“It is difficult to overestimate Jon [Wellinghoff]’s impact on the electricity industry in recent years — or for that matter in the years to come.”
–Dan Delurey, Executive Director of the Association for Demand Response and Smart Grid
As the administrative head of an agency with approximately 1,500 employees and a $300+ million budget, the Chairman of the Federal Energy Regulatory Commission (FERC) sets the priorities of an otherwise fairly independent agency. [1] Current Chairman Jon Wellinghoff recently informed the Obama administration he would not seek an additional term, ending a seven-year stay as Commissioner (2006–09) and as Chairman (2009–2013).
Wellinghoff was appointed a FERC Commissioner in 2006 by President Bush, largely on the support of Harry Reid, his fellow Nevadan and ally in the Senate. With Reid’s continued support and a staunchly pro-renewable record at FERC, Wellinghoff was promoted by President Obama from Commissioner to FERC Chairman in 2009.
Throughout his FERC career, as in his earlier career, Wellinghoff consistently advocated for more demand response and more renewable energy investment, including a new influx of transmission projects largely devoted to integrating wind projects.
Unfortunately, his futurist predictions about an inevitable and necessary “green” transition and his technocratic plans to effect such a change are misguided. He also stands as a key example of how the Obama administration has attempted sweeping policy shifts without legislative help by channeling efforts through federal agencies. For better or worse, the FERC Chairman does wield power, and Wellinghoff has not wielded it well.
Demand Response (Less is More)
When Wellinghoff came to FERC, he was doggedly focused on implementing demand response far and wide. As the rest of the Commission sorted through utilities’ filings in compliance with the OATT-reform tome that was FERC Order 890 and weighed dozens of issues, Wellinghoff was a broken record stuck on “demand response.” At the same time, he also published a paper on demand response in the Energy Law Journal. In short, he was obsessed.
As Chairman, Wellinghoff pushed through a one-sided demand response rule that culminated in FERC Order 745, which was essentially a subsidy for not using electricity (see my criticism at Master Resource last year). The FERC minority also took issue with the order:
[A]t the wholesale level, the corrosive effect of overcompensating demand resources over time will come at the expense of other resources, particularly generation resources that will have less to invest in maintaining existing facilities and financing new facilities. (Commissioner Philip Moeller’s dissent, p. 10.)
Wellinghoff displayed his “less is more” energy philosophy in several public statements ranging from a shocker about how the US doesn’t need any more coal or nuclear plants to another wild-eyed comment about how “we can reduce our energy usage in this country by 50 percent.” At the heart of this philosophy must lie the nagging ghost of Thomas Malthus, who was egregiously wrong in his dire predictions 200 years ago, yet somehow still very convincing to today’s neo-Malthusians.
FERC Order 1000, Integrating Renewables
To fully understand FERC Order 1000, it is important to recognize a few key facts. First, before coming to FERC, Wellinghoff wrote Nevada’s renewable portfolio standard, which now mandates that 25% of Nevada’s electricity come from renewable sources by the year 2025. Second, Senator Harry Reid’s green transmission infrastructure bill, which would have required transmission plans to incorporate state renewable mandates, died in committee in 2009, the year Wellinghoff took over the Chairmanship.
Third, as Chairman, Wellinghoff instituted a 2010 rulemaking that accomplished all the major goals of Reid’s failed legislation without the bother of the legislative process. That final rule is called FERC Order 1000.
Just to recap — Wellinghoff created a final rule at FERC that: 1) instituted at the cross-state level the same aggressively pro-renewable mandate that he personally crafted in Nevada, and 2) subsidized a huge portion of the hidden cost of the mandates (new transmission “investment”). Worse yet, Welllinghoff’s rule suspiciously mirrored the failed legislation proposed by his most powerful ally in the Senate. Not surprisingly, I also criticized FERC Order 1000 on Master Resource.
Other renewable-friendly rules like FERC Order 755 (Frequency Regulation Compensation) are less obvious but similarly imbued with that familiar mix of cronyism and technocratic planning. In this episode, the Department of Energy-backed flywheel energy storage company Beacon Power went bankrupt until FERC issued Order 755, which established different compensation for the faster-responding frequency regulation that flywheels can provide. Beacon Power was then acquired by a private equity firm, shrinking the total DOE (i.e. taxpayer) loss to only $12.5 million (rather than the total loan of $43 million).
Enforcement Actions
In 2012, Wellinghoff led an unprecedented crackdown on energy marketers. Empowered by the Energy Policy Act of 2005, Wellinghoff turned FERC into “the most powerful agency that no one knows about” by investigating the energy trading practices of banks such as JPMorgan Chase, Deutsche Bank, and Barclays. FERC also received a record $245 million settlement from Constellation Energy over allegations that Constellation had manipulated energy markets in New York and New England.
FERC’s new enforcement actions hit state public utility commissions as well, not for market manipulation but for failing to implement PURPA regulations. For example, the Commission’s recent suit against the Idaho Public Utility Commission steps on the toes of the long-standing state-specific process. As Commissioner Tony Clark said in his dissent:
“More broadly, while PURPA was designed as a foot in the door for emerging renewable resources and small generators, I sympathize with concerns that PURPA is increasingly being used as a cudgel that would force consumers to bear undue burdens. … [FERC] has now put itself in an awkward position. It will invoke the power of the federal government to proactively champion a private interest that may contradict the best interests of the consumers of a state.”
The Idaho PUC case is a clear example of a pro-wind Chairman bending over backwards to support wind at the expense of Idaho consumers and against a long-standing and already renewable-friendly federalist dynamic. FERC stepped in and asserted its authority before the Idaho Supreme Court was able to make its own determination on the issue.
The Right Approach
Going forward, the Commission should work to remove the Mathusian bias built into recent rulemakings like FERC Orders 745, 755, and 1000. Demand response, flywheels, and wind power (and everything else) should compete on a legitimately technology-neutral playing field rather than being specifically aided by key changes in the rules and selective enforcement of well-worn policies.
FERC should also be careful not to abuse its authority by implementing new rulemakings in the place of failed legislation, as it appeared to do with parts of Order 1000, or by encroaching on state-level procedures, as in the Idaho PUC case.
Further, there are fundamental barriers to the “grid of the future” imagined by Wellinghoff when he assumed the Chairmanship. Despite his best machinations, people will likely continue to pay flat rates for electricity (and ignore the wholesale price), wind power will continue to be unreliable (and not backed up by plug-in electric vehicles), and his vision of a completely re-tooled, green electricity grid will remain too expensive to tolerate.
Conclusion
Obama’s choice of a renewable energy advocate to lead an agency responsible for keeping rates just and reasonable will have costly repercussions. Wellinghoff set in motion policies that will inevitably raise rates, like the cost allocation portions of Order 1000. Some of his policies, like FERC Orders 745 and 755, are also unduly discriminatory in that they extend regulatory help to his favorite projects.
At the end of the day, I realize that I am the critic and he is the man in the arena. However, for the sake of all U.S. consumers, I do sincerely hope that the next man or woman in the arena embraces energy abundance and lets the best technologies win or lose on their own merit.
[1] See this informative FERC 101 presentation.
One could argue that Wellinghoff, like the dog in the old RCA logo, listened to “His Master’s Voice”. (http://www.wedesignandconquer.com/history-of-the-rca-logo/)
The parallels between Wellinghoff’s actions at FERC and Lisa Jackson’s actions at EPA are, or at least should be, enlightening.
FERC is a sleeping giant of energy interventionism. They are wed to original depreciated cost-based rate regulation as “just and reasonable” with interstate gas and electricity assets. They regulate entry and exit and just about every service change between. And they have mission creep to subsidize politically correct renewables.
It is past time to shine the critical spolight on them….
Biographical note: Wellinghoff began his rise by serving two terms as Nevada’s official utility consumer advocate, where he pushed the same anti-consumer initiatives that he brought to FERC.
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