Electricity Markets

Consider customer benefits first in CAISO changes

An issue that had been dormant since last year — expanding California’s energy markets to other parts of the Western United States — resurfaced at a hearing in the Assembly on June 7. Despite a major push by the Governor and significant public attention in the past year, “regionalization” of the grid had been placed on the back burner except for a few discussions in wonky energy policy circles. With the issue rising again, it’s important to revisit the facts and arguments on regionalization with the goal of finding consumer benefits.

The basic regionalization proposal would expand the operation of California energy markets, now administered by the California Independent System Operator (CAISO), to neighboring states. The CAISO hosts a sophisticated computer platform that runs markets and generates wholesale electricity prices every 15 and 5 minutes, like a commodity market. Few understand how difficult this is as the system must be adjusted every 4 seconds to maintain the reliability of the modern electricity grid. The CAISO also has a strong role in determining which grid transmission projects get built, and how much energy supply is required. By and large, neighboring states don’t use such a complex market to operate the grid.

Proponents of expanding the CAISO claim not only does this approach lower costs, it will help integrate renewable resources and lower carbon emissions across the West. Renewable resources such as solar and wind are intermittent and unpredictable, which conflicts with the high reliability demands of consumers. Furthermore, proponents of regionalization claim that a larger geographic footprint over which to spread this variability will solve potential grid reliability problems as California moves to 50 percent or higher levels of renewables under existing law and bills proposed in the Legislature. However, none of these claims of benefits have been shown to be convincing or compelling, even after detailed analysis; as a result, action on regionalization proposals has diminished.

Beyond any technical or energy policy considerations, is politics. Today the CAISO is run by a Board appointed by the Governor of California. No other Western state is likely to accept California control over a Board that will be responsible for their grid reliability. Changing the Board requires the Legislature to change California law. This Board also makes multi-billion dollar decisions that affect transmission development and resource procurement. Publicly-owned utilities in California and other consumer advocates are highly concerned about sharing costs borne in other States. And as you might imagine, other states don’t want to share California’s costs either.

Multi-state markets are successful in several other regions. Why is the West different? The reason is straightforward: The energy policies and priorities of each western state differ significantly. California is a leader in addressing climate change, as well as expanding renewable energy and carbon-free resources, and is willing to increase consumer costs to do so. Other states are more mindful of electric rate increases. This financial conflict and mismatch of motives creates greater uncertainty about impacts and benefits of regionalization.

There is a way forward. Regional expansion of the grid, if done right, should lead to consumer benefits. However, there’s no clear indication that expanding the CAISO will result in any real consumer benefits. The devil, as they say, is in the details.

Meanwhile, numerous utilities throughout the West have taken steps to increase regional collaboration, without the need for a change to CAISO governance. These ten utilities are voluntarily joining together to create the “Energy Imbalance Market,” where they pool generation across the EIM footprint to lower costs and emissions. It seems logical to let this voluntary evolution of energy markets continue without weighing it down with a Legislative mandate to try an untested, uncertain new governance structure with unknown value.

We owe it to consumers to let this voluntary system work, and give it a chance to deliver the lowest costs possible, while meeting the highest standard of reliability and environmental stewardship.