Federal regulators meeting next month to untangle the knot that is PJM Interconnection LLC will have to navigate the tricky division of grid and market responsibilities under the Federal Power Act, energy analysts say.
PJM, a regional transmission organization that controls the power grid across the Mid-Atlantic, is struggling to keep up with rising energy demand, a problem complicated by rapidly growing data centers. The Federal Energy Regulatory Commission, which regulates PJM, is holding a technical conference July 23 focused on improving the operator’s ability to address market needs. That comes as PJM is planning on trying to acquire more capacity in September.
The challenges of quickly adding new data centers to the grid while limiting costs to ratepayers will spur FERC and PJM to move quickly. However, any solutions are likely to be litigated based on the jurisdictional lines drawn by the Federal Power Act.
Since PJM—which spans across 13 states and the District of Columbia—answers to FERC, it’s confined to much of the same Federal Power Act restrictions as the commission.
FERC on June 18 announced it was issuing show cause orders to PJM and the other RTOs to demonstrate within 60 days how their tariffs can be considered “just and reasonable” without clear protocols addressing large load customers like data centers. The grid operators can also propose changes, the commission said.
“Where things start to get hairy is in order for a new data center to come online, it has to interconnect to the transmission system under FERC’s jurisdiction, often pay for upgrades—but the actual terms of the sale are under state power to that data center,” said Matthew Christiansen, a partner at Wilson Sonsini Goodrich & Rosati working in the firm’s energy and climate practice.
The Federal Power Act also only specifies what FERC—and PJM as an extension—is allowed to do, but doesn’t carve out states’ role.
“The state authority to regulate utilities is essentially unlimited, except where the Federal Power Act has specifically given FERC authority,” said former Federal Energy Regulatory Commission Chairman Mark Christie. The jurisdictional clash adds to the chaos of trying to figure out how PJM is legally allowed to interact with data centers.
PJM in an email said they were still working on those jurisdictional issues through their Critical Issue Fast-Path stakeholder process, which is the subject of a meeting on June 30. PJM released their proposal for that meeting on June 18.
Division of Labor
That jurisdiction centers around the different ways electricity is sold.
Under the Federal Power Act, federal regulators are responsible for the interstate wholesale sale of electricity. The states regulate the retail side where energy is sold to final customers, such as data centers.
PJM has faced scrutiny as power prices jumped 76% in the first quarter. One of the states within PJM is Virginia, which is the data center capital of the world.
Growing energy demand requires the addition of more generation, which sometimes requires upgrades.
However, PJM doesn’t build new generation, said Christie. It just operates the markets and the generation interconnection queue, which is the line that projects have to wait on in order to be analyzed to connect to the grid. That process takes a long time—which PJM has some effect on—and even when approved, some projects end up no longer being financially viable due to supply chain issues or other problems.
At the end of the day, states are in charge of generation.
“What’s happened is that the energy policies of those 13 states have diverged substantially, and particularly in terms of what kind of generation they want to build, what kind of generation they want to shut down, how they want to meet their energy goals, and so that’s not PJM’s fault,” Christie said.
For example, he said some states within the PJM region don’t allow utilities to own power plants to generate energy—they’re only allowed to buy and sell the power.
“Blaming PJM for the lack of generation—it’s sort of like blaming the street for being wet after it rains,” Christie said.
Legal Precedent
Christiansen pointed to US Supreme Court cases that define how FERC—and PJM—may operate: Oneok Inc. v. Learjet Inc. (2015), Hughes v. Talen Energy Mktg. LLC (2016), and FERC v. Elec. Power Supply Ass’n (2016).
“What those cases collectively stand for is that FERC cannot regulate matters within state jurisdiction or take actions within its jurisdiction that aim at or target matters within state jurisdiction,” he said.
The Federal Power Act also prohibits “undue discrimination,” said former FERC Chairman Richard Glick. “There’s a question of treating one class of customers differently than other classes of customers,” he said.
Glick pointed to New York v. FERC (2002), “in which the Supreme Court said if FERC wants to, it can assert jurisdiction over the distribution system, not just the transmission system” but the commission has never taken that route, he said. Distribution refers to local lines owned and controlled by the states.
PJM’s original proposal was at risk of running into legal issues because the entity considered giving directives to cut power based on the nature of the retail customer, like limiting electricity to data centers.
The most recent proposal dropped that idea and said states “will be given key information upon which they can take critical actions at the state level to implement retail load reduction priorities.”
“PJM significantly revised its proposal in response to stakeholders’ concerns that PJM was regulating within state authority,” Christiansen said.
“PJM seems to be taking on a facilitating role,” which is “much more consistent with the Federal Power Act’s division of jurisdiction,” he added.
Joseph Bowring, president of Monitoring Analytics, which is responsible for all market monitoring activities of PJM, had also echoed Christiansen’s concerns that PJM can’t cut data center electrical load specifically.
That being said, “the risk of data centers and the cost of data centers should not be imposed on other customers,” Bowring said.