Do the Right Thing


I haven’t written for a couple of weeks. Gary has been on a hot streak with the Burrito and there has been a great deal for the “incoming” Executive Director to process. But most of all, I’ve been watching what is happening in California, at FERC and the chess match for market development in the West between CAISO, the Mountain West and PEAK/PJM . Dang, this is happening faster than delivering pizza on a Friday night in Brooklyn.

Start with California: WPTF and several of its members have been hard at work on comments and reply comments in the CPUC Resource Adequacy (RA) proceeding… essentially, how to pay for what Easterners call “capacity”. The CPUC seems serious about doing something to better value the RA product. This is brought on by the preponderance of solar and wind – things that don’t produce at a set amount of power – that has been a goal of California policy makers. Our friends at Van Ness Avenue in San Francisco have realized that pushing renewable resources is fine but you have to pay for the things that help fill the gaps and work when the sun “don’t shine” and the wind “don’t blow”. A policy decision is due sometime in June that will determine if the CPUC is “real” about paying for RA – like endorsing a multi-year forward auction – or if the reliability product of RA falls victim to California fears of FERC involvement.

This “fear of FERC” puzzles me given FERC’s flexibility on all matters related to the West in the last 15 years. Recent court decisions (EPSA vs. FERC, Hughes vs Talen, etc) all seem to clearly say that reliability of the grid is FERC’s – unless you are in ERCOT, Hawaii or Alaska. However, the decision by FERC on March 9 relating to ISO-NE’s capacity market further demonstrates the lengths that FERC will go to accommodate state policies. I make this last point with more than a fair amount of chagrin as one begins to wonder at what point FERC will draw the line on state tinkering on jurisdictional markets. Commissioner LaFleur in her comments on the New England order was correct when she said these are “hard issues”. They are indeed but where is the line between state intervention into markets and if one is not visible, when do these cease to have the attributes – and benefits – of efficient markets? Hard issues, indeed.

Normally, these musings would end there but, as a result of our RA filings at the CPUC, I had occasion to chat with some of the WPTF members about the nature of RA or “capacity”. In recent years, I have begun to feel that I am doing some form of penance for my part in promoting PJM’s capacity mechanism – with its sloped demand curve based on “cost of new entry” (CONE) – to state and federal regulators when I worked at Valley Forge back in the mid-2000s. It was conceived as an attempt to properly value capacity rather than have it subject to having zero value when times were good and very high costs when things were tight. To be fair, we never really got to see what was meant by capacity being “tight” and thus the price being high as we mitigate prices so that the price effect of scarcity seems to never occur. It was an elegant construct but, alas, a sloped demand curve seems – to me – an administrative solution that can be as wrong as any regulatory decision and likely fails to truly capture an efficient value for capacity.

I expressed these views to some members and got some interesting discussion. One member correctly pointed out that RA (capacity) represented payment for the fact that electricity is a commodity for which regulators “never allow to become scarce”. This member noted that short-term energy works well as a market but that the signal and payment to allow for investment into long-term assets can not happen in the way we regulate and mitigate markets. Wow, I thought. This member had a point.We allow for oil and natural gas, and even refined products like gasoline to become scarce – not bothering to curb prices – which then pay for exploration, transportation, refinement and then distribution to retail. Not for electricity. This revelation was irritating to my sense of market efficiency.

This point was further underlined when another member in the email exchange I had referred to capacity markets as “a mitigation measure employed to address problems created by other mitigation measures – bid caps”. I took from this last point that perhaps only ERCOT – with its $9,000/MWh bid cap – seems to be able to allow the market to properly value capacity. The possibility of such a  cleared price seems to increase incentives for companies supplying to customers to hedge – either physically or financially. That is a good outcome for everyone.

So where does that leave the rest of us? FERC clearly wants to accommodate states’ policy choices for renewables, etc., but is caught between the desire to be flexible and market efficiency. California clearly has decided to “prefer” renewable resources and has actively intervened to achieve this preference. In some sense, one can say that California has done on the other side of the resource selection what the proposed rule promulgated by DOE last fall sought to do for coal. I suppose the crucial difference in divining what FERC allowed for New England  – state policies for renewables – was that a federal policy preferring a specific set of resources to ensure reliability could not be imposed without additional evidence. There is a distinction – barely –  but I am giving my friends at 888 First Street the benefit of the doubt in their ability to “nuance” an idea.

But when it comes to California this “nuanced” approach to capacity might work to everyone’s benefit. Opponents can gnash their teeth all they want about how capacity markets are messy – not really markets but rather a “mechanism” – and that you can easily screw up the energy markets if you aren’t careful. However, California has decided to push for specific resources but still needs to pay for reliability. Perhaps FERC’s ability to “nuance” may allow California to “do the right thing” and begin to structure a multi-year auction for network RA and local RA needs, recognizing that FERC may be a willing partner and isn’t the “big, bad wolf”. Maybe, but if the CPUC can’t get over its fear and embraces something unworkable, who knows? Might a 206 complaint be in the offing, initiated by someone? This is, after all, about reliability.

A final, hopeful thought: it appears that the development of renewables continues apace in the rest of the West and seems to allow for “co-existence” of traditional resources necessary to maintain reliability and balance the system. Whatever market is developed in the rest of the West, it won’t have to go through the very difficult gyrations we are experiencing in the Golden State. It’s nice to contemplate a simple real-time market with a day-ahead market that operates as a fully integrated and dispatched network.

OK, with that thought, I’ve transitioned from Spike Lee (“Do the Right Thing”) to John Lennon (“Imagine”). This is the Renaissance Man, signing off…