollars of value through the Shale Revolution to the people of the United States. And the value of the commodity that was produced by Shale Revolution is now being exported to nations across the world greatly in need of this energy commodity.

 

The final leg of the stool is the rule of law. And I’ll give a shout out to one of Commissioner Danly’s former partners who litigated the case of Morgan Stanley Capital Group, Inc. v. Public Utility No. 1 of Snohomish County. It was a case that arose from the California energy crisis. And I’ll cut to the chase and say in that decision, the United States Supreme Court ruled in favor of a doctrine called Mobile-Sierra that FERC cannot willy-nilly overrule contracts. It technically applies, strictly speaking, only to the standard of review of a bilateral contract between a purchaser and a seller of electricity under the Federal Power Act. 

 

But I, during my tenure at the Commission, broadened that aspect of this Supreme Court decision from 2008 to rule of law. And I’m informed by one of my law partners from Arizona who went to Ukraine shortly after Ukraine freed itself from the Soviet yoke, and he was charged with writing a commercial code for Ukraine, and he found that due to the inability or unwillingness or both of the courts in Ukraine to enforce law of contracts, commerce could not exist. And he could write the most marvelous code since Hammurabi, absent judicial willingness to enforce bilateral contracts, commerce could not exist. And similarly, absent FERC and the other courts of the U.S. enforcing laws of contract, you cannot have properly functioning energy markets. 

 

So I’ll just conclude with my optimistic Reagan era sunny smile view that I believe that the United States will enjoy and will be able to export to the rest of the world reliable, affordable, and sustainable energy within a legal framework that will unleash innovation through competitive market forces. And now, I’ll turn it over to Michael, Jennifer, and Jim for their remarks, and then we’ll move on to some interactive discussion. Thank you. 

 

Michael Buschacher:  All right. Thank you. It’s an honor to be here. And first, a disclaimer, I do a lot of energy and environmental work, but I am not a FERC lawyer. My interest here is in discussing FERC as part of a broader green energy transition that we’re supposedly living through and the Biden’s administration whole-of-government approach to addressing climate change, which as Commissioner Danly pointed out, FERC is attaining new prominence in that effort. 

 

And there’s a lot to say about it, of course, but for my opening, I’m going to focus on something I’ve written about with my colleague Taylor Myers, who’s actually here. It’s got a great title. It’s called, “FERC Gaslights America.” Taylor came up with that, not me, so I feel like I can brag about it. And it looks at how FERC’s climate idealism is weakening much of the nation’s power grid. 

 

So different power generation systems have different strengths and weaknesses. And while there’s a whole lot that’s really great about wind and solar, one challenge about using them is that they’re simply less consistent and less reliable than ultra-stable sources like coal or nuclear. So if you add more renewables into the mix, which we’re doing, ensuring reliability gets more challenging because the same issues that lead to demand spikes, extreme cold, extreme heat, storms and the like, those issues tend to disable wind and solar when you need them most. 

 

Many parts of the U.S. have not adapted their approach to reliability sufficiently to have a workable integration of renewables. And so we currently face what the author Meredith Angwin has called the fatal trifecta: over-reliance on weather-dependent solar and wind, just-in-time natural gas backstops that are not super reliable, over-reliance on imports of electricity from neighboring states. To quote Emmett Penny, “If the sun doesn’t shine, the wind doesn’t blow, the gas doesn’t flow, and your neighbors don’t show, you’re out of luck.”

 

And that is exactly what happened in Texas when Winter Storm Uri hit a couple years ago, and it’s what happened just a few weeks ago in California as the sun set and the solar panels stopped working during the recent heat waves. And this is a really big deal. NERC has estimated that two-thirds of the U.S. currently faces a heightened risk of power outages. And we’re on track for what I’m afraid may be a very serious crisis indeed. Hundreds died in Texas in 2021, and it cost about $300 billion. But if a similar crisis happens in the Northeast, to which I’d say is more likely than not at this point, I think it’s unfortunately likely that thousands of people will die freezing to death. 

 

Why has this happened? I think there are two main causes. The first is the way in which the energy market has changed over the last two decades or so. Historically, reliability was in straight through direct regulation of traditional vertically-integrated utilities, but more recently, we’ve seen the proliferation of regional transmission organizations and independent system operators, RTOs and ISOs. And these coordinate transmission primarily through holding auctions to determine what power plants can most cheaply meet demand at any given time. And these aren’t really markets in any kind of naturally occurring sense, though. They’re a sort of quasi-governmental creation. 

 

And one thing that’s — well, it’s relevant here, is that it’s become increasingly clear that this system does not have the tools to adequately punish and discipline those who do not meet their contract obligations and fail to deliver on what they’ve bid to provide to the grid. And the second reason ties directly into this which is that we give truly enormous subsidies to renewables. And that allows them to artificially out-compete sources like coal and nuclear. So wind and solar are getting to be a bigger part of the mix but without a sufficiently robust backstop to ensure that we’ve got reliable dispatchable energy. 

 

So thus far is just a wonky example of how complicated regulatory system, even one that’s market-based, can lead to market failures. Where I think things get really messed up, though, is in how FERC has been responding to the problem. Instead of being forthright about this, FERC Chairman Richard Glick has blamed climate change. So, for example, he opined last September that “the main threat to grid reliability is extreme weather associated with climate change: extreme heat, record-setting cold, droughts, and the like.” He also has said, “Make no mistake, climate change is the reliability challenge we face. If we fail to take serious action to mitigate climate change, we are signing up for ever-more serious reliability problems in the years ahead.” Thus, Glick has argued we should have the retirement of coal fire generators which he has said exacerbate the intensity and frequency of these extreme weather events.

 

So in other words, rather than fixing dysfunctionalities in the regulatory system to strengthen the grid, Glick’s way forward is to reduce global temperatures. I mean, good luck with that. It’s also not true. Climate change is not what is driving the reliability crisis. Cold snaps, heat waves, they’re not new and perhaps they’re getting worse, perhaps not, but that’s irrelevant. Who cares? Like Dubai, is much hotter than the U.S. but they have a reliable grid. I think therefore Commissioner Danly was exactly when he responded to Chairman Glick that we can’t blame the weather. The problem is the subsidies for renewables messing with the market. 

 

And what makes this whole approach so perverse is that the prescription for our current woes is more wind and solar, right? Retiring the coal plants and putting more wind and solar online. And then I suppose when this problem gets worse, we’ll be told that we need an even higher dose. Chairman Glick, just a few days ago, a few weeks ago, said about New England that what they need to do is to build more transmission and offshore wind. Transmission, yeah, but I’m not sure that offshore wind is going to fix the problem. 

 

So blaming climate change for blackouts in this way isn’t just misleading. I think it’s a kind of regulatory Munchausen by proxy. To quote C.S. Lewis in a sort of ghastly simplicity, “We remove the organ and demand the function.” Now, to be fair, plenty of folks, including Chairman Glick, recognize that the grid needs to change if we are going to increase our reliance on renewables. The two main solutions we’ve seen are to build up transmission infrastructures so that if there’s a lull in one place, it can be met with electricity from a different part of the country. And the other is to build battery banks. Both solutions are very expensive and deeply problematic. 

 

To put that in perspective, ISO New England, which definitely wants to head in this direction, has estimated that its systems reserve generation capacity would need to increase from the current 15 percent to 300 percent by 2040. This is just going to be cost prohibitive as far as I can tell, and I’m not even confident that it could be built. You have the NIMBY-ism problem that Marc just talked about which is endemic and has already prevented construction of transmission in the Northeast.

 

But whatever benefits, even if it can be done, whatever benefits batteries and increased transmission may have, they’re a long way in the future, whereas increasing reliance on renewables is continuing at pace. And the tragic irony is if we continue in this way, I think we’re not even going to help address climate change. People will not tolerate being left to freeze to death, and as we’re seeing in Europe, the response when that happens is people switch to coal. And there, it’s brown coal. 

 

But it does not have to be this way. We have a technology that can reduce greenhouse gas emissions, improve the grid, and cut costs. And that’s nuclear fission, which is the cheapest, cleanest, safest, and most reliable way to generate electricity. But we’ve basically prohibited the development of new nuclear generation since the mid 70’s. We may be turning the corner on that, but we’re way behind

 

Unless we lift the irrational regulatory barriers and properly incentivize for reliability, I think we’re just in for a lot of blackouts and a lot of coal. And to get back on the right path, I think we have to admit that we’re on the wrong one. And I think on this point, it’s not just government officials who need to be more forthright, it’s also industry and NGOs. Climate idealism has gone from puffery to policy, and they’ve kept nodding their heads and furrowing their brows. If you look at every conference, every report, every regulatory comment, every bit of hearing testimony, you’ll see the same green energy transition talking points. 

And if you question any aspect of this transition, you risk being labeled a crank or just a bad person. And that needs to stop, I think. If we don’t, I think we risk falling into what philosopher Eric Voegelin dubbed Gnosticism, a kind of misplaced idealism that holds that the world should be different than it is. He writes, “In the Gnostic dream, non-recognition of reality is the first principle. As a consequence, types of actions which in the real world would be considered as morally insane because of the real effects they will have, they will be considered moral in the dream world because they intended an entirely different effect. The gap between intended and real effect will be imputed not to the Gnostic immorality of ignoring the structured reality but to the immorality of some other person or society that does not behave as it should according to the dream conception of cause and effect.”

 

Rejecting climate idealism means facing some rather difficult truths about what reality is actually like, and it probably means facing some amount of push back and criticism. But if we care about human welfare and if we care about actually protecting the environment, as I very much do, we’re going to have to face the music and make some hard choices. 

 

Jennifer Chen:  Hi everyone. Thank you for inviting me, Federalist Society. I’m really excited to have this conversation today because I wanted to learn a lot more about what you’re thinking across the aisle and across the spectrum. So I come from an environmental perspective, but at the same time, I can’t represent everybody on that side. But I think we have a lot in common. And I don’t have a lot of notes jotted down because I wanted to listen first and try and identify some of the common elements of what we’re thinking and try to see how we can come together to really push ahead on solving some of the problems that are immediately before us.

 

So thank you for your remarks, Commissioner Danly and two former commissioners, Spitzer as well as Michael. I heard a lot of things that we do have shared principles. So we want a cost-effective power system. We want to make sure that it’s reliable in the face of all of these new challenges, whether it’s new resources coming online. Demand is changing. We’re going to be electrifying and we do have a lot more extreme weather. And we want to be responsive to public policy. The government does have to move together in lock steps so that different agencies are not at lager heads with each other.

 

So just to go back to a couple of these points, I do want to emphasize the importance of the demand side, customer behavior, electricity customer behavior, in ensuring that our power system is reliable because so far, we’ve been talking a lot about supply side resources and we’re missing out on half of the equation. And this is part of the equation that’s very cost-effective. We’ve seen demand side resources come out when the California heat wave was threatening another wave of rolling blackouts back in 2020, the summer of 2020. And I would say that there was some demand side that helps with the Texas blackouts too. We talk about the town side of gritty and exposing customers to prices, real time prices.

 

On the one hand, we do really need customer education and protection. But on the other hand, customers responded. They turned down their thermostats to 60 degrees when the grid was on the edge of cascading blackouts. And so a question is how can we learn from these experiences? It shouldn’t take a governor to get out there to issue an emergency alert before customers will respond. There should be something built into the markets. There should be a way to compensate for this actually quite cost-effective resource. So that’s one thing.

 

On reliability, we have to remember that our system cannot be built out to be 100 percent reliable all the time because to do so is just — I don’t know how much that would cost. The system is built out to withstand all events except for one-in-ten-years types of events. So events that are so infrequent that they would just happen on that level of frequency. So there will always be emergencies, and to really be able to address these emergencies, we have to make sure that customers are there and they know how to respond. So we know this with fire drills, for example, right? Or I don’t like to say this, but we’re training school kids to learn how to respond to active shooters. But things like this are going to happen so we need to make sure that customer behavior is ready to respond these emergencies.

 

So on the next point — oh, I’m sorry. NERC. The recent long-term reliability analysis or assessment, NERC does this on a regular basis. They do a long-term reliability assessment every year. They do one for the summer, every summer. And the latest assessment, they did say that we do have enough resources to sustain the grid under normal conditions. But, of course, there might be a new normal and we do have to plan for that. So I think that’s the often quoted “two-thirds of the United States” has to be thinking differently about that. And it’s true. We have to think about what we really mean about resource adequacy.

 

The demand side is a critical part of that. It’s about flexible resources that can respond to these types of events because we know that any kind of resource can fail. So power plants, sometimes they’re not able to function if it’s too hot or if it’s too cold. Pipelines might not be well enough insulated, and we’ve seen that in the past. We’ve seen that in Texas. 

 

On cost effectiveness, we do want to make sure that our markets work well. And certainly, having the incentives in place is critical. So PJM, back in 2014, after the Polar Vortex, did go through and put together a set of reforms that provided bonus payments to resources that showed up when they really needed them in emergency situations. And they penalized resources that were receiving payments to be there but didn’t show up. And so that is one form of market reforms that could be helpful. But we also have to make sure that the markets can include all the different resources that could be there to provide that reliable service.

 

So on the public policy piece, we’ve been thinking and talking about the need for gas in the E.U. and the war in the E.U. and helping our allies across the seas. At the same time, I’ve heard a number of times that the Natural Gas Act is here to ensure that Americans have a reasonable amount, they have a reasonable access to natural gas. And that is the purpose of the Natural Gas Act. So I think we have to think about what we really mean when we think about purposes of the Natural Gas Act, the Federal Power Act, and what we mean by public policy in the public interest. There’s certainly a balancing that needs to be done and we might not be able to rely on the original interpretation there of these pieces of these statutes. 

 

So maybe just to talk a little bit about long-term versus short-term goals because we do have a lot of — we are thinking about reliability. We do have a changing resource mix and a changing demand as well as threats to the grid. And in the long-term, we know that planning is really critical. So this could be planning for transmission. Natural gas pipelines don’t see the same amounts of planning that is required of transmission. 

 

And just to provide a little bit of an analogy, when you drive down the highway, the federal highways, and you get to a state border, you’re welcomed into another state. There’s no disconnect because this entire highway system was planned on a larger scale. But if we allow planning to only come up from the bottom up, the problem is that utilities have an incentive to monopoly vertically integrated utilities, have an incentive to ensure that if they build more, they can rate base more. And if there are transmission lines that connect their system with other systems, then they actually don’t need to build as much to retain reliability.

 

And so there is an incentive against robust transmission planning on a regional scale and on an inter-regional scale. And so just to use that same highway analogy, there is a role when there’s a failure for planning on larger scales to occur. There is a greater efficiency that can happen, and this planning does require studies. We have to look at all of the benefits. We have to look at all of the costs. And if we can get the stakeholders to table early enough, there should be less resistance further down the road. 

 

So planning’s important on the long-term, and on the short-term, we really do need to maximize what we can do with existing resources. Right now, we don’t know what’s out there in terms of underused utility transmission rights of ways. And in certain regions where we really can’t establish new rights of ways for transmission, the last resort, apparently, is to make better use of existing rights of ways because the wires that are running across existing rights of ways, you can actually expand upon them. You can reconductor. You can put more up to increase the capacity that’s transmitted along these swaths of land. 

 

So when we’re asking for more of landowners, of farmers, and different communities, I think it really helps to be able to say look, we’ve really made the most of what we’ve already asked of you, of what we’ve already condemned and taken from these landowners and communities. So I think these are just some thoughts that I want us to get out there. And I know that there are going to be a lot of responses. And so I would love to hear your thoughts on that and think about how we can forge a consensus moving forward. Thank you.

 

Jim Wedeking:  Well, thanks for having me here. I’m an environmental litigator which means I don’t know anything about electricity markets, and I’m currently writing summary judgment briefs to defend the permits for Vineyard Wind which will be the first offshore commercial wind turbine farm. So I’m not going to bad mouth offshore wind, but I’m a mercenary. I’ll defend whatever permits for anything you want to build. 

 

Recently, I’ve been defending permits for natural gas pipelines though. Just a couple of quick news articles, one from October 16. This is from MSN, hardly a right-wing broad sheet. “A change in energy distribution overseas is predicted to leave the region with inadequate access to the natural gas supplies needed to operate power facilities throughout the winter, making periodic blackouts all but a certainty.”

 

A few weeks later, Connecticut examiners said that New England customers are facing record high energy bills for gas and electricity. Although it started in the beginning of the article to blame the war in Ukraine, it did admit that “the region already walks a fine line each winter as demand for gas from our powerplants and gas for our heating strain the capacity of pipelines and force the region to import liquefied natural gas by tanker from abroad.”

 

Neither of those stories mention the Constitution Pipeline, the Millennium Pipeline, Northeast Upgrade Project, Northeast Supply Enhancement Project. These projects combined would’ve brought 1.9 million dekatherms of natural gas to the Northeast market per day. I’m not a FERC guy. That sounds like a lot of gas to me, I assume.

 

Each of these projects were killed by the State of New York using an environmental law that not a lot of people know much about called Section 401 of the Clean Water Act. Section 401 of the Clean Water Act conditions every federal permit or license including one from FERC to build a pipeline, an interstate natural gas pipeline, on making sure that the discharges from this project that go into a state’s waters comply with an EPA-approved water quality standards. 

 

When you think about it, that’s not crazy if you want to build a nuclear power plant in Maryland and end up dumping a whole bunch of really nasty stuff in the Chesapeake Bay, Maryland should have something to say about that. That’s okay. If the state grants what’s called the water quality certificate under 401, it can impose requirements to make sure the project is complying with the state’s water quality standards. But here’s the big kicker, if the state denies the water quality certificate, then a federal agency cannot issue the permit or license. That means FERC is prohibited from authorizing the natural gas pipeline to be constructed. One state can have that veto power. 

 

The fact that a state can veto a natural gas pipeline that goes through several states is really not debated. What’s debated is the breadth of that veto power. So New York in cooperation with a number of environmental groups decided this statute was going to be its key to blocking natural gas pipelines going from West Virginia and Pennsylvania into the Northeast. The fact is you can’t draw a line from [inaudible 38:13] into, say, Massachusetts without going through New York. And they weren’t shy about it. Governor Cuomo in his 2017 State of the State for New York said, “We must double down by investing in the fight against dirty fossil fuels and fracked gas from neighboring states.” 

 

So this was not about necessarily what goes on in New York. This was one state trying to decide an entire region’s, really, electricity portfolio. No gas for you either inside my borders or outside of it. So the way this worked, and this was done by New York DEC, the way to really kill a pipeline using 401 is they started with the legs. Applications were never complete. There were always demands for more information. Companies were told to renew their applications, just pull it back and resubmit it, or else we’re going to deny. 

 

The D.C. Circuit, to a degree, put a stop to this in a case called Hoopa Valley in 2019. It said that Section 401 has a provision that says the state must grant or deny the permit application within one year of receiving the application. If it does not do that within one year, then the state is now out of the picture. It has waived the ability to make a decision and the pipeline goes on through.

 

This was actually a big deal because it stopped the withdrawal and resubmission scheme that in the case of Hoopa Valley was actually voluntary, but in a lot of other cases with pipelines, it’s essentially exceeding to blackmail. Withdraw and resubmit or else we’ll kill your project. So afterwards, DEC, no longer able to just interminably delay pipelines, started issuing outright denials. And its position said despite the fact that 401 says you can deny if it’s going to offend your state water quality standards, DEC’s position is we can deny them for any reason that we want to. 

 

Often, the reasons for denial were things that were squarely in FERC’s jurisdiction. So New York would file comments with FERC, especially with the NIBA proceedings. You got to look at this. You got to look at that. There’s no demand here, yet they’re issuing water quality certificate denials under the Clean Water Act saying that there’s no true long-term demand for the natural gas. The pipeline is inadequately buried. They don’t like the blasting plan. They demand different construction methods for how they cross rivers. Demands to reroute the pipelines.

 

Now, I’m a piker when it comes to FERC, but if I think where is the pipeline going to go, that’s a quintessentially FERC question, not a Clean Water Act question. I guess this really ticks me off as a procedural administrative lawyer to a degree. New York puts these questions to FERC in its comments. They get an order back from FERC saying we disagree with you for the following reasons. New York doesn’t do what everybody else does. It doesn’t file a, what is it, a rehearing — request for rehearing. And then when that gets denied, they’re off to the D.C. Circuit like normal litigants. No. They just say well, up yours FERC. We’re just going to deny on these same grounds anyway. We can never lose under this situation. And we don’t’ have to actually appeal the laws. That must really be nice as a litigator. 

 

One problem with this scheme that allows for, really, individualized regulation, that’s a dangerous thing when regulators can look at a person or a project and make up the rules that are going to apply to you on the fly, that’s a problem. And it was a problem with DEC. They were denying water quality certificates based on standards that were impossible to meet, such as no disturbance to riverbeds that needed to be crossed. No disturbance to state wetlands that need to be crossed. Zero discharge standards for dirt. Literally, one grain of dirt goes into water, you’re in violation. And if you can’t prove you can avoid putting a grain of dirt in the water, we’re going to deny.

 

There are all kinds of other crazy things that have nothing to do with what’s allowed under the Clean Water Act: state-listed threatened species, disturbing shellfish beds, and my favorite, the folks that will be receiving your natural gas will be emitting natural greenhouse gas. Therefore, we’re denying you under the Clean Water Act. Some pipeline companies laid down when they got denial. They just gave up. 

 

This is really not a pipeline company fighting DEC like two sword fighters. This is a pipeline company fighting, like, 50 or 60 suits at one time and all kinds of forums. So getting your water quality certificate denied, given the fact that it really kills the FERC permit, that’s just really like the coup de grâce. For a lot of pipeline companies, they’ve been litigating the right to build their pipeline for six, seven, eight years, and this is it. They just can’t take anymore.

 

A couple fought like crazy. We had a bunch of interesting jurisdictional questions answered. For instance, you can’t file challenges in district courts. There was a state law case about whether a company can still use imminent domain while it’s appealing DEC’s denial of a water quality certificate. Apparently, you can. Second Circuit made a lot of interesting law but at the end of the day, the Second Circuit largely affirmed most of DEC’s approach to this. I will say that out of all the pipeline companies that took on a DEC denial, only one beat them, beat them twice in fact, which I assume is due to the brilliance of their outside counsel. 

 

But the Trump administration decided to get involved after seeing this, and they did 401 regulations. Now, EPA really doesn’t have any direct role in the 401 process. In fact, that’s part of the point of 401 is that it gets the states involved about what goes through their borders and is discharged into their waters. But the EPA did a regulation about how it interprets the requirements of Section 401. The bottom line is that to the pipeline industry, it granted, really, what they already had from the Hoopa Valley decision. They affirmed that state must grant or deny within one year of receipt, not some of the other crazier interpretations that DEC and some of the environmental groups did. 

 

But amazingly, it gave pretty much everything else to the states, including DEC. I think that it really mismanaged the way it read, especially Section 401(d), and it largely allowed them to deny a water quality certificate for things unrelated to EPA approved water quality standards. Amazingly, the environmental groups howled that this was an absolutely awful regulation and made it a priority to get it reversed. 

 

They immediately challenged it. California District Court vacated it after EPA refused to defend it because now the administration changed their plea in state court to stay the district court’s order pending appeal. They proposed a new Section 401 rule that is even broader than the one before it, amazingly.

 

So in the meantime, states and environmental groups have gone about other circuits trying to erode the Hoopa Valley one-year decisions, with some success in the Fourth and Ninth Circuits. I think at the end of the day, as people begin to really gasp when they open their electricity bills and they can no longer take it for granted that when they flip a switch in the wall, lights going to come on, the notion of actually getting them gas to literally keep the lights on is looking dimmer than it has in ever, I guess. 

 

It is kind of odd because in this country, we always believe in progressing upwards. Every generation to some degree is supposed to do better than the last. My grandparents always knew that if they flicked a switch, a light was going to come on, at least as when they were adults. I’m not sure my kids will have that luxury. 

 

Marc L. Spitzer:  Mr. Chair, if I may pose to my colleagues two inter-related, arguably leading questions, perhaps seeking consensus. Number one, can we agree that there are pluses and minuses with all fuel sources and all technologies and that no one fuel source or technology ought to be arbitrarily removed from discussion? And then secondly, this is The Federalist Society and I’m a former state legislator as well as state commissioner. So I’m appreciative of the appropriate role in the federal system states’ rights. Can we agree that the vox populi, the political forces in the states ought to be accorded more primacy on the power side than on the gas side due to the history of the relevant statutes and the history of the industries? 

 

Michael Buschbacher:  Yes, on both. I agree that I’m much more worried about the ability to build pipelines than I am about coordinating transmission and making a national highway system for transmission. And then I certainly agree that all kinds of energy generation, they have all good things and bad things, and many have a lot to offer, and we should be opening our eyes to all the opportunities that are out there. 

 

Jennifer Chen:  Yeah. So FERC has historically been known as a fuel-neutral agency. It doesn’t take any — it’s not supposed to look at any particular fuel but maybe characteristics and certainly taking into account the rest of the administration’s goals is something that it should facilitate as an agency but not necessarily come out with its own policy on what fuels to promote.

 

Certainly, we’ve spoken a lot about subsidies for wind and solar and some of these newer technologies, but there are still a lot of subsidies for all of the other technologies, all of the other fuel sources. So if we were to remove subsidies, I would say remove them for everybody. The one place where I think subsidies are really important are for new technologies that have not achieved scale, that have not bridged the valley of just, that are projected to become cost-effective, cost beneficial. So I think there is a place for subsidies because we want to promote innovation but just be careful of including all subsidies when we talk of wind and solar subsidies. 

 

On the last question on states, I think they absolutely should have a voice at the table, and it’s not just about transmission versus natural gas. I think we see a lot of these battles in the courts over natural gas permitting because there’s not that same kind of — before you get to the courts, what are we doing to try to avoid litigation? Is there enough planning? Are there sufficient forums for these states to engage and to come out with a solution ahead of time? 

 

So I think transmission is a good thing to prioritize because it’s a fuel neutral infrastructure. And natural gas pipelines, it clearly prefers a certain type of fuel. 

 

Jim Wedeking:  I’m a litigator so I’m an idiot when it comes to policy. To me, it seems common sense that every type of fuel’s going to have different aspects to it from cost to waste. That’s fine. I think that when it comes to, taking the second one first, when it comes to natural gas pipelines, we talk about interstate pipelines, the view of states is obviously complicated. So, like I mentioned, if Massachusetts needs gas and New York wants to block it, well, what does that mean when you ask what kind of voice should states have? Obviously, one state, just by sheer geography, has more voice than another. 

 

As far as electricity markets, all I know is that states are probably better off because when people make stupid decisions, they’re contained. Imagine Enron happening everywhere all at once because the decision’s vested in some giant body that had nationwide prominence. So when they screw up, let everybody point and laugh at them and not do that thing.

 

Marc L. Spitzer:  All right. And I guess we can take some questions from the floor. I just wanted to give two brief disclaimers that I endeavor because I and my firm practice before FERC to stay away from specific cases. And then you notice my surname and the State of New York came up. A distant cousin of mine, second cousin three times removed, had an episode at room 812 of this hotel. And I am not affiliated with this distant cousin. I did not go to an Ivy League law school. I am a Republican, as you probably surmised. So we have questions from the floor. Please. 

 

Todd Snitchler:  Am I the first one up?  

 

Marc L. Spitzer:  You are recognized. 

 

Todd Snitchler:  All right. Thank you, sir. I am Todd Snitchler with the Electric Supply Association. Like Mr. Spitzer, I am a former state regulator and a state legislator, so I take the states question seriously. As we look at how these situations have evolved over probably the last 15 years, the common denominator — I was trying as I was listening to your comments, what’s the common thread that all of you pulled on? And it was states and state decision and state authority and states creating issues, states trying to solve issues. I’m wondering if you can reconcile how states having primacy in almost every setting is creating more problems than it’s solving. 

 

And I’ll offer you the arsonist’s dilemma which is places like New England where we’ve talked about a lot, state policy choices have driven their retirement of resources that could keep lights on and would ensure reliability. But those states have chosen to go a different direction and then those states have turned to the NGO and said why can’t you keep my lights on and why are my rates so high? 

 

So we’re following a state choice paradigm which is resulting in reliability challenges, forcing Commissioner Danly and others to have to deal with reliability concerns at FERC. At the same time, those states don’t want to assume responsibility for resource adequacy and are leaving that to the whipping boy which is the RGO. And far be it for me to defend RGOs, they can do that themselves. But how do you reconcile that tension? There’s a federal component to this to be sure but there’s also a state policy decision which leads to policy outcomes that are unfavorable. I think, Jim, as you said, if people are going to have no gas in the winter, that’s a bad outcome. 

 

How do we solve that? How do you reconcile that tension and come up with something that’s workable, short of some type of federal mandate? 

 

Marc L. Spitzer:  Todd, thank you for your question and good to see you again. My brief reaction is somewhat based on experience and it’s granular. The regions are different. The states are different. In California, bless their souls, they appear to be willing, by ballot, by vote of the people, to absorb higher rates and thereby higher costs to promote green energy. In New England, by distinction, you described the circumstances by ISO. The politicians want to be green, but the voters don’t appear to be willing to pay for it through their elected officials. And they choose to make ISO and ultimately FERC the whipping boy for their unwillingness to pay the cost. The old saying is you want to dance, you got to pay the fiddler. And it varies across the country. I think the key is a lack of accountability in New England had created that challenge.  

 

Jennifer Chen:  Sure. I can offer some of my own thoughts on this. Yeah, there has been a bit of tension between states, state policies, and RTO decision making. The RTOs are overseen by FERC, and for a while there, FERC did struggle a bit with how the RTOs, which are charged with ensuring market efficiency, reliability, how they can incorporate state public policy. And I think that’s getting better now.

 

So New England states are looking to offshore wind. They are also looking to transmission to access that offshore wind. But ensuring that markets in New England can incorporate demand side, renewable resources is a really important issue that I know that the states and RTOs have struggles with. I think I might’ve forgotten the other parts of your question. Come back to me if there’s something else that I missed that I didn’t address. 

 

Michael Buschbacher:  I would just say that the problem’s not a new one, right? If you remember, I remember con law, 1L year and you read all those Chief Justice Marshall cases about some states trying to monkey with this and the court had to wrestle with it. So it’s just an endemic problem with our federal system. I think the benefits on that definitely outweigh the cost, but they do result in thorny issues.

 

Personally, I don’t like RTOs so I think we should just have the Tennessee Ballet Authority but for everywhere. They deliver more reliable cheap energy than the RTOs, so it seems like — I know that’s maybe not an orthodox thing to say at a FedSoc thing but I think that that — so I think there are some structural issues with that. And I think FERC’s role in the RTO and ITO or ISO system is problematic. I don’t see how — that’s a bigger conversation, but it strikes me as tenuous and hasn’t worked out, I think, very well. 

 

Jennifer Chen:  Sorry. I —

 

Jim Wedeking:  No, go ahead. 

 

Jennifer Chen:  I remember what I was going to say. And it was about the regional differences, and maybe I can cover the RTO issue as well. The RTOs offer transparency. They offer transparent market prices. And actually, it’s induced more by lateral contracting between new developers because when you’re trying to strike a deal, when you’re trying to make a business deal, it helps to have knowledge about market prices. So we do see more wind and solar build out in RTO regions than in non-RTO regions. 

 

On the regional differences, I do want to make sure that we understand that electricity prices are formed by many other things other than whether or not there’s a market. So labor, land, environmental regulations, all these things are in play when you look at electricity rates. However, electricity rates are not what you pay at the end of the day. Customers pay for electricity bills, and if there are more energy efficiency programs, demand-response programs, ways to encourage customers to more efficiently use electricity, those bills can be lower. 

 

So looking at those bills is the next step up. But I think going even further is that we need to look at energy burden. So if we just look at electricity bills, we might be thinking okay, some regions might have higher bills because there’s more just commerce, there’s more productivity. There might be industrial processes going on there, and market activity, things that boost the economy. So we want to look at energy burden. It’s tremendous in places like the Southeast where there are no RTOs. So I think it is important to look at the effectiveness of RTOs and examine how we can improve them but just want to make sure that we tease out the different factors. Thank you.  

 

Jim Wedeking:  I’ll be brief. I believe you began your question by saying that states seem to be causing more problems than they’re solving. I’d say, compared to what? As this, as sort of a backup quarterback syndrome, that when your starter stinks, the backup quarterback’s the most popular guy in town. But then he actually takes the field. Would a national board that had more power to make these decisions do any better? I doubt it, and if they’re not going to do much better, then you’ve got a problem.

 

Right now, the way it works is that if you’re a resident in Massachusetts and you don’t think the folks in charge are going to get it together, there’s a U-Haul waiting for you. Florida’s very nice. If when things are more in federal hands, that’s not as easy an option. 

 

Marc L. Spitzer:  Next question. 

 

Ashley Land (sp):  Thank you, all. Ashley Land. I’m a recovering energy regulatory lawyer, now on the efficient allocation of capital side, hopefully. Thank you all. This was really helpful for me but especially wanted to say thank you, Jennifer. I think it’s hard to come to a place where you know you’re probably not going to agree with most of the people in the audience. And for me, I think that’s really helpful, I think, for all of us, just not being in an echo chamber really, really helps so thank you.

 

My question’s for you. I’m really interested to understand, it seems to me that one of the biggest differences, and there is common ground, but one of the biggest differences is how we talk about intermittency. I think I hear a lot from the right and I tend in this direction as well. You can’t really just use wind and solar, maybe you’re going to end up with these massive batteries one day but we’re certainly not there now. And I want to understand from you, do you think that there is a way that we’re going to get to 100 percent green without using something like natural gas? And if not, do you think it’s okay to do something like carbon capture or is that bad because it’s effectively giving money to fossil fuel companies? 

 

Jennifer Chen:  Yeah. That’s a great question. And thank you so much for that too. I think — okay. So it depends on what our goals are, right? When we think about net zero, we’re thinking about greenhouse gas emissions. There are other types of pollutants that come with some of these resources. But if we really want to focus on greenhouse gas emissions, there is a lot of good modeling out there about transmission. Nuclear, using maybe natural gas as a bridge fuel, but the question is always do we build new pipelines? Do we build new facilities that we know that will become stranded in the future? 

 

So focusing on transmission I think is really great because it not only enables more efficient use of resources over greater geographic regions, it can get wind and solar out of these bottled up regions where they are currently. But it’s a fuel agnostic infrastructure, so that, I think, is very important to think about. So, yeah, I think in the future when we look at the various way to promote the flexibility of the power system, whether it’s through transmission, storage, electric vehicles, I mean, if we’re going to electrify everything, there are going to be a lot of demand side resources that we need to be smarter about coordinating.

 

So if they can show up when the customer doesn’t need it for transportation or heating, they can provide grid services. So if we want to leverage their ability to multitask, that could save us a lot of money and reduce some of this variability in wind and solar. So, yeah, I think if we’re looking at net zero greenhouse gas emissions, all of the above that you mentioned is really important. But I think on the level of just looking at land use, other impacts, other types of pollutants, nuclear waste disposal, there are some things that we need to think hard about there. So, thanks.

 

Ashley Land:  Thank you.

 

Steven Schaefer:  Please join me in thanking this stellar panel. And thank you to the audience for viewing online as well as in person. We’re happy to have you. And if you’d like to see more content like this, please check out FedSoc.org. That’s FedSoc.org. Thank you. 

 

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Conclusion:  On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcasts, Google Play, and Spreaker. For the latest from RTP, please visit our website at regproject.org. That’s regproject.org.

 

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