FERC v. the Biden Executive Order: Reversing Course on Competition in the Energy Sector?

A number of executive agencies have made visible progress toward promoting the goals of competition under the mandate of the July 2021 Executive Order (EO), Competition in the American Economy.[1] While it is important to recognize successes under the Biden EO to date, it is also vital to flag areas of concern. One is recent federal policy that directly affects competition in wholesale electricity and natural gas pipeline markets, the effects of which are felt keenly by U.S. energy consumers. This commentary highlights Federal Energy Regulatory Commission (FERC) policies that appear to have de-prioritized competition principles. For an agency that has focused closely and successfully on competition for decades, these developments should be a flag for the Biden Administration to continue to encourage sector regulators, antitrust authorities, and other agencies to work together to promote competition.

I.   Federal Energy Market Regulation and the Biden Executive Order

The 1990s and 2000s were watershed decades for competition in the U.S. energy sector. Fundamental changes in economics and technology opened a window for the Federal Energy Regulatory Commission (FERC) to re-think regulatory oversight of wholesale energy markets. This era brought forth major regulatory rulemakings and inquiries designed to promote competition in electricity generation and transmission, and natural gas transportation. Such initiatives benefitted consumers and spurred innovation while helping promote the reliability and security of critical energy supplies and infrastructure.

Since the 1990s and 2000s, there have been significant changes in the structure and organization of energy markets that emphasize the importance of an ongoing FERC commitment to competition principles. For example, consolidation has increased concentration in many critical energy markets. It has also resulted in vertical integration between a broader array of market participants, including natural gas pipelines, electricity generation and transmission, and electricity and gas distribution. Moreover, the role of private equity, which flies below the competition enforcement and policy “radar,” has increased significantly in the energy sector. These changes all affect strategic competitive incentives for building new transmission and pipeline infrastructure.

After 25 years of careful and largely successful efforts to weave competition principles into the oversight of energy markets, FERC’s commitment to promoting competition appears to be wavering. Troubling developments signal that the Commission may be moving away from, or abstaining from opining on, issues where competition principles are critical. For example, a FERC proposal in a major rulemaking on electricity transmission swerves away from competition. And the agency continues to delay decisions on important competition issues surrounding certification of new natural gas pipeline facilities.

These developments create a tension, if not outright conflict, with the Biden Administration’s prioritization of competition as a top line policy issue. The Biden EO recognizes that industries have consolidated and competition “has weakened in too many markets.” The EO sets forth a whole-of-government approach that is “necessary to address overconcentration, monopolization, and unfair competition in the American economy.”[2] The Biden EO names FERC, among other federal agencies, as holding the authority to protect conditions of fair competition, for example, by “…promulgating rules that promote competition…”[3] In implementing a whole of government approach, the EO envisions cooperation and coordination between FERC, the U.S. Department of Justice and Federal Trade Commission, and other agencies with energy policy and competition mandates. In what follows, we discuss FERC’s historical commitment to competition and two major FERC initiatives where, as a matter of policy, it appears to have been deprioritized, in direct opposition to the mandate in the Biden EO.

II.  FERC’s History of Promoting Competition in Energy Markets

During the era of energy market restructuring, FERC promulgated a number of landmark orders and inquiries recognizing changes that supported opening markets to more competition. These include, among others, an open access framework for electricity transmission (Order No. 888), Regional Transmission Organizations (Order No. 2000), allocation of transmission costs and generator interconnection (Order No. 1000), open access to natural gas pipeline transportation (Order No. 636), and certification of new natural gas pipelines (Docket No. PL99-3).[4] In addition to these major initiatives, FERC worked to promote competition “rules of the road” through policies on standards of conduct, information transparency and access, federal reporting requirements, and market monitoring.

The Commission thus spent decades promoting competition, at the same time it responded to changes in energy technology, energy price volatility, climate change and energy efficiency priorities, and state-level regulation affecting regional and local markets. Most of the Commission’s major pro-competition efforts survived judicial review, relatively intact. It is against this backdrop that more recent developments have competition advocates questioning the current direction of the Commission’s stance on competition.

For example, FERC has taken up two recent regulatory initiatives under the Biden Administration that appear to subjugate or even reverse course on competition, and the Commission’s statutory mandate to promote it. To be clear, both initiatives tussle with the interface between competition, expanding and modernizing energy infrastructure, ensuring reliability, and addressing climate change. These are heavy lifts, to be sure, but competition remains central to achieving these goals.

III.  FERC’s Proposal to Eliminate Competition Principles for Deciding on New Transmission Facilities

One recent initiative that raises concerns about the Commission’s commitment to promoting competition is a proposal to update rules for regional transmission planning and cost allocation and generator interconnection. That is FERC’s notice of proposed rulemaking (NOPR), Building for the Future Through Electric Regional Transmission Planning and Cost Allocation and Generator Interconnection (RM21-17), issued in April 2022.[5] The NOPR acknowledges that the difficult and controversial nature of allocating costs of new transmission facilities serves as a barrier to development. This is especially true of regional transmission facilities. To overcome the problem, FERC proposes to re-instate a federal “right of first refusal” for building new transmission facilities for purposes of cost allocation. Moreover, this right of first refusal would be conditioned on an incumbent transmission provider establishing joint ownership of proposed transmission facilities.

FERC’s NOPR would change policy on new transmission that has been in place for over a decade. In 2011, the Commission eliminated the federal right of first refusal for new transmission in its landmark Order No. 1000. This was done expressly for the reason that the right of first refusal had the “…potential…to discourage investment by nonincumbent transmission developers…” The Commission emphasized that it was important to “…‘consider and evaluate, on a non-discriminatory basis, possible transmission alternatives and produce a transmission plan that can meet transmission needs more efficiently and cost-effectively.’”

If adopted, the effect of FERC’s new proposal on the federal right of first refusal will be to give large, incumbent, vertically integrated utilities first dibs on building new regional transmission facilities, without considering alternative, competitive proposals from entities such as independent transmission developers and others. Vertically integrated utilities often enjoy significant market power in wholesale markets, with strong incentives to operate their transmission systems in ways that foreclose competition and ultimately harm consumers. Indeed, regulatory initiatives launched by the Commission in the 1990s and 2000s were designed expressly to address this market power problem.

Even worse, FERC’s proposal would condition the federal right of first refusal on joint ownership of new transmission facilities, promoting collaboration between parties that could well be competitors. Such arrangements would facilitate collusive agreements, whereby the participants to a joint venture agree not to compete and divide up monopoly profits from new transmission projects. Reinstating the right of first refusal would therefore revert the industry to an era that prompted the Commission’s landmark competition initiatives.

IV.  FERC’s Abstinence on Updating Competition Policy on Affiliate Precedent Contracts as Evidence of Need for Natural Gas Pipeline Facilities

A second major initiative that raises concerns about the Commission’s commitment to promoting competition is the agency’s stalled effort to update its policies for certification of interstate natural gas pipeline facilities. Had the effort proceeded, updated policy would have addressed a major competition concern in the Commission’s 1999 policy statement.[6] That is, relying almost exclusively on agreements between the developer of a new pipeline project and shippers that have a corporate affiliation with that developer, as evidence of need for new facilities. Such “affiliate precedent” agreements have the potential to facilitate regulatory evasion or what is also known as self-dealing.

For example, an agreement between an affiliated natural gas pipeline developer and regulated distributor with a common profit interest can create the incentive to inflate input costs. Such inflated costs would likely go undetected by regulators and be passed on to ratepayers of the regulated entity in the form of higher prices.[7] Regulatory evasion of this kind can stifle competitive discipline and raise prices in consumer product markets. For that reason, it has been a longstanding concern of antitrust enforcement and regulation and has arisen in a variety of applications, including: Fresenius Medical Care AG & Co; Entergy-Koch Gulf South Pipeline Company LP; Okeechobee Lateral Pipeline Project; Florida Southeast Connection; and Constitution Pipeline.[8]

The D.C. Circuit also addressed regulatory evasion involving FERC’s pipeline certification policy in Environmental Defense Fund v. FERC.[9] There, the court found the Commission’s reliance on affiliate precedent agreements as evidence of need to be arbitrary and capricious, noting “…evidence of ‘market need’ is too easy to manipulate when there is a corporate affiliation between the proponent of a new pipeline and a single shipper who have entered into a precedent agreement.”[10]

FERC’s policy initiatives to address the adverse competitive implications of affiliate precedent agreements have stumbled. For example, in 2018 FERC issued a notice of inquiry, Updated Policy Certification of New Interstate Natural Gas Facilities (PL18-1-000),[11] to evaluate various public interest factors for determining whether a new interstate natural gas transportation project is required.[12] This notice of inquiry languished under the Trump administration[13] but in early 2021, FERC revived the inquiry under the Biden Administration,[14] took public comment, and issued an updated policy statement in early 2022.[15]

In the updated policy statement, the Commission explained that the 1999 policy statement “…‘noted concerns associated with relying “primar[ily]” or “almost exclusively” on contracts to establish need for a new project’….”[16] and, therefore, that the Commission would “…consider all relevant factors reflecting on the need for the project.”[17] However, the updated policy statement went on to state that since the 1999 policy statement was issued “…in practice, the Commission has relied almost exclusively on precedent agreements to establish project need [emphasis added].”[18] The 2022 updated policy statement would have provided needed clarification to ensure the Commission looks at evidence beyond affiliate precedent agreements to assess project need.[19] However, in an about-face only a month later, the Commission converted the policy statement to a “draft” policy statement.[20]

Notwithstanding that this decision put the updated policy statement in limbo, such that it can have no legally binding effect on either the Commission or the industry, the Commission has neither amended nor re-issued the draft statement since the public comment period on the draft policy statement closed months ago. As shown in the figure below, 23-years of inaction on updating pipeline certification policy thus appears to have come full circle, with the 1999 policy statement remaining in force despite significant changes in the industry and competition concerns around some public interest factors surrounding certification of new pipeline facilities.

V.  Conclusion

While other executive agencies under the Biden Administration have made visible progress toward promoting the goals of competition, FERC seems to be moving in the other direction. Proactive policies that are divorced from competition principles and a lack of action to codify policies to promote competition in energy markets work against the interest of consumers. Rather than sacrificing competition, the Commission should look to less harmful and more innovative policy approaches for promoting reliable, secure energy supply and infrastructure and the welfare of energy consumers. To the extent the Biden Administration is working closely with sector regulators to implement the EO, a conversation with FERC is overdue.

[1] Executive Order on Promoting Competition in the American Economy, The White House (Jul. 9, 2021), at § 1, https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/.

[2] Id. at § 2(g).

[3] Id. at § 2(d)(iii).

[4] Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Order No. 888 (1996), 75 FERC 61,080; Regional Transmission Organizations (Order No. 2000), (2000), FERC ¶ 61,201; Transmission Planning & Cost Allocation by Transmission Owning & Operating Pub. Utils., Order No. 1000 (2011), 36 FERC ¶ 61,051; Pipeline Service Obligations, and Revisions to Regulations Governing Self-Implementing Transportation Under Part 284 of the Commission’s Regulations, Order No. 636 (1992), 59 FERC ¶ 61, 030; and Certification of New Interstate Natural Gas Pipeline Facilities, Statement of Policy, (1999), 88 FERC ¶ 61,227.

[5] Building for the Future Through Electric Regional Transmission Planning and Cost Allocation and Generator Interconnection, Notice of Proposed Rulemaking (2022), 179 FERC ¶ 61,028.

[6] Supra note 4.

[7] See, e.g., Michael H. Riordan and Steven C. Salop, Evaluating Vertical Mergers: A Post-Chicago Approach, 63 Antitrust L.J. 513 (1995). See also, Richard P. O’Neill, Natural Gas Pipelines, in Network Access, Regulation and Antitrust (D. Moss ed., 2005).

[8] 552 F. Supp. 131, 226-34 (D.D.C. 1982); 109 F.T.C. 167 (1986); KGaA and Daiichi Sankyo Company, Ltd No. 081-0146 (F.T.C. Sept. 15, 2008); In re Entergy Corporation ad Entergy-Koch LP, Case No. C-3998 (Jan. 31, 2001); See, e.g., Gavin Bade, FERC splits again on affiliates, climate in Florida pipeline approval, utilitydive.com, Jun. 5, 2018; Florida Southeast Connection LLC, et al. (2016), 154 FERC ¶61,080; and Constitution Pipeline Company, LLC, and Iroquois Gas Transmission System, LP (2014), 149 FERC ¶ 61,199.

[9] Environmental Defense Fund v. FERC, 2 F.4th 953, 976 (2021). See Brief of the American Antitrust Institute, Environmental Defense Fund v. Fed. Energy Reg. Comm’n, Nos. 20-1016, 20-1017 (Consolidated) (9th Cir. filed July 3, 2020).

[10] Id. at 973.

[11] Certification of New Interstate Natural Gas Facilities, Notice of Inquiry (2018), 163 FERC ¶ 61,1042. See, Comments of the American Antitrust Institute, Certification of New Interstate Natural Gas Facilities, Notice of Inquiry (2018), 163 FERC ¶ 61,1042.

[12] 15 U.S.C. 717f.

[13] Executive Order 13771—Reducing Regulation and Controlling Regulatory Costs (Jan. 30, 2017), https://www.govinfo.gov/content/pkg/DCPD-201700084/pdf/DCPD-201700084.pdf.

[14] Certification of New Interstate Natural Gas Facilities, Notice of Inquiry (2021), 174 FERC ¶ 61,125.

[15] Certification of New Interstate Natural Gas Facilities, Updated Policy Statement on Certification of New Interstate Natural Gas Facilities (2022), 178 FERC ¶ 61,107.

[16] Id. at P. 53.

[17] Id.

[18] Id. at P. 54.

[19] Id.

[20] Certification of New Interstate Natural Gas Facilities (Docket Nos. PL18-1-001) and Consideration of Greenhouse Gas Emissions in Natural Gas Infrastructure Project Reviews (Docket No. PL21-3-001), Order on Draft Policy Statements (2022), 178 FERC ¶ 61,197.