'Restructured' by any other name would smell as sweet
The following is a viewpoint from Tony Clark, senior advisor at Wilkinson, Barker, Knauer LLP.
What’s in a name? When it comes to electricity policy today, plenty; and it pays to keep that in mind when reading the breathless commentary surrounding the Trump administration’s potential lifeline to faltering nuclear and coal generators.
To hear many in the energy and environment policy trenches describe it, you would be forgiven if thinking the Trump administration is proposing nothing less than the end of electricity markets and the restructured utility model. If that is true, it is late to the game, because the breakdown of the restructured utility model has been accelerating for years. While I am glad many are awaking to the realization that there are serious structural challenges in the restructured utility model prevalent in much of the Eastern U.S. capacity market regions, let's not feign surprise that we are where we are.
In reality, action by the Trump administration would be no more or less a threat to electricity restructuring than the many existing public policies, subsidies and mandates that are routinely labeled by their supporters as "investments." It's all a matter of perspective.
The recent FERC Oversight Hearing before the U.S. Senate Committee on Energy and Natural Resources was a case study in the dissonance surrounding the issue. While a number of the Senators in attendance waxed eloquently about protecting electricity "markets," it was often with the backdrop of supporting their preferred generation resources.
It is not hard to understand why this happens. When it comes to energy policy, elected officials' positions are merely a reflection of the public at-large. So while "markets" are nominally supported as a matter of philosophy; operationally, Americans still view electricity service differently than they do other consumer goods.
Despite over 20 years of practice with restructuring, the American public still tends to like the notion of a utility that plans its future generation resource mix, or at least is heavily influenced by public policies that shape the outcome. Yes, sometimes it’s a local popularity contest. Renewables are embraced in California, as is coal in West Virginia. Sometimes it is based on support for other generation attributes like environmental friendliness or local jobs and tax revenue. And sometimes it is a commonsense desire for a hedge to provide long-term rate stability and by not putting all of the proverbial eggs in one basket. The bottom line is: a couple of decades after the heyday of utility restructuring, in practice at least, the public today still supports a planned utility model.
The evidence of this of this is overwhelming. Don't believe me? Try to name a "free market, restructured" state that has no portfolio mandates, no subsidies, nor an around-market support mechanism for resources like nuclear generators. The closest you'll find may be Texas, and even there, renewables received a boost via a mandate, federal tax credits and a favorable regulatory paradigm in which the cost of expanding the transmission grid to facilitate renewables was socialized across customers.
Without trying to be overly provocative, I would go so far as to say that the pure restructured model is at best, on life support in many of the states where it was adopted. What we are left with in the U.S. are two regulatory models that still basically work as designed, and one model that is rapidly being redefined.
Still, the traditional utility operating inside a joint dispatch market is largely a success story, as is the traditional utility operating in a bilateral market region of the country.
What remains to be determined is what happens to the model formerly known as "restructured." The federal wholesale regulators at FERC designed an entire construct around the restructured market model, but places like New York, New Jersey, Massachusetts and Illinois can no longer credibly be called full retail choice/restructured states. There are simply too many governmentally selected winners in the generation business. It may not exactly be the vertically integrated utility model, but it sure isn't Adam Smith's invisible hand either. The fact that these states are proactively selecting their generation mixes makes them look a lot like the traditional utility model they supposedly eschewed. The challenge is that their decision to pick and choose winners now undercuts the functioning of the rest of the market construct that was designed around them. This fundamental disconnect does not happen in the vertically integrated, non-capacity market regions of the country.
This brings us back to the rumored Trump proposal for certain baseload resources — feel free to point out that stepping into this arena would be an assertive exercise of Department of Energy authority. By all means, discuss the advantages and disadvantages of potential wholesale market reforms. Debate all you want the relative merits of the preservation and promotion of all manner of generation resources and what they contribute to electricity resilience. These are all worthy topics about which reasonable people can disagree. But please don't bemoan the Trump Administration as the singular death of free market electricity competition, retail choice and utility restructuring. That boat set sail long before Donald Trump was sworn in as President of the United States.