A discussion with former FERC Chairman Jon Wellinghoff regarding the best public policies in support of a 21st Century clean-energy grid;
- a consideration of the root cause of the historic grid failure in Texas and whether renewable energy or state regulation were factors;
- are traditional fossil-fired generators 'dinosaurs' or is the market failing to provide an adequate revenue stream?
- Jon advocates promoting markets for not only for generation but in transmission and distribution as well.
A discussion with former FERC Chairman Jon Wellinghoff regarding the best public policies in support of a 21st Century clean-energy grid;
- a consideration of the root cause of the historic grid failure in Texas and whether renewable energy or state regulation were factors;
- are traditional fossil-fired generators 'dinosaurs' or is the market failing to provide an adequate revenue stream?
- Jon advocates promoting markets for not only for generation but in transmission and distribution as well.
The Energy Markets Podcast, Episode 2, with Jon Wellinghoff
Transcript (edited for clarity purposes)
Note: The term, ‘load,’ is electric industry jargon for electricity demand, or the ‘load’ that electricity usage puts on the grid system.
Intro: Welcome to the energy markets podcast, curated conversations with policy experts and thought leaders on how to chart the best path toward a 21st century clean-energy economy. I’m your host, Bryan Lee. My energy and environmental policy expertise stems from more than three decades of experience as a journalist, federal government official and utility executive.
EMP: Welcome to episode 2 of the energy markets podcast. I’m Bryan Lee, your host, and I’m delighted today to have as our guest, Jon Wellinghoff. Jon, one of the principal things we try to do on this podcast is talk about what are the best policies to take us to a 21st century clean-energy economy. I think clearly, we have reached the tipping point on climate change. We can no longer pretend that it doesn’t exist and that it’s not already affecting the world’s climate. So we need to transition our electricity industry to one that is based on clean energy, non-emitting resources rather than fossil-fuel resources. But I think first and foremost in our discussion today, we should talk about what happened in Texas. And of course, Jon, I should introduce you as a former Chairman of the Federal Energy Regulatory Commission, and you came to FERC after being a consumer advocate in Nevada. So welcome John.
JW: Thank you, Bryan. It’s great to be on the show here and appreciate you giving me this opportunity. It’s nice to reconnect after our days at FERC, where we got to know each other. And good to be part of the program.
EMP: We did, we did. I remember when you came in you had as an agenda to promote demand response and the energy cognoscenti in Washington kind of snickered behind the scenes, you know. Oh, here he’s coming into FERC and he’s advocating something that’s state jurisdictional. And I really have to hand it to you, I think you used FERC’s bully pulpit really well to highlight the issue of demand response.
JW: I can tell you a kind of funny, very quick story you know when you first become a commissioner at FERC every single utility wants to come in and do the meet-and-greet and, they bring in their CEO and they bring in another whole management team and so one utility who will remain unnamed did that and the CEO came in and we went in the library and sat down, I remember, and I didn't bring any of my staff and I just came in all by myself, and the CEO started talking about what well, we’re going to put in this new generation and we’re going to do this transmission. I leaned over to him and I said, you know, wait a minute, why don’t you start thinking about these things and I went through this long list of alternatives, including demand response and distributed generation, cogeneration, combined heat and power, things that if you looked at, in many instances, could be less expensive and more effective for consumers if they were put in. And by the time I got done this guy was like leaning back on the table like he was seeing, y’know his hands on the table like this, and I was looking at their regulatory affairs guy and so we all get up and we’re walking out the door and the regulatory affairs guy leans over to me and taps me on the table -- on the shoulder and says, you know, you didn’t come here just to occupy a chair, did you?
(laughs)
EMP: That’s great. Do you remember your first address to EPSA, the Electric Power Supply Association, after you became chairman?
JW: Yes. Yes.
EMP: I remember that because I had left FERC by that time and now worked – at that time worked for a company that was a member of EPSA. And so I was now suddenly allowed to be in those meetings, which were closed to the press. Do you remember what you told them?
JW: Not specifically. Refresh my recollection.
EMP: I remember it vividly, Jon.
JW: They probably all remember vividly, yeah.
EMP: Yeah, you told all of these coal- and natural gas-burning company executives that they needed to get on the renewable energy and demand response bandwagon or they’d all be dinosaurs.
JW: Yeah, yeah, I do remember -- I don’t think it was maybe at that meeting -- but I know another, a press briefing I had, where I indicated that I thought baseload power was an anachronism. That ultimately we need to look at a more sustainable mix of resources which would include variable renewable resources and behind-the-meter resources like demand response and distributed generation and other things that ultimately consumers are now increasingly putting into the system in ways that, even back then, I didn't believe would be to the extent that we’ve seen it integrated into our system now.
EMP: So is/are baseload generation dinosaurs?
JW: Yes, they are. Because ultimately, we have now other resources that are cheaper. If you look at baseload meaning: a traditional central station, large coal and natural gas plants, and even nuclear resources. Those large plants are not flexible enough, they’re not low-cost enough, they’re not clean enough, certainly, to provide the resources that we need to meet the challenges that we have with climate change and moving forward with decarbonizing our electric grid. Today, you can put in solar or wind, plus storage and it can compete with the next-cheapest baseload resource which would be natural gas, and provide similar levels of reliability when you combine that with other behind-the-meter resources like demand response. That’s becoming cheaper and cheaper for consumers to do it on their own. I mean, recently, in the last four months, I put eight kilowatts of solar on my roof. Actually I already had five kilowatts. That was, it’s been in for almost six years but I added an additional three kilowatts to make it eight kilowatts, and I put two Tesla power walls in my garage. So I’m largely independent of PG&E. And you know that was done for a very inexpensive amount of money overall. Probably less than it would cost me to continue to be serviced by PG&E here in Northern California and …
EMP: … or to not be serviced as the rolling blackouts might …
JW: Yeah, well exactly. And that’s another reason that I put it in. And another reason that a lot of people are starting to put in their own resources is because of the increased frequency of these very severe climatic events like wildfires, like the freeze in Texas, and other things that we’re seeing that are causing people to understand that the levels of reliability are not what we are used to, and may not continue in the future. That people are going to have to take these responsibilities more into their own distributed lives either at their own homes are within their own communities, their own microgrids, and those are things that I think are going to increase into the future.
EMP: Well, let’s talk about the front-burner issue right now, which is Texas. We had what I would say is the worst market failure -- or the worst electricity grid failure, let me say that -- the worst electricity grid failure since the California crisis 20 years ago. Was it a failure of the market?
JW: Oh, I don't think it was a market failure. I mean, I think, in fact, you know, the, the New York Times had an article two days ago, where they blamed it on the market and what they term ‘deregulation’, although I think that’s a term that's used incorrectly. The market is not deregulated there. There are regulators of a market. It’s just they oversee the market structure. The market dictates the prices, but regulators like either the Public Service Commission of Texas, for the Texas case, or FERC for the rest of the country, determines what that market structure is and oversees it and ensures that there isn’t, hopefully, fraud and manipulation. But it wasn’t a market failure. The market prices acted as they would in that kind of a situation. They went through the roof because supply went virtually to zero. But the reason that supply went to zero was not a market failure. The reason supply went to zero was because ultimately, you know, generators and other entities did not take the advice of FERC in 2011 -- because there was a very severe outage in 2011 because of cold weather in Texas -- to weatherize their systems to ensure that those systems could sustain those kinds of severe weather events. So it was really a technology failure. A failure of people to pay attention to that system. Now whether or not there should have been some kind of market incentive to have them do that. You know, you can probably argue that. Maybe there should have been some kind of an incentive specifically in the market to have them ensure that they weatherize their systems. But I don’t think it was a market failure and in the sense that I don’t think we should move away from markets because of what happened in Texas, and I don't think we should go back to a rate-regulated system where a public utilities commission or FERC dictates what the rate should be. I don't think that is going to get us to a low-carbon future.
EMP: Well that's certainly what Mayor Adler in Austin appears to be advocating for (by blaming the Ercot market structure for February’s event). So if it wasn’t a market failure was it a regulatory failure?
JW: Yes.
EMP: Should the overseers in Texas have been less Laissez Faire and required the hardening of the system to prevent these outages we saw.
JW: No, it was absolutely a regulatory failure. I mean that I will concede and admit that there was need for better regulatory oversight to ensure that there was the availability of adequate resources even during severe weather times, because they in fact knew to some extent at least that this weather was possible, given the 2011 event. Even though the 2011 event was not nearly as severe as what happened, you know, a couple weeks ago. It was much colder. My daughter lives in Austin and she was telling me the temperature went down to two degrees. And I know it was not that cold in 2011. But nevertheless, 2011 did show that these systems -- primarily natural gas systems, not only the power plants but the wellheads and the delivery system -- all were subject to severe problems of freezing and did not have adequate systems to ensure that they could sustain delivery in times of very cold weather. So, yes, it was a regulatory failure. There should have been better regulatory oversight and they should have done whatever was necessary to ensure that there was adequate delivery in those very severe cold times.
EMP: So, FERC doesn’t have oversight of the wholesale market in Texas which is, as you know, an anomaly. Everywhere else in the country FERC oversees the wholesale market. But they do have jurisdiction, don’t they, in terms of the reliability of the system?
JW: They do but it’s kind of an interesting bifurcation. They have oversight in Texas, as in the rest of the country, over reliability of the transmission system. They don’t necessarily have -- they in fact don’t have oversight over the adequacy of resources, i.e., generation that comes in to interconnect and provide resources into that transmission system. So they are responsible and they oversee and work with NERC, the North American Electric Reliability Corporation, to ensure that the transmission system will deliver the electrons and that the electrons are put on it by generators. But if there’s not enough generators around to put those electrons on, that’s not directly under FERC’s jurisdiction. So it’s this kind of weird split. Now, whose jurisdiction is it? Well, it's largely the state’s, the state’s to determine whether there is what they call resource adequacy, whether or not there’s adequate electricity to be delivered to retail customers at the end-use. California has a resource adequacy requirement. I don’t know that Texas does. Maybe that’s part of the problem. They should develop one certainly and that would be part of the oversight that they should do. But there is this funny split jurisdiction between wholesale and retail and between federal and state with respect to this resource adequacy issue of generation and deliverability, and deliverability on the transmission system. And of course, then it comes down also to the distribution system when you have things like hurricanes that you see in the Atlantic states, in the Carolinas and Florida and Georgia, and Texas as well. At the distribution level that is, of course, a local or state-level jurisdictional issue as to whether or not the distribution lines are adequately reliable to withstand, you know, hurricane-force winds, etc. So, you know, there’s this split-up jurisdiction of determining whether or not consumers are going to be served with energy. That can cause some things to fall through the holes, and certainly they did in Texas two weeks ago.
EMP: Well, let’s talk about the first trend line to come out of this crisis, which was that wind and renewables were responsible.
JW: Well, there were, as I understand some wind systems that did freeze up, but everybody has to remember, there are wind turbines in Canada and in Minnesota, and they operate well …
EMP: And the North Sea.
JW: … and they operate all the time. So again it’s a matter of weatherization, of whether or not they were adequately weatherized just like the gas plants. So you can’t blame it on the renewables, number one. Number two, renewables were a very small part of the problem. It was that it was the natural gas plants that was a much larger component that didn’t show up, that wasn’t available. So it really wasn’t the renewables. And in fact if you look at renewables because they’re so distributed i.e., you know, they’re in such small chunks, it would make much more sense to have a much larger amount of renewables to provide your services because you would not see, you know, a large group of them go out all at once like you see a large coal or gas plant. If you have a 500-megawatt or 1000-megawatt natural gas plant, it goes offline, it’s gone. But if you have a thousand wind turbines that are all a megawatt apiece, they’re not all going to go offline like that. So you have a much more robust, reliable system with a resource system that has renewable energy. And those systems certainly can be weatherized and should be weatherized. Just like the gas plants that were not weatherized as well. Because as I say, they’re operating wind turbines in Minnesota, they’re operating wind turbines in Canada, and in the North Sea in Norway and Sweden.
EMP: Right. So, it wasn’t renewables, which Texas has bragging rights on in terms of their market enabling renewables.
JW: Yes.
EMP: It wasn’t the market. Was it the market in terms of not giving traditional generators the revenue stream they need to keep their plants in operating shape? Shipshape?
JW: Well, if they in fact would have put it in that, to do that. In other words, I think there should have been specific direction following the FERC report in 2011, which specifically said these plants need to be weatherized. FERC and NERC put a report together you can go back and look at that report and it gave the direction to Texas as to what the authors of the report, who were, you know, (what) analysts at FERC and NERC thought needed to be done. And there needed to be specific regulatory oversight that directed those plants to do that. So simply setting up, you know, higher market prices may or may not have incentivized those plants to do the right thing. They probably should have been directed to do it so that there was resource adequacy. In other words, you know, you could have said, well, to provide resources in Texas, you need to demonstrate to us you have done these things with your plant. And then, they should have incorporated certainly the adequate financial resources to ensure that they were compensated to do that, along with that. But I think there also needed to be specific direction as well.
EMP: Well, I bring that up because Texas is the only -- well, not the only market but Texas is notable compared to the organized markets in the Northeast in that it does not have a capacity market. And it also has an operating reserve margin that’s much, much thinner than you see here in PJM and elsewhere in the Northeast. So, would a capacity market be in order here in the wake of Texas, as well as hardening the system?
JW: You know I was at one time, well, when I first went into FERC I said I was market agnostic, you know, prove to me that they work and that they are beneficial and make sense. And after my seven years at FERC, you know, I’m a market advocate. I completely believe in the organized wholesale markets for electricity. I think retail markets are good as well, although there were other problems in Texas for that we could talk about. But in any case, I think markets do work. Whether or not those markets should include both an energy and a capacity market, I was somewhat on the fence on that. I always thought the capacity markets were good things. And then I started to believe, looking at Texas over a period of time, that maybe an energy-only market was the way to go. And now I’m starting to lean back the other way. I will say that after what has happened recently that maybe there is some need, if not for capacity market, at least for some resource adequacy construct, like they have in California. California doesn’t have a capacity market either, but they have a resource adequacy requirement. It’s overseen by the California Public Utilities Commission, where each load-serving entity in the state has to demonstrate that they have acquired a certain level of capacity to meet their needs and that capacity can be made available to the market over time. So, I think there has to be something that provides for assurances that there is deliverability even in times of extreme weather.
EMP: Well, it seems one of the issues teed up before FERC right now, with Rich Glick now as chairman, is the reliability – the capacity markets rather – in the Northeast. We’ve had an ongoing concern with how state subsidies for various resources are having an impact on the markets and the FERC position -- I don’t know if it will change now -- was that, you know, a single state should not impose subsidies for resources on consumers in other states. And do you see an avenue out for that issue? I think we have the concern in PJM, New York and New England as well.
JW: Right with the MOPR, with the minimum offer price rule. First of all is first principles. I do believe that FERC needs to try to structure the markets in such a way that there aren’t distortions in the market, that there aren’t subsidies in the market that cause market price distortion. So, you know the theory was I guess that some of these states were doing things to in essence inject subsidies into the capacity markets. That’s why the minimum offer price rule was established. But whether or not that flows to state policies like renewable standards and increasing the levels of renewables, I’m not certain. I think we need to encourage that, that is renewable development, and encourage states to have such policies. So, we have to figure out some mechanism where those policies can be accommodated on the one side, but on the other side those policies do not result in capacity prices being subsidized. Because if they are, ultimately, then there’s really no reason for the capacity market overall if you have these subsidies injected in the market.
EMP: So, Jon,I think Jon if you’ll pardon my interruption, I think …
JW: No, go ahead.
EMP: … I think really there there’s kind of two tranches of subsidies that are at stake in this debate, you know, we’ve got on the one hand we’ve got the unfortunate circumstances in Ohio and Illinois, where the states have adopted subsidy systems for the old coal and particularly the nuclear plants.
JW: Right.
EMP: I don’t know how many times we’re going to have to pay for those plants …
JW: Right. Right.
EMP: … but, you know, consumers there are paying for them at least a third time. But, and that I think was the straw that broke the camel’s back for the generators who were not utility affiliated. And so FERC in reacting to that also reacted to things like renewables mandates. Shouldn’t FERC adopt a wholly new approach to markets? The market design has worked really well, I think, for the last 15-20 years that it’s been in place, but we need to move to another level. Shouldn’t there be, instead of allowing each state -- as I think Rich Glick is, is kind of leaning towards -- allow each state to do their own thing in terms of renewables, shouldn’t there be a top-down from the federal government? Should FERC adopt, you know, a market in which resources are dispatched according to carbon content? In other words, cleaner resources would be moved first, etc., or should the markets incorporate a carbon cost? Is that the way we should go or do you have a different idea?
JW: Well, certainly, I think we need out of the Biden administration -- and I'm very hopeful that we’re going to get either through legislation or through an executive order, some type of an overall goal out in the future. If you look into the Biden plan in his campaign, he set forth the goal of decarbonizing the electric grid by 2035. I think that’s an absolutely admirable goal. And I think we need to do everything we possibly can to achieve it. So if we can inculcate that goal into federal policy, then we would have an overall federal requirement across the U.S., then I think you’re right then ultimately then we need to have both, you know, planning from a transmission standpoint and an infrastructure standpoint, to achieve that goal. And we also have to have a market plan that will achieve that goal as well. And so then we start looking at, you know, putting in more uniform markets across the U.S. We might even talk about something that you could, you know, I’ll come up with a, you know, maybe unique terminology: standard market design.
(laughter)
JW: And, of course, the reason you and I are laughing is because, you know, I know Pat Wood, you know, under George W. Bush, came in from Texas, proposed a standard market design and proposed that RTOs be put everywhere. Well, I think it’s time to do that again. I think it’s time to revisit what Pat Wood wanted to do, and put in place RTOs/ISOs across the U.S. You’d save billions of dollars, billions of dollars for consumers by simply doing that. In fact, there’s a study that shows it shows that if you just put an RTO in the Southeast or Florida, the Carolinas or Georgia, Mississippi, Alabama is net area, you would save consumers $19 billion a year. So, number one, put RTOs everywhere, which I think is necessary, including throughout the western United States. And number two, put in a standard market structure. If you had a standard market structure that was designed to achieve your goal -- decarbonisation by 2035 -- I think we’d have, you know, a system where we have the opportunity to actually realize that goal. Otherwise I don’t think we’re going to get there. I think, without a standard, a standard market structure without RTOs everywhere I don't think we can get to decarbonisation by 2035.
EMP: Yeah, as you know I was, I was on the FERC media relations team when standard market design became controversial and, you know that the opposition to standard market design was really centered in the Pacific Northwest and in the Southeast. And they’ve come a little bit around to proposing a market (in the Southeast) but it’s, I don't think it would pass. I don’t think what’s proposed down there right now would pass those SMD tests. But I think particularly in the Pacific Northwest there’s a lot of regret for the opposition. I think they wish that they had an organized market that would help facilitate the renewables resources that are booming out there right now.
JW: Well, I think there’s a lot of regret in the Northwest and I think there’s a lot of change in the country since a time when you and Pat Wood were there at FERC trying to move this forward. We have, first of all, the climate imperative that’s getting stronger and stronger every day to do something about climate change and we really need to do something, number one. Number two, we have very large corporations now that’re pushing very strongly for carbon reductions. You have Amazon, you have Google, you have Microsoft, you have Apple, you have Walmart. You didn’t have those companies, at that time in 2000-2001 that were that strong about these issues. And I think now you have a very strong corporate coalition in this country that politically could get behind that as well. And I think ultimately, you know, you have consumers who understand that we really need to do something about these severe climactic events that are causing the disruptions with the wildfires, the disruptions with the freezing outages in Texas, and hurricanes and other things that are happening to this country and to our citizens. We need to do something. So I think it’s a different dynamic because we are in a different era.
EMP: So, you mentioned the large internet-based companies out West like Google, Facebook, etc. Do they recognize the benefits of markets in terms of their agenda in wanting to be a zero-carbon footprint company?
JW: They absolutely do. I mean, they are trying to integrate in as much renewable resources as possible into their operations to make those operations as green as possible. I’ve been talking to a number of them. One is actually my client. I can’t disclose specifically which one but one of the largest ones, and ultimately, they understand that markets are absolutely necessary for them to achieve what they need to achieve. And it would be much, much easier for them if it was a standard market across the U.S., rather than having to deal with, you know, the market design in CAISO versus the market design in PJM versus the market design in New England, you know. If there was a uniform one that they could rely on for interconnection, for planning and for market rules for, you know, the transactions and sales within the market, they could accelerate their process of going green, greener, much quicker.
EMP: That’s funny because I don’t have any knowledge or awareness of them advocating for markets for electricity. Is that something they’re doing sub rosa?
JW: No, actually they have. REBA, the Renewable Energy Buyers Alliance, if you look at REBA’s principles, which most of these large corporations are a member of REBA, REBA’s principles include the issue of markets across the U.S.
EMP: Well, are they going to lend their support beyond an association? Are they going to be on Capitol Hill advocating for this?
JW: Yes, I think they will.
EMP: Okay. Well, let’s talk about demand response because we kind of talked about how you came in with that agenda. Why don’t you tell us what is demand response.
JW: Demand response is, and I think a sort of a new term that’s being used that I think is more descriptive for consumers to understand, is load flexibility. In essence, utilization of consumer loads, whether it be a residential air conditioning and heating system with a nest thermostat that’s controllable and internet accessible, or whether it be a large industrial plant that has a process that can be modified, up and down at different times, based upon controls that can be accessed remotely. It is basically controlling those loads and aggregating them into large groups of loads that can impact the grid. That can impact the wholesale market system and make that grid operate more efficiently. And the way it can make it operate more efficiently is if we can take out the spikes, the highs and lows, in the demand overall. We can ultimately have a system that operates much more efficiently across the board.
EMP: If I can interject, John. I think what you’re talking about is a system in which, you know, you talk about the spikes. What you have is what the industry calls a load curve, you know, as they get up in the morning people start using electricity and demand peaks in the late afternoon, early evening and then goes back down as people go to bed and start turning off all their devices.
JW: Right.
EMP: And so, under the traditional model, to meet that rising demand, you have to bring on new generation resources and they get more and more expensive, as you get towards that peak. And what you’re advocating and what demand response does is, is instead of bringing on a new generator that injects electrons into the grid, you stop pulling electrons off the grid.
JW: That’s correct.
EMP: And so I think it was Amory Lovins that coined (the term) negawatt, is that right?
JW: Yes. Yes, negawatt for efficiency. Efficiency is sort of long-term load flexibility where you’re just, you’re reducing load over a permanent period by putting in an LED light bulb or putting in, you know, some other technology that’s going to lower the need for electricity. What we’re talking about is, is actually varying the need for electricity by having a controllable thermostat that can have that thermostat go down to say, 70 instead of, you know, instead of heating at 72 heating at 70. And just that little difference, and you take that difference over a million homes can be many, many hundreds of megawatts of energy that’s no longer needed to support the grid. In Texas, one of the big issues in Texas is many, many new homes in Texas are electrically heated. So, they never believed that they were really going to need that electric heat, given what their climate is there. But when they had that huge cold snap the electric heat in those homes was one of the large contributing factors to the spike that caused the outages there. So, again, anything you can do to modify those usages at times when there is stress on the grid, when there’s a large amount of demand, you can make the grid more stable and more reliable.
EMP: Well, how do we make that work? I mean, I pay my bill once a month after the fact.
JW: Right.
EMP: So how do I adjust in real time to something that’s happening in the wholesale market?
JW: Right.
EMP: And of course, I’m not the most eligible person. A large manufacturing company is where you really get the big bang for your buck in terms of demand response.
JW: Right. It’s much easier to do it in groups of large companies, but that doesn’t mean that smaller entities like consumers can’t participate as well. And usually, in most every instance that’s done through aggregation. Through third-party entities who come to you and say, you know, Bryan, if you want ten dollars a month, we’ll give you ten dollars a month that you can take to reduce your electric bill or you can use it to spend on, you know, whatever. But if you allow us to simply control your thermostat in this range within two degrees on either side. We believe that you won’t experience any more or less comfort than you experience overall, but we’ll put in a brand new communicating thermostat for you. We’ll give you that thermostat, and we’ll give you $10 a month if you'll allow us to do that. And you make the decision. You make a decision whether or not you’re willing to do that. There’s a lot of companies now that are bundling those kinds of things with solar installations, for example. Sunrun is bundling, you know, load control of things like your thermostat and your refrigerator and other things in your house that can, again, cause those loads to change in critical times, but not change them in a way that is significant to you. That’s completely invisible to us so you don’t have any discomfort when you’re home, but yet is changing the amount that you’re demanding from the grid.
EMP: So what’s really necessary to make demand response work?
JW: Well, one thing is to open it up in all the states. And one thing we did when I was chair of FERC that I regret is that -- first of all, there was a very big order that we issued, Order 745, that said that if you’re going to do this demand response, if you’re going to be able to put out reductions, that whatever those reductions are for, in the wholesale markets, you should get paid the same amount that if a generator was putting in that same amount of increased energy. So a generator puts in one megawatt hour of energy. They get paid, you know, $100. Then a demand-response aggregator who takes out one megawatt of energy should also get paid $100. And that’s what in essence, Order 745 said. That order actually went all the way to the U.S. Supreme Court. EPSA challenged it, it was U.S. v. EPSA, and we won the case. The FERC won the case, saying that FERC had right to do that. But if you’re doing that, you know, you’ve got to ensure that ultimately it can be done everywhere. And to do that, quite frankly politically, in Order 745 and a companion Order 719 we had to give states an opt-out provision. We had to say to states, if you don’t want to allow your consumers to participate in these wholesale markets, or your utilities don’t want them to do that, your local retail distribution utilities don’t want them to do it, you can opt out. And you can restrict them from being able to voluntarily sign up with these aggregators who want to do this. Even if you’re an industrial customer, you can opt out and ensure that they don’t participate in demand response. Well, Louisiana has opted out, Kentucky, Indiana, Michigan, you know, a number of states have opted out. Well, we’ve got to do away with this opt-out provision and I think FERC has the authority to do away with it, even though we authorized it back in 2011 or 2012. I don’t think it’s a legal right the states have to opt out. I think it was a political convenience that FERC in essence gave to the states. And I think FERC can look and say now, we need this demand response. We need to have it everywhere. And also we have many other resources like storage, behind-the-meter storage, which we’re seeing more and more now, FERC said in Order 841 that there’s no opt-out for states in that. FERC has also said there’s no opt-out for energy efficiency. So if there’s no opt-out for battery storage that consumers have behind the meter, there’s no-opt out for energy efficiency, there should be no opt-out for demand response. So the first thing we need to do is make sure that we can have demand response everywhere, and consumers can participate with these aggregators. That’s number one. Number two, we need to do what FERC is doing in Order 2222. And that is have better coordination between the RTOs and the distribution utilities to ensure that data can flow between these, those two entities. So there isn’t any concerns from the local distribution utility, if their consumers are participating in demand response, that they don’t have to serve those loads. And that was part of the reason for the opt-out, is because a lot of local distribution utilities were alleging that they couldn’t tell how much load they had to serve if we allowed third-party aggregators to go in and have those loads, become demand response, i.e., not be present at certain times. They would be bidding into a market, asking for generation to come in that really wouldn’t be needed, so it would cost them something. I think that can all be solved with better communication, and that better communication can be done, and needs to be done and is required to be done under Order 2222 that was just recently issued by FERC. So we need to have those two things put in place: the opt-out done away with, and 2222 fully implemented, and I think if those two things are done demand response I think will really explode in this country.
EMP: Well, as I alluded to as I introduced you earlier, the retail sales of electricity are regulated at the state level.
JW: Yes.
EMP: FERC has jurisdiction at the wholesale level.
JW: Yes.
EMP: And most of the states you mentioned as opting out are ones that don’t have a competitive market at retail.
JW: That’s right.
EMP: So how do you integrate a retail market that’s regulated at the state level with a wholesale market that’s typically regulated on a regional basis by FERC?
JW: You do it again by the communication. You have to ensure that the retail provider fully understands what wholesale products their retail customers are participating in. Because what the Supreme Court said in Order 745, and what we said in that order ultimately is that, consumers, when they provide this and bid this demand response into a wholesale market, even though it’s reductions of their load behind the meter, that is a wholesale product that is participating in that wholesale market. But there is a retail interface in that their retail provider that normally provides them energy needs to know what’s going on. Because if they don't know what’s going on, they’re going to go procure too much energy and try to have that available for them when that customer really doesn’t need it all the time, because at certain times, they’re reducing their loads to participate in this wholesale market. So ultimately you need to have that kind of integration happen to make this all work effectively. And that’s how you have retail markets and the wholesale markets work together, is this cross-communication that I think Order 2222 rightly recognized. And I have to commend Chairman Chatterjee for his leadership in that, when Neil Chatterjee was chairman of FERC, in issuing that order because that is the real necessary step to make all this work.
EMP: But at bottom what you need to make demand response work is a market and price signals, right?
JW: Well, we have a market and price signals in the wholesale market. So, ultimately, it’s there. They just need access to it by making the opt outs go away. They need access to that market and there needs to be communication for the retail provider so they’re not left holding, you know, the bag in essence by procuring more energy than they otherwise would need to. So the market is there, and you don’t need to see it. That’s what you talked about, you know, you pay your bill once a month. You don’t need to see it as long as it’s seen by an aggregator who comes to you and can aggregate you together, and then ensure that that portion of your load is bid into that wholesale market. The wholesale markets are already out there. Prices are already out there.
EMP: Okay. Well let’s talk a little bit about what to expect going forward now with the new administration and a new chairman at FERC. You were part of an announcement, a week or so ago, a couple of weeks ago, involving a number of different former FERC chairs and commissioners, and it seems to me that that’s an issue that’s going to be probably at top level in terms of what’s going to be on the agenda at FERC going forward and in terms of electricity markets. Tell us about that group and what they’re trying to do.
JW: Yeah, well it’s really about transmission and the issue about really trying to ensure that we have a more rational structure for planning transmission in this country. And again, it comes back to the discussion you and I had about putting markets everywhere. Well, if you put markets everywhere, it would be the ISOs, independent system operators who would operate those markets, but it would also be RTOs everywhere, i.e., a regional transmission organization. And those regional transmission organizations are responsible under Order 1000, FERC Order 1000, for doing the planning. So really we need to have a uniform planning system that moves towards what we talked about before -- the goal hopefully of decarbonizing the electric grid by 2035. So we need to have a transmission system that will do that, ultimately. And so you need to have some kind of a robust structure in place to make that happen. And in addition to that, something else that was part of that discussion with those former commissioners and chairs that you saw was the issue of ensuring that we do it efficiently and cost-effectively. And that means also putting into place new technologies into the grid. Much like they’re trying to improve the distribution-level grid with smart meters, to some degree, and I can have a long discussion about that. But at least, improving the distribution-level grid. You need to do the same thing for the transmission grid. And there are new technologies like dynamic line-reading technologies, load-flow control technologies, software topology technologies that can be put in the grid very cost effectively because it’s being done all over the world. It’s being done in the UK, it’s being done in Australia and in Europe. But we’re not doing it enough in this country that can lower the cost of these transmission infrastructure upgrades and make the system operate much more efficiently, lower congestion and lower the resistance to high levels of renewables in the grid, as well, by making the system operate much more effectively. So really that’s what that whole push was from that group that you saw.
EMP: So, we’re going to see a lot of emphasis on transmission infrastructure development going forward.
JW: Yes, absolutely.
EMP: And by building up and making the transmission system more robust we’re going to allow more renewables into the system, and we’re going to have a cleaner energy system. Is that right?
JW: That’s right, yeah.
EMP: What other top-level issues should we be looking at going forward?
JW: Well, I think we do need to look more at the distribution level about making it smarter and operate more efficiently. And I’m seeing a number of technologies that are starting to do that. I think smart meters have not really achieved the promise that they were purported to provide, and the billions of dollars that have gone into them. I’ve got a smart meter in my house here in Berkeley, California, and I’m not sure what benefit it’s giving me at all, to tell you the truth. In fact, I’ve got devices plugged into various sockets in my wall in my house that provide me much better, more granular data and more information than my smart meter provides me at all. And those things were much cheaper. You know, I bought them myself much more cost effectively than the smart meter that I’m paying PG&E for. So, we need to figure out how we can adapt this technology that’s coming out so quickly, how we can adapt faster into the system. I think we need to look at more competitive structures to do that, both at the wholesale level, and I do believe in market competition, not only for providing for the sale of energy but also I believe in competition in development of transmission. That’s what we tried to do in Order 1000. I think we need to accelerate that, and I think FERC is going to look at that and why Order 1000 really didn’t meet its promise. I’ll admit that we didn’t, we haven’t achieved what was really my vision for Order 1000 of really having much more competitive transmission developed in this country. And so we need to figure out how to resolve that and also down at the distribution level. I think we need to have, similarly, as we have at the wholesale grid level, independent operators. I think we need to consider looking at independent operators at the distribution level as well. That will allow for more competitive providers of services on the distribution grid, both to consumers behind the meter and to the grid itself. So I think those are the big issues that we’re really going to see is, hopefully moving towards more competition. Now that doesn’t mean deregulation. I don’t want to use the ‘D’ word because I think that that word is used purposely to scare consumers. It means better oversight, more market oversight and more competitive oversight more consumer protections. You know it’s horrendous what happened to the consumers and in Texas, for example, with these high prices that went with certain retail providers that were giving them full visibility and access to those wholesale prices. And, you know, they had rates going from, you know, $30 a month all of a sudden to $3,000 a month or, I saw one guy who had a bill of $16,000. You know, that’s unconscionable. We can’t put consumers in that situation. We can’t let consumers do that. We need to make sure that they’re adequately informed, they make informed rational choices, and they have full information to make those choices and that they understand what they’re getting into. Obviously in that situation those people did not understand what they were getting into.
EMP: Well, I want to take you back a little bit because you were talking about competition and injecting even more competition into the system. Does that mean, pushing aside the utility and making them simply a wires company and less bundled?
JW: Yes, yes.
EMP: Good luck with that.
JW: We’re working on it. (laughter) I think it’s where we need to go, ultimately. I mean it doesn’t mean the utility company can’t then spin off other companies and become, you know, part of the competitive landscape that they think they can compete because they have expertise to do so. Let them do so. But from a pure monopoly standpoint, you know, I right now see primarily the distribution grid as the only monopoly system we have that should be retained as such. And so a pure wires company is a good thing. We have lots of pure wires companies that are either for-profit or are not-for-profit. I mean, in Texas they have pure wires companies. They’ve succeeded there. And a lot of people will say well that’s a failure because of what happened last week. I don’t think so. We shouldn’t throw out that baby with that bathwater, I don't believe. But ultimately, I think we can get to a system where we can have a robust competitive delivery of energy services that is clean and cost effective, and also consumers are protected. I think that is a goal that we can achieve if we structure it properly. And I think that structure is a better, and will be more a cost-effective structure and get us to clean, low-carbon energy delivery faster than a monopoly system that’s dependent upon rate regulation in the old way, which I’ve been involved in for 45 years. And there’s as much abuse that can go on or more in the monopoly system, than can go on in the competitive system. Both of them have to be regulated. Both of them have to be overseen. But it’s easier, I think, and more cost-effective to provide services to consumers, and you can do it cleaner, in the competitive system than you can do it in the monopoly system.
EMP: I think that’s a great place to leave things. I appreciate your time, Jon. I know you’ve got something else you need to get to here in a few minutes. I’ll allow you some time to get yourself ready and say goodbye and thank you again for your time and for participating in the Energy Markets Podcast.
JW: Why you’re very welcome, Bryan. This was a great pleasure. Let me know if I can ever do this again in the future. I’d be happy to.
EMP: We most definitely will. I had hoped to talk about your amicus brief at the Supreme Court.
JW: Yeah, that’s an interesting question.
EMP: That has to do with transmission and competition.
JW: Absolutely.
EMP. Well we’ve got a few minutes. Why don’t we go ahead and talk about that. That has to do with something called the right of first refusal.
JW: Right. The ROFR, the right of first refusal, which we thought we did away with in Order 1000. And then, then we had to put in a few exceptions in that order, and the exceptions have now become the rule. And so I think that’s in part why the competition that we envisioned in Order 1000 never happened. And that was bipartisan, by the way. It was Republican as well as Democratic commissioners, a very bipartisan group. Mark Spitzer, a Republican out of Arizona who served with me, was one of the biggest proponents of doing away with the ROFR. But, it’s been clawed back by both the transmission owners, a monopoly, transmission owners in the states through the stakeholder processes in the RTOs in part. But it’s also been clawed back by them by going into state legislatures, like Minnesota, where the amicus brief you talk about is happening. Like Minnesota and Texas, and a number of other states. In fact there’s a bill in Michigan, as we speak, trying to do the same thing, where they in that state legislation want to put in place a requirement that only in-state utilities can build transmission in that state. That just because you’re an international company that’s built transmission all over the world, you’re not competent to build transmission in the state of Minnesota. And so, LS power, one of the developers, who is one of those international transmission developers and who wants to develop transmission everywhere and is very competent, very capable, sued the state of Minnesota and took them to the U.S. Supreme Court saying that that law is unconstitutional because it violates the Commerce Clause of the U.S. Constitution, which I firmly believe that it in fact does because those lines in Minnesota are interstate lines in interstate commerce, and we shouldn’t restrict who can build those lines. Those lines can be built reliably, responsibly and cost-effectively by a number of firms, not just the firms in Minnesota.
EMP: So just to sum up, then what you’re talking about is providing a system in which not just the monopoly utility provider has the opportunity to build transmission. The right of first refusal is giving the utility the opportunity to build the transmission first …
JW: That’s correct
EMP: … as opposed to a competitive, or an outside, developer.
JW: That's correct.
EMP: And so that’s one way in which we can inject competition outside of the generation market, to have competition in transmission development.
JW: That’s correct. Allow the lowest bid from the most competent -- from a field of competent pre-screened companies to build those projects.
EMP: Well I’m glad we got a chance to work that in. Jon, I definitely want to have you back on. Appreciate your time and all the best. I hope to see you in a post-COVID world someday soon.
JW: Thank you. I’d love to have a lunch with you, Bryan, that’d be great.
EMP: Thanks. Take care.
JW: Take care.
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