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White Paper: Electricity markets combat problems

Almost 20 years after restructuring many of the nation’s electricity markets, regulators are navigating a brave new world where states want more than just affordable power. In addition to affordability, state goals now include fuel diversity, security,  green energy and job creation, among other things that the administrative markets were never designed to accomplish, according to a white paper by Tony Clark, a senior advisor at Wilkinson Barker Knauer LLP. Clark is a former member of the Federal Energy Regulatory Commission, a former President of the National Association of Regulatory Utility Commissionersand a former North Dakota regulator.

“To the degree policy makers and elected officials have moved the goal posts, it is time to consider the rational pathways forward,” the white paper stated. The paper includes recommendations for states in each of these three regulatory models: the Traditional Bilateral Market Model, the Joint Dispatch Market Model (both of which could be considered “vertically integrated”) and the Restructured Administrative Market Model.

Regardless of the model, all states must address some of the same issues, including distribution rate design. Given the rapid development of distributed energy resources such as rooftop solar, states must decide whether their rate structures reflect the changing landscape. States should require utilities to assign fixed costs of networked service to fixed charges and variable costs to variable charges, the white paper said.

Vertically integrated states should consider performance-based ratemaking and price cap regulation while also supporting utilities to develop ways to provide customers with more choices and more control. State regulators should also address problems with PURPA (Public Utility Regulatory Policy Act), adopted when no concept of cost competitive utility scale renewable projects existed.

As states “untether” from the limited goal of pursuing least-cost power, vertically integrated states have numerous advantages over restructured states, the white paper said. “In fact, security constrained economic dispatch paired with the stability of rate based assets, which allow utilities to cover costs over the assets’ useful life has demonstrated its value time and again,” the white paper added, and states can access this benefit without surrendering their control over resource decisions.

The paper points out the risks to the Restructured Administrative Market Model when states pursue ‘around market’ solutions. “While it can be alluring to think one can maintain all the benefits of a restructured market while also getting to select your generation winners and losers, I have come to the conclusion that is a siren’s call best left unanswered,” Clark wrote. Restructured states must avoid straddling the middle of the road between a merchant market and simultaneously adopting state-sponsored ‘around market’ resource selection, or becoming RINO – Restructured in Name Only, the white paper noted.

Finally, a restructured state must either fully commit to its model and reject efforts to dictate the resource mix or consider deliberately altering its regulatory model. “If a state does not believe that its constituents, elected officials, utilities, regulators and stakeholders will be able to resist the temptation of ‘around market’ solutions then the state must determine whether the Restructured Administrative Market Model is really the right fit,” the white paper concluded.

Released at the summer meeting of NARUC and available here, the white paper is the most recent in a series of Wilkinson Barker Knauer reports on electricity markets. The first examined state efforts to address the exit of coal and nuclear-powered baseload generation from organized markets, while the second updated state developments and examined the loss of natural gas baseload. The third, with the Power Research Group, described a bleak economic future for merchant generators.