March 23, 2021[1]
Right off I want to thank Chairman Glick for scheduling this conference and I compliment him, his chief of staff Pamela Quinlan, and the FERC staff for all the hard work they have invested in setting up this session and developing the questions.
The questions are well-chosen and I look forward to hearing from the speakers as well as the written responses.
And a great line-up of speakers it is! I know too many of the speakers to name-check everybody or I’d burn up my time, but I do want to recognize my successor as chair of the Virginia State Corporation Commission, Judy Jagdmann, who took over the gavel the second I was sworn in to FERC. I also want to note that Judy is the next president of NARUC, so I am happy she is here as a speaker.
For me, this whole topic really comes down to two major issues:
The first is quite simply whether the public policies of the individual states can be accommodated in these capacity markets while maintaining the goals of delivering reliability and least-cost power to consumers? And if you think they can, then please tell us how. So let’s call those questions 1 and 1 (a).
But the second issue I would raise is broader and I think it is time to put it on the table.
So let’s remember why these capacity markets were established in the first place. They were part of the wave of what was then called “restructuring” that took place in the late 1990s and early 2000s, and I think roughly half of the states did it. Under “restructuring,” states ordered their vertically-integrated utilities to divest or at least “functionally separate” their generation resources from the wires side of the business. The theory was that the wires network was a natural monopoly but the generation was not, and incumbent generation should be taken out of rate base and forced to compete with independent power producers (a/k/a “merchant generators”) in regional energy markets.
But to make sure there was enough power supply available to ensure reliability, RTO capacity markets were created to provide what was called the “missing money” that the generators could no longer get from being rate-based.
Now whether the restructured models have, in actual practice, been better for consumers than the state-regulated, vertically-integrated model is still very much a live debate. And it’s pertinent because that’s where these capacity markets came from. Because when you’re charting a path forward, you need to know the path behind you.
Restructuring was said to be the “textbook solution” to the cost overruns of rate-based generation, and it was – if the textbook was an economics textbook. But as so often happens, theory ran into reality over the past 15 years, specifically the political reality of a large multi-state RTO like PJM, with 13 states and D.C., each with different politics and policies.
And it’s important to remember that these capacity markets are not – and never have been – true markets, they are administrative constructs. And that’s not just a matter of semantics.
In a true market that’s competitive, consumers and efficient sellers win and inefficient sellers lose. A competitive market regulates itself and the participants don’t set the rules. So the regulator’s job is not to regulate a competitive market for outcomes but rather to protect competition from rent-seekers.
But an administrative construct, where the participants themselves are setting the rules,[2] is far more vulnerable to rent-seeking than a true market. Now when these constructs have delivered competitive results, consumers have won and real benefits were delivered – and I want to recognize that; I am not denying that there have been benefits to consumers at times.
But the losers went to the politicians in the various states and lobbied for subsidies and other forms of rents. As the PJM Independent Market Monitor, Dr. Bowring, has often said, “[s]ubsidies are contagious.” And there has been a veritable contagion of rent-seeking, certainly in PJM because it is so big and covers so many states. And I don’t have to recite all the examples; you’re well aware.
And that’s no knock on the very dedicated people who have run PJM over the past 15 years, people like Terry Boston, Andy Ott, Stu Bresler, on the markets side. I have tremendous respect for them; they did not cause the rent-seeking, they have often tried to resist it, but unfortunately with only limited success.
Another part of the record of the past 15 years is that, as a matter of policy, some of the states moved away from the goal of least-cost power and decided they wanted to pursue environmental goals and so they enacted mandatory portfolio standards and other environmental policies that were directly intended to affect the outcomes in the capacity markets, to change the generation supply mix.
Now let me emphasize that I don’t question for one second the prerogatives of any of these states to adopt their own preferred policies; all are clearly within their sovereign authority and I respect that. Tip O’Neill said all politics is local; he was right and I agree.
But we now have to ask:
While these multi-state administrative constructs called capacity markets may have been based on a sound or at least defensible economic theory at the beginning 15 years ago, does the reality of politics and rent-seeking in a large multi-state RTO simply make it impossible for these constructs to consistently deliver on the economic goal of reliable power at the least cost and at the same time accommodate individual state policies that conflict with that economic goal?
And if reality means they cannot, is the most realistic path now for the states to reclaim their authority and reclaim their responsibility for resource adequacy – because both go together – and chart their own courses to achieve the resource mix they want to fulfill their own preferred public policies?
By the way, I am not saying that the capacity markets should necessarily just disappear. I am asking whether – to accommodate political reality in a multi-state RTO –participation may need to be the state’s choice, with the capacity market non-mandatory, residual, or some other type of construct than what it has been. And we need to look at self-supply options as well to determine whether those need to be made more palatable to states which choose to self-supply.
I have not pre-judged any of these questions and I look forward to hearing today’s speakers.
And now back to you Mr. Chairman.