January 01, 2018

State policies and emerging energy markets

Kristin Munsch

The U.S. Department of Energy, the Federal Energy Regulatory Commission (FERC), and wholesale market administrators have begun examining the impact of “state policy decisions” on wholesale energy markets, particularly decisions to promote specific types of generation resources (e.g., zero emission resources). In fact, state policy discussions in recent years have acknowledged—at least tacitly—the pressure put on the traditional, capital-intensive distribution utility business model by discussing the potential for distribution utilities to serve as “platforms” for new services. As environmental and economic regulation for utilities appear headed on a collision course, what precisely is a “practice affecting wholesale rates” has the potential to become increasingly blurred.

The fundamental question is: Can organized wholesale markets with multiple states accommodate one state’s preferences in generation without discriminating against another state’s choice? Wholesale markets can already accommodate restructured and vertically integrated states, namely policy choices which impact how generators and customers ultimately are treated. Is it the same to have a state favor zero emission resources or does that inherently clash with another’s preference as market prices and quantities change? If states continue to distance themselves on matters of policy, market administrators will be challenged to ensure that their policies do not appear to favor one type of state policy over another. Discrimination against similarly situated actors could be harder to judge as states develop policies that develop different market opportunities promoting specific attributes like “resiliency” in its generation mix. How will market administrators be judged as states increasingly use the most narrowly tailored means to achieve legitimate purposes? States, which face public pressure to both preserve jobs and protect the environment, will inevitably have to turn to the courts for guidance on how to craft legally acceptable programs that encourage specific resources. For some states this will occur when competition fails to incentivize a public good like clean energy; for many others it occurs when competition fails to spur statewide economic activity.

State policymakers and federal regulators agree on the goals of competitive markets—to encourage efficient and least cost allocation and operation of resources resulting in a resilient and reliable grid. Moreover, promoting resiliency and reliability should drive investments in technologies with these attributes, (e.g., storage). If the states and FERC have similar interests, it could be harder to discern what each actor intends to achieve. While it may be easy to conclude zero emission policies promote state environmental goals, it may be difficult to evaluate programs designed to accommodate distributed energy resources and to change the distribution utility business model with the resulting impacts on energy usage and services.

As environmental and economic goals become intertwined, it will be difficult to discern what is and is not subsidized in a way “affecting the wholesale market.” A subsidy could well be found for almost any type of generation technology or generation attribute. Is it the magnitude of the subsidies’ impact price or the type of resource the subsidy bolsters which necessitates action?

In many cases, pressure on distribution utilities and discussions within states on how to move away from the traditional, asset-intensive utility business model to a model based on perhaps providing services (instead of providing kilowatt hours), could pose challenges for courts attempting to draw a clear line between federal and state jurisdiction. Many states are looking for potential distribution services platforms, which could support transactions in energy within neighborhoods or the use of localized resources, (e.g., integration of electric vehicles). If the volume and number of wholesale transactions shrink over time, is there a tipping point at which they can no longer be said to be competitive? Or are the markets themselves not viable because generators have chosen to seek state solutions promoting a specific type of technology or service?

A national grid fundamentally requires some sort of balancing to take place; however, technology is making balancing easier to manage at increasingly localized levels of the system. The market’s role to incentivize resource investment may become a role to promote services, which in turn drives technology. This can make market boundaries potentially harder to discern because no longer will there simply be incidental impacts from a state’s action. If we accept that some entity must have jurisdiction to regulate each and every practice in an electricity market, the shift towards the valuation of services and attributes may make identifying that entity increasingly difficult as legislation, and case law, have not kept up with technological innovations, nor are they likely to do so going forward.

Kristin Munsch

Kristin Munsch is the deputy director for the Illinois Citizens Utility Board, a nonprofit consumer advocacy group that represents the interests of residential and small-business utility customers. She practices before the Illinois Commerce Commission and the Federal Energy Regulatory Commission regarding utility issues, and in recent years has focused on the use of new technologies, performance regulation, and distributed energy resources for the benefit utility customers.