What goes on there? Sacramento and… FERC?

It was a strange week. A lot of travel, but it was all in the Eastern time zone – evident by the humidity in the air as Spring begins to arrive in the East. It began with a trip to Columbus, Ohio to present before the State Commissions in the PJM region on FTRs and then to Miami, FL to the WSPP meeting where I moderated a panel on the PG&E bankruptcy. Strange, but interesting.

The FTR discussion was a refreshing example of reasoned discussion. I was there as an independent consultant at the request of the Organization of PJM States (OPSI). It was a good group of the very diverse state commissions in the PJM footprint.  They had a lot to discuss regarding RTO Governance and Financial Transmission Rights (FTRs, we call them CRRs in California) and the recent default of a firm known as Green Hat in that market.

I was struck by the very serious, levelheaded attention paid by Commissioners and staff to a contentious issue. This was a hard subject with a lot of money at stake. But the tone was respectful but probing with PJM staff and industry representatives invited to speak.

Regulation, in my mind, is a task that requires a relationship between the industry and the regulators that is arms-length, which should neither be overly antagonistic, nor should it be overly “chummy”. Most states in the RTO markets seem to get this about right. Contrast that with some states in the Southeast where the relationship with regulated utilities seems overly accommodative while the relationship in California is poisonously confrontational and seemingly distrustful.

The California Hall of Mirrors

The distinction between how issues surrounding regulated utilities is handled in California and elsewhere was highlighted by the panel I moderated at WSPP. The participants were great; Katie Bellezza of Novatus Energy, David Perlman from the Bracewell law firm and Karol Denniston from Squire Patton Boggs.  Katie provided the perspective of renewable generators who face challenges to maintaining contracts with a utility in bankruptcy and navigating the changing credit environment going forward. Both David and Karol detailed how unique this bankruptcy is. PG&E has abundant cash on hand but is in bankruptcy because of the unknown risk of wildfire liability in a state with “inverse condemnation” (more on that later and why it is a crazy liability structure). Furthermore, the bankruptcy is less about satisfying creditors and more about coming up with a political solution to the liability problem going forward.

The bottom line: The solution lies with politicians rather than equity or creditors’ needs. Sure, whatever is decided regarding future liability may affect contracts that need approval of creditors, but the solution of whatever emerges from bankruptcy must change the liability standard from “inverse condemnation” to something more in line with the rest of the country – like a “negligence” standard. If the politicians in Sacramento can’t decide to do this, then it is hard to imagine anything emerging from bankruptcy. What entity could possibly bear the risk of getting stuck with all the resulting damages from a wildfire even its system was operated properly and yet some electrical equipment is involved in causing the fire?

So, while the Governor and others in California go around setting up task forces about how to deal with wildfires in the future, one hears nothing of any appetite to legislate a reasonable liability standard. Without this, there is no solution. No CCA, no municipality, no shareholder owned company, not even the State of California would want to shoulder that risk going forward. The bankruptcy judge and a creditor’s committee are unlikely to have anything to act upon until this issue is wrested to the ground. Yet it is evident that nobody wants to take on this politically unpopular issue.  It is unlikely we will see any inserts into Profiles in Courage for the political class in Sacramento.

Talent Drain at FERC

Anyone who knows me professionally will agree that I have high regard for the FERC as an institution and great respect for the staff there. While we all have been dismayed by the bickering between Commissioners (even “tweeting” at each other) most of us took comfort that the staff was there to maintain the standards of carefully reviewing the record of all contested proceedings and using their experience and deep knowledge to help the Commission adjudicate the matters before them.

The loss of quorum was difficult for FERC staff. The subsequent illness and death of Chairman McIntyre further set back the Commission and made life for the staff uncertain. During this time, some senior staff began to leave. These were people with deep experience. Then staff that comprises the “bench strength” of the future staff began to leave as well. I have been made aware of so many “going away” parties in the last few months that I am now genuinely concerned. The solid, honest broker that we have all come to rely upon suddenly seems less than it was. This is bad for everyone in the Power and Natural Gas industries but especially so for us in the West.

Many states in the West are changing the generation mix aggressively to renewables based upon state legislation. This transition needs a federal referee so that state policies don’t collide to hurt the regional grid. The West needs a regional market to help with the transition and to allocate resources as efficiently as possible. FERC assistance in this matter is likely to be needed. Is FERC going to be willing and capable to help us? I wonder.