The Line Between State & Federal Authority: Electricity

Our nation has struggled to define the proper boundary between state authority and that of the federal government since the first vote on independence. In this video, you can see the debate in the first Presidential Cabinet between Thomas Jefferson and Alexander Hamilton — two talented Founding Fathers — having completely different views. It’s been a struggle ever since, encompassing a Civil War, several Constitutional stand-offs, and indeed it has been the backdrop of almost every US Presidential election.

In electricity, the discussion of state versus federal control was largely dormant until the 1990s. Electricity-related jurisdictional issues concerning the federal government were largely limited to federal dam projects and Federal authorities like Tennessee Valley Administration or Bonneville Power Administration. Then the success of PURPA, which let the competitive dog off the regulatory chain, led to vast efficiencies in combined-cycle technology.  This was then followed by the Exempted Wholesale Generator concept in the 1992 Energy Policy Act.  This then led to the 1996 FERC Order 888 on Open Access. From there, ISOs and RTOs were a natural evolution to assure delivery of power over the transmission highway for much of the country. The Western Power Crisis of 2000-01 — some call it the “Regulatory Crisis” because of the poor market design being a major cause — led to the first conflict over federal and state jurisdiction in the new world of Electricity.

Following the Energy Crisis, California and some of the states in the Western Interconnection blamed FERC for causing much of the price shock and then the Southern/Western backlash against Standard Market Design (SMD). The Feds subsequently backed off prescriptive competition. In the Western Interconnection, FERC has since taken a passive approach by recognizing the unique western resistance to federal intervention, both in progressively minded California or conservatively minded Arizona. I would argue that FERC has largely left California and the rest of the west to its own devices as long as there were no blatant intrusions on FERC tariffs specifically or on Open Access in general.

This passive approach has largely worked to allow for the west to chart its own course on market development. The CAISO’s EIM has grown organically, as have the efforts to create Mountain West as part of SPP.  Likewise, the discussion regarding developing another market platform to circumvent governance and other issues unique to California are evolving. But a couple of developments occurred over the past week that made me wonder if FERC can continue to keep its hands in its pockets if the CPUC were to take liberties with a FERC-approved tariff…

Talk Less, Smile More…

Earlier this past week, the CAISO held a meeting on the 2019 and 2023 Local Capacity Requirements Technical Study Draft. The results were straight-forward as reported by our CAISO Committee Chair, Carrie Bentley — who was in the room where it happened. What was atypical was the intrusive questioning of the technical aspects of the model by the staff from the CPUC. Apparently, the CPUC staff concerned with RA challenged many of the procedures the CAISO uses in the modeling — especially when those that led to increased local requirements. While it is expected for the CPUC to work with the CAISO on goals and standards, the involvement into “how the sausage gets made” was very unusual and unsettling. This is an area in which the CPUC staff has little expertise and likely has a policy prejudice.

As we all know, the CPUC has shown itself to be very sensitive to anything the CAISO has done on RA to shore up reliability, particularly on the local level. This sensitivity is probably why the CAISO filed a very narrowly focused tariff change at FERC on the capacity procurement mechanism (CPM).   After the CPUC opposed some backstop RA contracts last year, the CAISO understandably tried and bolster its ability to deal with resource retirements that would affect local reliability. FERC rejected the proposal — admittedly a bandage — and encouraged the CAISO, CPUC and other stakeholders to attempt to deal with RA on a more “holistic” basis (ER18-641-000). The likelihood of this occurring to the satisfaction of anyone interested in competitive outcomes, however, is very low.

The World Turned Upside Down…

Since becoming the Incoming Executive Director of WPTF in January, I’ve been particularly struck by the reluctance of the CAISO to embrace the responsibility of ensuring adequate resources. This stands in stark contrast to every other ISO/RTO with which I am familiar in the country. They all have different ways to ensure adequate resources — I have an affinity for the ERCOT method – but they all see the issue as their responsibility. CAISO, however, seems to wish someone would take on this responsibility from them.

To some extent, who could blame them? The CPUC has taken exception to any of the CAISO’s efforts to procure anything but “preferred” resources. In this regard, the CPUC RA policy has become similar to the advocates for coal and nuclear who want payments to those “delicate” assets that need nurturing. Such micro-management has probably conditioned CAISO management to see little upside in looking to “holistic” solutions to resource adequacy.

Rise up?…

The combination of the state’s (CPUC’s) new assertiveness in the technical process of the local RA process — and its ardent advocacy of “preferred” resources — may lead some parties to seek help from federal (FERC) safeguards.  In particular, FERC can aid in sorting out how the CAISO responsibilities can be effectively met or indeed if the CAISO is responsible for reliability as is the case with every other ISO or RTO. If this happens, how will FERC respond? Will FERC look the other way, preferring to not anger the California political establishment? Will it see a complaint regarding these issues as representing an unwarranted tampering with reliability and federal jurisdiction?

Mr. Washington, will you moderate while Mr. Hamilton and Mr. Jefferson discuss this?