Item E-3: Commissioner James P. Danly Concurrence in the Result Regarding Grid Resilience in Regional Transmission Organizations and Independent System Operators

Commissioner James Danly Statement
February 18, 2021
Docket No. AD18-7-000
Order:  E-3

I concur in the result of this order insofar as it is the privilege of the majority to terminate a discretionary inquiry.  I write separately, however, to highlight my concern that the resilience issues raised in this proceeding have not been solved—indeed, in most cases they have not even been addressed.

Despite the fact that the Commission has been unable for the last several years to command a majority for specific, comprehensive action in this proceeding, we should heed the urgent need for reform that has been exposed by the extensive blackouts this week in the Electric Reliability Council of Texas (ERCOT)—where the Commission lacks jurisdiction—as well as by the strained conditions in the Southwest Power Pool (SPP) and the Midcontinent Independent System Operator (MISO).  This is the second supposed “perfect storm” of bad events in the past six months, the first being last summer when the California Independent System Operator (CAISO) was forced to implement rolling blackouts in response to heat and wildfires.[1]

I reject the perfect storm excuse.  There are any number of problems that lead to reliability failures, but I want to focus on one in particular: market failure.  The bulk power markets provide inadequate cost recovery, and thus investment, to ensure reliability.  There are several key failures that should immediately be remedied.  Existing dispatchable generation resources often do not have the opportunity to recover adequate revenues to continue operating or to invest in necessary equipment and upgrades.  Longstanding price-formation issues (i.e., artificially low prices) persist in most RTO markets, and proffered solutions have failed to achieve the fundamental objectives: ensuring reliability through rates that allow a just and reasonable return.  Many regions lack meaningful capacity markets, and the regions that do have capacity markets often allow state-subsidized resources to suppress prices such that the capacity markets cannot achieve one of the goals they were designed to achieve, which is to provide for revenues adequate to create incentives for the construction and operation of sufficient generation capacity to ensure reliability. 

Natural gas resources largely do not have firm fuel contracts.  In cases where there is sufficient pipeline infrastructure, those resources could obtain firm fuel contracts, but such contracts often are prohibitively expensive.  Any generator responsible enough to obtain firm fuel easily could find itself priced out of the market and on a quick path toward bankruptcy.  Other incentives to obtain firm fuel have proven inadequate.  For example, increasing penalties when generators fail to obtain natural gas is a poor substitute for a market structure that compensates them for ensuring adequate fuel supplies in the first place. 

Another increasingly serious problem is that intermittent resources largely are planned for, operated, and compensated as if they provide reliability benefits that they, in fact, are incapable of providing.  Thus the term “intermittent.”  The bulk power markets should treat intermittent resources as they actually perform, not as we hope them to.  

These represent but a handful of examples—there are many others.  Some are unique to particular regions, but others are pervasive.  I have worked to convince my colleagues to take the steps necessary to remedy these problems and will continue to do so.[2]  As long as we employ markets, they must be designed to—and actually succeed at—producing just and reasonable rates and ensuring reliability.

Doubtless there are technical issues at play in the recent events that will be investigated and perhaps mitigated.  I will carefully review the facts as they come out, including the details of system planning, market prices, generator performance (of every type of resource), natural gas pipeline performance, and root causes. 

However, one of the fundamental problems we must face is that we have tended to focus too much on low, short-term prices and development of new, clean power sources to the detriment of reliability.  I do not believe these latest power crises to be yet another perfect storm, but a case of reaping what we have sown.

The bottom line is this: as long as we have markets that procure the wrong types of generation and in the wrong quantities because the resources providing the greatest reliability benefits are insufficiently compensated, we will continue to see events like those in California and Texas.

For these reasons, I respectfully concur in the result.