The following is a contributed article by managing partner Ray Gifford and partner Matt Larson at the Denver office of Wilkinson Barker Knauer LLP.
There is still time for New Year's Resolutions. This is particularly so since the "eat more healthy, exercise more and be kinder on Twitter" resolutions have gone similar to Bow Wow's alcohol abstinence resolution that lasted all of one day from January 1 to January 2, 2022. Our 2022 resolution is, therefore, perhaps more achievable: let's change the way we approach the Regional Transmission Organization/Independent System Operator (RTO/ISO) debate.
Across the so-called "market debate," there may be agreement on the objectives we are working toward. At present, the energy policy objective is to achieve reliable decarbonization. Reducing emissions is an accepted goal in the electricity world, and is increasingly becoming one on the gas side of the business too. Stakeholders across political and advocacy stripes can agree that maintaining reliability is paramount. It is the fundamental job of any utility with an obligation to serve. Decarbonization with degraded reliability invites political backlash. Be it a restructured "market" or a more traditionally planned utility, the public will not stand for a regulatory structure that becomes less reliable just as the push for electrification becomes more broad-based.
So, with the objective defined, one might think we have avoided Bow Wow's fate and satisfied the New Year's Resolution. Unfortunately, there is more to do — and it comes in the form of developing a paradigm to achieve that objective.
Our perspective is this: revisiting the late-1990s restructuring proposals or the California-led community choice aggregation proposals from the past decade will be unavailing. Neither sort of proposal delivered beneficial results with sufficient clarity to justify a major act of state political will to embrace them. Those policies are superficially attractive in some quarters as bumper sticker slogans like "breaking the monopoly" or "forcing competition." Slogans do not achieve reliable decarbonization, however — utilities do. And monopolistic tendencies are endemic to network industries like electricity — just ask retail behemoths like NRG in Texas.
The conversation to meet the objective needs to start with an analysis of what is working. In many states, integrated resource planning drives deep emissions reductions from the electric sector. These IRP processes inevitably include competitive devices to lower costs to customers. Resource planning thus is something that any market structure should be built around — not built to break. Intrastate transmission development by incumbent utilities is also something that works in many instances. To be sure, there is transmission development needed to drive further reliable decarbonization, but processes are in place before public utility commissions and at the federal level to help make that development a reality. Similarly, distribution system planning processes are also starting to take shape before commissions, and these may ultimately represent processes — if structured the right way — that markets should be built around.
It is not all cupcakes and unicorns, however, in working through this thought exercise. It is not as if every existing process works or does not need modification or improvement.
This brings us to the next phase of the process, which is identifying where improvements are needed. The first area that naturally comes to mind is interregional transmission development. Any market structure should be designed to achieve interregional transmission outcomes that further the ultimate objective of achieving reliable decarbonization. It should also be a regional process that invests based on need and benefit, not on an unaccountable, slow stakeholder process that owes its outcomes to political economy horse-trading.
There is also a gap in the area of carbon tracking, tagging, accounting — pick your term — that needs to be further refined in an emissions-limited operating world. There undoubtedly are others, and that should be part of our 2022 New Year's Resolution market policy conversation. Once we identify the problem or improvement areas, market structures can then develop in an appropriate way to fill in the gaps while simultaneously preserving what is already working towards the reliable decarbonization objective.
Maybe this thought exercise approach deserves as much credence as Bow Wow's abstinence pledge. But to indulge us, let's assume this notion is worthy of further pursuit. In working through this thought exercise, we must avoid classic energy policy traps. These traps, from our perspective, are operating with the assumption that RTOs are magic interregional transmission building machines that will automatically fill interregional transmission gaps. That is simply not the case, and there is no meaningful data set we are aware of that proves they do.
Similarly, we must avoid the acronym trap. RTOs come in many different forms — look no further than ERCOT, PJM, and MISO to see three different models right away. Our thought exercise is not designed to drive to an "RTO"; rather it is designed to drive toward a market structure that preserves what works and tries to solve for what does not. This market structure may not look exactly like existing market models in use today, and that is OK. Indeed, markets need to be designed to meet the needs of the region they will serve — "by the West, for the West," as some have said — and that same logic is applicable in the Southeast, the Pacific Northwest, or any other sub-region of the country where the market debate is alive.
If we can get ourselves to that place, markets can be structured to meet needs and make progress toward the reliable decarbonization objective. For example, developing a robust carbon tracking system and building the market around it, as opposed to layering or, even worse, forcing it into an existing market model that was not built for that purpose, is a worthy endeavor. The integrity of the price system remains central to the outcomes of any market – a market where the market-maker spends most of its time undistorting (or re-distorting) already distorted prices is not a market at all.
RTOs from ERCOT to PJM to ISO-NE have all gotten themselves in deep trouble by overly rigid adherence to blackboard models of "competition" that struggle to address, much less balance, the full suite of political, social and economic interests attendant to our transforming grid. We can do better in how we approach energy policy objectives with some humility about institutional design and a focus on what we are trying to achieve.
We do not intend to cast aspersions on Bow Wow — he broke into the rap game at age 13 in 2000 and has been there ever since. But let's pledge to do better than him on our New Year's Resolution. There is another way to approach the market debate, and we should pursue it to achieve an objective we can all agree on: reliable decarbonization.