FERC Finally Wakes Up

By Michael McKenna

At their February public meeting, the Federal Energy Regulatory Commission issued a Section 206 petition, which argued that the PJM tariff is unjust or unreasonable (or both, I suppose) because it doesn’t include rules that allow for locating generation sources near or at data centers.

Let me commend FERC for finally engaging on the crucial issue of how we might be able to power the data centers which will be essential to the United States’ efforts to win the artificial intelligence race. Welcome to the fray.

Let me also commend FERC for issuing the equivalent of a vote of no confidence in an organized market. I’m not sure it is the first such vote, but it is definitely the first time that FERC has acknowledged that an organized market may be able to meet the challenge posed by an absolute requirement for the construction of more power and more reliable power in a prompt manner.

The Section 206 issued to PJM is an acknowledgment that the current regulatory model is unlikely to produce the results that the nation needs in this moment; that PJM, as currently configured, is not likely to lead to the building of enough generation in time.

What makes it worse for PJM is that the Commission is not the only one who has lost confidence. In January, in the wake of last Summer’s auction where prices jumped 800%, Governor Shapiro in Pennsylvania decided that PJM needed more generation. Mr. Shapiro warned in a January open letter to PJM that price escalation “threatens to undermine public confidence in PJM as an institution.”

In response to his letter, PJM wrote that it had long warned about potential supply shortfalls during periods of high demand, blaming “state and federal policy decisions that are pushing generators to retire prematurely” and “unprecedented and rapidly growing data center construction.”  In short, the problem was that customers were actually starting to ask for generation from generators.

PJM ultimately energetically argued that that the “market” would take care of the problem. Just kidding. What really happened is that PJM quickly folded and set a price cap for its next two capacity auctions.

The Section 206 petition filed by the Commission is a bit more comprehensive than the back and forth between Governor Shapiro and the hopelessly outmatched PJM. For those of you who think it is liable to be fixed quickly, the Commission’s petition wrapped up with 6 single-spaced pages of questions (39 questions in total) to the world. They varied in complexity from simple questions that can’t be answered (“Please explain whether the existing Tariff rules are sufficient to ensure resource adequacy if increasing numbers of large existing generators choose to co-locate with load.”) to complicated questions that won’t be answered (“Please explain whether or not it would be appropriate to establish an interconnection study outside of PJM’s interconnection queue process for newly interconnecting co-location arrangements . . . “).

We’ve been at this question of data center demand for more than a year now and are just getting around to asking questions that get near the core of the problem, which is, of course, that many places generally, and PJM specifically, appear to have given up completely on building generation, no matter how loud the message from the capacity market gets.

The original sin is, as always, that no one seems to be responsible for reliability. Generators aren’t, otherwise they would be building powerplants. The people who run PJM aren’t; they weren’t elected or appointed by anyone and therefore are not accountable to anyone in particular. The capacity markets are obviously not getting the job done either.

The demand driven by data centers – and the urgency to win the artificial intelligence race now – has exposed the flaws in the slow, sclerotic, self-absorbed system. FERC and its progeny in Valley Forge are completely happy to live in their co-dependent relationship, tossing pieces of paper back and forth to one another.

For the rest of us, though, winning the race to the commanding economic and national security heights of the next three generations is too important to be left to organizations that can’t even decide who might be in charge of system reliability, and whose sense of urgency and clarity results in six pages worth of questions, the answers to which will spawn even more questions and the inevitable litigation.

The system is broken. It is not going to be fixed by pretending that FERC orders get powerplants built.

What we need – and are not likely to get from a FERC-driven process – is some sort of variance or off-ramp to our current approaches that allow builders and their customers to build generation (and buy power) without having to wander through the maze of rules, customs, and folkways embedded in some organized markets.

Until we get something that looks like that, we will continue to struggle with reliability, with costs, and with concerns about our national competitiveness.

Michael McKenna, president of MWR Strategies, advises utilities, merchant generators, and transmission companies. He was deputy director of the White House Office of Legislative Affairs under President Trump. 

This article was originally published by RealClearEnergy and made available via RealClearWire.