California's dream of a regional power market faces the risks of a Trump FERC
Can a proposed regional plan’s protections for state policy be trumped by federal authority?
Momentum is gathering again behind the California grid operator’s ambition to expand its market across the West. But opponents fear the state's energy and environmental priorities could collide with a conflicting White House agenda.
Others, including several environmental advocates, counter that it would expose California to no more risk of federal control than what it faces now. California Independent System Operator (CAISO) leaders agree.
Some stakeholders have suggested a middle ground is available through an expansion of the voluntary CAISO energy imbalance market (EIM), which now serves portions of eight states and is rapidly adding to its six utility participants.
CAISO is leading the advocacy for regionalization and California's investor-owned utilities have not participated in the discussion. But EIM-member utilities outside California support the CAISO effort.
A regional power grid market could generate $1 billion to $1.5 billion in annual benefits to California ratepayers, recent studies for CAISO have found. It could also, by 2030, provide between 9,900 jobs and 19,400 jobs throughout the West, reduce California greenhouse gas (GHG) emissions 8% to 10%, and reduce Western region GHG emissions 3% to 4%.
Opponents are skeptical of the forecasted benefits and argue regionalization would make California’s hard-won climate goals vulnerable to other states’ dirtier power mixes. They also worry a regional system will make California vulnerable to the authority of the Trump-appointed Federal Energy Regulatory Commission (FERC).
Proponents respond that California will be no more vulnerable to FERC’s control than it is now. And, they say, provisions in the new version of AB 813 — legislation to expand the grid that is now being considered by a California Assembly committee — will provide CAISO market forces to protect them.
Could become a reality
Currently, the California grid operator oversees 26,000 miles of transmission and a $10 billion-plus annual market that delivers 80% of the state’s electricity. A concerted effort to expand it into an integrated western states transmission system and marketplace was initiated by the 2015 passage of the state’s landmark SB 350, and may become a reality this year.
A bill to to create an expanded system, was set aside in 2016 and the first version of AB 813 was held in committee by lawmakers in 2017. But Democratic Assemblymember Chris Holden and his staff have initiated a dialogue with the state’s power market stakeholders this year that is winning wide praise for its openness. Input has informed language that some say could get the bill to Governor Jerry Brown (D), a proponent of the plan.
Chief California Assembly Consultant Kellie Smith leads the AB 813 effort on behalf of Assemblymember Holden. The way the bill restructures CAISO governance is pivotal to acceptance of a regional grid, she told Utility Dive.
Unlike the 2017 version of AB 813, this 2018 version of the bill is based on principles that would apply to any regional system operating in California, including the one proposed in AB 813, Smith said. The current version also ensures that California controls its own energy procurement and the cost of its procurement.
AB 813 stipulates that California’s carbon adder, which increases the price of generation that causes GHG emissions, and other key policies remain in place and there will be no capacity market, she added.
Its language is system operator-neutral, she said. It specifies that if a California-based load serving entity (LSE) wants to join any regional system, that system must be reviewed by the California Energy Commission for compliance with the principles established in the bill. Those principles include protection of California's climate policies and transparency of deliberations and review by governance authorities.
“The Trump administration has declared war on California and it would be naive to assume it will pass up this opportunity to go after California's clean energy leadership. I imagine any member of the FERC who successfully does that will get a promotion from this president.”
Staff Attorney, The Utility Reform Network
The new bill also addresses past reluctance of other states to join a regional system overseen by a board appointed by the California Governor, Environmental Defense Fund Attorney Lauren Navarro said.
Governance would be by a board “independent from state control and independent of undue influence,” Navarro told Utility Dive. And any regional system participant would be able to appoint three members to a western states advisory committee that could engage the board “on any matter of collective state interest.”
Natural Resources Defense Council (NRDC) Director of Western Transmission Carl Zichella, a former Sierra Club Director, agreed these provisions strengthen the bill. “Advisory boards are a common solution for multi-state systems. And an independent and neutral governing board is essential to FERC’s non-discrimination requirement.”
Risks outweigh benefits
But Bill Corcoran, the Western Director of Sierra Club's Beyond Coal Campaign, is not satisfied with the bill’s restructuring of CAISO governance.
"It is not clear the guarantees for public access to information and transparent decision-making are as strong as the CAISO standards,” he told Utility Dive. And there is no legislative review to ensure compliance, he added.
There “absolutely” are benefits from regionalization, Corcoran acknowledged. Examples are lower renewables integration costs, displacement of out-of-state fossil fuel generation by exported California renewable generation, and elimination of duplicated transmission rates.
“But the risks of regionalization outweigh the benefits,” he said. “It could make California’s clean energy progress subject to market gaming and politically motivated interventions.”
Matthew Freedman, staff attorney with The Utility Reform Network (TURN), said his “primary concern” is the current bill moves accountability protections of the values represented by the principles described in the bill away from “the governor-appointed, state Senate-confirmed board.”
Under the present governance structure, the CAISO is subject to FERC jurisdiction and oversight but is also responsible to the state of California, he told an Assembly Energy Committee hearing on March 14. Under AB 813, California’s regulators and agencies would have no more input on governance decisions than stakeholders from other Western states.
“This bill would be literally the last one on system governance California legislators could vote on,” he said. “If the California legislature has any concerns, it can send a letter to the ISO or file comments with FERC, where President Trump's appointees will be more than happy to consider whether California's views are valid.”
A regional market would likely include stakeholders opposed to California policies as well as mechanisms that conflict with California policies and practices, he warned. A FERC-imposed subsidy for coal and nuclear, like the just-rejected Department of Energy (DOE) proposal, could make coal-generated electricity price-competitive and bring it into the CAISO market.
It's that potential conflict between federal and state energy policy that has Freedman and others concerned, and could be fodder for future litigation.
There will be lawsuits
The expansion also “opens the door” to increased scrutiny by FERC and to the risk of litigation that preempts California state policies, Freedman said. In Utah, which could be a participant in the proposed system, the legislature recently budgeted $1.6 million "to sue California over its greenhouse gas policies,” Freedman added.
In Minnesota and Maryland, legal decisions have upheld FERC's authority over the states in energy contract questions, he said. “ A just-issued FERC decision on the ISO New England capacity market makes it clear “this is not your parents’ FERC and it may attempt to limit state clean energy policies," he added.
AB 813’s few enforceable and durable protections are vague, subject to interpretation, and inadequate to address the threat to California's interests, Freedman said. Regionalization is “very likely” to produce legal challenges, especially from coal-rich states concerned about California's policies.
A regional system will require FERC oversight and tariff approval, he said. “The Trump administration has declared war on California and it would be naive to assume it will pass up this opportunity to go after California's clean energy leadership. I imagine any member of the FERC who successfully does that will get a promotion from this president.”
Can California avoid this outcome?
Union of Concerned Scientists (UCS) Senior Energy Advisor Laura Wisland argued that getting the benefits of regionalization will require California to both share leadership and protect its own climate principals. “This bill threads that needle.”
"Participants from other states will be reluctant to join without adequate representation,” she told Utility Dive. But under the bill, California would retain significant input on the new organization's agenda because it would "still pick and confirm its own representatives.”
NRDC’s Zichella added that California Energy Commission certification of participating LSEs also provides a measure of state protection.
Wisland, Navarro and Zichella agreed the proposal exposes the state to no more FERC regulation than the CAISO now faces. They also agreed the conclusion of a 2017 Yale Law School legal and policy analysis continues to apply.
Yale paper co-author Josh Constanti told Utility Dive FERC regulates all regional U.S. electricity markets, including the CAISO. “But the Federal Power Act requires it to be apolitical and prevents it from interfering in state decisions,” he added.
Yale co-author Franz Hochstrasser added that interstate commerce regulation of wholesale electricity markets would also “not subject CAISO to new challenges under the Supremacy Clause or the Commerce Clause.”
Zichella dismissed the idea that the Trump administration might use FERC oversight to undermine California's climate policies. “The Yale study makes it clear FERC already has the authority," but its unanimous rejection of DOE's September 2017 proposal for subsidies to coal and nuclear power shows it remains independent.
Are California’s climate goals safe?
Sierra Club’s Corcoran said two important concerns with power grid regionalization could compromise California's climate policies.
The first is leakage. It occurs when a price on carbon in one state forces emissions-generating industries to move to another state, Corcoran said. The emissions “leak” from one state to another.
California cannot impose carbon prices on out-of-state generators without raising “dormant commerce clause issues,” Corcoran said. But out-of-state generators that do not pay the “carbon adder” have a competitive advantage over California generators.
The second is "resource shuffling." It happens when low-emissions power in a state without carbon restrictions is exported and high-emissions power is used to serve the exporting state's customers, Corcoran said. Indirectly, high carbon resources are being used “on behalf” of customers in the state with carbon restrictions.
Some utilities in states without strong prohibitions against GHG emissions own both wind and coal generation. They could sell the wind generation into the California market and ramp up the coal to serve customers in their own territories.
With both leakage and resource shuffling, the generator escapes “the carbon penalty” and “California's carbon policy is rendered less effective,” Corcoran said.
NRDC’s Zichella said the increased availability of low-cost renewables in the regional market would, over time, neutralize these concerns. “Anything that burns fuel is going to have a higher marginal cost than renewables,” he said.
"Let's not set an impossible task, let's keep our eye on the prize. The biggest benefit [of regionalization] is making it easier and cheaper to bring renewables onto the western grid which, over time, will put downward pressure on coal.”
Senior Energy Adviser, Union of Concerned Scientists
Studies show regional markets reduce out-of-state emissions because renewables displace natural gas in system balancing, he added. “That eliminates the need for natural gas plants to run all day at minimum levels to be ready to ramp at the peak.”
Markets have proven to be “a relentless tool for cleaning up the generation stack,” Zichella said. “Even without a carbon adder, coal can’t compete. 30 GW of coal were retired in the last five years and more plants were retired already in 2018 than in the last three years of the Obama administration.”
UCS’s Wisland acknowledged it is “unclear how California could use its statutory authority to direct any individual electron.” But this bill keeps the state’s cap and trade program and emissions performance standards intact “to make sure that we're not getting any direct imports from coal plants,” she said.
If coal is dispatched, the bill’s strong emissions tracking requirement would reveal that, she added. Knowing how much coal is in the market, which is not clear today, "would be a real benefit.”
Regionalization does not guarantee that any specific coal plant will be shut down, Wisland said. “But let's not set an impossible task, let's keep our eye on the prize. The biggest benefit is making it easier and cheaper to bring renewables onto the western grid which, over time, will put downward pressure on coal.”
Freedman said TURN does not oppose regionalization but does not support the current proposal because is not clear there are “binding protections” for California policies.
Many of the benefits of regionalization are possible without the risk of giving up control through governance changes, he noted. The CAISO could work with other in-state balancing authorities, like publicly-owned utilities, to expand their access to more flexible resources.
An exchange of Pacific Northwest hydropower and California solar overgeneration with the Bonneville Power Administration would be "a win-win," he said. And the CAISO could work to reduce barriers to coordination with other Western balancing authorities.
Under an expanded regional grid, the CAISO could also expand its EIM to transactions that “go beyond the real-time market,” Freedman said. That would expand the exchange of resources that is already reducing GHG emissions and cutting ratepayer costs in real time markets. The ISO is already developing day-ahead transactions with the EIM's participants.
In a hint of the middle ground, NRDC’s Zichella agreed the ISO’s newly announced day-ahead provision for the EIM is a “reasonable” way to move toward regionalization.
California Community Choice Association (CalCCA) Executive Director Beth Vaughan is working with leaders in the community choice aggregation (CCA) movement to develop a consensus on regionalization. “Some members support it, some are against it, and many are uncertain,” she told Utility Dive.
CCAs and other consumer-led groups could be responsible for as much as 85% of the state's retail electricity load by the mid-2020s, according to a 2017 California Public Utilities Commission white paper. “We are especially concerned about procurement decisions," Vaughan said. “The law seems to assure that California will control its own procurement, but the arguments about the risks of FERC control are concerning.”
CalCCA does not oppose AB 813, she said. But an expanded EIM with a voluntary day-ahead market might be a way to experiment with greater regionalization without making an irreversible commitment, she said.
No one contacted by Utility Dive was willing to venture substantial forecasts for AB 813. Most expect legislative committees to give it a thorough working over. Political questions that touch on current Washington politics follow Yogi Berra's wisdom: "Predictions are hard to make, especially about the future."