The following is a contributed article by Tony Clark, a member of the Federal Energy Regulatory Commission from 2012-2016, a North Dakota Public Service Commissioner from 2001-2012, and now a senior advisor at the law firm of Wilkinson Barker Knauer.
A spate of recent articles in the energy trade press, including a recent one in Utility Dive, suggest a regulatory campaign is afoot. Big Tech and large industrial customers are teaming up, using the pretext of clean energy to impose prescriptive wholesale regional transmission organizations (RTOs) on the West and Southeast, the two regions of the country where organized markets have never taken hold.
The question is, why?
It is likely not truly about transformative investments in a clean energy grid, for that can be better achieved through traditional regulatory models of planned utilities. And it is most certainly not about lowering prices for average customers, since restructuring has rarely worked out well for them.
Rather, it appears to be the same reason utility restructuring was pushed more than two decades ago: It is about large purchasers of electricity creating a system where they can leverage their buying power for direct access to real-time wholesale prices. There is no crime in their pursuit of financial self-interest, but let's not confuse it for altruism or constructive climate policy.
Consider how supporters of imposing top-down market models frame the terms of the debate. They submit that their proposals will lower costs, as well as enhance reliability, innovation and customer options. Advocates also make clear, as evidenced by another recent Utility Dive op-ed, that the true end-game is not just the imposition of RTOs nationwide, it is full restructuring of the utility industry.
More affordable, more reliable, cleaner, greener and customer choice? As the old saying goes, if it sounds too good to be true, it probably is.
One of the great things about our American system of federalism is we have a lot of real-world experience to test these assumptions. For the past two decades, 13 states have fully restructured their former monopoly utilities through generation unbundling, retail choice and participation in RTOs. During that same period, 16 other states in the West and Southeast have maintained vertically integrated utilities operating outside of RTOs. The remaining states have followed a hybrid path in which they maintain vertically integrated utilities, but within RTOs.
If the assertions made by advocates of restructuring are correct, then the most fully restructured states — those where generation is unbundled, and customers have retail choice within FERC jurisdictional RTO markets — should have both the most affordable energy and the greenest energy supply.
Care to venture a guess whether the thesis holds? It doesn't. In fact, it fails rather spectacularly. This is where platitudes meet facts.
Consider the following: of the 13 states that have fully restructured and entered RTO markets, nine are ranked in the bottom half of percentage of electricity generated from renewables. Compounding the greenhouse gas emissions challenge for these states, restructuring paired with RTO markets is a financially brutal combination for the nation's largest source of carbon-free generation: nuclear power. It is little wonder why these are the jurisdictions that struggle to retain nuclear units, which has been the issue at the heart of attempts to stave off their abandonment in restructured states like Illinois, Ohio, New York and New Jersey.
To the degree new renewables have been getting built in restructured states, it's been done by going 'around market.' In Maryland, New York, throughout New England and elsewhere, state leaders have decided markets, as designed, don't deliver renewables at the level they want, so they're taking back the reigns from the RTOs by engaging in a form of quasi-integrated resource planning. The fact that states must finagle ways to circumvent RTOs to build renewables says a lot more about how restructuring functions than any study authored by those who support it.
But what about affordability? Surely, restructuring must drive consumer savings. Well, not so much. According to data released this month from the Energy Information Administration, nine states (excluding Hawaii and Alaska) had average retail electricity prices exceeding 11.5 cents/kWh in 2019. Of those nine highest cost states, eight of them are fully restructured, and all of them are contained within RTOs.
A new academic working paper further debunks the assertion that utility restructuring has led to reduced rates for average consumers. Spoiler alert: while restructuring may work out for some very large-volume industrial purchasers, it doesn't cause average customer rates to decrease.
In fact, customers in traditionally regulated states fare better than their restructured counterparts. In the context of exploring the topic, the authors even note that "point estimates suggest that renewable energy generation per person grew faster in non-restructured states than restructured states."
As for reliability and clean energy innovation, there is nothing to suggest regions of the country with full restructuring are more reliable or innovative. While scale matters when it comes to reliability, it pays to remember that the biggest reliability events in recent memory have predominantly occurred not outside prescribed markets, but in them. That's not to suggest the markets are at fault, but it drives home the point that RTO's are no silver bullet for reliability.
Similarly, electricity industry innovation does not lag in regions of the country with traditionally regulated utilities. To the contrary, these regions have been leaders in investments in low-carbon resources like nuclear and renewables. Tried and true regulatory structures like integrated resource planning offer an open and transparent mechanism for competing generation resources to be financed in harmony with state energy goals. Restructured states have been unable to achieve the same results.
Reliability, affordability and next gen grid investments are best supported through traditional regulatory structures. That much is clear. The more practical-minded renewable advocates and non-profits that support a cleaner grid will recognize this. The more ideologically dogmatic will continue drawing overly simplistic caricatures of markets versus monopolies, but these advocates are chasing the wrong squirrel. Pro-consumer outcomes should be the goal, not allegiance to bumper sticker slogans.
In sum, it is unsurprising Big Tech is pushing this agenda. As large buyers of electricity, they have the same incentives large industrial customers had during the hey-day of utility restructuring. But we should also acknowledge this effort is only marginally related to renewables, reliability or innovation.
John Adams famously said, "facts are stubborn things." Policymakers would do well to recall his words. The facts are: restructuring paired with prescriptive RTO market structures are not producing more clean energy and customer savings relative to vertical utility integration and cost-of-service ratemaking.
That being the case, we should spend more time studying why the more traditional regulatory models are succeeding — and exporting those lessons learned — rather than imposing failing theories on those states that seem to be getting it right.