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The Corrosive Effects of Political “Capture”

A recent effect of the rolling blackouts last summer was that the Federal Energy Regulatory Commission (FERC) considered last month (but ultimately rejected) an investigation into the CAISO’s Resource Adequacy (RA) program. A colleague in California suggested that CAISO’s Capacity Procurement Mechanism (CPM) provided the backstop California likely needed to avoid the rolling blackouts. We agreed the CAISO may have been reluctant to exercise this authority. The last time they did in 2017, they got slapped by the CPUC because natural gas units had been selected to meet a shortfall.

My colleague and I concluded that the wrong part of the tariff was being considered. A real investigation of CAISO’s tariff should concern how a combination of political climate and a governance structure that is beholden to the Governor’s office create a kind of “capture” that inhibits the CAISO management. At the same time, we understood why engaging in such an investigation would probably be counter-productive given the likely reaction in California political circles. But it is clear; a major flaw in the CAISO tariff is in its governance structure which can lead to “capture” by the politics of California.

A little background…

The ordeal of the CAISO highlights why “independence” of governance is so important. Traditional vertically integrated utilities had both the means of electric production (generators) and the means of transporting them to customers (transmission & distribution) within their corporate structure. But the shift to competitive markets required separation of these responsibilities to ensure the least expensive megawatts could be feasibly delivered without discrimination.

Since these vertically integrated entities were mostly held by private investors, the government could not just order divestiture of generation from the transmission “common carrier”. So, the Federal Energy Regulatory Commission (FERC) came up with the ingenious idea of an Independent System Operator which blossomed in later orders to a Regional Transmission Organization.

In establishing a market run by an ISO there are many critical technical elements such as how to administer security constrained economic dispatch (SCED) and how granular to make the pricing (nodal versus zonal). However, key to creating these new organizations to run the grid in the most reliable and efficient manner is the “independence” of the governance.

Naturally, the structure of an independent grid operator can take many forms. Some chose to go the route of completely unattached and economically disinterested Board members that met certain criteria and confirmed through a vote of market participants. Others, like CAISO, SPP and ERCOT took the approach of having a Board composed of market participants that were to represent the interests of various parts of the industry (generators, transmission owners, retail providers, etc.). This latter structure has worked in ERCOT, SPP, and elsewhere. In California, however, it fell victim to political need after the 2000-01 crisis to assign blame and to give the appearance of “doing something”.

What emerged was a Board that was appointed by the Governor of California. This satisfied a political need but – I argue – failed the independence requirement set out by FERC. It is concerning when political pressure is brought to bear on institutions like the Federal Reserve or the Department of Justice. Similarly, it troubling when an entity charged with reliability and market operation could be influenced by immediate political needs.

This is not to say that CAISO Board members intend to do anything but a fair job at overseeing the CAISO management. But it would be nearly impossible not to be influenced by the process that brought them into the job, and to reflect the political objectives of the incumbent Governor. I think we can all agree that politicians often give into “immediate gratification”. While it is also impossible for every person in authority to be perfectly impartial, we count on having a variety of interests in most governing structures to balance out the influence of any one.

As someone who once worked for a large RTO (PJM), I am familiar with the difficulty of impartial administration of a tariff. State regulators often are pressuring the RTO to moderate prices in ways that would interfere with efficient market outcomes. Every market participant may, at some time, feel the ISO/RTO management is biased against them. Heaven help the ISO or RTO who encounters a genuine price event that affects customers so that the wrath of neophyte journalists and politicians is brought down on them.

A politically acceptable governance structure is possible

But let us be realistic. Changing the governance of the CAISO can only be achieved if politicians feel it serves their interests. It must be made clear to all involved in California energy policy that their primary goal - the integration of renewable energy and decarbonization - needs a larger market. One that incorporates all the resources necessary to meet policy goals, serve load and do so reliably. This means out-of-state resources.

The only way that California can share all the Western resources necessary to meet its goals is to broaden the market. If the governance is controlled by Sacramento, no non-California utility with any sense of fiduciary responsibility will put its transmission system or any assets under the control of CAISO. The board must be changed to allow for other utilities and state policy makers to feel the governance of a broader Western market is fair to their interests.

Consider the possible scenario:

  •          All utilities that are currently part of the Energy Imbalance Market (EIM) of CAISO agree to join CAISO in one year if:

o   Agreement can be reached to change the composition and selection of the CAISO Board to satisfy FERC, applicable state regulators, and current public utilities

  •          If agreement cannot be reached within a year on suitable CAISO Board changes, the current EIM entities would work with state regulators and public utilities to form their own governance structure to work with CAISO on a common tariff.

o   The two Boards would form a “federal” structure whereby agreement of both Boards is necessary to make a tariff filing at FERC under section 205 of the Federal Power Act.

I would hope that, by now, California knows how much it needs other parts of the West. Fixing Resource Adequacy while transitioning to renewables has been a huge challenge. It is made even more so given that some resources needed to accomplish it are not under CPUC jurisdiction. Similarly, other Western states which are pursing aggressive renewable goals need all the region’s resources to be efficiently dispatched to meet reliability as many thermal assets are being retired. Reaching mutually agreeable accommodation on a broader Western RTO governance structure is critical to everybody.

When FERC wisely stepped back from launching an investigation into the California RA program at last month’s open meeting, there was discussion of a possible Technical Conference on regional RA. Such is the sensitivity of the participants in the West that even this raised concerns. If FERC makes clear its intention is only to educate itself and to raise a dialogue, the resulting record might reveal the common need for faster market integration to meet reliability as well as environmental goals. Whatever emerges will have to avoid political “capture” and serve all interests impartially.