Thursday, January 24, 2019

Can RTO Stakeholders Find Consensus on Big Issues?

When FERC set out the requirements for RTOs in Order 2000 in 1999, it put stakeholders at the center of the rulemaking process, guaranteeing that generators, transmission operators, electricity buyers and public interest groups would have a voice in any rule change filed for commission approval.

Simeone | © RTO Insider

The stakeholder process works well for many routine issues, but it has shown an inability to reach consensus on major contentious issues, says Christina Simeone, who authored a May 2017 study on PJM’s governance. Simeone, director of policy and external affairs for the Kleinman Center for Energy Policy at the University of Pennsylvania, says some of the shortfalls in PJM’s stakeholder process resulted from compromises made under the Governance Assessment Special Team (GAST) process created in 2009.

Last week, the issues Simeone’s paper raised were back in the news, following complaints by FERC Commissioner Robert Powelson and regulators from Pennsylvania and Illinois over PJM’s decision in February to file two competing proposals for insulating its markets from state-subsidized generation. (See Powelson: ‘Erosion of Confidence’ in Stakeholder Process.)

RTO Insider’s Rich Heidorn Jr. talked last week with Simeone about her study on PJM’s governance, which asked “Can Reforms Improve Outcomes?”

Simeone points to PJM’s lower committees, where generation and transmission owners with multiple affiliates can dominate the voting on proposed solutions. The power dynamic is largely reversed at the RTO’s senior Markets and Reliability and Members committees, she says, because sector-weighted voting often results in buyer-side stakeholders (the Electric Distributor sector and End User sectors) exercising veto power over proposals resulting from the lower committees. PJM’s rules require a two-thirds vote from the members of the five sectors to recommend a rule change to the Board of Managers.

FERC REV RTO Insider Kleinman Center for Energy Policy

In 2015, more than 77% of the generation needed to meet PJM’s summer peak was controlled, in full or in part, by only 10 companies. Although each company had only one vote at PJM’s senior committees, their multiple affiliates gave them more power at the lower committees. Note: Capacity totals and affiliate counts for companies may have changed since 2015. | Simeone

Simeone recommends that states have a vote through their governors and that PJM review the makeup of its five sectors, noting the dispersion of stakeholders representing the fastest-growing industry segments: renewable energy (Generation Owners), energy efficiency (Electric Distributors, Transmission Owners and Other Suppliers) and demand response (Other Suppliers). She says FERC should require RTOs to re-evaluate their governance processes regularly to comply with the “ongoing responsiveness” principle of FERC Order 719. The researcher is now working on a second phase of the study, expected to be published in the fourth quarter, that will explore the issues further.

This interview has been edited for clarity and length.

RTO Insider: So, it’s been about a year since you issued this report, and you made some recommendations that you acknowledged probably would require a FERC order, because the existing sectors are unlikely to give up whatever advantages they have. I’m curious, have you gotten any feedback from PJM to your findings?

Panelists discussing the RTO stakeholder process at the 2017 annual meeting of the National Association of State Utility Consumer Advocates. Left to right: Christine Simeone; Denise Foster, PJM; John Hughes, Electricity Consumers Resource Council; Bill Malcolm, AARP | © RTO Insider

Simeone: I have not received formal feedback … I have briefed the Members Committee on the report, and I’ve briefed various different groups, [including the National Association of State Utility Consumer Advocates and the Organization of PJM States Inc. (OPSI).] (See Policy Churn, Voting Rules Raise Questions on RTO Governance.)

The shortcomings of the stakeholder process I think are starting to gain more attention. I would say there [has] been some general acknowledgement that the stakeholder process could use improvements; I think there’s disagreements on what those improvements could be.

RTO Insider: In your study, you have a continuum that shows, pure market efficiency at the left side, and at the right axis, pure politics. What do you mean by politics in that context?

FERC REV RTO Insider Kleinman Center for Energy Policy

PJM Decision Making Continuum | Simeone

Simeone: On one side it’s pure market efficiency: What would an academic economist say [about] how the market should be designed? On the complete opposite end of the spectrum, design choices could be made [based on] pure politics. You know, this stakeholder wants this, or this state wants this. The decision that ends up happening on market design falls somewhere on that continuum. And there was always a role for politics to interject in that process, because FERC had always envisioned the role of stakeholders.

Generally, these really controversial issues are about who pays and who is getting paid — and then fairness and power balance issues. And it just sets up this legitimacy compromise. If PJM chooses market design that goes too far toward an efficient market, it is going to be seen as illegitimate to some of the people who have politically motivated priorities. If it goes too far on politics, it’s going to be seen as illegitimate to the people who are prioritizing a competitive market outcome.

So, finding the right place on this continuum is critical to the organization that’s being seen as legitimate. This is very difficult … and the hypothesis is: Could a reform improve the effectiveness of the stakeholder process in finding that sweet spot on the decision continuum that preserves legitimacy?

RTO Insider: Your report mentioned sector self-selection. You said voting in the wrong sector can complicate caucusing and reduce trust among members. Did you hear examples of that in your research, or is this more a theoretical concern?

Simeone: Yeah, I think that this is not … a top concern. I think the bigger issue is making sure the sectors reflect the actual stakeholders in the market. Those five sectors have been in place since the RTO was formed. So, you’re talking about 20 years. In 2009, you had the Other Supplier, and the Generation Owner sector at about 300 members, and 117 members, whereas the other three sectors were between 30 and 60 participants. Fast-forward [to] 2016, and the growth in the Other Supplier [and] Generation Owner sectors has been huge. … This is where all the new market entrants are coming in — renewable energy, demand response, energy efficiency, marketer traders — and they’re all kind of being lumped in to these two supply-side sectors. … As they become more diverse, it’s not clear that any kind of sub-sector has its own voice.

Generation Owners’ share of votes at lower level committees increased from 22% to 28% of the total between 2009 and 2016, while Other Suppliers’ share increased from 55% to 57% — mostly due to an explosion in the number of affiliates. The three other sectors saw their shares decline. | Simeone

To me that’s one of the most important things — making sure the sectors reflect the participants. That will have some impact on sector-weighted voting; you may have to adjust weighting. But getting the sectors right, and then the weights right, is important.

The other thing is looking at some of these legacy deals [from GAST]. At the higher-level committees, only the voting members can vote. At the lower level, it’s the voting member, and all of the affiliates. … There’s going to be a huge supply-side bias through the effect of affiliates at the lower level. … The lower level voting data is completely opaque. You have no idea what’s going on there.

At the lower level, you only need 50% majority to get something passed. Ten companies, through their use of affiliates — [based on] one of the Seasonal Capacity Resource Task Force votes, where I know there was 190 votes cast — in theory, could have prevented anything from passing, because they had 108 votes out of 190 cast. Now, I have no idea if any of these companies voted, let alone all of these companies, but it’s just an illustration.

Of 185 votes by the Markets and Reliability Committee in 2015-16, 158 (85%) were by acclamation and all but one passed (99.4%). But only 12 of 26 sector-weighted votes passed (46%). | Simeone

RTO Insider: Right. And then at the upper level, you’ve got the buy side — End Use Customers and Electric Distributors — which can effectively block a two-thirds vote.

Simeone: Right. … Because the higher-level committee data is transparent, researchers from Penn State have been able to empirically measure the strong voting coalition on the load side. They can’t get anything passed [themselves], but they can block. And so, to me, this is a clear area of reform, where there should not be this splitting of power between the different committees.

Now, I’ve heard some people say, hey, well, this is kind of Congress, where you have an upper chamber and a lower chamber. But in the House and Senate, a proposal can originate from either chamber. Here … all the creativity in the proposal development happens at the lower level. Yes, you need a problem statement approved at the higher level, but all of the creativity — all of the details of the proposal — happen at the lower level.

So, if there were sector-weighted voting at the lower and the higher level, that might be a better alternative — more neutrality, and less bias, in the process. The next area of reform is transparency. And I think that’s critically important.

RTO Insider: Transparency of votes at the lower level?

Simeone: Transparency in votes at the lower and the higher level. Especially when you think about these larger companies, who own generation and distribution, what type of behavior are these firms exhibiting? Could they be using their votes on the regulated distribution side to advance proposals that would [benefit] their generation? You know, that’s an interesting question to look at. But because the data is protected, you can’t determine if that’s going on or not.

RTO Insider: Among your recommendations, you cited fairness issues, and you said to ensure RTO/ISO neutrality, there should be procedures in place to monitor, and correct for behaviors that create preferences, or prejudices. What kind of procedures might be effective at that?

Simeone: I think that’s an area to look into further. There have been some researchers at Penn, led by Cary Coglianese, a professor in Penn’s law school. And he found a variety of projects that talked about regulatory excellence. One of the sub-initiatives in some of these regulatory excellence projects talk about how you monitor organizational culture and how you put management processes and metrics in place to achieve the kind of culture that you want.

FERC has said that the RTO needs to be independent from any market participant. But the RTO also has to be responsive to participants at the same time.

So, what kind of processes can you put in place to acknowledge that, yes, an organization could potentially be biased? I think there’s a lot of work to do to dig further into that topic.

RTO Insider: So, you would put this more in the category of areas needing more research, as opposed to having real recommendations for such procedures at this point?

Simeone: Yeah. And I wouldn’t put that as the top-tier reform at this point. I think it’s important, but not quite as important as things like getting the sectors right, looking at some of these legacy deals, like the split of power, transparency and then the role of the states. I think that’s another really big one.

RTO Insider: Let’s talk about getting greater state participation. That was one of your strong recommendations. Is that related to your observation that it can be difficult to determine what the public interest is because it’s diverse and often conflicted?

Simeone: Exactly. … There are some stakeholders who have strong accountability over the RTO. FERC has this kind of legal accountability, but not the political accountability of the RTO. FERC can’t appoint a CEO to an RTO. Nor can they appoint board members to the RTO.

Transmission owners tend to be the stakeholders that are thought to have the most accountability over the RTO, because their participation is voluntary but needed to run the system — and also because PJM is operating their assets. And then the state has the ability and the right to put policies in place that affect the market. So, these are the stronger accountabilities. And everybody else has maybe comparatively weaker accountabilities.

This raises the question of, does this reduced political accountability benefit certain private interests to the detriment of public interest? And it’s a really complicated question, because what is the public interest? Some people identify [it] as competition, lowest cost, new technologies. Others may say it’s economic development or preserving industry that’s important to my state. Or pursuing this particular environmental goal. And the public interest can change over time.

… So, I think as market design becomes more political, the importance of states participating in the process increases. Not to make things more complex, but actually to kind of integrate those opinions in earlier on in the process. And it is not clear — it’s just a hypothesis — that this would improve outcomes.

I think OPSI should always be a part of the process. …The only problem is that OPSI can only speak [when all members are in] consensus. And clearly the issues in PJM are numerous, and there’s not always consensus on the part of the states.

So, is there an opportunity to have a complement to OPSI, where states can present their opinions on an individual basis, early on in the process? I don’t have all the answers to what that looks like, but I think it’s an important thing to look into. Part of the phase two research will be presenting to the stakeholders a little survey about how these other RTO/ISOs integrate state opinions into the process … and then trying to get stakeholders to think about what they feel would be options for a revised approach.

RTO Insider: You reference the D.C. [Circuit Court of] Appeals’ decision on [the minimum offer price rule]. [See On Remand, FERC Rejects PJM MOPR Compromise.] What’s your perspective on that?

Simeone: NRG [Energy] brought [the appeal challenging FERC’s order] where there was a supermajority stakeholder agreement on design changes to the minimum offer price rule, and FERC —

RTO Insider: — kind of undid the compromise.

Simeone: Not only did they undo the compromise, but they kind of went the other way. … And [the court] basically said, no, FERC, you can’t do that — you can disagree with the stakeholders and kick it back to them. But you can’t renegotiate the compromise.

So, for me, I think it has some interesting implications, because it raises the value of supermajority agreement. Could it spark some behavior that might yield some interesting outcomes? Sure. You know, if there’s certain stakeholders who are really motivated to achieve certain outcomes. Could they strike quid pro quo deals with stakeholders that don’t typically vote in the system? So, for example, the financial traders participate in the process, but not very frequently — only on issues that are important to them. So, if you’re trying to give the stakeholders supermajority, does it then become more valuable to court voters like that to [say] ‘Hey, if you vote for me on this issue, I’ll help you out on your issue.’ That was not explored in the report, because the decision came after.

RTO Insider: So, it raises additional questions. You don’t necessarily see it impacting stakeholder reforms at this point.

Simeone: Right. I think it raises the importance of getting the stakeholder process right. To be clear, there are some people who think the PJM stakeholder process is a complete mess that can never be right. And I disagree with that wholeheartedly. I think it’s really important that the stakeholders are involved. And I think there are many, many things about the stakeholder process that are very strong and critically important to informing these decisions.

But, like anything, the markets have evolved, the stakeholders have evolved, circumstances have evolved. The stakeholder process needs to evolve, and it hasn’t for almost 10 years now. So, it’s time. I think this should be seen as reform consistent with improving the process — which is a normal part of evolution rather than an attack on the stakeholder process, or kind of a judgment that the stakeholder process is somehow bad. I’ve just heard some people just be hyperbolic in their criticisms, and I don’t think it’s warranted.