The U.S. power and natural gas sectors could face a tumultuous 2019 as a new lineup at the Federal Energy Regulatory Commission works through a wide-ranging, politically charged agenda that involves competitive wholesale power markets, taxes, transportation rates and infrastructure permitting.

The relatively new slate of five commissioners and an uncertain Republican majority headed by FERC Chairman Neil Chatterjee have interfered with industry observers' vision of how the agency will handle the agenda.

Republican Commissioner Kevin McIntyre's health issues have kept him from voting or participating in proceedings since mid-October 2018. And the newest Republican to join the panel, Commissioner Bernard McNamee, has faced calls to recuse himself from electric power generation mix and grid resilience matters he touched in previous roles at the U.S. Department of Energy and a conservative think tank. McIntyre's absences set up the possibility for 2-2 deadlocks with Democrats on some issues and even a 2-1 Democratic majority if McNamee determines he should not vote on a certain docket.

The commission traditionally votes as a bloc. But decisions may take longer if they involve contentious issues, given the variance in viewpoints between the commission's Republican and Democratic factions, said Delia Patterson, American Public Power Association general counsel and senior vice president of advocacy and communications.

"I think there is going to be a lot more compromise … [and] decisions may take longer to come out because of the need for them to negotiate probably a little harder than they would have done under a different FERC makeup, but it's hard to tell," Patterson said.

On the other hand, United States Energy Association Executive Director Barry Worthington expects the caseload to progress more quickly in 2019, given the pressure on FERC to make headway on lingering issues. Chatterjee "is an action-oriented individual; He wants to see results," Worthington said. "He's going to push the staff to act quicker" while staying within the commission's authority.

Observers expect the Trump administration's energy policies to weigh heavily on FERC, both inspiring decision-making and drawing greater scrutiny from Congress as Democrats take control of the U.S. House of Representatives.

Power markets

Among the first issues to be decided at the commission in 2019 will be PJM Interconnection's capacity market redesign, intended to blunt the price-suppressive effects of increasing levels of state-subsidized generation in the region. (FERC dockets EL16-49, ER18-1314, EL18-178)

"The issues underlying the PJM filing are common across many of the ISO/RTO regions, and the proposals that the parties have put on the table before FERC could set precedent that will apply to other regions," said Katherine Gensler, acting vice president of federal affairs for the Solar Energy Industries Association.

Following a June 2018 FERC order that found its existing capacity construct to be unjust and unreasonable, PJM pitched a plan in October 2018 to expand the application of its minimum offer price rule and essentially block low bids from state-subsidized resources. The proposal included a "resource carve-out" that would allow those resources to receive a capacity commitment without bidding into the auction. It offered two options for how capacity clearing prices would be set, with one recalculating prices to prevent unsubsidized generation from being "crowded out" by the resource carve-out resources, according to FERC filings.

Electric Power Supply Association President and CEO John Shelk said FERC's decision in the PJM capacity market docket will be "an early test" of the commission's commitment "to protect wholesale markets from being undermined by out-of-market actions."

If FERC does not adopt "strong mitigation measures to protect the integrity of market outcomes for unsubsidized economic competitive generation" the commission has deemed to be unlawfully threatened by out-of-market payments to supposedly uneconomic generation, "then PJM's wholesale markets cannot function properly," Shelk said.

Jeff Dennis, Advanced Energy Economy's general counsel for regulatory affairs and a former FERC official, said the PJM proceeding is one of the most challenging he has seen in terms of finding a path forward that satisfies the interests of varied parties and avoids continued turmoil in the market.

Renewable energy credits and the renewable portfolio standards that create them "don't have a demonstrable impact on the capacity market and on offers into the capacity market," Dennis said.

That line of thinking would require FERC to "pull back on some of the findings" it made in its split decision to declare PJM's capacity market unjust and unreasonable, Dennis said. However, "right now there doesn't appear to be three votes to maintain the approach the commission took in that order."

Republicans Chatterjee, McIntyre and Robert Powelson pushed the June 2018 order through. Since then, Powelson has left the commission and McIntyre has been unable to participate much in FERC's caseload.

McNamee was sworn in December 11, 2018, replacing Powelson. At his first FERC meeting, he said he planned to take some time to listen before jumping in to vote on matters before the commission. It is unclear whether he will participate in the PJM proceeding. FERC must act early in the year to keep PJM's capacity auction on schedule for August. The auction has already been delayed three months due to the complexity of the proceeding.

Electric transmission

Transmission development also promises to be a hot-button topic in 2019. FERC outlined a proposed policy in October 2018 that would set transmission base rates of return on equity using several different models rather than relying solely on the discounted cash flow methodology. The approach would create a wider band of acceptable ROEs, making room for a higher total ROE after incentives are added.

Chatterjee announced in November 2018 that the commission would be reviewing whether to make additional changes to its calculation of base ROE and transmission incentives.

Worried about upward pressure on ROEs, Patterson said her group would keep a close eye on the policy proceeding.

"We understand that transmission needs to get built," she said. "We don't think that there is a need to increase incentives or raise ROEs to get that transmission built."

Worthington said FERC will hit a logjam as transmission developers push for higher returns while distribution companies and large industrial customers conversely push to restrain those rates. "The commission is going to have to make a determination of sorts as to what's in the national interest."

With renewable resources often located great distances from demand centers, Worthington added that serving one national goal of boosting the deployment of renewable energy will likely require a separate goal of encouraging and incentivizing transmission. "So the agency is going to have to sort out all of these competing priorities."

Worthington said he was "highly confident that the administration is going to make a big push for infrastructure investment in 2019," noting that the White House is behind on its campaign commitment to focus on infrastructure.

Gas infrastructure

For the U.S. gas industry, the brightest focus in 2019 likely will be on federal appeals courts that are reviewing FERC certificate orders. Those cases will likely impact not just the individual pipeline projects involved but also the commission's certificate policy.

The way FERC determines that a project is in the public interest, the adequacy of its environmental analysis, potential impact of new infrastructure on global climate change, and exercise of eminent domain authority are among the key issues before the courts and at play in the debate over commission policy.

According to Height Securities, another issue soon to hit the courts involves the commission's decision to eliminate its policy of allowing pipelines that are organized as master limited partnerships to recover their income tax costs from customers through their gas transportation rates. Court appeals involving Enable Mississippi River Transmission LLC and others "could meaningfully shape the application of FERC's final MLP income tax policy," Height Securities said in a research note.

While Democratic control of the House likely means an increase in congressional oversight of FERC and other federal agencies, Height Securities still expects legal and regulatory changes under the Trump agenda to help the pipeline industry in 2019.

The new year is also shaping up to be busy for pipeline rate cases. Many pipelines have submitted either limited Natural Gas Act Section 4 rate filings to lower their rates as a result of the January 2018 federal tax overhaul, which reduced the corporate income tax from 35% to 21%, or general Section 4 rate cases in which all of a pipeline's rates and revenues are reviewed. Pipelines also have pursued settlements with customers on how to factor the corporate tax reduction into their rates.

The pipeline industry has argued that the question of whether rates remain just and reasonable is more complex than just applying the new tax rate to a pipeline's cost of service. FERC has a process for assessing how the new corporate income tax rates affect pipelines' cost of service, and the commission has the authority to determine whether a pipeline's rates are just and reasonable and establish a new rate if necessary, pipeline representatives have noted.

It will be up to commission leaders to decide whether FERC's review of its pipeline certificate policy will remain on the agenda. McIntyre officially launched the review of the two-decades-old policy in April 2018, not long after he took over as chairman of the commission. Health concerns forced McIntyre to give up the gavel, and observers think Chatterjee is unlikely to move on the review because Republican members are mostly satisfied with the commission's traditional way of measuring an individual project's environmental impacts and its process for determining whether or not a project is in the public interest.

Democrats have pushed for expanded analysis to answer public interest and environmental questions, particularly those dealing with potential contributions to climate change.

The review has attracted more than 3,000 filed comments, but the proceeding is a notice of inquiry and not a proposed rule or policy statement, so FERC does not have to take any further action.

And a policy statement cracked by dissenting opinions would not provide stability for regulated companies with up to billions of dollars in a single project and stakeholders concerned about climate change and their local communities. The federal court review of many of these same issues is another reason the policy review might have to wait for another time.

As the courts and commission review these issues, the U.S. LNG and gas pipeline industries would like the certificate review process to remain transparent and efficient. FERC has a number of pending applications for LNG export facility authorizations under Natural Gas Act Section 3 and pipeline and compression facilities under Natural Gas Act Section 7.

Environmental group Natural Resources Defense Council said it hopes that a new policy statement, with a way to determine project need that considers "all relevant factors" and not just agreements for pipeline transportation service, will be in place soon to help guide the commissioners through a busy year. Gillian Giannetti, a staff attorney with the group, said there are several major projects on the FERC agenda.

"In the pipeline space, FERC will be reviewing Mountain Valley Pipeline's Southgate extension project," Giannetti said. "In the LNG space, FERC plans to issue its environmental impact statement for the Alaska LNG project. Both of these projects are significant in scope and will require FERC to implement its revised policy on the disclosure and consideration of greenhouse gas emissions."

Jasmin Melvin is a reporter for S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.