S3E21: WPTF's Scott Miller talks about market-based grid regionalization efforts in the West, and the ghosts of the 2000-2001 regional energy crisis that haunt those efforts

More than two decades ago when the Federal Energy Regulatory Commission sought to put large regional wholesale power markets in place nationally, Western states were a hotbed of opposition to the since-abandoned goal.  But today there are two competing proposals for competitive day-ahead wholesale power markets as the region has come to recognize that market-based regionalization helps cost-effectively and reliably integrate increasing amounts of variable renewable energy resources.

The Western Power Trading Forum's Scott Miller breaks those down for us, and explains why he's optimistic that the two nascent efforts under way today will one day result in establishing a Western regional transmission organization, or RTO.

"The desire to get to an RTO with the simplicity of a single tariff is something that I think will manifest itself as people get some experience," Miller says. "I'm betting on the fact that once people get some experience in this day-head market, they're going to want to get to the single tariff, with probably some Western twists that are different." 

Transcript

EMP S3E21: Scott Miller, Western Power Trading Forum
(transcript edited for clarity)

EMP: Welcome to the Energy Markets Podcast. I’m Bryan Lee, and our guest today is Scott Miller, executive director of the Western Power Trading Forum. Scott, welcome to the podcast.

SM: Hey, Bryan, thanks. Good to hear from you again. Happy to be on your podcast.

EMP: It's been long overdue. We've known each other a long time. I think when I first met you, you were still with that merchant power pioneer in Bethesda.

SM: It was U.S. Generating Company which became National Energy Group.

EMP: But we went from casual colleagues to working together at FERC when I joined the Commission in the summer of ‘02, the proverbial fires of the Western energy crisis were still smoldering at that point. They hadn't turned into the real fires that go on regularly now. Enron had cratered and you were one of my go-to guys in helping me understand things I needed to explain to the many reporters following the commission in those matters. So I appreciate your coming on to help us talk about the grid regionalization efforts out West. Why don't we begin by talking about what is the Western Power Trading Forum? I was going to describe it as representing merchant power producers. But on digging a bit deeper, I see you've got a wide range of members including utilities and community choice aggregators.

SM: Yes, WPTF when it started in the late ‘90s was primarily a group of competitive entities – IPPs, power marketers. And it stayed pretty much that closed community until the early, mid-2000s. It began to expand a little bit, but it really took off now where we're over 120 members that include IPPs, power marketers, energy service providers, but IOUs, community choice aggregators, Bonneville Power Administration is a member as is LADWP, you know, these large public, federal and public utilities. And I think the reason is, is that while we are at heart still an advocate for competitive markets, and our board is composed entirely of competitive providers, that things are happening so quickly in the West and there's such a need for information and WPTF is to some extent an information clearinghouse for these and we've built our membership from that. So with all that’s happening in the West, we've found that people like coming to WPTF to get their information and as to how they should proceed in the various activities that are occurring out in WEC.

EMP: Yeah, well, it's definitely a moving target, and I can see where being a WPTF member would be helpful out there. So as I said, the main reason we invited you onto the podcast today is to discuss something I never would have imagined all those years ago when we were at FERC together, and that's grid regionalization efforts in the West. The Energy Imbalance Market seems to be a successful enterprise. And now folks are looking at moving that incrementally into a day-ahead market. So we had folks from Brattle on several episodes back where we talked about the California ISO’s EDAM day-ahead market efforts, which have progressed since then. And I reached out to you after reading news about SPP’s grid regionalization efforts in the West. Can you flesh those out for us, for our listeners?

SM: Sure. Yeah. I agree with you that when I took over WPTF from my predecessor, Gary Ackerman, in 2018, what was surprising was that there was this real organic effort to create regional market platforms. There have been several attempts. Part of what makes the West different is it's the structure of the entities. A lot of public power, a lot of federal power entities that are not jurisdictional to FERC or to states. And right now, we have these two day-ahead market offerings. And to understand what these represent, how they're different from RTOs, you need to go back a little bit in time to the creation of the Energy Imbalance Market and also the issues surrounding California's governance. 

EMP: So how long has the EIM been around now?

SM: Yeah, the EIM began in 2014 with PacifiCorp joining CAISO’s Energy Imbalance Market. And it's since grown now to compass, I think about 80% of the West now is a member of the Energy Imbalance Market, which as you're probably aware, is just a real-time market where entities can sell into the CAISO market. Let me just sort of say this all began because there's this organic interest in the West and when you and I were at FERC, and we were trying to get the Standard Market Design up, the resistance to markets in the West was pretty profound. The way the Energy Imbalance Market began, was Avangrid, who is obviously a renewable developer, had several wind projects, which were being curtailed in the WAPA and Bonneville areas. They came to FERC, complained about the curtailments, the arbitrary nature. FERC found that it actually had some jurisdiction over these federal entities in reliability aspects of the Federal Power Act, and required changes to the Bonneville and WAPA tariffs so they handled curtailments differently. What that led to, because of the rapid development of renewables in the West, was a desire to figure out a way to sell renewable power, because oftentimes you have more power produced than you can utilize and sometimes you don't have enough power being produced. And so there was this incentive to find a way to find markets for either balancing or selling this product. And that was the beginning of the Energy Imbalance Market and since then it has developed and it's largely because of the retirement of certain thermal units for economic and environmental reasons, as well as the increased number of renewable assets, that there's been this now organic interest almost completely regionwide for regional markets, and that initially was thought to be that an RTO would grow out of CAISO and the Energy Imbalance Market. But because of governance issues pertaining to the Board of Governors of California ISO being appointed by the governor of California, until that gets straightened out CAISO began looking at a day-ahead market short of an RTO. And while they were considering that coming out of COVID, SPP came forward with its own day-ahead market offering and that's where we are now is there are these competing day-ahead market offerings.

EMP: Well, let's, let's get into the governance things because there's still ill will, I think, two decades on from the California-caused Western energy crisis. You know, we call it the California crisis. But it spilled over throughout the West and impacted California's neighbors pretty severely. Is that right? Or is it just the political aspects of having a politicized governing board?

SM: I think you're correct in terms of the sort of attitudes in the rest of the West towards California. You're right. It was obviously a Western crisis. But it is viewed as being quote/unquote, caused by California, which the market structure of California and the rules surrounding it did have a lot to do with the crisis. There were some macroeconomic issues and supply-and-demand issues, but the attitude towards California and the desire to find some other partner for this regional market enterprise. You're right. It has a lot to do with some lingering attitudes towards California. And of course, California is the big behemoth. There is a certain amount of hubris that California exudes in dealing with its neighbors. CAISO isn't like that, but because it's a California entity, it is collateral damage in terms of the attitudes that some in the West have towards CAISO because it's California.

EMP: You describe EDAM as an incremental thing while these governance issues are addressed. Is there a serious effort to address the governance issues at CAISO?

SM: There have been serious efforts in the Legislature. There's one bill just failed in the latest California legislative session. There are efforts because California has finally woken up to the fact that it needs the rest of the West and with SPP’s entry into the market of ideas for a day-ahead market they realize that they risk being left alone. It's not necessarily that the governance needs to be fixed for a day-ahead market. But if California is to be the basis of an RTO in the future, if we go beyond the day-ahead market approach, then certainly because transmission systems are turned over to the operational control of the RTO and the governance structure would certainly need to be changed by then. So right now, we're looking at efforts to do that. But in the meantime, there are these, what I would call shared governance approaches that are going to be utilized for CAISO to build its EDAM. SPP has a cleaner governance structure because it has an independent board and is going to try to set up other governing bodies for any Western efforts that it's involved in.

EMP: It's interesting you use the word “hubris” in referring to California, you know, when, when I was covering all the events leading up to this market development, I don't know how many times I heard California politicians say, you know, “we're the sixth largest economy in the world.” And you know, that kind of evoked the attitude they had that they were this grand entity and that they could build a market and think that the trades within the market wouldn't be affected outside of the market. And that preventing utilities from hedging their risks would not be a problem.

SM: No, you're absolutely right. And that hubris still exists to some extent, and I think you and I used to joke about that that there was like, yeah, they might have the sixth largest economy if they were an independent country. But, you know, so did Argentina once and if they don't, if they're not careful, they could become Argentina. But, that, to some extent, that's changed because of a few events, you know, beginning with the August 2020 blackouts, and then a couple of near-death experiences electrically. Because what we have in the West right now is we're the most resource-constrained region in the country. And that used to not be the case. And now that they're resource-constrained, and California realizes that they need the rest of the West both for the diversity of load, the diversity of assets, the ability to share these assets. Finally, people are coming around – even Californians and some people who don't like California – are coming around to this regional approach to sharing assets on a market basis. It not only helps in other areas, but it underpins reliability, and that has changed that hubris considerably. Although the neighbors surrounding California still remember that hubris.

EMP: So you keep indicating that you have an expectation that there eventually will be an RTO in the West. Is that a shared feeling amongst all the parties involved in this right now? 

SM: I would say that is not a shared feeling. Oftentimes when you hear CAISO and SPP talk about it, they would like to move to a full RTO after this interim step, because there are obvious advantages. You'd be operating under a single tariff. There would be no different individual utility tariffs to consider in the operation of this grid. But when you talk to individual utilities, they're not entirely sure. I think there are aspects of full-up RTOS that some people would rather not get into. I would say transmission planning is one of them. Some of the interconnection queues that they see in the East they feel like somehow these can be better managed than they have been in the East. But the desire to get to an RTO with the simplicity of a single tariff is something that I think will manifest itself as people get some experience. You may recall, back in the days when the Midcontinent ISO, which was known then as the Midwest ISO, stood up, that all the utilities kept their control areas. And then after about a year, they suddenly realized that there was no real benefit to keeping their control areas. It was it was more a liability. And so MISO became a single control area. So I'm betting on the fact that once people get some experience in this day-head market, they're going to want to get to the single tariff, with probably some Western twists that are different. I don't know that they'll ask for the RTO to do transmission planning because there are some aspects of the West’s topology that may not be suited to that – the federal lands, the tribal lands and things like that.

EMP: So what's your expectation? Will either California ISO or SPP prevail? Or are the two going to coexist somehow?

SM: My sense is, right now, that there'll be two. The border, where that exists, is to be determined. CAISO has filed its EDAM tariff with an operational go-live date in the first quarter of 2026. Markets Plus is working hard and has accelerated its stakeholder process to hopefully file in the first quarter of 2024 with a go-live date of 2026. So you can see this sort of like this competition to try to, you know, get to the finish line and see which entities are going to join. It's something that – you know, seams exist in other markets in the East – PJM, MISO, SPP, New York – they all share seams. This one is a little more chaotic, because FERC has limited ability to coerce people into it. The attitudes towards California are pretty profound. You know, there are a few key players that, depending on how they make decisions, could change the boundary of these two entities radically.

EMP: There are benefits to this, but there are also benefits to not having independent governance. You know, it seems apparent that in the Southeast here, the utilities see a benefit in not having a regional entity that coordinates the system. And I think the clear reason for that is that they make more money that way. Is that kind of dynamic in place in the West as well?

SM: I think the dynamic between those two regions is different. SERC is dominated by a few very large investor-owned utilities. The two areas are very different. SERC is dominated by three – or a few very large investor-owned utilities plus TVA. And those large entities can pretty much coordinate the grid, although not as efficiently as an RTO. The West is so balkanized that the coordination is really almost impossible without a market administrator, similar to an RTO or a day-ahead market administrator, so they just can't do it because the topology and the number of entities in the West.

EMP: You noted a short while ago that California ISO has filed its EDAM tariff with FERC. And I understand you guys have filed some comments with concerns?

SM: California filed its EDAM tariff, which stands for Extended Day-Ahead Market, along with what they called enhancements to its own internal day-ahead market. And it’s called the Day-Ahead Market Enhancement, and they linked the two together such that they said that EDAM could be approved, but not without approval of the day-ahead market. And there were aspects of it that we found highly problematic and unfortunately had to protest even though we’re very, very supportive of EDAM. And so those are before the commission now. We hope that CAISO will change and sever these two, so we can pass EDAM and work on the day-ahead market enhancements.

EMP: Well, a lot of this is being driven by renewable energy development, right? There's a lot of renewable energy development happening outside of California. I mean, California has got its mandates approach and it's trying to drive renewable energy that way. But outside of California, a lot of this is happening organically. And they realize that having a market system or a regional approach is more conducive to integrating all of these variable resources. Is that about right?

SM: Well, it is, but I caution people when they emphasize the integration of renewables as a driving factor. That is true. But it's also you get in certain areas where they're less concerned about that and so they're like, what's in it for us? You know, you think of certain red states like Idaho, Nevada, Wyoming. Nevada is not exactly a good example, it's more of a purple state. But with the reduction of thermal assets and hydro not being as predictable as it once was, this is as much about reliability and the ability to share resources across a broad region as it is about integrating renewables. And I think it's important to emphasize both, because we are dealing you know, we are human beings and we deal with politicians all the time. And politicians like to simplify things into boxes. And so let me simplify this into a box. It is very, very useful for meeting reliability. It makes meeting reliability far easier, because we'll utilize the full capability of the grid we have now and it will make the integration of renewables easier and easier to finance, quite frankly, because you're producing a price that can be part of a pro forma that you take to a lender. It's necessary because of where we are resource-wise to meet reliability, and it will help be meet state goals in terms of renewables.

EMP: So there's been a lot of extreme weather in the West. It seems pretty clear to many of us that this is aspects of climate change coming home to roost. But there's still a strong sentiment denying climate change as a real thing and calling it a hoax. Is there growing acceptance in the Western region that climate change is a threat and that it's affecting the electric industry?

SM: My sense is that is less denied in the West than it is in other places. Certainly you will get people who will still deny it. I think it's hard when you look at the preponderance of heat events and wildfires and droughts for people to continually say that climate change is not real. I think in terms of the debate about whether or not you speed up the renewable integration, cut back on thermal assets, the speed is what people debate. You'll still get people who will deny it, but I think the great concern is whether or not, you know, some people want to get to net zero very, very quickly. Other people are like, yeah, I understand that we need to get to a cleaner grid, but we're still going to need some thermal assets around. How do we manage that? And that's a real issue. That's one of those things where you look at the last 25 years and the evidence is there. Things have changed. Now, there will be people who will say they're not sure that that was caused by manmade climate change. But yeah, the drought situation has gotten very, very bad. The wildfires have increased dramatically since then. It's pretty profound. It's something that everybody talks about all the time. That's had an effect just as much as you know, the retirement of the thermals and renewables and things like that in terms of people's attitudes to what's necessary because when Portland, Oregon, has summer days – and Seattle too – of 110 degrees, people who did not have air conditioning suddenly are buying air conditioning. Houses are being built with air conditioning that hadn't been before. And so what we've had is not a cyclical change in in electric usage, but a profound change in electric usage going forward. So the residential load has increased in these areas. And it's not going back. People are going to have air conditioning. 

EMP: One of the overarching points of this podcast is to accept the fact that climate change is real. We need to respond to it yesterday. So what are the best policies that we can adopt or promote that will help us achieve a clean-energy transition, a clean-energy economy, at least cost to consumers? 

SM: Obviously there are wholesale market approaches to this and then there are retail market approaches to this and my expertise is more on the wholesale side. Mandates are fine to a certain extent. I think California has gone overboard in terms of its mandates. And it mandates a certain level, then it decides that it wants to intervene in the market to build out the market and then get the state involved in procuring the assets necessary. I think that is taking things in a bad direction because you may get the assets but the state is not very good at buying these at market prices. You and I will remember when the state of California did this in response to the crisis of 2000-2001 and the Department of Water Resources started buying contracts without regard to price. They were more their hair was on fire about just getting enough capacity. And then of course, the market corrects. Assets get built and the price falls and you're stuck with very expensive assets. So I am in favor of carbon markets, tradable carbon markets. Now California has its tradable carbon market, which is a good market with good rules. Unfortunately, California still likes to intervene. But I think that if you build a regional wholesale market – one or two – and you set your goals for net zero, and if you went to, you know, an actual carbon market that can be traded, you know, putting a price on carbon, that you would get where you need to go more efficiently and to the least cost to the consumer. Unfortunately, it's unlikely that we're going to get to either a regional, Western regional, or certainly a national carbon market would be even better. But you know, it just the politics just don't feel like they're there. So in the meantime, I would, you know, want there to be wholesale markets where there is the ability to build renewable assets, finance new technologies, and new assets, and then the ability to share it so that you don't have to build any more than is necessary. And if that could include a carbon market, that would be even better. But clearly stated goals and a wholesale market that meets those goals, I think, would be the best way to meet our environmental and our economic objectives in terms of changing out the grid.

EMP: You mentioned the Department of Water Power, DWP, buying all those expensive contracts to get out from under the crisis 20-plus years ago, I think consumers are still paying for those. 

SM: They are.

EMP: Yeah, and then you know, and they just keep heaping costs on their customers like they think they know how to get things done. It's unfortunate for the consumers there.

SM: Well, I'll just put a cherry on that idea of what was interesting was they created a surplus in the market such that by the 2010s prices were very, very depressed. So nobody had any incentive. And matter of fact, people like Calpine and others were retiring assets because they couldn't make any money in those markets. Then lo and behold, California then takes on very aggressive renewable goals. A lot of assets have been retired and suddenly you know, the prices were very, very high. But people were still paying for utility-procured assets DWR had contracted for and so they get in this sort of, you know, doom loop where it's like, we'll build a whole lot, and then the prices drop, then we want to do something different and so we intervene again, and they'll respond to high prices, but then the prices will drop again. Rather than stating clear goals and letting the market do its business.

EMP: As long as we're touching on the Western energy crisis, did Enron cause it?

SM: (laughter) Enron did not cause it. It was caused by a combination of factors, which was a very poor market design that emphasized spot market purchases, disincentivized utilities from engaging in long-term contracts, a very hot economy. People remember that in the summer of 2000 the economy was still going gangbusters. A very tough hydro year where there was not a whole lot of water around. As California reacted to high prices – which were partially driven by supply and demand and the fact that nobody had any long-term contracts – they kept ratcheting down the price cap, and it only applied to assets inside California. And so people were less willing to produce and sell in California. And so they had to go on the outside and procure energy, where the price caps didn’t apply. I'm not saying there were not entities who were taking advantage of these situations and engaging in trading activities that caused market manipulation is a narrative that is false, but unfortunately has stuck and it's very, very unfortunate and it has delayed people engaging in changing the market in such a way where it would benefit everybody. But you know, we still engage in a hangover. And every time, every time there's a shortage or a blackout or something happens, you will hear some of the familiar names from way back in that distant past start saying that the real cause of, like, the August 2020 blackout was market manipulation. So it's a narrative that just won't go away because it's a simplistic narrative. 

EMP: I had a guest on a while back, talking about an issue in California. And she was going through a time-driven narrative, and she said, “and then Enron happened,” meaning the California Western energy crisis. I think she was a bit taken aback by how I reacted to that because I feel quite strongly that we ought to have the truth dictate how we respond to these things and not politically driven narratives.

SM: I would agree with you there. The unfortunate thing was we had the Enron tapes and we did hear Enron and traders talk very cavalierly about shortages and things like that. And, unfortunately because we had that soundbite, that's what people resonate to, rather than the fact that it was a marginal aspect of what was a bigger picture that in some ways was created by the California political leadership that negotiated the market structure.

EMP: Well, Scott, I’ve pretty much gone through my notes. As I do with all my guests. I'll throw it back to you for one last go here to bring up anything we haven't brought up so far that you think is relevant here.

SM: I appreciate your having me on to discuss the West because so much of the discussion around electric policy are echoes of things that have happened in the East. What we've got, I like to think of an analogy that the West is kind of like the New World. And we have, it's an optimistic future if we do a few things, right, we could create a structure that is devoid of some of the problems that have bedeviled some of the Eastern RTOs with their centralized capacity of markets and things like that because our version of capacity is still negotiated on a bilateral basis. So we don't get these centralized prices. And there are aspects of the Western approach that are – it's frustrating that we're not at an RTO now, but I do think the fact that we've got this near regionwide consensus that we need an integrated regional market is a cause for great optimism about solving the problems of the West. And I just, I think that we're close to getting there. And I think it's something that bears watching, because it could hold lessons for the East as they seek to tinker with how the RTOs are and what they are. The RTOs are great. They really fully utilize the grid, which is the magic of these regional markets is full utilization of the grid. And you know, we all know that transmission is a scarce resource and we need to use it as best we can. And these structures are intended to better utilize the grid.

EMP: Scott Miller, Executive Director of the Western Power Trading Forum. Thank you very much. 

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