For Neil Chatterjee, acting chairman of the Federal Energy Regulatory Commission, coal feels like home.

“Speaking as an individual who grew up in Lexington, Kentucky … I don’t think people outside of that region understand not just the economic but the cultural significance of coal-fired generation,” Chatterjee said during an interview at his Washington office last week. “It's not just about the direct and indirect jobs tied to the industry.”

The acting chairman, set to hand his gavel to incoming chair Kevin McIntyre in the next few days, said one of the clearest examples of that cultural significance comes from the basketball program at the University of Kentucky, which can count Chatterjee as a committed fan.

“I don't know if people realize this: The dorm that the basketball players live in at the University of Kentucky is called the Kentucky Coal Lodge,” Chatterjee said, referring to the luxury housing complex for Kentucky basketball players paid for by a coal magnate. “It is a boon to [head coach John] Calipari’s recruiting because he's able to go to these top recruits and say this is where you're going to live for the eight months that you're in [the university] before the NBA.”

The Kentucky Coal Association banner even hangs at the university’s basketball stadium, Rupp Arena, Chatterjee noted.

“It’s part of the culture in the Commonwealth and it doesn't mean that people in Kentucky aren't concerned about the environment, that they don't care about climate change,” Chatterjee said. “It's what they kind of grew up around in some of these Appalachian communities.”

In some of those communities, Chatterjee said, “there’s nothing else — there’s not a Burger King or Walmart for 30 miles.”

“So when the plants shut down and the mines shut down, the only asset these people have left are their pensions tied to their mining jobs or the value of their homes, which plummet because the economic center of the communities went away,” Chatterjee said. “That's what I think people don't get — the emotional toll, the cultural toll, and the significance of it.”

The chairman’s comments on coal came at the tail end of an extended interview in his FERC office. Chatterjee had just completed describing details of an interim plan to save coal and nuclear plants from retirement, but he stressed that his nostalgia for the resource does not play into his decisions as a regulator.

“That doesn't factor in to what I will do in my job here because I'm adamant that this independent agency operate in a fuel-neutral, technology-neutral way within the parameters of our statute,” Chatterjee said. “But as a human being … I think if more people would have exposure to what people's lives are like in a poor rural state like Kentucky, they might be more empathetic and not quite so absolute yet in their positions on some of these divisive issues.”

Chatterjee’s baseload bailout

Critics question whether Chatterjee’s approach to his FERC chairmanship has indeed been fuel neutral. In the same interview, the acting chairman outlined a temporary support package for coal and nuclear plants he hopes FERC will approve as it enters into a longer-term investigation of grid resilience.

The order would require each regional grid operator to provide "interim compensation for existing resources that may provide necessary resilience attributes” and could be retired before the longer-term rulemaking concludes, Chatterjee said. Either that, or an operator would have to "show cause that it not be required to do so."

This “interim solution,” as Chatterjee calls it, comes in response to a Notice of Proposed Rulemaking (NOPR) from the Department of Energy that proposed full cost recovery for merchant coal and nuclear plants with 90 days of fuel supply onsite. The coal and nuclear lobbies support the proposal, while it is opposed by a wide swath of energy interests — from renewables to natural gas companies — as well as a group of former FERC regulators.

The targeted nature of the NOPR — largely applying only to generators in the PJM market — has led many observers to conclude the DOE proposal is a "favor" to Trump campaign supporters like coal generator FirstEnergy and miner Murray Energy. “Save FirstEnergy, save jobs, save friends,” is how former Republican FERC Commissioner Nora Mead Brownell described what she saw as the motivation for the NOPR.

Chatterjee’s interim proposal did little to quiet those critics, as it closely reflected comments from FirstEnergy that proposed a temporary compensation package. Under that, any plant designated as "resilient" by regional grid operators would receive "a payment each month equal to its full costs of operation and service," minus the plant's market revenues.

Chatterjee indicated the week prior that he had met with FirstEnergy’s senior management team to “kick the tires” on the company’s proposal, but he rejected the notion that his proposal is "somehow tied to one company or one entity or political donors to the president."

"The reason I wanted to meet with the FirstEnergy team is that amongst the comments that were submitted, they were one of the ones that actually put forward a potential solution," Chatterjee said. "I wanted to have our experts here really put them through their paces ... to test the concepts that they put forth.”

‘Minimally distortive’ the goal

While the details Chatterjee offered on his interim plan may reflect the FirstEnergy proposal, the acting chairman said he is “sensitive” to comments that oppose the NOPR as well. In particular, he highlighted a submission from John Shelk, head of the Electric Power Supply Association (EPSA), a generator trade group that opposes the DOE proposal.

“His concern would be that if you propped up otherwise uneconomic plants, that the end result would be you would have otherwise economic plants that get pushed into the red,” Chatterjee said. “That's a consequence that I would have a hard time with, and so those are the types of things that we're trying to work through to see if there's some mechanism to ensure that that does not occur.”

To that end, Chatterjee said he aims to make his long-term baseload support package as “minimally distortive” to wholesale power markets as possible. That could be accomplished, he said, by directing generators receiving payments for their resilience characteristics to not factor those payments into their bids in wholesale power auctions.

“My thought there would be some kind of mechanism ... so that the entities receiving cost recovery would have to bid in their marginal cost in energy markets,” Chatterjee said. “We would have to find some way to ensure and enforce that they in fact bid in their marginal costs and therefore it did not alter dispatch and it did not change market behaviors.”

That construct could look similar to existing Reliability-Must-Run arrangements in wholesale markets, where grid operators provide cost recovery to units deemed essential for system reliability. Each market already has such arrangements, but Chatterjee said they do not take into account his concept of grid resilience — the ability to "bounce back" from outages. 

"This would be based on the precedent of existing RMR, but to focus more on resilience attributes and make sure that these potentially critical plants stay afloat," Chatterjee said after an event hosted by CQ-Roll Call earlier that day. 

FERC has done similar things before with provisions on Cost of New Entry for generators and the Minimum Offer Price Rule, Chatterjee later elaborated, which prohibits generators in PJM from submitting bids below a certain price point.

The impact of such a reform package remains uncertain. If many of the generators receiving cost recovery have a higher marginal cost than ones that do not, the subsidized plants could end up acting like a giant standby generator — available for reliability needs, but not dispatched very often. A similar scenario was envisioned by conservative energy think tank ClearPath, which advocated in its comments for two types of reserve markets comprised of generators only around to meet the most extreme reliability and resilience needs.  

Chatterjee said the ClearPath approach is “something we could look at” for a longer-term solution, but stressed that in the interim, a support package is needed “out of an abundance of caution” to ensure that generators critical to the grid do not go offline during the extended rulemaking.

Another potential long-term solution could come from the grid operator at the center of the NOPR debate. During Chatterjee’s interview with Utility Dive, PJM released a new proposal to alter price formation, allowing “inflexible” generation such as “coal, nuclear and large gas units” to set the locational marginal price (LMP) in its market.

Chatterjee said at the time he had not seen the PJM proposal, so it did not factor into his interim plan. But after FERC’s monthly commission meeting the next day, he offered a qualified endorsement of its approach.

"Just from my top-end observation of it, it seems like something that we could look to for a longer term solution that I've proffered," Chatterjee said, "but I still remain committed to doing something in the short term."

Chatterjee ‘befuddled’ by critics

Chatterjee’s high-level endorsement of the PJM pricing reforms is unlikely to win him many friends in the RTO outside of coal and nuclear generators themselves. In comments to FERC, a group of state regulators, industrial consumers, environmental groups and generators in the PJM region urged the federal regulators to not adopt the PJM reforms as part of their NOPR investigation.

The PJM proposal would “prevent market price signals from incenting efficient dispatch, increase out-of-market payments that are not hedgeable and reduce market transparency, change the definition of ‘marginal’ in LMP so as to render it meaningless and no longer reflective of the marginal costs of serving load,” stakeholders wrote.

The PJM stakeholders argue that no new compensation mechanisms are needed because reliability and resilience are not threatened. Quoting the PJM Market Monitor, they note that “generators ‘at risk' of retirement are old, inefficient, and constitute a small amount, only 14,500 MW, of PJM’s reserve margin.”

The PJM comments join a chorus of critics of the DOE NOPR who argue that grid conditions do not justify new cost recovery for plants. Reliability of the bulk power system is strong and grid operators already designate essential generators through RMR, they point out.

Chatterjee acknowledged those critiques but said he is concerned grid operators and the North American Electric Reliability Corporation (NERC) do not go far enough in assessing risks to the power grid.

"The way that we plan for grid outages now, we don't do correlated risk — looking at ... what happens if you have multiple generators going down in the region and you have a cascading effect?" he said. "What happens in the event of a manmade disaster or natural disaster, a physical attack or cyber attack on an infrastructure that takes out large chunks of [the grid]?"

While Chatterjee said he takes the grid operators’ perspectives into account, he was concerned by comments from “people that own the assets” — companies like FirstEnergy or nuclear operator Exelon — arguing their baseload plants could soon be forced offline.

“This isn’t what Neil Chatterjee thinks,” he said. “The people who are submitting the comments are the people that own these assets who are saying that the threat is imminent and that these plants are set on the current trajectory to be prematurely retired.”

Given that thinking, Chatterjee said it is only reasonable to design an interim support package to keep plants online that could provide “essential services” for resilience.

"Maybe we will conclude there's no imminent threat to resilience and that these other baseload assets were not necessary from a security and resilience correlated risk standpoint," Chatterjee said. "But what if we're wrong and we find out that we did need them and they're gone? The risk of that is, I think, in the ratepayers' interest [to address] and is a cost worth paying. And I think ratepayers have paid for things that have a lot less grid value than that."

Many observers find flaws in the logic of Chatterjee’s proposal. In the hours after the initial write up of his Utility Dive interview was published last week, energy lawyers and analysts panned his proposal on social media, writing that a “show cause” order would be the wrong mechanism to devise plant supports and could be outside the legal realm of the NOPR if it applies to all grid operators.

Chatterjee was clearly displeased with the reaction, saying after the FERC meeting that he was “befuddled” by the backlash at what he sees as a “reasonable” proposal.

"I think people just need to calm down," Chatterjee said. "I think folks are having a hyperbolic reaction to this because quite frankly they don't understand it."

Part of the problem, Chatterjee said, is that “people are still debating the NOPR as it was submitted to us.”

“What I'm trying to say is we've moved past that and we're moving toward a constructive solution,” he said.

The ‘constructive solution’

FERC is still on track to act on the DOE NOPR by its Dec. 11 deadline, Chatterjee said, likely with his proposal for a “show cause” order and a longer resilience rulemaking. In the coming weeks, the acting chairman said he will present the interim solution to his fellow regulators, negotiate the finer details, and come up with a proposal that he hopes can win a majority of the commission’s support.

"Working with the staff, we've certainly gotten input from my colleagues as we've gone through this process," he said. "I'm hopeful that once I'm able to really flesh out this interim construct and longer-term rulemaking, then I will be able to persuade my colleagues that this is the right thing to do."

More detailed analysis of Chatterjee’s interim proposal will be possible once FERC releases the full order, but in the meantime, Chatterjee stressed again that affinity for coal is not shaping his rulemaking process.

“I've just spoken as Neil Chatterjee, individual, who is expressing a cultural sensitivity that in no way will influence how we approach policy here at the Commission,” he said after his coal remarks. “If it’s not fact-based and in the docket, it’s not going to happen.”

“I just don't want any confusion that ‘oh he's sympathetic to the plight of people in coal communities and therefore is going to prop up uneconomic generation,’” he added. “If it ain’t in the docket, it ain’t going to happen.”

This post has been updated to include a statement from Chairman Chatterjee comparing his baseload support package to existing RMR arrangements.