Place your bets! Place your bets!

 

Well, the media is certainly poised to see what will happen after the elections this November. Many are focusing on whether one, or both, Houses of Congress will change hands and what the national implications will be. As for me, I’m more interested in what is happening in Nevada regarding Question 3 and the possibility of retail choice for electricity in the Silver State.

I’ve been asked by a friend of mine with ties to Nevada Power – the incumbent utility strenuously opposing Question 3 – if WPTF is advocating on behalf of choice in this ballot initiative. While WPTF is all about competition, I answered “no, WPTF is not.” The issue of retail choice for electric providers is such a local matter that a multi-state organization like ours would be unwelcome. WPTF has members who would be interested in serving customers in Nevada and owners of generation assets would have an interest in selling to Nevada, but the issue is for Nevadans to decide. I have no idea whether Question 3 will pass but if it does, I have a it is fascinating to ponder what might ensue.

Imagine this…

Let’s assume that Question 3 passes. It is hard to imagine retail access and truly competitive choice without an RTO to provide a true wholesale reference price for retail providers and customers. It is equally hard to imagine retail providers having access to enough sources of supply without the non-discriminatory access to the grid that an RTO provides over a broad network. Finally, it is hard to imagine a retail market without an independent entity making sure the bids conform to the real-time needs of the transmission system for the dispatch of generation.

When discussing the possibility of retail access in Nevada with a reporter from an energy trade publication, the working assumption was that NV Energy would just join the CAISO. “Wait a minute,” I said. While I would love for NV Energy to join the CAISO and begin what I hope would be an inexorable trend toward a regional market, it would be extraordinary under the current CAISO governance rules. No utility outside of California is likely to put its transmission system under the control of a Board that is controlled by the Governor of California. “Well,” my friend asked, “They would join the EIM wouldn’t they?” At this point in the conversation, I realized the problems of such a development weren’t obvious.

EIM has been very helpful in unlocking some of the value of an organized market. As an estimate, an imbalance market unlocks about 5-10% of the all-in value of an RTO. The real value of a market is realized when a day-ahead market allows for scheduling and appropriate hedging in advance of the real-time balancing of supply and demand. It also helps with reliability. While the CAISO is busy working on an enhanced “day-ahead product” that it hopes to extend to the EIM, it’s not clear to me how such an apparatus – which relies upon transmission still controlled by utilities external to the CAISO – would meet FERC standards for non-discriminatory open access.

Imagine an EIM utility nominating 500 MW of generation and associated transmission in one “day-ahead” time frame. The next day-ahead time frame might be only 200 MW, 300 MW, 100 MW or none. The point is that the amount of transmission available in such a market would be controlled by the utility, not the RTO. How could anyone who is not the utility participate in such a market? While we’ll have to await the details of what the CAISO and the EIM utilities agree to, again, it is hard to imagine how to get over this hump without the CAISO controlling the transmission. That could feel like a rigged game of roulette for any transmission dependent entity (see video above), to use a casino metaphor. And then, there is the very considerable question of how to allocate Transmission Access Charges – a thorny issue that the CAISO has taken up and gingerly put down more than once.

If the enhanced “day-ahead product” is either 1) as problematic from a non-discriminatory aspect as the scenario above suggests; or 2) takes several years to develop, vet, get approval for, and implement, then anyone hoping for an RTO any time in the near future would be out of luck. Under such circumstances, shouldn’t parties in the West outside of California be looking for another market platform offering to provide a possible alternative and competition to the CAISO opportunity? Many expressed optimism that the proposed Mountain West component of SPP could be the alternative that would eventually link to the CAISO market – happily marrying supply and demand assets over a broad footprint. But, as we all know, that effort fell apart. The question arises: Can the market offering of PJM to utilities in the West be a realistic alternative?

Alternate reality?

Naturally, an RTO-alternative would have to include a wide geography comprised of customers – including supply and transmission – beyond Nevada’s borders. Since the utilities in the Pacific Northwest have their eyes firmly locked onto the CAISO and growing the EIM, the question then is: Will the Desert Southwest and perhaps some of the Mountain West be interested? Reportedly some utilities in the Desert Southwest are talking to PJM.  If Nevada passes Question 3, it may be that PJM becomes a natural platform to construct a competing RTO. This might occur, perhaps, because its governance would be a new one created by members joining the RTO, with a stakeholder process tailored to the needs of all the members, inside and outside of California. (Note here the juxtaposition with the CAISO’s current posture.) The PJM’s business plan for such a market offering would be fairly simple consisting of a real-time market, a day-ahead market, assigned financial transmission rights (FTRs or the same thing as CRRs), all at an estimated usage charge per MWh that looks pretty reasonable.

Whenever a conversation arises around a market competing with the CAISO market, the question as to whether a single regional market could achieve the efficiency of a single regional market. FERC would insist on a market-to-market agreement allowing transactions to move across borders in an almost seamless manner. In the Eastern Interconnect, for example, MISO, SPP, NYISO and PJM all have similar agreements. The degree to which there are inefficiencies are small in most circumstances, but the power is efficiently and reliably moved through these agreements. In effect two markets in the West can operate nearly as efficiently as one over the same footprint with the proper market-to-market agreements.

Holding out Hope

Let’s be clear, this is nothing against the CAISO or its management. They are dealing with the hand they were dealt by the California State Legislature. They are trying to make the best of it. Good for them. However, waiting for the thorny issue of governance to be cured or possibly arriving at a work-around on day-ahead market may be like “Waiting for Godot” … a teasingly, tantalizing possibility that in the end does not materialize.

I hope, like many others in the West, that the CAISO governance can eventually be made truly independent from California state government. It would be a benefit to the customers in California, and it would be a benefit to anyone wishing to join the CAISO. But as they say… “hope isn’t a strategy.”

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