Energy Markets:

FERC's Brownell calls for national monitoring system for electric grid

As the debate over the reliability of the U.S. electric grid plays on, the Federal Energy Regulatory Commission is undergoing some major changes. The Senate recently confirmed three new FERC nominees. During today's OnPoint, outgoing FERC Commissioner Nora Mead Brownell looks back on her five years at the commission. She discusses the commission's handling of the fallout from Enron. Brownell also stresses the importance of technology in making a difference in the management of the electric grid.

Transcript

Mary O'Driscoll: Welcome to OnPoint. I'm Mary O'Driscoll. Our guest today is Nora Mead Brownell, a commissioner at the Federal Energy Regulatory Commission. Welcome to the show.

Nora Mead Brownell: Thank you. I'm delighted to be here.

Mary O'Driscoll: Well good. And I guess you're going to be there just probably for a couple more weeks anyway.

Nora Mead Brownell: At least a couple days anyway. I'll be there to vote. That's the important thing.

Mary O'Driscoll: There you go, there you go. Well, it looks like the Senate, I wanted to talk about that, it looks like the Senate matched it with some pretty unprecedented speed to confirm your replacement and the other two commissioners.

Nora Mead Brownell: Yes.

Mary O'Driscoll: This new commission is going to be very interesting. It's going to have a real Western bend for the first time. Considering how the West feels about markets, energy markets and electricity and that kind of thing, what do you think the effect on the commission is going to be?

Nora Mead Brownell: Well, I think the important thing about commission is that you've got three really incredibly smart people, longtime professionals, who bring a variety of perspectives to the table and have different disciplines, so I think there's going to be lively discussions on a lot of issues. But the idea that you have Western and Eastern and Midwestern commissioners is just not sustainable. I mean the reality is Commissioner Spitzer was born in the East, but you get, it's a federal commission. And you really look at it from a federal perspective. And as they say, the Supreme Court justices grow and change in their jobs. People do as well. And I know all three of them, and I don't think any of them bring kind of a particular bias one way or the other.

Mary O'Driscoll: OK, well I'm asking that because it's very interesting in the sense that you had 12 Western senators recently send a letter to FERC regarding the California market proposal that's come up. And it's raising a lot of issues in the West, not just California, but in other states of the West. You have a commissioner coming in from Nevada, one from Arizona, bordering on California, that big California market. Do you think, you know, does this pose any new kinds of issues or new kinds of angles that you think the commission might be taking on these issues?

Nora Mead Brownell: No, because we base our decisions on a record. And I think often in the rhetoric that gets forgotten. And while we certainly acknowledge that we are created by Congress, we also acknowledge that we are bound by due process administrative procedures. The California market design has been in the works for five years. There have been over 300 meetings that I know of that included representatives from the Northwest and the Southwest. The Northwest particularly has had something called CRPC, which is state commissioners. And then they formed something called SIGWE, which has all the stakeholders to deal with the development of market design and potential seams issues. I think that's the record that people will look at. What they will ultimately do or not, I don't know, but it strikes me that five years is a long time. Particularly when the agency has been telling California in order after order after order after order that they really needed to get their act together and get their market design, so that we don't have the situation that not only hurt California, but certainly hurt the Northwest particularly, but the entire West.

Mary O'Driscoll: All right. Well, speaking of five years, you've been at the commission for five years. So that means you are at the commission doing the initial cleanup after the whole California market meltdown and the whole Enron situation. Are you pleased with how the commission handled that? Are you pleased that, or do you wish it would have happened faster? Just some perspective on that.

Nora Mead Brownell: Certainly. Well, I certainly wish that we could have cleaned up California faster. I think that that was our expectation when we came in. The challenge was that there were continuing revelations of market dysfunctions, of behaviors that were unacceptable, of market design flaws. And so it wasn't as if we were presented a neat and tidy package. And, to me, that also speaks to the really important work of the commission, is get the rules right, because if the rules are right and the design is right those dysfunctions aren't as able to destroy a marketplace. We can't control supply and demand. If people will not build and people look for supply and look out over the long term, we can't change that, but we can change the effects of that in the marketplace if the rules are right. Which is why, again, I feel so strongly about getting the market design right in California. Underlying some of the problems were that the rules were inadequate to address the issues that hurt everybody.

Mary O'Driscoll: OK.

Nora Mead Brownell: So I wish we could have done it faster, but we had the ongoing revelation, we do have due process in this country. You know, there are days I like it and days that I don't. Then, against that, you have the backdrop of Enron and then more trading revelations and on and on and on and on. So I think that what has transpired is lots of lessons learned, including it's almost impossible to mop it up for two, three, four, or five years later. And that's, I think, why people have gone to settlements. And I think why we even see courts saying, hey, let's get these things settled, because there is no perfect solution.

Mary O'Driscoll: OK. I wanted to ask you, talking about market designs and that kind of thing, when you came to the commission the big push was on standard market design.

Nora Mead Brownell: Right.

Mary O'Driscoll: The old SMD.

Nora Mead Brownell: Yup.

Mary O'Driscoll: It was the keystone of the whole commission's, you know, the commission's policy back then. In retrospect, was it a bad idea or was it pretty much deep-sixed because of political and regional concerns?

Nora Mead Brownell: Well, I think the concept, while not perfect, was a good idea. I mean imagine if we had regional financial markets. Imagine if the regional rules for trading, for investing, were different region by region. There would be certain inefficiencies in the marketplace, there are and there will continue to be inefficiencies in the marketplace, but having said that, the reality is that regions did not want to standardize markets. So we're accepting a certain amount of transactional inefficiency and some barriers to entry for the foreseeable future. But is what it is. What I do think SMD did, it galvanized, by the way, a huge amount of money to be used to oppose it. I can't honestly say I believe it failed on its merits. I think there was a huge amount of money that went into making sure it failed. But, you know, that's life. It's not perfect. I think what it did do was make everybody stand up and say, OK, Congress told us to really open access in 1992. We still haven't achieved that goal. How do we do it? And we don't want SMD, so how are we going to address it regionally? And I think it really elevated the debate, sometimes in a not so helpful way, but I think there was a lot of substance in the discussions. Some of that will be dealt within OAT reform, some of that has been dealt with at the regional level and some of it is being dealt with on regional initiatives, like the wonderful Rocky Mountains Initiative that then Governor Leavitt and Governor Freudenthal started. So that regions are taking infrastructure and market issues, in some cases, in their own hands in a pretty effective way I think. So more than one way to skin a cat. That was one idea. It didn't fly and life goes on.

Mary O'Driscoll: Do you think there's any way it could have flown? I mean this is something that, it took a long time for the commission to finally say, OK, we're just not going to do it. I think there was pressure from Congress, pressure from all over the country, in the West and the South primarily. Was it anything that, I mean was it sold wrong? Was it just an idea whose time has not yet come? Is it something that you think might happen down the road?

Nora Mead Brownell: Well, it clearly was an idea whose time had not yet come.

Mary O'Driscoll: Right.

Nora Mead Brownell: You know, there have been arguments that it wasn't discussed enough. We did have over 40 or 45 technical conferences, so I'm not sure who we missed in that discussion, but apparently we missed someone. I think, well, it hung out there a long time I think because as long as it was out there people were talking and talking and talking. So I don't think that it was hanging out there in any expectation that people would wake up and say, boy, this is a great idea! Let's move forward. And you have to remember, in about almost two thirds of the country it was already substantially in place. So I think it failed, it's an idea who hasn't come. I mean people were frankly protecting turn in a way that I don't believe has necessarily or will necessarily, in the long term, benefit customers. And you have to believe that when, in fact, most of your complaints come from certain parts of the country and you see the inefficiencies there. But we'll get to it.

Mary O'Driscoll: You have been a very big proponent of competition in electric markets. But competition really seems to have not necessarily stalled out, but there are a lot of places where it really hasn't taken. And that its most of what, I guess, they call the dark spread. You know, the spread between natural gas prices and nuclear and that kind of thing. How do you get out of that and get to the goal that you're looking at, to have this competition that's really based on prices instead of being able to take advantage of what the market situation is right now?

Nora Mead Brownell: Well, I think you get there in a couple of ways. And I think first you have to distinguish between wholesale and retail competition. Because I think, you don't, but in most of the country, when they're having the discussion you find out after, you know, kind of an hour or so they're really talking about retail competition. So I think we need to focus on a robust wholesale market in the country. And I think it can't be based purely on price. It needs to be based on ability to attract capital, ability to create shared risk business models. While I'm not happy about what happened to the IPPs in the meltdown, the bottom line is investors had taken the risk. Investors have a vote, they vote with their money. Native load customers do not have a risk, so it worries me that we are going back, in some cases, to a model where we just throw everything at rate base. Inherently, if you don't have financial discipline, if you are not held accountable, you don't have to innovate, you don't have to look at alternatives. And least cost is not always the best, because we're building 20-year infrastructure. So I think that we need to focus on wholesale markets and, frankly, we have. And there are benefits that you can quantify and see both in terms of reliability, but in actual value to the customer throughout the country. And I think we're also confusing competition with what's happening when price caps go off. And we saw that in Maryland. People don't talk about, gee, we got a free ride for seven years as fuel prices were going up. They talk about, oh my God, today we're confronted with this. And so I think that we've used a lot of artificial means to mask price signals and that isn't what markets do. Imagine if price signals were masked in any, at the New York Stock Exchange. Well, you know, you didn't know what you were buying. But I look at models like Microsoft and Google, where they wake up every day and say what new thing can we do for the customer and how efficiently can we deliver that? There isn't any of that economic incentive in that standard old regulated model. Further, technology is changing the way we do business, it already has. We manage the grid differently today than we did 10 or 15 or 20 or 30 years ago. That was one of the things that Bush, the act in 1992, we're looking at a variety of new technologies. Why aren't they in this marketplace? Because we don't have the economic signals to send to them the way we did in the telecom market.

Mary O'Driscoll: OK. Well, can't have a conversation about electricity without talking about reliability.

Nora Mead Brownell: Yes.

Mary O'Driscoll: Chairman Kelleher just told Congress that New York may be facing problems because two power lines went down, from upstate New York down to the New York City and Long Island area, and that they could be facing problems. Do you agree with that? Are you ...

Nora Mead Brownell: I think our grid is fragile no matter where you go in the country, even some places that say that it's a perfect world in a perfect system. I don't know how perfect it is when, for example, in one part of the country, who shall go nameless, customers are paying more for generation, that just happens to be owned by DM Covney, gee whiz, because the grid is so fragile that it literally can't get to stranded generation that's cheaper and more efficient and cleaner, that's almost right next door. I think the vulnerability of our grid, because of efficiency, security and reliability, is a problem no matter where in the country that we go. And because you are so thin the least little thing, the tree falling, God forbid a security incident, a fire in the West, all of those can change the equation overnight. Now we're never going to have duplicate systems. And we're never going to have kind of double transmission lines, but lacking real transparency on the grid, we should have a national monitoring system that tells us what's happening on the grid in real-time, all the time. We could fix things faster. We could be more efficient. It could also help them better planning. We are now 20 years, 30 years underinvested in transmission, some would argue also in distribution. We're now looking at big baseload generation, but we don't have the information to really make the right decision. So you could end up building a lot of stuff in the wrong place or the wrong stuff. That impacts reliability as well. So we need the highest possible reliability standards, so that we can know who's a good operator and who's not. And who is spending money to train their people, to upgrade their control rooms and who is not. Because those people should not be playing on the highway with the big kids and shouldn't put it all at risk. But the reliability problems we're seeing now are a function of underinvestment and not having serious reliability standards that would force people to play to a certain standard.

Mary O'Driscoll: Ok. Well, we're out of time. We're going to have to end it on this note. I'd like to thank Nora Mead Brownell for joining us and thank you for joining us. See you next time on OnPoint.

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