Rick Perry's Crusade for Coal

In late September 2017, Rick Perry, Secretary of Energy, sent a letter to the Federal Energy Regulatory Commission (FERC) proposing a new rule to help ensure resiliency for the nation’s electrical grid.  On the surface this is exactly what voters should expect of energy leadership.  However, nine months into the Trump occupation of the White House, we have learned that it is a good idea to look closely at every proposal for hidden agendas.  Perry is asking FERC to pass a rule that will protect coal-fired and nuclear power plants from independent market forces that now favor lower priced natural gas and renewable energy sources such as wind and solar. 

FERC has received an exceptional number of comments on the proposed rule in a very short period of time.  Perry had asked FERC to fast track the rule making process, limiting the amount of time for public comment.  However, comments quickly poured in.  It has made some interesting compatriots of natural gas producers, solar system operators and wind power developers. Their positions have been strongly against Perry’s proposed rule, eclipsing the expected support from the coal industry.

Investors are probably scratching their heads over the entire controversy.  Are investment dollars in jeopardy?

Scuttling Coal

Previous posts such as “Bull Case in Perry Study” published on May 19, 2017, have focused on Perry’s attempts to cast coal as critical to the U.S. electrical grid.  Perry points out that coal-fired and nuclear power plants can generate electricity without interruption in part because they can store fuel on-site and therefore are critical to the nation’s power structure.  Perry claims coal and nuclear power are not given full valuation for the contributing “reliability and resiliency” to the electrical grid.  He also claims unfair subsidies to renewable energy are driving coal and nuclear power plants out of business.

Unfortunately, it is natural gas production has left coal in the dust (no pun intended) and nuclear is crumbling under the weight of its exceptional capital costs.  Furthermore, as described in a subsequent post “Smarting Up Electrical Grids” published on May 23, 2017, with technology advances even intermittent power sources such as solar and wind can be a reliable source of power in the modern electrical grid.  Completed in August 2017, Perry’s own study of the matter noted as much.  The study went a step further by declaring the U.S. electrical grid uncompromised by plans to retire coal and nuclear power plants that have cease to perform economically. 

Sparing Coal from Realities of Market Forces

Perry was no doubt less than pleased with the results of his own study, which was likely expected to find in favor of coal.  Not to be dissuaded, Perry has decided to move forward with a new plan to force electrical grid operators to buy from coal-fired power producers instead of cheaper natural gas power plants or solar or wind power systems.  The plan would change the way wholesale power markets price electricity so that coal and nuclear power producers would receive compensation for their costs and thus be able to offer power at prices competitive to natural gas.  In other words, Perry wants to dismantle a free market approach to electricity and impose in its place a version of crony-capitalism that favors Donald Trump’s coal industry supporters. 

Perry in the Cross Hairs

While Perry’s letter to FERC received only nominal attention in the energy news, it did not go unnoticed by wholesale electrical grid operators.  One of the country’s largest regional transmission companies, PJM Interconnection, helps deliver electricity to over 65 million people in thirteen states in the Mid- West and Atlantic states.  It happens that PJM receives as much as a third of its power from coal-fired power plants, even though it has presided over the retirement of at least nineteen poor performing coal plants through the end of 2016.  PJM executives lost no time in firing back comments to FERC asking the Commissioners to reject Perry’s proposal.  PJM executives have commented publicly that the grid operator has been singled out for its efforts to modernize its grid and retire poor performing coal plants. 

Several other grid operators piled on with similar full-throated objections. Among other criticisms the grid operators note that Perry’s proposed rule is incompatible with the Federal Power Act.  In particular FERC is mandated to ensure no undue discrimination among power sources occurs in the U.S. electricity markets.  In other words the U.S. electricity market is to be independent.  The grid operators argue that the Perry rule would undermine fair competition in the wholesale electricity market to the detriment of consumers.

Transmission companies are getting support for their side of the argument from some surprising quarters.  ExxonMobile (XON:  NYSE), Devon Energy (DVN:  NYSE) and other suppliers of natural gas have filed comments with FERC that point out that natural gas power plants also have onsite storage and deliver the same reliability and resiliency as coal and nuclear power plants.  Yet Perry’s proposed rule gives no special ‘valuation’ for natural gas.  The reality of natural gas power plants appears to cast a particularly harsh light on Perry’s plan, revealing all the talk of resiliency and reliability as a thinly veiled attempt to shore up the coal industry.   

Political Reality and FERC

The overwhelming opposition to the Perry rule is likely to give FERC commissioners are reason to pause.  Careers could be lost in the wake of rubber stamping the Trump administrations attempt promote coal at the expense of fair market forces not to mention undercutting FERC’s own Congressional mandate.  Of course, FERC is a political animal if it is anything.  It is composed of five commissioners appointed by the president and confirmed by the Senate.  No more than three commissioners can be of the same political party.  The group was without a quorum until August 2017, when the Senate confirmed two of Trump’s nominees.  Third and fourth appointees were confirmed a month later  -  just in time to consider Perry’s proposed rule.

It may not be simply a matter of politics.  Even if FERC bends to Trump administration pressures to support coal, the rule change would most likely going end up in court.  PJM Interconnect has already signaled its view that the proposed rule is unfairly biased against it’s operation.  Other grid operations would likely join in.  Until then grid operators and power suppliers will likely continue with business as usual, despite Perry’s crony capitalism.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.