The Loss of Independence

1984

I’ve not written for a couple of months. July and August are supposed to be calm, quiet months. But I was busy putting together and running my first DC Roundtable for WPTF. Then I had to take my son to college and subsequently mope around the house for a couple of weeks missing him. Next, my Mom seemed on the verge on passing and then recovered after a vigil in the hospital. There was planning and running the WPTF Summer Meeting in Tahoe while, at the same time, arranging for my son’s evacuation from his college in North Carolina in advance of Hurricane Florence. But then I found myself brooding and decided to write about it.

Write about what? Independence and why it is important.

The California Independent System Operator – CAISO. Why was “independent” part of the name? Is it “independent,” not only of all market participants but of political influence or pressure? Why would it be important for the CAISO to plan and operate the system in an independent manner – free of influence of well-intentioned state government politicians? Consider the importance of “independence” of other institutions with similar or greater responsibility. Consider the Federal Reserve of the United States.

The Federal Reserve (the Fed) is the central bank of the United States and controls the flow of money in other banks which includes setting interest rates charged to other banks which, in turn, helps to set the interest rates retail banks charge businesses or individuals like you or me.  It has a “dual mandate” to stimulate maximum employment but at the same time ensuring stable prices. If this responsibility weren’t enough, Congress has added the oversight and regulation of bank operations. The Federal Reserve Chairman, the Presidents of the 12 Regional Banks and the Board of Governors are independent of Congress and the President of the United States, having terms that are staggered to overlap the politicians.

So, when the Fed raises interest rates to calm an economy that is in danger of over-heating, it sometimes runs into opposition from said politicians. As a recent example, President Trump has expressed a dislike for the Fed’s gradual “normalization” of interest rates. The good thing is, nobody seriously thinks the Fed is going to be influenced by the President. The Federal Reserve Act codified the independence of the Fed because it was recognized that politicians often have more short-term views – like the next election or popular opinion – and thus should not have control on monetary policy.

Contrast this with other countries’ central bank functions and how well their economies’ compare to ours. The truly advanced economies such as those in the European Union, Japan and other established democracies all enshrine “independence” in their monetary institutions as they recognized the vicissitudes of political passion. However, nations with great economic potential like Argentina, Turkey and Russia find themselves with central bankers who know when liquidity should be injected or removed but are subject to the desires of political masters. The result is currency weakness and reduced investment.

So, let’s apply this to the California Independent System Operator – sorry, CAISO. Why would independence in the governing of the market and grid operator be important. Briefly, it is needed to make sure that no party is favored in obtaining access to the dispatch which is intended to produce efficient prices. It is also needed to make sure that reliability on both a short-term and longer-term basis is achieved without respect to other considerations such as giving preferences to any particular area or party. Given the extreme political environment in California as relates to Energy since the crisis of the early 2000s, this is an absolute necessity.

We can certainly agree that the CAISO is independent of any market participant or segment. But what about California politicians? As we all know, California has a Board that is appointed by the Governor of California. What practical effect might this have?

  • Could it exert implicit pressure on CAISO to dispatch the system to minimize prices rather than following the results of the market algorithm? It has been suggested this has occurred and while the “exceptionally dispatched” unit receives compensation, the unit that is not taken in merit order does not get to set the clearing price. This leads to price suppression and can be result in lower prices in the moment but higher prices down the line as units are not appropriately compensated. Do I know it has? Of course not. But the question gains credibility with frequent uses of “exceptional dispatch” in the context of who the Board represents, which is often viewed as the interests of short-term interests of price suppression which, though politically popular, can be inefficient in the longer-term.

  • Could the lack of independence make the CAISO accept load forecasts from the California Energy Commission (CEC) that CAISO believes the forecasts to be low only to have to procure “backstop” RA as they have the last two months? The CEC is a state agency that can be viewed as answering to Sacramento political interests that can be very “short-term.” The effect tends to lower RA prices which could put long-term reliability at risk by not providing a robust price signal for the value of steel in the ground.

  • Could the lack of independence and fear of upsetting political masters in Sacramento and elsewhere in the State be the reason that CAISO absolutely refuses to engage in the debate about how to fix RA procurement and defer the solutions to others? The CAISO has offered to tinker at the edges by offering “enhancements” of the current market when everyone knows an overhaul is needed. Every other similar ISO/RTO in the country recognizes the reliability of the system is their primary responsibility. What is the reason for deferring to state agencies? Could it be the CAISO doesn’t want to upset important state political constituents? It is a reasonable question.

These are all difficult questions and ones that only arise because the CAISO lacks fundamental independence at the Board level – which can have an effect on management actions. This does not mean the Board members are acting in bad faith but rather that they are acting in a manner consistent with California political sentiments – like politicians on interest rates. If we take great pains to insulate important economic decisions like monetary policy from the froth and sentiments of politics, we should insist the same of a grid and market operator that, for good reason, has “independent” in its name. It may be time to remind ourselves of the virtues of independence rather than just taking accepting the narrative offered to us. Otherwise, we may all be guilty of “Orwellian culpability.”

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