Without Congress acting, electric markets will ‘muddle through’ — panel

Source: Rod Kuckro, E&E reporter • Posted: Tuesday, September 9, 2014

With legislative gridlock the rule rather than the exception in Congress for the foreseeable future, badly needed reforms in the way electricity markets operate are not on the horizon.

Instead, federal and state regulators will “muddle through” trying to make outdated jurisdictional arrangements work even as advanced technologies and changing consumer preferences disrupt the industry, said Robert Nordhaus, a partner at Van Ness Feldman and formerly the general counsel of the Federal Energy Regulatory Commission as well as the Department of Energy.

That relatively downcast assessment was the consensus among a heavyweight panel of former federal energy officials with decades of service on Capitol Hill and in the executive branch who appeared together at the Center for Strategic and International Studies in Washington, D.C., on Thursday.

Nordhaus’ view was shared by others on the panel, “Electricity in Transition,” which included Elizabeth Moler and Charles Curtis, both former chiefs of FERC; Linda Stuntz, onetime deputy secretary of Energy; and Lawrence Brenner, a member of the Maryland Public Service Commission and former FERC official.

Nordhaus laid out a number of options under current law to help restore what was once regarded as a “bright line” regarding the role of the federal government to regulate interstate, wholesale electric markets and state governments to oversee retail matters.

The rub is that most of Nordhaus’ suggestions require Congress to act, “which is not something we’ve seen much of recently,” he said.

“We’ll muddle through, and they’ll figure out how to make the existing jurisdictional arrangements work,” he speculated, saying he is “skeptical that this is a viable long-term solution.”

Stuntz agreed that “we’ll be in a muddling-through mode for a while, and I don’t think it’s all necessarily bad.”

“We certainly could not build a consensus to develop legislation until we had a clear notion of what the questions are and what the answers are,” she said.

There “maybe could be multiple answers and [jurisdictional] architectures,” said Stuntz, reminding the CSIS audience that “it is very easy for us to get myopic about the way things are here in the Northeast/Mid-Atlantic, the way things are in [regional grid operator PJM Interconnection]. They are not that way other places.”

Nevertheless, Stuntz believes “this may be as challenging a time for FERC and for the states in the near future as any time since the California energy crisis.”

Beware the sharks

Citing the age-old advice that when your boat is sinking, it’s no time to fault its design but to worry about the sharks in the water, Stuntz warned of three such “sharks.”

The first is the “very real problems in the real world with the operation of the [regional transmission organizations, or RTOs],” especially those with capacity markets “that don’t seem to be working” because they cannot, through their forward auctions elicit the generation resources needed to keep the lights on,” she said.

In capacity markets, electricity generators are compensated for investing in power plants. Utilities that distribute power to customers pay generators to ensure the long-term availability of sufficient capacity for the reliable delivery of power. What they pay generators is set in an auction.

In the last two years, the low cost of wind power, efficiency resources and natural gas generation have knocked pricier nuclear power and coal-fired plants out of contention for future capacity supply by bidding into auctions and clearing at a lower price.

Second is the concern that U.S. EPA’s proposed Clean Power Plan to curb greenhouse gas emissions from existing power plants will in its implementation by states “overlay how electric markets are currently structured and regulated.”

Lastly, building infrastructure such as transmission lines and natural gas pipelines “is not getting any easier,” which is why “we’re talking about a price spike again this winter because we can’t get infrastructure” built to serve the changing mix of electricity generation, Stuntz said.

“Everybody in this room knows there is no bright line between federal and state jurisdiction,” Moler said, lamenting that a legislative fix is not in the offing. “We all know it ain’t going to happen. Congress is not going to legislate productively in this area anytime soon. I would say 20 years would be my horizon — not one, two or three.”

Congress is “broken,” Moler said, and lawmakers are not inclined “to delve into the intricacies” of a line of regulatory and court actions that have blurred the bright line and created uncertainty in the electric sector.

“And if they were to legislate, I’m not all confident it would be a good thing. It could be a really bad thing, as a matter of fact. If they were to act, they could ultimately do more harm than good to Americans. That puts me clearly in the muddling-through camp,” Moler said.

She agreed with Stuntz that among the challenges that cannot wait are electric market fixes. “Capacity markets need work, they are the new competitive battlefield; we need to figure out what’s working, what’s not and where we go from here,” Moler said.

Panelist Peter Fox-Penner, an economist with the Brattle Group, said that the nation’s RTOs “look like they’ve become quasi-regulatory agencies” as they help to “mediate” actions by federal and state regulators.

But Fox-Penner warned that “what we’re doing today is blending extremely complex markets into a legal system of regulation and the markets that we’re creating are extremely complex, they’re evolving quickly and a lot of this transformation is blowing up the way old markets work.”

FERC’s LaFleur will try to do what the agency can

FERC Chair Cheryl LaFleur followed the panel discussion and pledged that her “highest priority as chairman right now is to assess the state of competitive markets and figure out where we need to continue to work on them;” especially to attract capital investment to assure grid reliability.

“Should we redefine how the markets work if we expect them to attract investment for reliability? That’s going to a big piece of my focus over the next several months,” she told the CSIS audience.

Part of FERC’s effort will be at least four technical conferences in the coming months to look at various market issues, she said.

“Almost every day I hear somebody criticize the competitive markets for something they were never designed to do,” said LaFleur, such as supporting fuel diversity, renewable portfolio standards or helping to get gas pipelines constructed.

“If we don’t find a way to have the competitive markets work and states feel they want to get their power from the competitive markets, they’ll just take their ball and go home,” she said.

FERC will “have to be willing to make decisions and act even if they’re not popular with everyone because this is just the complicated ecosystem we have,” LaFleur said.

Click here to read a recent EnergyWire interview with LaFleur.

Click here to watch OnPoint’s interview with LaFleur.