Find Common Ground and Focus the Debate
Jay Morrison is an Energy Bar Association Primer Dean and Vice President of Regulatory Issues at the National Rural Electric Cooperative Association. This screed solely reflects the views of the author and does not necessarily reflect the views of NRECA or any of its members.
At the recent Energy Information Agency's annual energy conference, one of the speakers offered a rousing defense of the RTO markets against perceived challenges from state policy mandates. He considered the mandates to be reregulation piece-by-piece.
He further explained the multitude of benefits that RTOs have offered consumers and the system including: elimination of multiple control areas, regional planning, the use of redispatch instead of transmission line-loading relief, increased utilization of the grid, and increased transparency.
The speaker contrasted the present state with the "bad old days" in the 1970s, before competition developed in the electric utility industry, when consumers were "mad as hell." He then suggested that state policies supporting individual resources or resource types put all of the benefits of RTOs at risk and threatened to return us to the bad old days. To prevent that retrogression, he supported policy and market-design responses that would pre-empt or mitigate the effects of state policies.
Unfortunately, the speaker's argument conflates some settled historical issues with current policy disputes on which parties disagree. And, in so doing, it makes it more difficult to focus on the crux of the policy disagreement underlying the conflict between the RTOs and the states.
To help figure out where we have common ground and where we don't, it will help to unpack the argument a bit.
First, it is true that the seventies are not a model to which the industry should return. Those were the "bad old days." In those days, smaller load-serving entities, and those that were transmission-dependent, were at a deep disadvantage. Because it was difficult for load-serving entities to obtain transmission service from their neighboring utilities, it was often impossible or simply uneconomic for them to own generation or buy generation from anyone other than their neighboring utility.
Unless they could site a plant in the middle of a load pocket served entirely by their own transmission and distribution facilities, they would have difficulty getting their power delivered from their own resources to their load. They often couldn't contract for service from generators located one or two utilities away without the grace of their neighboring utility - frequently available only at a very high price.
And, they rarely had any access to economy energy in real time from generators around the region. As a result, most transmission-dependent utilities had to enter into cost-of-service requirements contracts with their neighbors and many of them spent years or decades in lopsided litigation at FERC over the rates, terms, and conditions of service.
There were a few bright spots in this dark time. New York, New England, and the original PJM footprint had power pools that somewhat enhanced options and reduced reserve costs. During the initial phase of nuclear construction, some transmission-dependent utilities were able to use their neighbors' need for capital and the antitrust provisions in the Atomic Energy Act to negotiate joint-ownership and transmission-sharing arrangements that gave them greater access to transmission and thus better generation options. These, however, were exceptions to the rule.
The preamble to Order No. 888 does a good job of reciting this history. And, this history is why cooperatives and public power were among the earliest and loudest proponents of transmission open access and wholesale competition.
Co-ops and public power recognized that open access and wholesale competition had the potential to dramatically reduce power costs for their consumers. Open access would enable them to build their own resources and deliver their output to their members, contract with more distant suppliers of wholesale power and energy, and access economy energy on a near-real-time basis.
As hoped, open access worked well. It accelerated the development of an independent power producer industry and it encouraged generators to increase their efficiency, reduce their costs, and become more responsive to wholesale customers.
Of course, there was still room for improvement. There was still some discrimination in transmission planning and service. There was still transmission rate pancaking - the need to pay separately for wheeling service across each intervening transmission system between a resource and load. And, there were still significant inefficiencies in the operation of the transmission system.
That's why cooperatives and public power in many parts of the country again supported change: the formation of independent system operators. The idea was that ISOs would operate the transmission system regionally and independently. The goals were to further reduce discrimination, enhance regional planning, eliminate rate pancaking, increase efficient utilization of the transmission system, and in so doing, further increase reliability and competition, reduce power costs, and improve service.
So, that's the birthplace of RTOs and ISOs, as transmission operators centrally dispatching resources to maximize value and minimize cost on the transmission system. As Order No. 2000 provided when it established principles for RTOs, the RTOs were expected to establish energy markets to manage transmission congestion. Those markets were designed to serve as operational tools. RTOs, ISOs, and the markets they run still serve in that role today, and it is in that role that RTOs and ISOs provide the operational value noted in the second paragraph above.
Where does that leave us?
We agree that the seventies are a bad model. We agree that wholesale competition benefits consumers. We agree that RTOs and ISOs, in the areas where they operate, can provide significant operational, reliability, and competitive benefits.
It's not clear, however, what any of that has to do with state decisions to support particular resources.
There's no doubt that state policies, and federal policies for that matter put a definite thumb on the competitive scale. That is, after all, the point: to give those preferred technologies or resources a competitive advantage over others.
But, how is that relevant to the Federal Power Act's direction that the rates and terms and conditions for interstate transmission and wholesale sales be just and reasonable and not unduly discriminatory? How does that return us to "the bad old days" of the seventies?
The development of competition in the electric-utility industry has generally not been about ensuring a level playing field between different fuel sources. Nor has it been about protecting individual competitors or types of competitors.
Rather, the Federal Power Act has been read - at least until recently - as a consumer protection statute. It has been read to ensure that regulated monopolies do not gouge their wholesale customers and transmission customers. FERC reviewed public utilities' tariffs to ensure that they were cost-based and didn't discriminate against wholesale and transmission customers vis-a-vis the regulated public utility. The goal was to ensure that monopoly utilities didn't use their ownership and operation of the system to advantage their own generation and their own customers at the expense of others seeking to use the system.
When FERC moved toward market-based rates in the 1990s, it did so, based on analyses demonstrating that the wholesale suppliers were subject to sufficient competitive pressures to drive prices down toward cost and that open and independent operation of the transmission system prevented the individual public utilities from discriminating against their wholesale customers.
In other words, competition was not about ensuring a level playing field between natural gas generation and nuclear or between wind and coal. It was about ensuring that customers had access to enough choices that no one supplier could drive up wholesale prices or limit customers' options without a competitive check.
So, we come again to the question: Do state policies supporting individual resources or individual resource types undermine RTOs' and ISOs' abilities to ensure competition? I think the answer is no.
State policies do change the competitive landscape. But, they do not reduce competition per se.
First, state policies have no impact on the open-access revolution of Order No. 888. Nor do they deprive wholesale customers of the ability to obtain non-pancaked, non-discriminatory service across RTO and ISO grids.
Second, because customers still have access to multiple options, state policies do not undermine competitive incentives for suppliers. An RPS may give a wind generator a competitive advantage over a gas generator. But, to be successful vis-a-vis other wind generators, wind developers must still improve their product, improve their service, and drive down their costs as much as possible. And, gas, coal, and other developers must do the same.
Those fossil and nuclear generators that survive in an environment where consumers prefer - or are required to buy - renewable resources, must have competitive advantages that make them attractive to consumers and/or their political representatives. For example, efficiency, location, service quality, operational characteristics, environmental characteristics, contribution to the reliability or resilience of the portfolio, or willingness to enter into contracts that meet other customer needs.
Consumers still have options, and competition still drives suppliers to be more efficient and better at what they do. Who is competing may change, consistent with the state and federal policy goals, but the level of competition does not.
Just as state policies are unlikely to return us to the seventies, those policies are unlikely to undermine the RTOs' and ISOs' abilities to perform their core operational tasks.
In their role as system operators, RTOs and ISOs maximize the efficient dispatch of the resources that are available to them subject to reliability constraints. They are, or should be, indifferent to which resources those are. And, the benefits of that centralized dispatch and independent system operation - regional-transmission planning, elimination of rate pancaking, the use of redispatch instead of transmission line-loading relief, increased utilization of the grid, increased transparency - are unaffected by state support for resources or the resulting changes in the resource mix.
If the concern is not truly based on the impact of state policies on RTOs' and ISOs' operational benefits or on wholesale competition, we need to isolate the real source of the dispute between RTOs and states. The problem seems to come down to the impact that state policies have on what's being called "efficient" price formation. That is, the impact state policies have on the RTOs' and ISOs' ability to establish prices that serve as the primary incentive for exit and entry and the primary if not sole source of revenue for generators.
If so, it is true that state policies can undermine that function. It is not clear, however, that that is a problem under the Federal Power Act or a problem for wholesale customers.
The answer to that question depends on how we answer some other questions:
Do we believe in long-term or integrated resource planning and the long-term reliability, resilience, and integrational efficiencies they can provide?
Do we believe that the electric utility industry must serve a broader range of public interests beyond efficiency, such as environmental performance, economic development, technological evolution, or long-term reliability?
Or, do we believe instead that electricity is a pure undifferentiable commodity like gold or silver, and thus that the industry ought to pursue efficiency and short-term reliability as its only two goals?
Do we believe the decision between these visions should be made by states and wholesale customers or by FERC, RTOs, and RTO stakeholder processes?
Suppose we conclude that electricity is a commodity unaffected by the public interest and that FERC or the RTOs are empowered to make that decision. Then bilateral markets, native-load-service obligations, integrated resource planning, and state policies aimed to protect the environment, long-term reliability, and local economies may in fact be inconsistent with the future we're pursuing.
That's the core of our disagreement. We agree that we don't want to go back fifty years to before open access. Let's drop that argument. We agree on the value of wholesale competition. Let's drop that argument. We agree on the operational value that RTOs and ISOs can provide. Let's please drop that argument as well.
Let's focus instead on the debate over the nature of electric service and who decides.
Has the industry changed so much? Is the Federal Power Act so flexible? That FERC and the RTOs are empowered to decide that electric energy should be regulated and traded as a pure commodity over the loud objections of states and load-serving entities that see "the business of . . . selling electric energy for ultimate distribution to the public [as] affected with a public interest?" As the Federal Power Act says?
And, even if the RTOs and FERC have that authority, should they so fundamentally redefine the nature of our industry? Those are questions worth debating.
