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"The California ISO-PacifiCorp Energy Imbalance Market Experiment: Can Public Power Avoid Assimilation?" Eric Christensen Publishes Article in January NWPPA Bulletin

January 28, 2014

We're proud to announce that GTH partner Eric Christensen has published an article in the January 2014 Northwest Public Power Association Bulletin. The article is available electronically here. We've inserted the text below:

Regulatory Update: The California ISO-PacifiCorp Energy Imbalance Market Experiment: Can Public Power Avoid Assimilation?
By Eric Christensen, Partner Gordon Thomas Honeywell

PacifiCorp and the California ISO are now cooperating to create an Energy Imbalance Market ("EIM") encompassing their collective service territories, which stretch from Utah to Southern California. For public power managers who follow "Star Trek", this development bring visions of the Borg, perhaps the most frightening foe dreamed up by the imaginative writers of "Star Trek: The Next Generation." The Borg is a half-technological, half-biological alien race with a collective hive-mind. With machine-like implacability, the Borg assimilates all other intelligent species, turning them into cyborgs without independent thought. When the heroic Captain Picard is captured and assimilated, and programmed to instruct the human race "you will be assimilated, resistance is futile," all hope appears lost. Development of the EIM forces public power to consider whether assimilation into the ISO and its mind-numbingly complex system of regulations and "structured" markets, is inevitable, whether resistance is futile, and what can be done to protect core public power values.

As envisioned in the PacifiCorp-ISO scheme, the EIM would create a short-term market for balancing and regulating reserves, scheduled every 15 minutes and dispatched at 5-minute intervals. The core functions of the EIM would be provided by the ISO's automated 15-minute market. Dispatch would be optimized across the footprint of the Balancing Area Authorities ("BAAs") participating in the EIM, principally as a means of optimizing the use of balancing reserves to integrate wind generation and other intermittent resources. The PacifiCorp-ISO EIM is designed to allow other BAAs to easily join, with reduced balancing costs held out as an incentive. It is almost certain that NV Energy, the IOU serving Nevada, will join the EIM once regulators approve its sale to Warren Buffet's business empire, making it part of the same corporate family as PacifiCorp. It is easy to anticipate that other BAAs in the West might follow suit. The assimilation of BAAs across the West makes the assimilation of public power seem all the more inevitable.

It now appears nearly certain we will see some form of EIM in the West. Public power should take proactive steps to prevent assimilation, to achieve a peaceful co-existence with the EIM, and, ideally, to move the EIM in a direction that benefits public power. To achieve these goals, public power will need to engage actively in the ongoing PacifiCorp-ISO process and the parallel Northwest Power Pool process. Public power should also consider creative structural solutions that can both insulate us from the problems of an EIM and allow us greater control of our own destiny.

Assimilation by the ISO creates a number of problems for public power. These include, for example, "mission creep," the concern that an EIM would establish a beachhead for a much intrusive entity, such as a west-wide RTO long opposed by public power. Similarly, there is concern that the EIM will lead toward substantially increased regulation by the Federal Energy Commission ("FERC"), particularly over the Bonneville Power Administration.

Two examples demonstrate the potential problems. First, Southern California public power entities operating within the California ISO have been subject to FERC regulation of their transmission rates where it was adjudged that their rates were an element of the ISO's FERC-jurisdictional rates. Second, attempts by both Maryland and New Jersey to deal with the inadequacies of the PJM market, which lacks a coherent mechanism for load-serving entities to secure long-term power supplies, have recently been struck down by federal courts as inconsistent with FERC's exclusive jurisdiction over the wholesale power market. Thus, experience with other RTO/ISO markets suggests that expansion of the EIM to a west-side RTO could create both greater FERC jurisdiction over western public power entities and undermine the ability of public power to secure long-term power supplies. These outcomes are, of course, antithetical to public power's core value of local control and its primary mission of assuring reliable and economical power to public power customer-owners.

The problem of expanded FERC jurisdiction is, in light of recent events, a particular concern with respect to Bonneville Power Administration ("BPA"). If BPA joins the EIM as an active participant, FERC may well assert that the rates it charges for power dispatched into the EIM are a component of FERC-jurisdictional wholesale rates charged by the EIM. This would subject BPA to greater FERC jurisdiction, shifting the focus of control over the agency toward Washington, DC, and away from the Pacific Northwest. And it may provide a lever for FERC to exert greater pressure on BPA to move toward a west-wide RTO.

As discussed in my May 2013 Bulletin article, the risks of mission creep and expanded FERC jurisdiction can be limited by including specific safeguards in the documents governing the EIM. In this article, I propose additional safeguards, including a publics-only EIM and additional measures that should be included in the EIM's governing documents.

By moving aggressively to create its own EIM with membership limited to public power entities, public power can create a structural mechanism to limit both damaging proposals from the EIM and FERC jurisdiction over BPA and other publicly-owned utilities. Fundamentally, the proposed structure would bring together public power utilities, including but not necessarily limited to publics operating BAAs, to pool regulation and balancing reserves and to interact with the PacifiCorp-ISO EIM.
A publics-only EIM would have several advantages over an EIM with mixed public and IOU participation. Perhaps most importantly, the publics-only structure would create an attractive option for BPA, capturing most or all of the advantages that an EIM might create for BPA, but creating a bulwark against expanded FERC jurisdiction over the agency.

In addition, the publics-only EIM would keep public power's fate squarely in its own hands. Because FERC generally has no authority over public power, a publics-only EIM will be able to resist top-down mandates from FERC. If FERC attempts to force a publics-only structure into an expanded mandatory market along the lines of a West-wide RTO, the publics can resist without the same fear of regulatory consequences that would be inherent in an EIM where FERC-jurisdictional IOUs are participants.

Similarly, when faced with the question of adding new functions that would move the EIM toward a full-scale RTO, a publics-only RTO can consider adding new functions on the basis of their own merits, without concern that mandates from FERC would force their hand. Thus, this structure allows public power greater control of its own fate, limiting the extent to which FERC can use its expansive jurisdiction over IOUs as a lever to force its will on the West.

As currently planned, the EIM will operate using the ISO's 15-minute market system. This creates the danger that the ISO will become the default operator of the EIM across the West. With this underlying market structure, ensuring that public power, especially public power entities operating outside California, have an adequate voice in the EIM's operation becomes a challenge.

PacifiCorp and the ISO propose a "Transition Committee" to move toward an independent governing structure for the EIM, but it is not clear the proposed structure would result in fully representative governance. The Transition Committee would be composed of seven members, but, apart from EIM participants, there is no requirement that any particular segment of the industry be represented. This is particularly a problem for public power utilities without BAAs, which are likely to ultimately foot the bill for EIM costs but will not directly participate. And the long-term governance structure of the EIM is still to be developed. This process merits public power's careful attention.

In addition, public power should insist on a "Circuit Breaker" that would require the EIM to suspend operations if there are indications that the market is being manipulated or is otherwise functioning improperly. Circuit breakers of this type are a common feature of most commodity markets. When there are indications that a market participant is attempting to "corner" the market in particular commodity or is otherwise manipulating market prices or outcomes, the circuit breaker kicks in and trading is suspended in that market until appropriate measures are put in place to end the market abuse and make whole those market participants who have suffered from the manipulation.

A circuit breaker is particularly important for the EIM because credible concerns have been raised about market power in the transmission markets covered by the EIM and because the cost-benefit analyses performed so far suggest, at best, modest benefits for the EIM. It is simply not worth the risk of repeating the disaster of the 2000-01 Enron crisis in order to obtain these relatively modest benefits. A circuit breaker would provide market participants with the kind of immediate protection that was lacking in 2000-01, when Western public power waited for more than a year for FERC to take meaningful action to end widespread manipulation and dysfunction of the power markets, which cost hundreds of thousands their jobs and reduced regional economic output by tens of billions of dollars.

When all hope of avoiding assimilation by the Borg appears lost, Star Fleet throws all its remaining ships into a blockade around the inner Solar System. With some clever last-minute thinking by the crew of the U.S.S. Enterprise, the Borg's invasion is stopped and the human race is saved from assimilation. In the same way, the measures suggested here can create a blockade that protects core public power values, and prevents assimilation into FERC and the ISO.

With ISO Vote, Energy Imbalance Market Begins to Take Shape

November 24, 2013

The California Independent System Operator's ("Cal-ISO") Board of Governors recently voted to move forward with a proposed Energy Imbalance Market ("EIM"), with the aim of encouraging Balancing Authority Areas ("BAAs") from across the West to participate in real-time energy imbalance market operated by the ISO. The market design approved by the Cal-ISO Board of Governors is scheduled to begin operation in October 2014. Consistent with an earlier agreement, PacifiCorp and the Cal-ISO would be the initial participants, but the market design approved last week is meant encourage the West's other BAAs to join the EIM. Ultimately, the aim is to create optimal real-time dispatch of generation resources across the EIM footprint, and thereby to reduce dispatch costs and improve the region's ability to integrate variable renewable resources like wind and solar into the electric system.

Under the Cal-ISO's plan, the EIM will be integrated into the Cal-ISO's real-time market. The ISO is now in the process of implementing a real-time market featuring 15-minute scheduling and five-minute dispatch. This market is being developed in response to the Federal Energy Regulatory Commission's ("FERC") Order No. 764, which, among other measures, required adoption of 15-minute scheduling as a means to improve integration variable renewable resources such as wind and solar. The ISO plans to implement this new market structure in the spring of 2014, and will use this structure as the basis of the EIM. Balancing Authorities participating in the EIM will then be able to voluntarily offer resources into the EIM and the ISO will use its 15-minute scheduling and five-minute dispatch programs to efficiently dispatch balancing resources and transfers between balancing authorities across the EIM/ISO footprint. Participants will also submit schedules 75 minutes before the operating hour. These will serve as the load forecast and the base schedule against which balancing resources will be dispatched.

Continue reading "With ISO Vote, Energy Imbalance Market Begins to Take Shape" »

Pacific Coast Action Plan Sets Framework for Regional Climate and Energy Action

November 7, 2013

Last week, the governors of the three West Coast states and the Premier of British Columbia signed the Pacific Coast Action Plan on Climate and Energy. While not legally binding, the Action Plan is important because it lays out a regional framework on climate and energy policy that is likely to be reflected in specific legislation and other measures adopted in each of the four jurisdictions, as well as in coordinated actions among the jurisdictions. Notably, the Pacific Coast regional economy produces a combined U.S.$2.8 trillion in GDP, making it the world's fifth largest economy when considered as a unit. Because the Action Plan charts a course for the future of this huge economy, the Plan is worthy of careful attention.

Issued under the auspices of the Pacific Coast Collaborative, the Action Plan lays out a series of policy goals in three areas, including climate policy, clean transportation, and clean energy infrastructure. Among these policy goals, several are particularly noteworthy:

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California Throws Down Challenge to Energy Storage Entrepeneurs: Bring Us Cost-Effective Options

November 1, 2013

The California Public Utilities Commission ("CPUC") has thrown down the gauntlet, creating a 1325-MW market for energy storage in California, but requiring California's regulated utilities purchase storage only if cost-effective options are available. The CPUC's novel approach upends the usual after-the-fact prudency review of utilty purchase decisions, forcing energy storage sellers to leap the cost-effectiveness barrier in order to access the new CPUC-mandated market.

The CPUC's order, adopted in response to legislation enacted in 2010 (AB 2514), is a new approach to an old idea -- technology forcing. Environmental legislation dating back to the 1960s aimed to force manufacturers to develop new pollution control technology by imposing health-based standards even if those standards could not be achieved with known technology. Rather than following this command-and-control regulatory approach, the CPUC order imposes only general requirements for energy storage: storage must (1) optimize the grid, contribute to reliability needs, or defer upgrades on the T&D system; (2) help integrate renewable resources; and, (3) help achieve greenhouse gas reduction goals. The order requires California's regulated utilities to purchase 1325 MW of storage meeting these requirements by 2024, but allows them to defer these obligations if no cost-effective options can be found. The CPUC order, then, uses the incentive of a huge, mandated market to try to force rapid development and deployment of new energy storage technologies.

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California, Climate Change, and the Commerce Clause: Ninth Circuit Expresses Skepticism in Argument Involving Low-Carbon Fuel Standard

October 25, 2012

The U.S. Court of Appeals for the Ninth Circuit last week heard oral argument in a challenge brought by a number of out-of-state biofuel producers who assert that California's Low-Carbon Fuel Standard ("LCFS") violates the Commerce Clause of the U.S. Constitution because it discriminates against out-of-state producers and artificially favors in-state producers. The three-judge panel appeared, at times, perplexed, and at other times, to be highly skeptical of the LCFS.

For example, Senior Judge Dorothy Nelson, citing comments from California officials stating the LCFS will increase employment and tax revenue in California, asked, "Isn't this unambiguous evidence that the board was motivated by protectionism?" Similarly, observing that electricity is a major factor in the carbon intensity calculations used by California and that biofuels producers have no control over how the electricity they use is produced, "isn't this the equivalent of discriminating against producers with the 'dirtiest' electricity," who are generally located in the Midwest. Similarly, Judge Mary Murguia, seemed particularly troubled with LCFS regulations that, on their face, apply a higher carbon intensity score to Midwestern biofuels producers than to California producers. The third judge, Senior Judge Betty Fletcher, did not participate heavily in the argument, but observed that she followed the argument closely and, found some of the answers provided by the attorneys "very satisfactory, others not so much." An audio tape of the argument is available here.

(Sadly, Judge Fletcher passed away just five days after the argument. A native of Tacoma, Judge Fletcher had a highly successful legal career here in Seattle, where, among other achievements, she became the first female partner at a major Pacific Northwest law firm. She was appointed to the Ninth Circuit by President Carter in 1979. She will be missed.)

Continue reading "California, Climate Change, and the Commerce Clause: Ninth Circuit Expresses Skepticism in Argument Involving Low-Carbon Fuel Standard" »