What’s the Big Deal About CAISO Regionalization?

The key to successful regionalization is a governance framework that clearly preserves each state’s existing authority to control the resource planning, resource mix and resource adequacy of its jurisdictional utilities.

In the waning days of the recent California legislative session, bill language was introduced into the final weeks of action in Assembly Bills 726 & 813 by Assembly Member Holden that would have launched a process to transform the California Independent System Operator (CAISO) into a regional grid operator.  Ultimately, the bill “died” this year and will be revisited next year to allow parties and the legislature to consider the issues in more depth, without the time pressure attendant to the last week of session.  But, with the drama these bills caused this year in the legislature, one should ask the obvious question: What’s the big deal about CAISO regionalization?

The Holden Bills would have directed the current Governor-appointed CAISO Board to develop a plan to evolve the existing governance model to incorporate a fully independent board no longer subject to control by the State of California (CA).  The plan was to be submitted by the fall of 2018 to a new body consisting of four legislators, the Governor or his appointee, and the heads of the CPUC, CEC and Air Resources Board of CalEPA.  If that committee approved the plan, it would go into effect.  If not, the status quo would be retained.

So, why is this a big deal and why should Californian’s care?  Here is a short list:

• Reduced rates for customers across the state: More efficient day-ahead unit commitment and dispatch of resources, beyond what can be achieved through the Energy Imbalance Market (EIM), resulting in reduced costs for customers across the footprint;

• Reduced reserve requirements, resulting in fewer unnecessary fossil power plants being built, both for peak demand and operating requirements, due to the regional diversity of loads across a broader footprint;

• Smoother integration of increasing renewable resources due to a more diverse supply, both technologically and geographically, and the potential to reduce otherwise expected curtailments of renewable generation; and

• Better regional transmission planning and elimination of unnecessary “pancaked” transmission rates:  Elimination of “pancaked” transmission rates across multiple Balancing Authorities (BAs) will facilitate increased trade in surplus renewable energy. More efficient transmission system planning across a broader geographic footprint will help ensure that only the most cost-effective system additions are approved.

These potential benefits do not come without risks, however.  While the CAISO has always been subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC) and cannot change its rules and tariffs without FERC approval, opponents have voiced justifiable concerns that FERC may be more inclined to intervene in its policies and activities if the entity becomes multi-state.  Further, a number of other Western states do not necessarily share California’s policy of rapid decarbonization of electric supply, and some state economies are heavily dependent on revenues generated by the coal industry.

At the same time, the relatively high retail rates in California cause trepidation for regulators in other states, who fear that joining a California-based regional entity could cause higher prices for their consumers.  While the CAISO is a transmission system and market operator and not a policy-making body per se, there is understandable angst that, set free from the oversight of the CA Governor and Legislature, the new regional entity may become less accommodating to our state’s energy policy than it is today.

It is my belief that there are real and substantial benefits to regionalization, but I also believe that the concerns of the opponents have been given short shrift by the proponents.  The key to successful regionalization is a governance framework that clearly preserves each state’s existing authority to control the resource planning, resource mix and resource adequacy of its jurisdictional utilities.  This is achievable, but it will be a delicate balance.

The appearance of such important legislation at the very end of the legislative session did not provide anyone with adequate time to assess the specific provisions, let alone propose substantive amendments.  This was unfortunate, and may have served to foster the impression among other western states that California does not have its act together.  We can and must do better!  I hope that this important debate does not lie dormant until January, but moves forward expeditiously via discussions among all the interested parties.  At a minimum, Chair Holden and the Governor’s Office should work with the parties not ready for regionalization in California (e.g., hello, labor) to identify a pathway for future success.  Otherwise, it could remain an unobtainable holy grail that will only be used to leverage other asks in the legislative sausage making irrelevant to achieving the benefits mentioned in this blog .