The Energy Markets Podcast

S3E1: R Street's Josiah Neeley talks about the debate in Texas on the future of the ERCOT power market

January 09, 2023 Bryan Lee Season 3 Episode 1
The Energy Markets Podcast
S3E1: R Street's Josiah Neeley talks about the debate in Texas on the future of the ERCOT power market
Show Notes Transcript

Josiah Neeley, the Austin-based research fellow and Texas director with the libertarian-leaning R Street Institute, discusses a recent letter that the think tank and some 30 other interest groups sent to Energy Secretary Jennifer Granholm urging that DOE, when it is allocating funding under the Inflation Reduction Act and the infrastructure bill, to take into account areas of the country that have not yet adopted a regional transmission organization and organized competitive wholesale power market. He also discusses the debate in Texas about whether some kind of capacity construct should be adopted for ERCOT's energy-only power market. The PUC is expected to address the matter soon. State lawmakers' concerns about the regulatory commission potentially altering the energy-only market structure could become fraught as the biennial Legislature convenes soon. And on top of that, the PUC is up for Sunshine Act review under state law. "There's definitely going to be a lot of sparks flying related to that and I'm not enough of a prognosticator to tell you exactly what's going to happen. Will the energy-only market still exist at the end of that process? Will the market still exist? Who knows? But it's certainly something that there's been a lot of pressure, pro and con, of all these different options," Neeley said.

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EMP S3E1 Josiah Neeley, R Street Institute, transcript
(edited for clarity)

EMP: Welcome to the Energy Markets Podcast. We're kicking off Season 3 with Josiah Neeley of the R street Institute. Josiah is headquartered in Austin, Texas, where he does all things Texas and all things electricity. And we're talking with him today because of a Nov. 18, 2022, letter that R Street spearheaded with some 30-plus groups urging the Department of Energy, when it's doling out money under the IRA and the infrastructure bill, to keep in mind the need to establish organized competitive wholesale markets across the country. Josiah, welcome.

JN: Thank you. Thank you for having me. And I should say, you know, that letter is a team effort. There's a lot of groups on there, everybody from Advanced Energy Economy, Conservative Energy Network, Sierra Club, the Energy Choice Coalition. So I mean, there's a really broad variety of groups all come together on that.

EMP: Yeah, I was really impressed with the range of groups you had on here. You've got environmental groups, you've got business groups. It's an impressive group. So let's talk about the letter. We've got a ton of money that DOE is going to be doling out under those two bills. Was the point of this letter to try and urge DOE to tie formation of organized markets to the money that they're going to be doling out?

JN: No. So just to back up and give a little context, you know, as your listeners, many of them are probably aware, it's about two-thirds of the continental U.S. right now are in some kind of organized wholesale market. Sometimes they call it an RTO. Sometimes they call it an ISO, same thing. But there are still significant parts of the country that are not in an organized wholesale market at this time, but mostly you have one region in the Southeast, and then there's another region in the West. And you know, I think as you've maybe alluded to, there have been efforts in the in the past for FERC or other people to try and maybe impose an RTO on those regions, which provoked a lot of resistance, a lot of controversy. I don't think that's on the table or in the cards. On the flip side of it, what we have seen in the past few years is there are a number of states who are not currently in an RTO but who have expressed interest about joining one. You know there are a couple states, Colorado and Nevada, their state governments have said, okay, we want to join an RTO, we're on the path to do that. And then there's also some other states in the Carolinas that have said, well, we’re thinking about it, we want to study it. So the idea of this letter is, that can be a process that can be kind of technical, involves a lot of information and analysis that, particularly if you are a state that has not traditionally been in an organized market, you might not have access to that so easily. And one place that is a kind of a repository of a lot of that analysis and technical expertise is in DOE and with the Feds. So the idea behind the letter is to make that money available for technical assistance for states that want to join an organized market or they’re thinking about it. Obviously, it's not going to be forced on anybody to do it. So that's kind of the thinking behind there. The other thing I would just note is there's a lot of money in the IRA and it's like $700 billion or something. There's a lot of money for energy, some big fraction of that. What we're talking about in this letter is in the range of like, tens of millions of dollars. It's a very, very small portion of the money. But it could, I think, have a big benefit both to consumers, and in terms of some of the climate or energy goals that the administration wants to do in terms of helping us out. So that's kind of our thinking and what we're asking in the letter.

EMP: It's no surprise to me that the areas of the country where we don't have regional markets are the Southeast and the West. When I joined FERC in their media relations office the chairman was pushing a rulemaking called Standard Market Design, which would have put RTOs in every region of the country. And the most vociferous and organized opposition to that rulemaking was in the Northwest and the Southeast. Now, I see, you know, 20 years later that the Northwest is coalescing around RTO development, but you know, there's still ill feelings from the energy crisis 20-plus years ago. But I think the Southeast is going to work tooth-and-nail to not go beyond SEEM. I mean, there's a group, an astroturf group I just got wind of that I understand it was funded by one of the Southeast utilities, and it's called Big Tech Power Grab. (laughter) And it's got, you know, against the backdrop of powerlines it’s got the “ugly truth about RTOs” and they call it the “really terrible option.” Do you want to talk about that?

JN: Sure. I would say the tie-in with like RTOs as a “big tech,” you know, related to big tech censorship or other things like that. It's a little tenuous. Certainly, it's an indication there are, I think, a lot of the incumbent utilities in these areas, particularly in the Southeast, you're right, they don't want to join an RTO. And where there has been discussion in the Carolinas of trying to do that, they have put a lot of money and influence behind trying to stop that in any way possible. Personally I think there are a lot of advantages that that come from RTOs, a lot of cost advantages, as well as potential environmental issues. It's a little ironic because a lot of these utilities, they have developed SEEM to try and be like, an alternative to an RTO or a non-RTO. They do recognize, you know, the thing about SEEM is it's definitely not an RTO. It's lacking in all sorts of different ways, but it does sort of highlight that even the utilities recognize that there are benefits that come from trade, and you know, being able to offload their power or get additional power from outside their territory or other areas when conditions are favorable. So that's something that I think will kind of develop over the course of time. That's the nature of our politics, a lot of rough elbows. There's a certain respect in which, you know, that's up to the people or the government in North Carolina or South Carolina or whoever it is, how they're going to do that. I'm sure at the end of the day, there will remain a lot of areas that are not in any sort of organized wholesale market. But I do think that there is an opportunity for some states to kind of join or do that. And I think that they should be given the assistance they need to go forward with that, if that's what they want to do.

EMP: Well, let's step back a little bit and talk about the benefits of an RTO. As I stated previously, I've been following these issues for a very long time. And I remember as the organized markets were first being established that every year they would put out an assessment of the millions of dollars that the markets saved consumers by having this coordinated approach to transmission. Has anyone quantified the ongoing savings for consumers that are available because – or that are being derived because of this sort of organized market approach?

JN: Yes, so there's two levels to that. There's the wholesale level and then there's the retail level. And there have been, I think, if you look at the wholesale level, it's pretty clear that the organized markets have been associated with cost savings, you know, price declines, and that's logical. I think if I were to try to, you know, grow all my own food and consume all my own food in just my own little area or even with the other neighbors here in the neighborhood, that's going to be pretty limiting. So if you have a bigger geographical footprint, you have a better chance of being able to sell your power under more favorable conditions. So that's definitely a big one. I know that there has been more of a question of, well, have those cost savings at the wholesale level translated into cost savings at the retail level? That's been more of an issue. That's a complicated, very technical question. It’s hard to kind of figure out. And, you know, some of the analyses that I have seen have ranged anywhere from, yes, it has resulted in cost savings to, we don't see any cost savings. So I think that's definitely an area that could benefit from further research into (A), has it translated into retail cost savings? and (B), if not, why not? Where's the money going? I know that there's been a lot of discussion of surcharges or other things that utilities are doing to try and make up the money that they would have lost and other things. So, some of that involves technical analysis that, frankly, is beyond my ken, as a lowly ex-attorney turned electricity policy person. It is complicated but the savings are out there. I guess it's a question of, who are the savings going to is the bigger, outstanding question at this point.

EMP: Yeah. I don't know if you saw Ivan Penn's recent story in The New York Times. 

JN: I did. I'm writing something in response to it. I think that there's some flaws with his analysis there.

EMP: Well, it wasn't necessarily his analysis. It was Robert McCullough’s analysis. 

JN: Right. Yeah. Well, fair enough. 

EMP: I'm familiar with Robert McCulloch going back to my days at FERC and Standard Market Design. He was the consultant to the Northwest interests, and possibly other interests, in terms of the battle against regionalization. It all depends on your assumptions. I mean, it's ridiculous to say that 36 states have a competitive market. I know that R Street is part of an effort that's asking for GAO to investigate why customers may not be seeing the benefits of RTOs, but they clearly are. The retail design, especially outside of Texas which keeps utilities in the retail supply, it's passing those savings from the RTOs along to customers at a much faster rate than we're seeing elsewhere.

JN: I think that probably the bigger question mark has to do with states that don't have retail choice, but that do participate in organized markets. You know, there, I think, it might be easier for the utility, or whoever, to kind of retain some of those cost savings. Whereas if you're in a retail competition environment, there's a lot of competitive pressure to pass those on. One thing, just as an aside, it's a little afield of the conversation, but that New York Times article, one of the odd things about it is they say, well, the reason that the prices are higher in these deregulated and so-called deregulated states is because of transmission costs, you know, other grid costs, which, as you know, that's not the part of the market that got deregulated. You know, so it was a little weird. 

EMP: Well, I mean, there is something to that. Utilities as they've seen revenue from their legacy generation units decline have increasingly jumped into transmission as a way of keeping their revenues up. But I find the premise that it's more of a problem in the organized markets than in, say, the Southeast, I find that laughable, given the clout that the utilities have within each of their states, either at the legislature or the regulatory commission. And they get a higher rate of return for their state-regulated transmission than they get at FERC, which I think is part of the driver here to the opposition.

JN: Yeah, I think you may be on to something there. 

EMP: So let's talk a little bit about Texas, because it's clear to me that entities that are opposed to competition in electricity, to the regional markets, are jumping on the increased stresses to the grid from climate effects to point to that and say the markets aren't working. You see, Texas had a problem, you know, and then just recently, with this last polar vortex, you know, they're jumping all over it and saying, well, you know, it's a problem with the organized markets, and it's a problem with renewable energy. And, well, I mean, the same problems happened to the utilities in the Southeast and if they hadn't been able to reach out to MISO and PJM and get supply they would have gone dark. And so this all started with Winter Storm Uri, and the misinformation started right out of the gate with Austin's mayor attributing the wholesale market in Texas to the problem, which had nothing to do with it. So, Texas just had another cold spell. How did they do?

JN: Texas did very well, there were no issues in terms of, you know, people were predicting, oh, you're going to have rolling blackouts. That sort of thing. That did not happen. As with any storm, you do have transmission lines that will go down some place. And so a neighborhood will be out of power for a while. But unlike, as you noted, other parts of the country, Duke had to do forced outages. TVA, I think, had to do forced outages. And, you know, Texas, I was looking at it kind of nonstop. They have a little website where you can see what the reserve power is and it was pretty comfortable the entire time. As you know, a big part of the problem with Winter Storm Uri was, it's not a matter of competition or anything to do with wholesale markets or anything like that, it's a weather-related problem, capacity not being able to function in the cold and the ice. And there were also fuel supply problems with natural gas. And this time there wasn't really all that much ice, it wasn't quite as cold and the natural gas kept flowing. And so everything was everything was gravy. That's not to say that there aren’t issues that remain with the Texas market and the possibility that regulators there might make them worse. You know, there have been all sorts of plans that have been put out to "fix" the Texas grid, and no one can quite agree what the problem is that they want to fix.

EMP: Before we leave the Southeast and the problems they had, I just want to note that, you know, I guess they see RTOs as a really terrible option until they need them to bail them out. 

JN: Right. Yes. Right.

EMP: Well, let's let's talk about what's going on in Texas because there seems to be a really vigorous debate going on about whether or not they need a capacity market, if an energy-only market is something they should maintain. 

JN: So, the state PUC, and the chairman of the PUC, a fellow by the name of Peter Lake, he has been putting forward for a while the need for some sort of major market redesign effort for Texas that, no one will call it a capacity market, but it's definitely a move away from the energy-only market. It attempt to try and guarantee capacity and they have all sorts of different variants, different acronyms for it. But the current version of that, they had a preliminary analysis that came out, and they're supposed to have a vote on that next week, like the 12th of January. The complicating factor is, after they announced they were going to have this vote, the Texas Senate, all the members of their business and commerce committee, the committee of jurisdiction, sent a letter to the PUC saying do not do this without getting approval from the Legislature first. So that's kind of set up a political battle of wills there between the PUC and the Senate. You know, some people see different stalking horses for the governor, lieutenant governor or things like that. So the legislature, of course, in Texas we only have legislature in session for five months every other year. But, you know, the downside for Chairman Lake is that's happening next week is too . . .

EMP: The session’s beginning next week? This is really going to take off then.

JN: Yeah. And there's even, you know, as if that were not enough, Texas also has a thing where every agency, every state agency, every 12 years or so has to go through a process called Sunset Review where the legislature has to make whatever changes they want and repass (enabling legislation), or that agency goes out of business. Well, it just so happens sunset review for the PUC is this year, too. So, there's definitely going to be a lot of sparks flying related to that and I'm not enough of a prognosticator to tell you exactly what's going to happen. Will the energy-only market still exist at the end of that process? Will the market still exist? Who knows? But it's certainly something that, you know, there's been a lot of pressure, pro and con, of all these different options. There's a lot of people in Texas who like the energy-only market. They think it works. They don't like the idea of a capacity market. It's a lot of money to pay power plants to not do anything. But there are powerful people who do want to change, who want something like that, and, you know, maybe they ideally would like to get some of the money if there is money out there. So, maybe in a couple of months I can come back and tell you what happened. But that's where things stand right now.

EMP: So I noticed that Potomac Economics sent a letter recently urging state lawmakers in Texas and the PUC not to not to mess with the ERCOT market, so to speak, and they said that the energy-only market was working. What was behind that letter?

JN: Yeah, so as we discussed, the chairman and some of the other members of the PUC have been looking at various options for what they call their Phase 2 market redesign. Phase 1 was while there was a cold storm, so we're going to weatherize, they did some other stuff. Phase 2 they're looking at, do we need bigger changes? And so they went through a whole process, they had a report on the proposal at the end of it that came out. There are various versions of it, but I guess what they kind of settled on at the end that the chairman wants is something that's called a PCM or performance credit mechanism. I can't even always keep the acronyms straight and what they mean but, you know, the basic idea is they're going to pay, they're going to pick the 30 highest demand hours on the grid in retrospect of the year, and then they'll give performance bonuses to the generators who were on at that time. And so the idea is that this is a way to try and reward, to incentivize new generation, reward generators that are there when the grid needs it most, etc., etc. That's one flavor. It’s kind of hard to keep straight because there's so many different proposals that are out there, broadly, the people will say that they're all kind of trying to do the same thing which is incentivize new capacity onto the grid. Some of them really seem to be like, they're more about keeping old capacity on the grid than getting new on. And, you know, they have different definitions of what counts. I think there's kind of an undercurrent, sometimes, of if it's not a natural gas plant, is it really new capacity. You know, if it's a solar or a battery or something like that, so it's kind of a mess. It's hard to keep track of but the current thing and I think that's what the Potomac letter was about, was concerned about, was about this PCM although they probably have concerns about, you know, a lot of the proposals that are out there. 

EMP: Yeah, I thought it was interesting. The energy-only market gets attacked so often, to have the market monitor stand up and defend it in the face of what you describe, I thought was interesting. And I guess you alluded to what I seem to read about the performance credit mechanism, that it really seems to be more designed to reward maybe natural gas political benefactors than necessarily prop up the grid, or am I being too cynical?

JN: Yeah, so the term that's used is dispatchable generation. They want to incentivize dispatchable generation. And it's not always clear, is that just a euphemism for natural gas? Or is it something else? I think there are some people who will say well, no, no, no, there's other things that count as dispatchable, which is true. There’s other sources that can be dispatchable. Even renewable energy can be dispatchable in certain circumstances, or whatever.

EMP: Especially if you combine it with batteries.

JN: Correct. Yes. But at the same time, you do have to wonder, you know, I think for innocent and perhaps not so innocent reasons there is a kind of tendency on the part of a lot of people, I would say, to just think of natural gas as the, you know, if it's not natural gas, it doesn't really count. I mean natural gas, it is, it remains, it's the largest component of the Texas fuel mix. That's probably not going to change anytime soon. And I'm not anti-natural gas by any means. But it does have its own, you know, people I think sometimes contrast well, you have reliable energy like natural gas and the abundant energy like wind and solar. Well, what we did see during Winter Storm Uri is a lot of the natural gas plants were not able to function because they couldn't get gas supply. So that's a big reliability concern right there. There's other reliability concerns. So, it's complicated and when politics gets involved, it's not always so straightforward, I guess, is the diplomatic way to put it.

EMP: And so what's going to happen Thursday that might provide some more definition?

JN: So, the PUC has said that they're going to vote on something. I guess, on this proposal. As you know, the Texas Senate, all the senators on the relevant committee have sent them a letter saying don't do that. And the chairman, I think he's kind of gone back and forth a little bit in his public statements about what's going to happen. So I don't think people totally know. It's not – the other big question mark is, this PCM as it exists, I would describe it as more of a concept than an actual plan that can be implemented. There's a lot of detail that we still need to fill in. That I think also affects like, what kind of the substance of the vote is going to be. But that's what they say. They're planning on voting on something and we'll see what happens. 

EMP: Stay tuned. 

JN: Yeah, exactly.

EMP: Before RTOs FERC had a different acronym. I mean, it's still in place in California. It's the Independent System Operator.

JN: Right.

EMP: And the “I” in ISO was intended to remove the ability of utilities to use their transmission system to favor their generation despite all the best efforts of (FERC Orders) 888 and 889. But there's a different aspect of that now that seems to me to be a real problem, and that's interference from the political side. We're seeing that now in Texas. It's a real problem with California. And it's a large issue for the neighboring states in terms of establishing a larger RTO in everything but the name RTO. They're very interested in an RTO as long as you don't call it an RTO. But it's really not going to happen as long as the politicians in California are so invested. Is there an answer to that? I mean, we have the problem in non-RTO areas in which you've got the utilities, which are very generous contributors in their states, are able to influence policy very well. So what do we do about that?

JN: Yeah, unfortunately, it does seem like Texas has kind of taken a step backward in this regard. Traditionally, and you know, one of the positives of the Texas system in my opinion was that you didn't get like, obviously, it was not a libertarian utopia or whatever. There was regulation and there was political influence. But there did seem to be a better-than-average commitment to not politically dictate outcomes or other things like that in the market. And you have seen, I think, recently with ERCOT, the ERCOT board has become a lot more political and they've cut out a lot of input and power from other stakeholders. So that's a problem. I mean, you know, this is, I think, at a high level, this is this goes back to James Madison, you know, how do you get government to constrain itself? That's the only thing that can kind of do it. You kind of need political discipline to say we're not going to put our fingers on the scale and try and micromanage everything. You know, that can kind of be in the short-term interests of particular folks. I think the experience shows it's not in the long-term interests of either for consumers or for the health of the market, in general. But, I think we just need to kind of get back to the old-time religion a little bit. That's my answer is, you know, people need to realize, okay, you're not the all-powerful all-seeing Oz, right? You can't manipulate everything from behind the curtain.

EMP: Well, I mean, they don't have the expertise. 

JN: Right. 

EMP: And so they're going to be guided by the political interests that are supporting them with campaign contributions. I think it’s a big problem. Do you think that FERC should have greater authority over transmission that is under state authority right now? The Supreme Court in its opinion upholding Order 888 ruled that FERC did have authority over wholesale transmission that's bundled in state rates and that it just had to choose to exert that authority. That's something that outside of SMD they really haven't done. Do you think that would help? 

JN: I do think that what you have seen with transmission is that, you know, where FERC says, okay, we're going to exert authority on area A, but not area B, a lot of the projects get shifted from A to B, they get reclassified. Or sometimes they get redesigned to try and gerrymander themselves out of the jurisdiction or the, you know, like with the ROFR stuff. That doesn't seem, I mean, that does not seem healthy. It's not economically efficient. Maybe a way to deal with that is to have a broader exercise of FERC jurisdiction, particularly because, like a lot of these projects, even if it's just technically an intrastate project, there's either regional cost allocation or there's other impacts on other states. So I do think, I mean, the courts say that the FERC has that authority. I think it's worth looking at them to like, you know, whether if they want to achieve the goals that they say they want to achieve, they need to actually exercise it. 

EMP: What's your outlook for the new year? We're in 2023, we've got a stalled House that can't seem to find a speaker. You've got the DOE about to dole out a lot of money. You've got the grid system being really assaulted by the climate effects that we're seeing today. Where do you think we'll be a year from now? 

JN: And we have a two-two FERC you know.

EMP: For now. We'll see how long – my personal hope is that Rich Glick gets reappointed and they're able to overcome Manchin now that they've got a one-seat majority.

JN: That’s possible. Overall, my guess, just looking at the balance of things, is you're probably headed for a lot of gridlock. You know, you have a split House and Senate, you have these other things. DOE, you know, they have a lot of money. But one thing that some of our analysis has found is that, I mean, they can always spend it but to get the projects done, probably would require some permitting reform or other things. You know, there's other blockages that just, you can have as much fuel in the tank as you want but if there's a problem with the engine, then you can just put push down the lever and you're not going to go anywhere. So, that's kind of where we're focused for the next year is like, okay, well, what are those regulatory roadblocks, you know, permitting delays and other things like that, that would prevent some of the stuff from going forward? I'm a man of hope so I definitely see potential there. But you know, if I was forced me to bet on it, gridlock is probably what I would bet.

EMP: That might be a safe bet. (laughter). Do you do you see any hope for Texas integrating with the other interconnects?

JN: So I would say it's a non-zero probability, but I wouldn't think that it's likely. The main driver of the lack of Texas interconnects has, of course, been the desire to stay out of FERC jurisdiction. That's the whole reason why we have ERCOT and the ERCOT region. And you know, there are people who will say, hey, you know, like, a lot a lot of times, people are focused on Winter Storm Uri or other shortages, but actually, a lot of times Texas has more power than we know what to do with, a lot of times a year, and you know, we're a big market, but we could definitely make some money if we were allowed to offload that into the neighboring regions. But there is a kind of fear, or maybe even almost bordering on paranoia, about tripping into FERC jurisdiction. I'm a paranoid person myself, so I don't use that as a pejorative. So, sometimes, you know, what is it they say? Just because you're paranoid doesn't mean they're not out to get you but . . .

EMP: Yeah, I'm only paranoid because everyone is out to get me.

JN: That's right. (laughter) Yeah. So you know, because of that, this is kind of the dog that hasn't barked that much in terms of the response, you know, in response to the storm. Everything from, you know, capacity market, to all this stuff. There have been a few people who've said, Well, how about to interconnect, but it really has not got any traction in the political scene or in the regulatory environment to do that. So my guess is probably not.

EMP: Yeah, well, it's clear that the problems the state saw under Winter Storm Uri would have been lessened if they'd had opportunity to, better opportunity, to import.

JN: I don't know that we could have gotten a lot of power. You know, from MISO or wherever.

EMP: Yeah, MISO was in a dire situation as well.

JN: Yeah, yeah. So but it definitely would have helped ease the, I don't think, I suspect we still would have had significant outages but it would have helped ease the pain at least a little bit. 

EMP: And it’s is a strong argument for exporting the wind power when you've got excess there. You know, my personal opinion is Texas should do it, and then hook up a turbine to Sam Rayburn turning in his grave and generate all that electricity. (laughter) Well, Josiah, I've enjoyed our conversation very much. I appreciate you taking time to talk with us today. Josiah Neeley, R Street Institute. Thank you very much.

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