Saturday, March 23, 2019

Q&A: PJM’s Ott Still Looking West

By Robert Mullin

In addressing last week’s annual meeting of the Northwest & Intermountain Power Producers Coalition (NIPPC), PJM CEO Andy Ott made clear his RTO is still in the running to provide wholesale market services to the Western Interconnection, despite the dissolution of its partnership with Peak Reliability. (See related story, Western Regionalization ‘No-brainer,’ PJM CEO Says.)

PJM andy ott western market

PJM CEO Andy Ott | © RTO Insider

After his speech before attendees, Ott sat down with RTO Insider for the second time this year to discuss PJM’s perspective on a Western market, this time in the aftermath of Peak’s decision to wind down its operations next year. (See PJM Chief Confident on Western Market Proposal.)

The interview has been edited for clarity.

RTO Insider: In a press conference last month, NERC CEO Jim Robb said he had heard Peak Reliability’s effort to develop a Western market characterized as a kind of a Hail Mary pass intended to maintain their financial viability. Would you agree with that assessment?

Ott: From what I understood from my conversations [with Peak CEO Marie Jordan], they were getting feedback that their costs for reliability services were above what others like [CAISO] or SPP felt they needed to charge. So I think Peak’s approach was if they were going to provide high-quality reliability services, they had to find a better way to pay for the other infrastructure needed to provide those services. Their constituency was saying if you would like to provide market services like others do, you may be a viable alternative. So [Jordan] was actually getting asked that question.

They were facing a cost structure that people were telling them was unsustainable, so their answer could’ve been, ‘We either fold the tent and more or less do the wind-down, or do something else.’ From a [different] point of view, some people thought it was a Hail Mary pass because it came so late in the discussion. The notion of bringing in someone like us who does markets, it was certainly doable, but for them, they couldn’t sustain that project for any length of time because they were facing cost pressures.

How unexpected was it that things fell apart as rapidly as they did after Peak made the announcement to pursue a market? Did that take you by surprise?

No. From our perspective, they’re going to have regional markets in the West. It’s just a matter of time and how they evolve. The thing we didn’t have in the West was the relationships with people, and we also didn’t have a real-time model that could be stood up fairly quickly. Peak brought both. We had the market expertise, but we didn’t have that, so it was a pretty easy decision for us to pair up with them. That said, once [Peak] introduced us, we were able to build our own relationships. And then the real-time model, based on my understanding, is going to become available to everybody, so I don’t see that as being a real challenge.

If all you provide is reliability services, there’s a certain overhead that’s required to do market operations, grid operations and reliability services. That infrastructure needs to be in place to do any of those three. If you build the infrastructure to do more than one of the three, then the costs for each one of those services per unit goes down. So what we’re saying is that we can’t be competitive in providing just reliability services, but if we could provide RC [reliability coordinator] services plus grid operations plus markets or some combination of those so that lowers the rate — because that’s essentially what [CAISO] is doing.

Does the balkanization of RC services in the West complicate things for PJM?

If you’ve talked to Jim Robb, I’m sure he’s told you this: Most folks on the reliability side preferred a single RC in the West. But it was obvious 18 months ago that Peak was saying, ‘I’ve got California and I’ve got Mountain West both telling us it’s too expensive,’ it was already going to be balkanized. I think the attitude in the West is that it’s too expensive to maintain the West-wide [RC] model because other folks want to do their own thing, so as you pull larger regions of the West out, the costs for everybody else goes up. So I think it’s inevitable that it becomes more regionalized. So for us, I don’t think it’s something we’re causing, we’re just observing it’s going to happen. It’s a fait accompli at this point. It obviously helps us because if people want to look at alternatives, then they will look at us.

You mentioned in your [NIPPC] speech that there’s interest [regarding PJM] in the Southwest, not so much in the Northwest. What entities in the Northwest have you approached?

If I’ve had conversations with folks, I’d rather not talk about that. I don’t feel comfortable. Suffice it to say, there weren’t many people in the Northwest that wanted to have conversations because they thought they already had a path forward. Hopefully that will change.

Compared with CAISO, most RTOs appear to have a different model of stakeholder engagement, with CAISO probably being the most staff-driven, and MISO and PJM, for example, being more stakeholder-driven. What advantages do you see in the latter model?

I think certainly in a Western context … who better to decide what the rules of the road should be than the actual stakeholders of the market? And I am a bit biased because that’s where I come from, but my people aren’t wise enough to drive. I mean we can provide services, we can consult, we can give them the analytics, but at the end of the day, the RTO is more or less a service provider, an information provider to stakeholders who make decisions with that independent information. I just think it’s a better model because it’s more transparent.

Occasionally we have to step in and do something controversial because our mandate is to have nondiscriminatory results, but I think 90% of the issues are resolved through that consensus, and I think it’s more healthy. And out here [in the West], if people feel they’re not being fairly treated and they don’t have any other option, how sustainable is that?

You talked in your speech about the relationship [between a new market] and the Energy Imbalance Market. What kind of complications would there be in having an overlay with that market?

This goes back to the mindset of folks saying, ‘Either I do EIM or I have to do this regional market, and I have to choose between them.’ And that was my point [in the NIPPC speech] — you don’t.

I mean, the only difference is whether you are participating in the EIM as a group or individually. If you’re participating as a group, then maybe you’ll have a say in how prices are formed, where today you don’t have a say.

If the California legislature won’t give up control [of CAISO’s governance], well then you’re having a peer-to-peer discussion and that goes to FERC. So the point is, if [CAISO] won’t change its price formation, then the entities outside will say, ‘We got together and we decided we’re going to price ramping this way, and we’re going to price hydro this way,’ and then you have to make those interact at the border. And so when we’re selling to you, you’ll pay our price, and when you’re selling to us, we’ll pay your price, and that’s interregional coordination.

The whole point is that market-to-market coordination creates huge efficiencies. In fact, you’d have higher levels of trade than you would with the EIM, because EIM is individual, so if one person creates a constraint on another person’s system, you have to stop. If you combine them together and say we’ll manage constraints together, we’ll have more throughput. So the whole notion out here that they have to make this choice between EIM or not is just fiction.

I hope they’ll go back and think about this notion of participating as a team or a group, banding together and then participating in the EIM, and then you can have a conversation about, ‘Well it doesn’t matter what California says about price formation, we have an opinion too. And if there’s a conflict, we’ll resolve it at FERC.’ And I know that scares some people, but my point is, who [is CAISO] going to trade with?

So it would be something like a joint operating agreement? That would be the relationship?

Yeah, it’s a market-to-market coordination joint operating agreement. There would be an agreement approved by FERC. This is not unheard of. This is the way everybody else does it. We have them with New York, MISO, [the Tennessee Valley Authority], with Duke [Energy], so it’s pretty standard.

I’ve talked with some in the Northwest who say the idea of applying the standard market design is outdated and not really applicable to the region. What do you think about that?

This is key: The market design has to adapt to the region, not the region to the design. So the whole mindset back in the day that you have a standard market design and we have to adapt to it was never going to work. In fact, we don’t even have that. There’s differences between MISO’s design and PJM’s design because of the regional structure.

But for the West, we’re not saying you have to take our design. Now there’s stuff we’ve learned where every place in the world there are certain key things — like economic dispatch — that are always going to work. But as far as hydro coordination out here, it’s a huge deal, so the market side has to adapt and let hydro coordination be a primary design criteria.

Is there a timeline you’re operating on in the West?

No, it really depends on the folks here. There originally was a timeline because Peak had a certain burn and had to have an answer by a certain date. But once Peak and PJM dissolved their relationship, there’s no timeline on our side. It’s what the region wants. And this is why we considerably slowed down and we’re talking to people at a more casual pace. My opinion is, the quicker the better for them.

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