Federal Energy Regulatory Commission and Costs to Consumers

This week’s Senate hearings for the new head of the Federal Energy Regulatory Commission (FERC), Ron Binz, former Colorado Public Utilities Commissioner, deserve the public’s attention because of the role that FERC will have on consumer prices for energy.

It will be a challenge to make the issues from the hearings clear because most of the public is unaware of even the existence of FERC.  Before the Bush administration, FERC drew little attention but its power grew under President Bush, and that position of increased power has continued under the Obama administration.  As a part of the Energy Policy Act of 2005, FERC was revitalized and given responsibilities for establishing and strengthening the smart grid, the integration of renewables along with the responsibility for the regulation of natural gas, liquefied natural gas terminals, natural gas pipelines, and interstate transmission of electricity.

With a broad-based charge, the Commission has the capacity to affect the costs of electricity and the prices ultimately paid by the consumer.  Much of the direction that FERC takes will depend upon the assumptions it adopts about energy sources and future change to energy policy.  Because Mr. Binz has a long history in the industry, he has left the public with an understanding of his own assumptions and the direction he may take as the head of FERC.  For example, he is an author of Practicing Risk-Aware Electricity Regulation: What Every State Regulator Needs to Know.  This report is available from Ceres, a nonprofit organization advocating for sustainability leadership.

The report focuses on how regulators and utilities make decisions relative to risk.  The fundamentals of the report are straightforward; decisions are always fraught with risk, and the decision-maker, e.g., a utility, has a responsibility to moderate risk, based on assumptions about the future.  What are the assumptions that Mr. Binz will make about the future?

Among them is that renewable sources of energy, like solar, will receive government incentives for their use, that additional federal regulation will be imposed on fossil fuels, that the supply of natural gas is volatile, and that the likelihood of price increases for a low carbon fuel like natural gas is moderately high. The report states, “the authors expect that the scientific evidence of climate change will eventually compel concerted federal action that greenhouse gas emissions will be costly for fossil-fueled generation.”  While the scientific evidence for the impact of fossil fuels on climate change is increasingly clear, the validity of these assumptions is questionable.

Here are some of the reasons why the assumptions may be faulty.  First, technology associated with solar technology is advancing, making it more likely in the future that solar energy may become increasingly affordable without the need for government incentives.  Second, the impact of fossil fuels on the release of atmospheric carbon is varied.  For example, natural gas is a relatively low contributor to atmospheric carbon when compared with other fossil fuels.  Third, known reserves of natural gas from shale are vast and the carbon footprint for natural gas is relatively low (see EPA Study Provides Striking, Favorable findings for Natural Gas).  Thus, the likelihood that natural gas prices will raise is constrained by the increasingly available supply of natural gas.  Moreover, the lower carbon footprint of natural gas makes it a likely continued choice by energy generators, even in the face of the evidence for climate change.

Assumptions matter when assessing risks in decision-making.  FERC can make decisions that matter for consumers.  Consumers are well advised to pay attention to the Senate hearings this week on the new head of FERC.  The outcome of the hearings will likely affect consumers’ wallets and energy production for years to come.

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