Have No Fear

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This past Tuesday was Primary Elections Day in my state. The headlining race was for governor, but since my party’s nominee was running unopposed – and I like him very much – the incentives for showing up for one to vote were “just because…” Just because one is a good citizen and cares about the process. I have a son who is 18 and about to go to college. We passed the polling place and I told him I had to go home, shower, put on better clothes, and go vote.

In hindsight, I suppose I was making a point even though I hadn’t the faintest idea who was running in my party’s primary for lower profile offices like sheriff, or the downright obscure “Orphan’s Court”. I simply felt strongly about setting an example for him. I feel that in today’s political climate we must try even harder to respect – even revere – our institutions. Maybe small things like this will help. I thought about that as I held the door for the 95-year-old neighbor who was born in the Ukraine at the church where we vote. We’re very fortunate here in the US and I don’t want my kids – who were adopted from Kazakhstan – to take it for granted. I don’t want to lose sight of the specialness of our country and our institutions.

As the world evolves, so too do its regulatory institutions…

I think about process a good deal. Anyone who is in the electricity industry must as it is one of the most heavily regulated industries in our otherwise capitalist system. There are many theories as to why this is, but the bottom line is that ours is a capital-intensive industry that in the past relied upon a regulatory compact – a sort of guarantee – to allow for capital to be attracted at low financing rates. That made sense as the need for infrastructure was ever growing throughout most of the 20thcentury.

Any “mistakes” in terms of procuring too much capacity – or the wrong capacity – were overcome by the rapid expansion of demand for electricity. Only when load growth slowed in the 1970s (Arab Oil Embargo, big recession) did the formula falter. Regulatory disallowances suddenly became possible. When the PURPA law of 1978 began to allow for the environment where innovations in efficiency were rewarded with contracts, technology drove efficiencies in natural-gas heat rates relentlessly downward.

Highly efficient combined-cycle units popped up and subsequent policy makers and Congress conspired to pass the 1992 Energy Policy Act that allowed for generators outside of utility structures to be built in the name of competition. But to have the output of the power plant – now considered a commodity – delivered, the transportation network (bulk transmission system) had to become a common carrier like a highway, not controlled by utility owners that had interest in their own power plants’ sales. In other countries such as the United Kingdom, the utilities were owned by the government, so it was easy to force the separation of wires from power plants. But in the US, we were dominated by investor-owned utilities along with municipally owned and cooperatively owned utilities. Short of divesture, regulators needed to find a way to break the incentive to discriminate in allowing access to transmission. And so, Independent System Operators (ISOs) and their bigger sibling Regional Transmission Organizations (RTOs) were born.

The story of how the industry went from “competition” and the hope of “light-handed regulation” to more layers of regulation has something to do with the catastrophic California market of 2000-2001. I’ve got my narrative – bad market design, supply/demand imbalance and poor coordination between the retail regulator (CPUC) and the wholesale regulator (FERC) – but you may have your own. Leaving California aside, the common theme is that regulators in most states demonstrated an inability to let competition work. Automatic bid caps evolved to instantly deal with perceived “market power” and capacity markets were deemed necessary to ensure reliability and to provide “missing money” from mitigation. The fact that such mitigation does not exist in any other commodity market was never acknowledged or discussed. It seemed that regulators everywhere said, “we can’t let market participants make decisions on how to manage their needs.”

Even with this “helicopter regulating”, competition has provided considerable efficiencies in most of those parts of the country that have embraced competition. California, however, has established a new benchmark for regulatory fiat. The 15 years that followed the California Energy (regulatory) crisis has been one of aspirational exuberance – obtain renewables at all costs – combined with broken promises to come up with a holistic policy to also ensure reliability. The “inconvenient truth” of California policy on electricity is one of doing the “fun” stuff (command renewable procurement) while ignoring the connection to reliability to balance the system.

Participation in the process is vital to its health…

Until I saw a complaint filed by the owners of the LaPaloma plant in California, I had forgotten all the times the CAISO or the CPUC had indicated the need to properly structure Resource Adequacy (RA) and how many times the effort and promises were abandoned or forgotten. When I read the complaint, I was taken aback at how many times FERC or market participants were told that an interim solution would be followed by a completely vetted outcome only to be put aside for other business or folded into another proceeding.

The complaint was very compelling, and one had to wonder why this had gone on so long. How could FERC allow the process to meander without conclusion? How could the participants not get so frustrated as to go to FERC, to court, or somewhere to get resolution? I suppose the answer has to do with fear of annoying the CPUC, the legislature, or some element in the California political firmament. This kind of fear is understandable – but unhealthy. Parties that felt themselves aggrieved by California policy were angry and exasperated and seemed to feel they had no alternative but to “take it”. Such fear reminded me of what one US Senator recently said about disagreeing with the President… you might “poke the Bear” and things would get ugly.  Not a healthy regulatory process.

And since process is important, I’m glad the owners of the LaPaloma powerplant filed their complaint. While I don’t always agree with FERC, I trust their professionalism and their integrity to follow the record and to endeavor to follow the law. That is why I don’t think California policymakers should be afraid of FERC. FERC has demonstrated its willingness to work with states to respect their policy goals while ensuring the integrity of the market as was demonstrated a recent ISO-NE case on capacity markets. Parties that own assets in California shouldn’t be afraid of FERC either. Filing a complaint is their right and their privilege and their duty. Being afraid of exercising legal rights is, well, un-American.

Happy 4th of July everyone.

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