The transcription of the video is below. 

The roles and responsibilities of public utility commissions, discussing their importance in ensuring fair and efficient energy regulation.

Welcome back to our series on Untangling the Grid. I am so grateful to be joined today by Ted Thomas, and I’m going to give him a little bit more background in a moment. But I also want to recognize Suncast Media and Solar Academy for delivering this content to users around the world. Untangling The Grid is one of those key elements to understand because as we’re moving into a more interactive grid environment, we need to understand it better, and it is super complex. First and foremost, this is a three-part series. We did 101 together and we’re going to have a 301, which will be a special round table and I’ll give you more information about that in the conclusion of this session. But I want to welcome back Ted Thomas, who is going to help us answer this question of why is it so expensive and time consuming to interconnect solar, wind, energy storage and EV charging assets to the grid? And to understand that question is not simple.

And so, I really encourage viewers to go back to the 101 session where we dissect some very, very simple building blocks around how the United States Grid Environment was even created. And we go through some of those challenges and here in 201, we’re going to be looking at more advanced concepts of roles and responsibilities of the variety of players that are in the marketplace. And then finally, we’re going to conclude today’s session with some of those complexities around real-time actions in this built environment and interconnected grid environment. And then it’ll really dovetail our hope into the 301, which again, is going to be this special round table. So welcome back to Ted.

Ted is a former chair of the Arkansas Public Service Commission and today’s episode is really going to focus on roles and responsibilities of those public utility commissions or public service commissions. And Ted is an expert in this field. He practiced many, many years as an understudy, but also as an active participant in the Public Service Commission Environment, making decisions about this particular topic. So, when we have Ted talk about this topic, this is really coming directly from the regulator position and it’s super insightful and I’m really grateful that Ted has joined us. Ted, thanks again for joining us here today. 

Ted:
Thank you for having me. 

Jon:
You’re welcome. Please go back to the 101. Check out who is in this acronym soup of all these things. But we’re going to break these down now, so I encourage you to go back to 101, but we’re going to jump right in on this complex map of the United States and Ted, talk us through this map because we didn’t get to do it in the 101 session, and I think it really illustrates super well some of the complexity here.

Exploring regional transmission organizations and independent power networks, which play a crucial role in the energy grid.

Ted:
Yes, the first observation is that when you look at northwest and southeast, those are not separate. Those are nothing. Those are the non-RTO areas.

Jon:
Yeah, so they’re not in a regional transmission operation. They’re like independence, completely independent.

Ted:
Yes. Yes and then the maps are shaped the way they are because the members of the RTOs are the utilities, not the states. So, when you look at SPP, MISO in Missouri, that is the Ameren border. I think it’s West Star on the Missouri-Kansas side on the west side with SPP. And Ameren, which also goes into Illinois, is the blue part. The brown part is the cooperative. 

Jon:
But that’s PJM here in Illinois.

Ted:
In Missouri, the brown part is the cooperative territories, which aren’t in anything. And if you look over at PJM. And it helps to have them contiguous. It’s obvious that it’s not a requirement. The part of Illinois, the city of Chicago is in that part, right? Chicago is in the PJM parts of Indiana. There’s a little bit of Michigan, that little corner is in PJM and the rest. That’s because of where the utility service territories are. 

Jon:
Got it. Okay. And then those are the RTO networks here we’re talking about PJM, New York ISO, New England ISO here. Southeast, as you’ve said, is an independent sort of a region here, not part of an RTO. You have your ERCOT, which is an independent, non-regulated. So, FERC has no jurisdiction over ERCOT, is that correct? 

Ted:
Yes and that’s because FERC jurisdiction requires interstate transmission. The grid is interconnected. We have a Western interconnect and an Eastern interconnect that’s balanced all the time. The Eastern interconnect has been described as the largest machine in the world. ERCOT has DC ties but no AC ties and in the thirties, they set it up that way so they would not have FERC jurisdiction over the economic regulation of electricity. Now, of course, in Texas, they’re still subject to EPA rules. There are other federal rules. That impacts electricity that they’re still subject to, but the economic regulation of utilities within the ERCOT area, and Texas. It is also interesting and if it has some MISO, it has some SPP. And over there by El Paso, it actually has some western interconnect. El Paso is in the Western interconnect and the rest of Texas is in the Eastern interconnect.

Jon:
Okay. But just to be complete here, that big blue splotch in the middle there, that’s the MISO region. Yes. And then we have the SPP, that’s the Southwest Power Pool. So then you’re pulling through the Southwest Power Pool there. Now that Southwest Brown block there, that is an RTO, is that correct or not? 

Ted:
No, that was an error earlier because Northwest and the Southwest is not an RTO.

Jon:
So these two, the gray region and that brown region in the Southwest and the Northwest are not regulated either. And then CAISO, the California ISO is regulated by FERC. Okay, so we have three regions, Southeast, Southwest, and Northwest. These big, huge blocks that are not regulated by FERC. And then we have a myriad of New England ISO, New York ISO, PJM, MISO, SPP, and Caiso that are all under FERC. But ERCOT is not. 

Ted:
Yes. Now they’re not regulated in the way that an RTO is. If you do a wholesale transaction in Idaho, you’re still subject to FERC regulation. It’s just not an RTO. That’s another point that I should have made.

Jon:
So, is that because they’re doing an interstate transaction? 

Ted:
Yes, or even just any wholesale transaction. Well, there’s some intrastate transactions that FERC doesn’t, I think they might have authority to, but they choose not to. But if it’s interstate, it’s still regulated. It’s just not regulated under the RTO construct. And another important thing about the west is that it is moving. There are some Colorado entities that have declared an intention to join SPP. There are things that are on a pathway to an RTO that’s not yet a full RTO, including an energy imbalance market.

Jon:
And where is that happening?

Ted:
It’s all over that northwest and southwest territory.

Jon:
Okay. Sort of a big regional block in the west is really coming together.

Ted:
Yes, and they’re actively looking toward forming an RTO. The one that’s announced is the one that’s in Colorado. And that there’s some car entities that will be joining SPP. The Southeast has largely resisted. They pushed towards doing this but in the West, they’re really embracing it. In the next five years, that map’s probably going to change in the west. There’ll probably be some SPP.

Jon:
So, SSP looks like it’s going to push west into Colorado and it sounds like there’s maybe a Bonneville Southwest-Northwest conglomeration that might come under one RTO jurisdiction. Is that right? 

Ted:
Yes. Now there are governance issues with the California governor appointing the board of directors of CAISO. The California legislature would have to change that. And that’s probably a non-starter for full RTO, even though the California RTO runs the largest energy imbalance market in the west. And has a day ahead market, which are little milestones on the way to full RTO. Those are like components of the RTO services. So, you see people in the west taking the early steps that when other people have taken them have eventually led to an RTO. But that’s all in development. That’s western RTO expansion.

Jon:
And when you say in development, could we expect five years, two years, three years, ten years? How long does this new picture of RTO land take for you in your mind? 

Ted:
The SPP thing, I think they want to go live in 2024. So, your map would change in 2024. Wow. This would, in energy circles in the west, in regulator meetings and utility meetings. This is one of the top conversations that’s happening there right now.

Okay. And two or three weeks ago, both Kaiso and SPP had major announcements. SPP is working with a bunch of northwest entities on regional resource adequacy. And then Kaiso runs the larger of the two energy imbalance markets. SPP also runs one, and both of these things are, they’re just, they’re one component.

If you look at an RTO and say, it does say it does six or eight things. So these are one or two of the components that they’re introducing. So, it is very much in flux in the west. And then the more recent, the Christmas Eve, Christmas Day power outages pushed into the southeast.

And although there’s been a lot of resistance to the regional markets, more regional interconnection and planning, some will argue that could have reduced the impact of those events. So, we’ll see if that starts a different kind of conversation in the Southeast. But that conversation is already moving forward. None of this stuff moves very quickly, but as quickly as it runs, that’s already happening out west. 

The Benefits of Transactions: Hydro Resource and Market Opportunities

Jon:
Let me ask you something because you’ve said a couple of things there that I want to just connect the dots on. The Northwest has a lot of hydro resources, which is Yes. Low cost and firm, so you really shape that power the way that you want.

It’s basically on demand for green electrons that are very low cost. Which are like the ideal resource. The problem with hydro, of course, is that it doesn’t scale anywhere that you could have done hydro. You’ve done hydro, so would it be a true statement to say that SPP wants to make a deal with the northwest folks to be part of their region because then they have large scale standing green electrons that are shapeable? Why does the SPP want the northwest in their territory?

Ted:
Generally speaking, the broader your footprint is, the more diversity in weather and in diversity in resources that you have and that’s a key part of the benefit proposition. 

Jon:
Okay, so SPP has a ton of low-cost wind, but it comes when it blows. And so, that’s not super helpful. So they would want to balance potentially with that hydro. 

Ted:
Yes. But the hydro is mostly already spoken for. They have contractual obligations to California, so it gives them more flexibility. In fact, a lot of that, the city of Los Angeles, which is a municipal utility that’s five times the size of my entire state, owns transmission assets outside of California.

And it’s basically geared toward how we do. Happening already to that hydro resource. And then also the Bonneville power Administration is a federal entity and it’s really complex to get a federal entity, and SPP worked on that. When you look at North Dakota with the different colors there, there’s a WAPA, a Western power authority that’s a federal agency. There are different rules for one federal agency to take jurisdiction over another. And of course, Bonneville is a large, powerful entity, but it helps them. It helps everybody when there’s more transactions. The more, if your benefit metrics are right where each transaction is beneficial, the more transactions you have, the more benefits you have. 

Of course that applies to anybody. And if there’s a market, Bonneville’s interests is a market right next to them. There’s a lot of transactions going on and they want to be part of that. When it’s the hydro, when they’ve got extra it’s a great value for them to sell it and pass those savings back to their rate payers instead of having it sit surplus. And for the other folks, because it’s a cheaper source of generation. And that’s the nature of markets. You don’t have a deal unless it benefits both sides.

Tackling Fuel Shortages, Climate Volatility, and Aging Infrastructure in the Power Grid

Jon:
which is confusing. Why these, like the Southeast you mentioned, the Christmas day and the Christmas Eve Southeast problems that they had. There’s been an enormous amount of solar development in North Carolina, and for them not to be interconnected to PJM or to their partners at MISO, it doesn’t make sense. They would probably want a broader, more interconnected network so that they can get the lowest cost, highest quality resources to their customers. 

Ted:
That makes perfect sense to me. Now TBA has some of the same federal challenges that Save Bonneville has, but then it’s also about control. And it’s really easy to say look at ERCOT. They had a market and they hit the wall. Yeah. The reason they hit the wall is because that weather pattern, the coldest, if you overlay the weather pattern with the RTO boundaries , you can tell people are who’s going to have a problem. 

When the weather pattern swallows all of PJM there’s no neighbor to get anything from it within PJM at that point, because they’re all under the same weather pattern. Of course, the weather pattern pushed into the Southeast and we see those same issues. The weather risk is not created by RTOs. In my view it’s mitigated by RTOs. Having more regional transfer capability, and you never know whether you’re going to be the buyer or seller, whether you’re going to be helping your neighbor or your neighbor’s going to be helping you. Cause it, it’s random. It depends on what the weather does.

You saw that when they had rolling blackouts in the state of North Carolina, even though they have a higher reserve margin because reserve margins go down. When you have an RTO. They had a higher reserve margin. The weather still hit it. And the other problem with winter; winter is harder than summer.

These challenges are going to happen more in the winter than the summer because of a couple of issues. Your solar helps you in the summer. But the sun is the key driver of load. And when the clouds are out, not only does your solar go out, your load goes down. In the winter you have the correlated risk of gas production gas competition because it’s a home, heating resource and then also gas for generations. So, there’s a correlated risk in the winter, not in the summer. The other problem is the system is designed, the whole mentality that designs a system that’s fairly old is you meet summer peak, you meet summer peak, we peak in the summer.

And of course these weather events are going to change the focus and are already changing the focus. The risk is in the winter more than the summer. And when you see ERCOT. They talk in the summer. Oh, are they going to hit the wall? They do pretty good in the summer. They’ve never hit the wall in the summer.

Jon:
It’s winter. It’s cold, right? Yeah. And so, our natural gas fired power plants are derated by extreme heat and extreme cold. 

Ted:
Yes. But that’s on the margin. They perform differently. The key risk is fuel availability. The water. Fracking happens in remote places on remote roads with water being cropped to, and the wastewater being cropped from. And trucks, water and ice, and dirt roads are a really poor combination. So, when the weather gets cold, the production slows down. It’s more the fuel availability. There is variance in the performance of the plant but that’s fairly small. The real factor is fuel availability because you’re drawing your gas for heat, you’re slowing down your production. You need more for electricity. And the correlation of those risks is the key thing that folks are trying to manage.

And it’s an aging system too. Even the retail access that happened 20 years ago, a lot of the plants that still exist didn’t come into existence under that model. They come into existence under the old model. This is aging equipment and like anything, if your car is 10 or 15 years old, your repair bills are up.

They just are. That’s how, that’s the nature of physical objects. So we have an aging system. We have extreme weather. We have increasing loads and then we have a lot more dependence on the 20 or 25 percentage points that have shifted from coal to gas and then you throw renewable variance on that, and you can get some problems.

Now those, it’s interesting some of the people in the southeast are talking about renewable problems. Well renewable is 5% and we just do it in a pie chart. And have renewable as green and non-renewable as red, and it’s five to 10%. And then you’re going to say the whole problem happened at the five or 10%? Not the 90%?

I mean that’s just silly. Now every problem matters when your load exceeds your generation. Now when you look at SPP, which sometimes hits 90% of its loads, served by wind. If you have a wind problem in SPP, you have a big problem just because of that same pie chart, where there’s no renewable penetration. It’s pretty silly to blame or not know about low renewables? 

Jon:
But if you zoom out, Ted, if you zoom out a second and you say, this looks like a balkanized crazy little map here with a lot of history. Why would we not, if what you’re saying is that an interconnected open marketplace is the key to these increases in extreme weather conditions so that hydro energy in New York state could potentially help Chicago or maybe even serve customers in Texas.

And the wind, as you say in Iowa, could maybe serve someone in LA or in Tampa Bay, right? And so why are we fighting against this? What would be an elegant solution for a nationwide single regulated point so that we can have an open marketplace where the best resources serve the load nationwide. 

Ted:
The first point I would make is if you think this is balkanized, if you tried to do a map like this 20 years ago and you had the individual balancing authorities that would try to solve the same problem on a smaller scale. You’d have three or 400 little circles on this map. I think there’s 180, and I might be wrong in these numbers. If you take Northwest plus Southwest, there’s like 180 balancing authorities. This is a move over 20 years with a lot of progress toward what you described.

And then the other is the physical limitation of the transmission of power. Particularly on AC you have significant line losses. The farther you get away, you have less of that on the DC side. There’s very few. There’s some proposed DC lines. I think there’s a couple of them that are actually operating. You don’t have the line loss with DC but then you have a very expensive conversion proposition at the end of the line. Then you convert it to AC and you put it in the existing grid. There was a plan that was new, well it’s not really new, it’s the existing administration now.

I think they rejected it, and it was basically a big DC overlay over the entire country, which would be very expensive but over time would probably be paid for by savings with more flexible generation going all over the place also citing difficulty.

The DC lines are just larger. They’re bigger. They’re larger. And then the politics, when you’re going from Denver to Chicago, if you’re in Kansas, Nebraska or Iowa, you get the detriment of the big line and there’s no benefit unless you’re paying for them. But then of course, that’s a cost that goes for the project. So, there’s the whole, not in my backyard, the whole challenge of building anything that we have right now, that gets worse when you’re being gone through without any of the power being dropped off. So that’s another complexifying factor.

Jon:
You just said 20 years ago, this map would’ve included 300 plus balancing agencies, and now we have, let’s call it, ten Potential areas or twelve.

Ted:
But there’s 10 in Florida alone though. There’s 10 balancing authorities in Florida by itself. Now, the Southern company, which is most of Georgia, Alabama, and that part of Mississippi that isn’t covered blue, that’s one balancing authority. So that varies a lot from region to region, and that’s an oversimplification. But like MISO and SPP, they operate as one large, well SPP operates as one large balancing authority, so that’s one. And then Florida has ten.

Jon:
Yeah. But in 20 years, could we see a single RTO?

Ted:
I don’t think we’ll ever get to a single RTO. The Congress, neither Congress nor the FERC have ever said that an RTO should be mandatory that you have to join. And the reason you have the system with the different ones is those are the rules that they negotiated in order to join a voluntary organization. 

Jon:
But Ted, listen. 

Ted:
Now they tried to do that in 2000. There was a thing called Standard Market Design where they were going to have one market design. And you joined it. And that ran into a brick wall, a political brick wall. 

Jon:
Who’s the politics behind that? Because politicians are, I would expect them like airways and waterways and railways national parks. We have a federal system that works very well. So why Yes, could we not?

Ted:
But we have a Federal Power Act that divides state and federal authority. You have politically active entities. I don’t want to do these things. And it’s voluntary. The whole thing has been built. Now we have what we have now as compared to what we had, and it’s probably closer to 25 years ago because they were voluntary. You could join them voluntarily rather than being compelled. 

Regulating Wholesale Energy and Interstate Transmission: The Role of FERC

Jon:
Okay. Okay. So let’s get back. Let’s get back into the details and I’m going to go forward here on our next bit of information, which is who is responsible for what? And really we talk about serving the customers ultimately, what this whole complexity is about. And it’s got to be cost effective, meaning low cost, safe, high quality, et cetera. And each one of these parties has a role. And so, Ted, break down what the role of the Federal Energy Regulatory Commission is like. What are they responsible for and what are their roles? 

Ted:
Their key role is to regulate electric and natural gas transactions that are sales for resale. 

Jon:
Okay. So wholesale prices. 

Ted:
Yes. If you’re selling to the end user, it’s retail and FERC does not have jurisdiction. If you’re selling it to somebody for the purpose of them selling it again, that is where the wholesale jurisdiction is, that is their key role. Now, it used to be, say, 20, 25 years ago, that they would do cost of service regulation., and what they did was they developed a concept called market-based regulation, where they essentially say, if you have a fair market, then we presume the price to be reasonable. If you don’t have a fair market, then you do cost of service regulation the way it’s done in most states at retail.

And of course, the FERC also has Interstate transmission roles. They have backup siding with respect to gas backup siding on the electric side or backstop authority. If the state denies a gas permit for sighting reasons, they can go to FERC and basically get the state overruled.

Jon:
So, they would be the private natural gas distribution company if they’re denied on a state level.

Ted:
This is on the interstate transmission side, though. This is on the larger pipes. 

Jon:
But they are owned by private organizations, right? I mean they’re, yes. So, the private organization, if they’re rejected for whatever reason, running a natural gas pipeline from one state to the other, the states say no, thank you. They can appeal to FE to say, we need this for the following reasons. And they could be approved and it would override the state’s decision in that case.  

Ted:
Yes. And that’s called backstop siting authority. There’s a gradual move that’s not fully developed, but it’s in flux of doing that on the electric side. Okay. In part because of resistance to these large lines, but the interstate transmission is regulated. Burke has additional statutory authority and an exercise of the first two. Their authority over sale for resale and their authority over the transmission system. They created RTOs as part of their exercise of those first two. So, the RTOs are creations of FERC. They’re regulated by FERC. 

Jon:
Well, we’re going to get to the RTO’s…

Ted:
It’s literally, who’s your daddy? The RTOs daddy is FERC. and so the one and two, those responsibilities are sometimes exercised at the RTO level. And when you look at the responsibility to do the fair competition best to take the transmission system, which they have extra authority over, which is owned by private entities and give the management of that system over to the RTO so there’s fair access to the generators. And then once you have fair access to the generators, then you start to build these market structures that give customers access to those generators. 

Now we have what’s called bilateral. Bilateral is what we’ve always had. Bilateral is when one utility gets on the phone with another and says, hey, can we make a deal? Well with the RTOs, it gives you visibility and a market structure. It’s like the stock market. When you sell a stock, you’re not picking the buyer. You’re putting it up for sale, and then the market structure matches the buyer. Now that’s what RTOs allow that to happen in energy when the bilateral transaction would be like if I have stock and I call you and say, hey, you want to buy my stock and I pass it over to you.

Now if we do that transaction well, nobody else can see what the stock price is. There’s no transparency. So, I might be getting one over on you. You might be getting one over on me. When everybody sees the prices that are actually being transacted in a reasonable time. Now you don’t want them to know beforehand because that’s commercially sensitive information and then somebody can gain that.

But after the fact, the stock market does the same thing. The stock market posts in real time, the actual trades. And then if you’re watching that gives you insight. The RTOs bring that transparency insight into these same transactions, and then they also increase the geographic scope of who you can transact with through management of the transmission system.

Jon:
But Ted, you keep on referring to FERC as a regulator of generation, which is a concept that has literally gotten us to this modern day, which is central generation being pushed out. How does FERC interact with something like Demand Response, which is certainly an energy service and valued to the transmission and distribution network. Go ahead. 

Ted:
There’s a very important Supreme Court case. I think it’s EPSA, the Electric Power Supply Association v FERC, that’s been a few years, I think maybe 2011. That dealt with that issue because there were people that argued when FERC set a rate for demand response that they were actually setting a retail rate that only the state could do.

Now the EPSA case correctly, in my view, rejected that argument. That when you have these new technologies like Demand Response and you have these new entities like RTOs and you have the rigid wholesale versus retail that was created by the Federal Power Act in the 30s before any of these technologies or business practices existed, you have an inevitable problem, when innovation outruns your statutory model. And so you have some of that going on when like traditionally the power system, the distribution was state and the transmission was federal. Well, what if you have a distribution interconnected storage asset that you want to transact wholesale? Well but that’s what the people got wrong. It was a tradition that FERC regulates transmission. States regulate distribution. But the law said wholesale and retail. It didn’t say distribution and transmission. So, under 8 41, the storage order from FERC order 841, you can interconnect to the distribution level and participate in the wholesale market under FERC regulation. It’s just that technology has changed some of the dividing lines, which is causing some friction in jurisdiction.

Jon:
Got it. So, 841 allows someone that installs an energy storage device into the network distribution network to sell into the wholesale market. Okay. Let’s go to the next one here. 

The Relationship and Responsibilities between ISO, RTO, and PUC/PSC

Ted:
That’s deep enough into the weeds on that. That one can go…

Jon:
But that’s exciting. That’s a really important thing to pick apart. I think we’ll do it in 301, which is this interactivity between generations centralized and. And demand response, or let’s say behind the meter resources. Providing wholesale energy services. But let’s dive in a little bit deeper on the ISO, RTO relationship to role and responsibility. Why don’t you go ahead and pick that apart?

Ted:
Their key role is to manage the transmission system and someone else owns, for the members of the RTO. Now when you manage the transmission system, what you’re managing for is reliability. So, what you have to do is take all the members of the RTOs, which are the utilities; you have to take their resource mix, which is controlled by their state if they’re traditionally regulated, and you have to make it work. It’s like a potluck dinner where everybody can bring what they want, and then it’s the RTOs job to turn all the different stuff people bring into one meal.

Now, that can be challenging because if everybody decides to bring dessert, then you have a problem. So, it creates this interaction between the RTOs and the state regulators in terms of trying to get the resource mix right? So, they’re, the states are responsible for resource adequacy. That’s having enough stuff and the stuff that you have, the RTO is responsible for running it reliably.

Now, managing a transmission system also includes transmission planning. Because if you have states, you have local reliability stuff, which of course the local utility knows about. This is what we need for reliability. And then NREC, which is the National Electrical Reliability Council, has engineering standards that’s what you’re doing with reliability as you’re complying with NRCS engineering standards. But if you have two adjacent art utilities, there might be one larger project that solves both utilities’ reliability problems, but at a lower cost because it’s one scale project rather than two small projects. 

Jon:
But the assets themselves that are being managed by these RTOs are privately owned by investors or by somebody? 

Ted:
Yes. They’re owned by IOU or a municipality. Or a co-op. Now the IOUs larger and own most of them

Jon:
Investor-Owned Utilities, right? They own the largest bits and pieces of this transmission and distribution network, right? Okay. 

Ted:
Yes. And oftentimes it’s munis and co-ops that want to buy generation from somewhere else and don’t have transmission that need to use the IOUs transmission system to enable the transaction. 

Jon:
Got it. Okay. And this dovetails directly into what you are talking about with the state level public utility commissions or public service commissions.

Tell a little bit how the RTO works with these other organizations that are responsible for reliability.

Ted:
The RTO where you have one is responsible for reliability. What they have to do is make work what each state, when you have a multi-state RTO brings to the table. Now that’s a little bit different when you have New York, or you have ERCOT in Texas, or you have Caiso where the state is the same. Now there’s still friction between these entities, but it’s different. The key role of the PUC, PSCs is regulation of retail rates. That is their key role that when you’re selling for end use, the person that actually uses the power, that rate is controlled by the state. Now, the state has different methods they can do that they have authority to do. They might choose to exercise that authority and have retail access, which gives the consumer choice among who their generation provider is while transmission and the cost of transmission and the cost of distribution remain regulated or they have the traditional rate case method, 

But they bring, the state is in charge of resource adequacy, which is the amount of generation and generation mix. While the RTO, if you have one, is doing reliability and those two clash because one of the reasons you might not have reliability is if you don’t have enough stuff. Yeah. The RTO doesn’t have the ability to direct that there be more. They’re stuck with using what the states bring to the party to do their role.

Now the responsibility and they’re appointed, the commissioners themselves are appointed typically by the governor or a municipality like the city council or the co-ops select their board. There’s a governance structure for all. On the PSC side, they’re elected, or they’re appointed. Most are appointed. And all of this authority is a legislative responsibility. 

Jon:
I’ve got two questions here. I want to tie into your buffet, sorry, potluck analogy, which is that the RTO is hosting a potluck and they’re inviting all of the owners of these transmission and distribution assets and the PUCPSC is responsible for who’s invited and what they need to bring to the party. Is that right? 

Ted:
Yes and I just put into chat in a book that actually reads like a biography, not an economics textbook. It’s called The Profits of Regulation. I should be able to remember the author. It’s the story of four people. The first person is the Adams that followed John Adams and John Quincy Adams, The third in that generation, his father and grandfather were president. He basically invented the concept of an expert panel delegated the authority by the legislature.

So, he’s, in some ways but really that book is like the history of the regulatory model. And it’s told in a bio biographical form so it doesn’t read like an economics textbook. Excellent regulation. If you want to delve into the history of the PUCs as a great resource.

Regulating Consumer Choice Aggregators and Planning for Long-Term Assets in the Electric Industry

Jon:
I’m going to put that in the show notes too. I also want to ask a question about the CCAs. So, the consumer choice folks Are going to be regulated by the PUCs because they’re offering a retail product. 

Ted:
Well now, the consumer choice aggregator that is unique to California, The problem, and this is where well,

Jon:
Are they regulated or not by the PUC? I think they must be? 

Ted:
They’re in a no man’s land in a place where a lot of other no man’s land already exist and it’s unique to California which means it usually has some special promise, but also in some special peril. That is the case with these. It’s an opportunity, it’s basically a scaled opportunity for consumers to choose a generation mix that’s different from their incumbent utility, even though the incumbent utility retained some of the universal service distribution and generation mandates, which makes it kind of a mix. 

The problem that you always have with a regulated monopoly is it’s planned. That’s why you have a regulated monopoly, because natural monopoly is about network markets that do not create networks.  Networks require planning, but, and long-term investments, you have planning. And when you have planning, if I have to plan for the entire load of the state of Arkansas, I’m creating financial obligations to build stuff when people leave that system, because these costs are fixed. When they leave the system, what they’re leaving is something that was planned for them. And so there’s cost responsibility issues and that varies. That depends on what’s already planned. But if you have to plan, if the state puts on the utility, the obligation to plan for its load, and it invests money to pay for that load. When some of that load leaves, what it leaves is the same fixed cost with fewer customers, which creates more fixed costs put on the existing customers. 

Jon:
Which would be part of that M3 conversation that happened here in California. But we’re not going to get to that today.

Ted:
Yes, but it’s broader than that. You have that in anything. The other problem, which makes it worse in the electric industry is because the assets are long lived. That when you commit for 40 years based on what your load forecast is, if you do, this happens in the real world, in the market world, the same thing happens. When does something become obsolete? What is the life cycle? The reason that telephones could move so fast is both the switching and interconnection stuff, they had two and three year life cycles. And your cell phone has a two or three year life cycle. So, you have to recover those costs in three years and then once they’re recovered in your pricing structure, well then there are no stranded, what we call stranded costs, and we combine the next. But when you have a 40 year life cycle of assets it’s different and it’s challenging.

It drives the net metering challenge, but it’s a bigger challenge. It drives the CCA challenge because if people leave the committed resources, well who gets stuck paying for the committed resources. Now as the committed resources run out their useful life, then you come back up for air and you plan for a smaller deal. So that cost shift that exists is temporary and it’s driven by whatever resources were planned to meet your load. Now when load is growing, yeah you can grow out of that problem, but when load is contracting, you can’t.

Jon:
Right. We do see here, a real conflict. I mean, when you’re looking at long-term planning for assets, you’re looking at a user base or as they like to, or I say IOUs, like to call them ratepayers. There’s an obligation of load or forecast of load, and then you start seeing decentralized assets like solar and energy storage and electric vehicles potentially upsetting the apple cart of that planning.

Ted:
Yes. Well, electric vehicles, though, take it the other way. 

Jon:
Potentially right now they’re only a load. But if we start looking not even that far in the future, you could see the vehicle serving the load. 

Ted:
Yes. Yeah. The V to G thing is real. Now you have got to; that’s run. You got to crawl and walk before that. But in history where it takes five or 10 years to build anything, if you want to run in 10 years, you gotta be thinking about it right now.

Investor-Owned Utilities in a Regulated Industry: Complexities of Pricing, Assets, and Returns

Jon:
Absolutely. Let’s get to roles and responsibilities of the investor-owned utilities. How they play is very complex. 

Ted:
Yes, they’re private for-profit businesses but they’re different because they’re regulated. That makes them different because A, they can’t set their price because they’re not subject to competition. The state gives them a service territory and says, you’re the only one that can sell this product. But the state takes from them the right to set the price. The other thing the state takes from them is the right to dispose of the assets or to sell them to somebody else.

So, the assets, whether they’re highly valued, whether they’re selling it below market, or whether they’re above market or basically held in, in some ways, analog, just a trust for the rate payers. The utility is paid, cost of service rate making whatever it costs to produce them. and then the benefits… 

Jon:
But what would we say the average cost of return rate for…

Ted:
It’s six or 7%. Now when you see, if you Google ROE, which is the return on equity, you’ll get a higher number than that. But the equity is part of how they’re financed. The other is debt. So when you take the asset base, we’ll call that a hundred dollars and you say we’re going to do $50 debt and $50 equity. That ROE only applies to $50. Then the debt, which is usually actual market debt based on bond issuance, is the other $50, and then you take them together and do a weighted average, and that’s called the weighted average cost of capital. And all of this is very interest rate sensitive. So, I’m probably going to be dated on some of my numbers. I’m guessing that’s six or seven right now. And this time last year might be like 5.8, 5.9 to 6.25. So, then you add two or three points of interest that go up, and of course that will trickle through to the customers. That’s enough. 

Jon:
Which they call rate payers. So their obligation is to provide energy services to retail customers.

Ted:
Yes. Yes. And they have universal service on the electric side. They have a universal service obligation. Which, that’s another problem with customers leaving. When you have a universal service obligation, and you have different population densities, inevitably it’s more expensive to serve in lower population density areas, and so the IOU carries that obligation they have to serve. So, if somebody comes in and cherry picks a concentrated thing, that’s easy to serve because there’s less wires per customer.  And all of this played out in the sixties with telecom, with the AT&T monopoly. So there, there’s a lot of stuff you can look at and learn from all of that.

So, they have an obligation to serve, which is part of their monopoly construct. But then they’re for-profit entities, they have an obligation to their shareholders, right? But part of what makes the system work reasonably well or over time is these are granny stocks, which is a good thing. They’re low risk. Stable because the risk, and this is a highly risky business, whether it’s good or bad, flows to the ratepayers, and the reason it’s that way is to keep them as granny stocks. So, they’re low risk.

Jon:
But having PG&E in bankruptcy for the second time in 20 years is really not a granny stock. No one would call it that, I don’t think.

Ted:
Yes. That’s an important regional difference. Now the wildfire liability, there’s some of the liability rules that contributed to that. And also, the switch of markets contributed to that. Because when they first switched to markets, they deregulated wholesale prices. and they left retail prices regulated. So, two years ago you would have regulated hamburger prices at retail, but not at wholesale. Who’s ever paying the inflation on wholesale that can’t pass it to retail? They go straight to bankruptcy court. It happened in California. That happened in Maryland, and it was because there was a, you can’t regulate, you can’t deregulate a wholesale. And if wholesale is the contributor to retail, leave retail regulated without creating the risk of that kind of a major screw up. 

Challenges and Solutions for Interconnecting Renewable Energy Resources

Jon:
Yep. Yeah, definitely. Let’s move on a little bit, and this is going to be more, I think, topics for our next conversation. We’ve done 201 here. Ted , your knowledge and experience here is so valuable and I’m glad we’re capturing it here because it is a very complex challenge. And so now we see recent actions mentioned before the California NEM3 ruling.

The FERC 2222. Looking at valuing demand flexibility. The AIRCOT free great freeze out of 21. MISO’s pricing, which has gone through the roof. How are we going to land all this low-cost offshore wind in the New England area, mid-Atlantic area. There are so many things that tie into this. Yes, from a modern day problem solving perspective. We’re going to challenge ourselves in 301, which is our next session. And we’re going to be joined in our next se next session by two former FERC Chairs. Both John Wellinghoff and Neil Chatterjee will join us in discussing, based on the information we’ve learned in 101 and 201, we’re going to talk about how the modern day FERC-RTO-IOU interconnection happens and maybe we’ll get to some one, two, or three solutions discuss some solutions. So, I want to conclude here and thank Ted so much for his insights here to this very complex challenge and hopefully we’ve disassembled this in a way that people can. Oh, now I understand why it works that way. And that’s so important. 

Ted:
Yes. If we’ve succeeded in one and two, and I know it’s very complex, particularly someone that’s uninitiated in it, Then when we start talking about this list that’s on the slides now, it will make a lot more sense. Because the other way to do it is to try to talk through all of that stuff in the context of each of these problems, which is overwhelming. But the concepts that we’ve talked about touch on all of these things. So, if you can get a grasp, conceptually then when we get into the details of these real life things, hopefully it will make more sense. 

Modern-Day Solutions to Complex Energy Challenges: A Conversation with Ted and Former FERC Chairs

Jon:
Yes. I’m going to stop sharing now and I’m going to thank you so much Ted and I look forward to having the four-way conversation. We’re going to have a round table. Yeah. For the next conversation, the 3 0 1 level of this untangles the grid. So that we can, I think more, get more people active in this conversation around making it lower cost and shorter timeframes to interconnecting these resources. We want to see more of it. Solar, wind, energy storage. EVs as you said, V to G. So, vehicle to grid and grid to vehicle. Already Tesla represents one of the largest energies rolling around in the streets. Ener prevents potential energy providers. So, there’s a lot of exciting things happening there that will only be unpacked if we have that successful 101 and 201 blocks.

And I think we’ve done a good job here. To disassemble that. Ted, do me a favor. Send me that book that you’ve suggested. Email it to me. I’ll put it in the show notes. And we’re also going to have this slide deck that we reviewed in the show notes too, so people can access that. Thanks again. Ted Thomas, I really appreciate your help here and understanding it. And we’re lucky to have you out there. I’ll tell you that.

Ted:
Yeah. Thank you. I appreciate it. Have a good one. Until next time.