December 7, 2016

Federal Electricity Policy Under the Trump Administration

Holland & Knight Alert
Stephen J. Humes | Beth A. Viola


  • President Obama has achieved the majority of his energy policy objectives through executive action (regulation, guidance or executive order) and, as such, most of his actions can be undone or mitigated by the incoming Trump Administration.
  • Because the electric utility industry in the United States is so heavily impacted by state and regional regulatory structures, as well as the independent regulatory authority and decisions of the independent Federal Energy Regulatory Commission (FERC), President-Elect Trump's impact on federal electricity policy is unlikely to be dramatic.
  • However, there are potential short- and long-term actions that the President-Elect can take that would impact federal policy, including appointing new FERC commissioners and undoing some of President Obama's regulations that have affected the coal industry.

The huge unknown about President-Elect Donald Trump's energy plans is in electric power. Whatever he decides, with a unified Republican Congress behind him, he has the ability to shape federal electric policy in the coming term. It is important to note that President Obama achieved the majority of his energy policy objectives through executive action (regulation, guidance or executive order) and, as such, most of his actions can be undone or mitigated by the incoming Trump Administration. However, President-Elect Trump's impact on federal electricity policy is unlikely to be dramatic, largely because the electric utility industry in the United States is so heavily impacted by state and regional regulatory structures, as well as the independent regulatory authority and decisions of the independent Federal Energy Regulatory Commission (FERC). Still, there are a couple of short- and long-term actions the President-Elect may undertake that would impact federal electricity policy.

The first immediate action a Trump Administration could take that would impact federal electricity policy is the appointment of new FERC commissioners. FERC currently has two vacant seats. Moreover, the current FERC chairman, a Democrat, has long hinted at resigning by the end of 2016. This would open another appointment for the Trump Administration and shift the balance of power in the commission. It is worth noting that if Chairman Norman Bay were to resign before the appointment and confirmation of additional members, FERC would lose the necessary quorum to issue decisions and permits. As such, the appointment of FERC commissioners will likely be among the first major actions the Trump Administration will make to impact federal energy and electricity policy.

A second, more long-term action Trump may take is to undo a number of President Obama's regulations. During his campaign, Trump vowed to scrap President Obama's Clean Power Plan (CPP), abandon the Paris Agreement and end Green Climate Fund payments to developing nations. Moreover, the President-Elect has promised that, during his first 100 days in office, he will "end the war on coal, rescind the coal mining lease moratorium ... and conduct a top-down review of all anti-coal regulations issued by the Obama Administration."

Coal vs. Natural Gas: A New Market Reality

While Trump may overturn executive actions or work with Congress to change laws, one law that he will not be able to change is the law of supply and demand economics that has kept natural gas at historic low prices. According to the U.S. Energy Information Administration (EIA), the price of natural gas as an electric generation fuel has been dropping dramatically the past couple of years, leading to its increase in market share and the steady decline in the use of coal. It is hard to imagine that Trump will be able to reverse the laws of economics and promote coal as a power source, even if he undoes the CPP and other regulations, because coal is simply out of the money as a fuel source.

Coal-fired power generation generally costs more than natural gas, and that trend is likely to continue for the foreseeable future, although the EIA's current outlook forecasts that natural gas prices are likely to edge up higher than coal for the short-term, at least through the winter months. For this reason, Trump is unlikely to impact the economic realities facing the coal sector. Furthermore, if Trump implements support for infrastructure spending that might include expanded interstate natural gas pipeline installations, it is expected that expanded hydraulic fracturing (or fracking) and the expanded pipelines will produce an even more abundant supply of natural gas in the long-term and continue to drive down the cost of power generation from natural gas.

For decades, natural gas was the second-most prevalent fuel for electricity generation behind coal, but it became the electric utility and independent power production industry's primary fuel source for the first time in April 2015, the EIA reported. Natural gas-fired generation has surpassed coal-fired generation in most months since then, and generation fueled by natural gas reached record levels this past summer. During the first six months of 2016, natural gas supplied 36 percent of total U.S. electricity generation compared with 31 percent for coal.

However, for the short-term outlook in the upcoming winter months, EIA expects coal to outpace natural gas. Because natural gas is also in demand for thermal heating, that drives up the natural gas cost in many local markets during the winter. Therefore, especially in markets in which generation capacity exceeds electricity load, power plant operators are expected to select the most efficient fuel source – which could be coal over natural gas – but this trend may not hold, especially in the event of another mild winter. At the beginning of 2016, the national average price of natural gas was consistently below the cost of coal delivered to power plants, reaching a low point of about $16 per megawatt-hour (MWh) in March. Coal, on the other hand, has averaged between $21 per MWh and $23 per MWh for the past two years, according to the EIA. Natural gas prices were low earlier this year because of ample fuel supplies and mild winter weather, which also reduced overall electricity demand.

The Trump Administration must identify some strategies to support the coal-fired power plant industry if coal is going to remain competitive beyond the short term, especially in light of environmental regulations such as the coal ash rule, which will continue to be a drag on the coal business. Therefore, it is a safe bet that natural gas-fired generation will continue to outpace demand for coal in the longer term.

Coal Ash

A major area of focus for the U.S. Environmental Protection Agency (EPA) in its regulation of the coal sector in recent years has been in the area of coal ash, also known as coal combustion residuals (CCR), which includes fly ash, bottom ash, boiler slag and flue gas desulfurization materials resulting from coal combustion in the power generation industry (including electric utilities and independent power producers).

After several high-profile coal ash impoundment failures triggered localized environmental impacts and expensive clean-up obligations for the responsible parties, the EPA issued a new regulation on coal ash to establish nationally applicable minimum criteria for the safe disposal of CCR in landfills and surface impoundments. After proceeding with notice and comment rulemaking for more than four years, the EPA Administrator signed the final rule on Dec. 19, 2014, and the rule became effective six months after publication in the Federal Register on April 17, 2015. Thereafter, the EPA Administrator signed a direct final rule on July 26, 2016, that extended certain deadlines for inactive CCR surface impoundments and became effective on Oct. 4, 2016. (Note that because this rule was adopted more than 60 days before Trump will be sworn into office, it is beyond the reach of the Congressional Review Act.)

The CCR regulations regulate CCR impoundments or landfills as non-hazardous solid waste under Subtitle D of the Resource Conservation and Recovery Act. The rule provides a comprehensive regulatory program to address risks posed by groundwater contamination, structural failures of CCR surface impoundments and fugitive dust emissions. The rule requires CCR units that pose unacceptable risk to either retrofit or close. The rule applies to new and existing CCR landfills and surface impoundments, as well as any lateral expansion of such units, and is self-implementing, which means that facilities are required to comply with the requirements without regulatory oversight.

The coal-fired power generation industry views the CCR rule as another EPA attack on coal and yet another federal regulatory mandate that increases the cost and risk presented by the continued operation of coal-fired power generation. Therefore, coal-fired power plant owners and operators are forced to consider this rule as part of the regulatory risk they face when deciding whether to shut down coal-fired generation or continuing to operate. When coal generators face the higher cost of fuel and higher regulatory compliance risks, it becomes harder to justify keeping coal-fired generation operating – even if the Clean Power Plan fails.   

Nuclear Power

Nuclear power generation has long been the backbone of the baseload power generation industry nationwide. However, it has become increasingly clear in recent years – as lower natural gas prices set the effective clearing price for all power plants, not just those that are natural gas-fired – that nuclear power plant operators cannot continue to operate their plants in the competitive wholesale power markets without some form of market support.

In addition, according to the April 2016 U.S. Supreme Court decision Hughes v. Talen Energy Marketing, states run into trouble in these competitive wholesale power markets if they try to provide out-of-market payments to support any specific generator. In the terms of the Supreme Court decision, "States interfere with FERC's authority by disregarding interstate wholesale rates FERC has deemed just and reasonable, even when States exercise their traditional authority over retail rates or, as here, in-state generation."

Therefore, the fundamental law of supply and demand economics is weighing down nuclear power these days in a similar way to that of coal generation, although the stakes are much higher than coal. Nuclear power generating plants take significant effort and resources to ramp up and operate, with refueling costs in the millions, and turning these baseload generators on and off cannot happen quickly. But in competitive wholesale power markets – which include the Northeast, the Midwest and California – natural gas generators are setting the marginal price of power. With prices trending far below nuclear generators' operating costs, the result is that nuclear facilities are losing money.

Again, similar to coal but on a much broader scale, if Trump favors keeping nuclear generators in business or perhaps favors an "all of the above" power generation strategy, the federal government must identify a strategy to assist the ailing nuclear industry.

One state has already started a program designed to support nuclear power, but it's a "blue state." Trump is not expected to endorse New York's energy regulatory approach because it would require him to admit that climate change is a major problem and that supporting nuclear power generation is a part of the solution. On Aug. 1, 2016, the New York Public Service Commission adopted an order implementing a Clean Energy Standard that, among other things, stated that New York's goal is to achieve 50 percent renewable energy by 2030 and reduce greenhouse gas emissions in the state by 40 percent by 2030. Furthermore, the order concluded that allowing upstate nuclear power plants to close would seriously impair the state's ability to achieve the 40 percent greenhouse gas emission reduction standard by 2030. The order implemented a controversial payment mechanism whereby the nuclear generators would sell the "zero emission reduction" attributes, or credits, from the upstate nuclear power generators in amounts equal to the megawatt-hours of electricity that all of the state's load-serving entities sell to end-use customers beginning on April 1, 2017. This mechanism is already being challenged by other market participants that claim the nuclear payments violate the U.S. Supreme Court's holding in Hughes v. Talen Energy Marketing. This litigation is just commencing, but the case illustrates the challenges that states face if they try to assist the nuclear power generation industry in competitive wholesale power markets.

At some point, Trump's energy policy will need to indicate whether nuclear power is important to the future of the nation's power generation industry and, if so, how the federal government can provide meaningful support to this industry.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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