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This is Getting Muddy...

Sloppy

When you are from a small state like Kentucky, you pay particular attention to things that are part of your cultural fabric. College basketball comes to mind, although my primary team is the University of Louisville, not the better-known program down the road in Lexington. UofL is not my alma mater but Columbia University isn’t a frequent participant in high level hoops competition and, you gotta go with your home town. Similarly, the Kentucky Derby is a big deal for any Kentuckian. I always watch the Derby, stand when the horses are brought on the track and the band plays “My Old Kentucky Home”, and enjoy the most exciting 2 minutes in sports.

Like many who watched this year’s muddy race with 20 impressive horses barreling down the stretch, I was surprised and confused by the objection concerning an alleged foul around the last turn. I’ve seen objections before, but never in a race of the Derby’s stature. At first, I didn’t agree, but after listening to the explanation of the stewards, I came around to the logic of their decision.

The next day there was the expected sports talk – blah, blah, blah – by commenters who watch horse racing at most once a year. Unexpectantly, the debate spilled onto social media suggesting that the Derby decision has broader societal and political ramifications. The commentary could be characterized as breaking down along political fault lines. “Good grief”, I thought. When a Kentucky Derby result is blamed on a societal or political agenda, we really are in a bad place. Have a mint julep and calm down!

Speaking of Competition

But what has the Derby to do with power markets? Nothing except to point out that competition sometimes can be controversial. For several years, many parts of the West have struggled with the concept of competition as it applies to power. As a full-throated champion of the virtues of competitive markets, even I would have to admit that the recent interest in a regional power market in areas outside of California are motivated by the need to effectively integrate renewable generation sensibly rather than out of fealty to competitive outcomes.

So, it was refreshing when Gary Ackerman – the former (shall we say Emeritus) jefe of WPTF sent me a copy of a letter for the Department of Justice Anti-Trust Division to the Texas House of Representatives. It seems that Texas asked DOJ to comment on some proposed legislation concerning competition for building electric transmission. In the first page, DOJ made a statement that was startling in its simplicity and clarity:

“Competition is a core organizing principle of the American economy.”

In the footnote that was attached to this clarion statement was a quotation from a 1951 Federal Trade Commission case involving the Standard Oil Company:

“The heart of our national economic policy long has been faith in the value of competition.”

The thrill for me in quoting these sentences is just below that of “We hold these truths to be self-evident, that all men (persons) are created equal….”Fundamentals are a good thing to study from time to time.

But how do we apply this to building a market in the West, with its varied political and regulatory profiles? Think of the coastal states of California, Oregon and Washington in comparison with Arizona, Utah and Wyoming. My head hurts! The one unifying feature of Western sentiments often seems to be antipathy toward Federal regulatory assistance. But what of the current crop of Feds that inhabit the halls of 888 First Street – the FERC?

The Humble Regulator

While attending an Energy Seminar at a well-known law firm in its DC offices, I was able to listen to the considered thoughts of the FERC General Counsel – James Danly. The GC (some call the FERC GC the “6thCommissioner”), gave an interesting talk in which he spun a cautionary tale on the proper role for a regulator by drawing parallels to the end of the Roman Republic). The GC asserted that Rome ceased to be a Republic as it gradually ignored its (unwritten) Constitution.

Mr. Danly then went on to outline the lesson this had for the “humble regulator” in exercising its authority. In its essence, the lesson is to adhere to a very strict reading of the Federal Power Act and Natural Gas Act in which FERC gave a “thumbs up” or “thumbs down” on proposed filings without alterations or advice on ways to do things better. While acknowledging the possibility of engaging in generic rulemaking, one got the impression that this should be very rare and aimed at curing obvious problems. The GC made this offering of philosophy given a reading of federalism in which the states are recognized as supreme sovereign entities.

One can appreciate how well this would sit with most state regulators. It is not a bad philosophy, except that power matters are so intrinsically inter-state that it seems hard to rigidly adhere to this philosophy. Indeed, as California makes decisions on procurement that are predicated on significant levels of imports from its various Western neighbors, I thought about writing the GC. I even drafted an email:

“I enjoyed your presentation. Naturally, as a history enthusiast I had a great time with your trip down the classical memory lane. While I appreciate the “guard rails” that you outlined as a FERC roadmap, I would suggest that FERC is needed as a balance against some regulatory hubris in the West. The last several Commissions have been exercising what I will call “extreme” deference regarding all things California. This was a natural reaction to the perception that California blamed FERC for the 2000-01 power crisis, although I believe the fault lies mostly with the California process that conceived the original market design… Enough said about that.  

However, California’s “sense of sovereignty” resides at the same level as Confederate states had in the 1861-1865 timeframe. While the CAISO tariff is a FERC tariff, any attempt by FERC to be at all directive would be seen as a violation of the California borders. This, even though California is reliant on imports to balance much of its large renewables ambitions. As the region begins to contemplate how to manage resources to make the political desires for “green energy” match reliability, an open, competitive network will be essential. Most folks in the West now recognize this and that is why so many are working to achieve a regional market. But it is reasonable to say that California is getting in the way by virtue of its governance.

California has no fear of anyone. They are the population center and will attract the assets of the rest of the West. That is capitalism. Goods go where the demand is… But this is also interstate commerce and it may not evolve in a manner that is consistent with the needs of other states and may not be efficient, without some federal oversight. In the current environment, the CAISO knows that FERC would not back them if they disagreed with the State. The same with regulated entities like the utilities. The CPUC and others would kill them in rate cases and other forums if they did anything that did not conform with the political dynamic in the Golden State. Unlike other RTO areas, where FERC has told the ISO/RTOs where they were wrong (ever notice how many deficiency letters SPP has gotten?), FERC never says “boo” in California. You may call this “humble”; I call this a plan predicated on the hope that all will ultimately go well.”

In the end, I didn’t send it for fear that someone would assert that it dealt in matters that were ex parte (something contested before the Commission) or, that in this day of “gotcha” politics, someone could assert that it was an improper communication. But the point is important. Westerners need to understand to what lengths FERC will go to avoid upsetting California or seem an “arrogant regulator”. Will the rest of the West be able to negotiate with the new Rome (California) without some help? We must hope so, but the way forward is as muddy as the Tiber… or the track last week at the Derby. E pluribus unum?