Energy Policy:

FERC's Kelly sees no adverse effects to new California market design

As a new, five-member Federal Energy Regulatory Commission starts up a new session, it faces several questions regarding the design of Western energy markets. During today's OnPoint, FERC Commissioner Suedeen Kelly explains the commission's decision regarding California's revised market design and how the decision may effect the rest of the West. Commissioner Kelly also talks about being the only Democrat on the commission and discusses Order 888.

Transcript

Mary O'Driscoll: Welcome to OnPoint. I'm Mary O'Driscoll. Our guest today is Suedeen Kelly, a member of the Federal Energy Regulatory Commission. Thank you very much for coming today.

Suedeen Kelly: Hi, Mary. Thanks for asking me.

Mary O'Driscoll: The commission last week approved a new market structure for California that was a controversial decision, but it was softened somewhat by some of the requirements that you imposed on the California ISO for actually implementing it. But some members of Congress from the West, and your state of New Mexico included, earlier, before you had made the decision, weighed in against this proposal. So how did the commission address their concerns?

Suedeen Kelly: Well, I think that the concerns have to do with whether or not this proposal is going to improve the California market. And I don't think they understood exactly what the proposal was, and so we went to great lengths to try and explain what it was going to do.

Mary O'Driscoll: OK.

Suedeen Kelly: And I think that that's actually a helpful way to describe the decision. The problems that California had in 2000 related to primarily their market design. So one of the problems they had was flawed market rules. Another problem they had in 2000 was in adequate resources. And a third problem that they had was market manipulation. This is not a new market design, but an improvement on the existing market design. Currently the market design is pretty weak and California's just been limping along, waiting to implement a market design that really works. So I think the other point to stress is that this has been the outcome of six years of careful analysis. I don't know that the members of Congress understood that. The experts and the participants in the market that were hurt by the electricity crisis have been working very carefully this time to ensure that the new market design actually works.

Mary O'Driscoll: Well, and this also allows California to pursue such things as demand side management and demand response in a market structure, which, as you said, they've been limping along ever since the 2000/2001 meltdown. Are there any other specific things that they're able to do now under this revised market design?

Suedeen Kelly: Yes, in addition to having demand side compete equally with supply-side resources, the resource adequacy provision of this market design is very important. As I said before, and as you know, California's problem in 2001, one of the major problems was they just didn't have enough generation. And they, frankly, still don't have enough generation, but the California Legislature mandated resource adequacy.

Mary O'Driscoll: Resource adequacy being that you have to have a certain number, a certain amount of resources available in case the demand goes up or down.

Suedeen Kelly: That's right.

Mary O'Driscoll: OK.

Suedeen Kelly: And the Legislature told all utilities in California that they had to meet resource adequacy requirements. And this takes that California state requirement of resource adequacy and also puts it into the California ISO market design. So we think that that's a major step forward in solving one of the problems that led to the California crisis.

Mary O'Driscoll: OK. Some of the concerns were that this would also kind of have a domino effect on other areas of the West, because of what they called seams issues, what are called seams issues between the California market and other parts of the West, in Nevada, Arizona, and the effect on the rest of the region. What about the effects on the rest of the West?

Suedeen Kelly: Well first of all, let me talk about seams. Seams exist when one part of the country or the region buys and sells electricity differently than other parts of the country do. And California has been doing that since the 1990s, so there's always been a seam between California and the rest of the West. The question is whether this is going to, how this is going to change the seam. We are going to have technical conferences to explore that issue and to ensure that there are no seams, and to hear whether there are any real concerns. We've looked at it very seriously and we don't see adverse impacts. And we've also required the California ISO, in this order, to implement tests, so that we will be able to test it carefully to determine if there are any problems with this design before it's actually implemented. But we'll nevertheless have a technical conference to look at the seams issues. One of the things that we actually think is going to improve the seam, if you will, is that the new market rules allow for more transparency in electricity prices. And right now sellers outside of California are selling into the California market where the prices are not that transparent. So one of the changes to the market design is to increase those electricity prices, make it more transparent, make it easier for sellers to sell in. And we think that will be a big improvement.

Mary O'Driscoll: OK. Well, this decision helped kick off this new FERC, where you've got actually the first five-member commission in several years, at least since your tenure. How has been a member of a five-member commission now changed your perspective on the work that you do at the commission?

Suedeen Kelly: Well, it makes it much more lively and, overall, I think Congress made a great decision in having a five-member Federal Energy Regulatory Commission. The issues that we deal with are complex and they're national issues, but everyone looks at these issues differently. Traditionally, the FERC commissioners have not been split along partisan lines, and I don't believe that we will be split along partisan lines with this commission. What it does is brings the perspective of different people with expertise in the energy industry, with experience in the energy industry, and with real commitment to solving these problems. It brings their expertise to the table and better informs our decisions. I'm very pleased with it, with all of them.

Mary O'Driscoll: OK. Now you are the only Democrat on the commission. You were before and you remain the only Democrat on the commission. Now, however, with the addition of the new commissioners you might find one or two more votes every once in a while that might be more along your lines. And I'm thinking in particular of the one vote that went, your one dissent that was most notable, which was on an LNG siting issue. I want to know, what are you looking for? What kinds of concerns do you have in mind when you're looking at LNG siting issues or pipeline siting issues and that kind of thing?

Suedeen Kelly: I'm looking at the overall safety of the LNG site. And in the case that I dissented on, Cove Point, there were many unresolved safety issues that I felt were so big that the site should just be rejected. The majority thought that it could put conditions on it and ultimately that the conditions would take care of the problem or if the conditions couldn't be met, that the plant wouldn't be built. But I thought that it was important to say that this particular site, which was 22 miles up a very narrow river, involved traveling under a number of bridges, some of which had to be removed to allow the tankers in. It involved a terminus where there wasn't enough for the tanker to turn around and get out, and so there was going to have to be a lot of dredging. It was just on a safety basis, not to mention the environmental and socioeconomic impacts, unacceptable.

Mary O'Driscoll: Well, that, Cove Point had significant local opposition.

Suedeen Kelly: Did I say Clove Point?

Mary O'Driscoll: Yes.

Suedeen Kelly: Oh, I'm sorry. I didn't mean to say Cove Point.

Mary O'Driscoll: That's OK.

Suedeen Kelly: Fall River.

Mary O'Driscoll: Fall River, thank you very much.

Suedeen Kelly: Thank you, thank you very much.

Mary O'Driscoll: The Fall River plant, it had significant local and state opposition to it as well. One of your new colleagues, Jon Wellinghoff, said that he respects companies that go in and if they find significant opposition they say, OK, we're going to go and find another place for it. Do you think that that's a good, is that a good position to have? Or are you looking at larger issues rather than the local opposition? Because his view is that you can't build anything if you don't have local support.

Suedeen Kelly: Well, I certainly take into account, in my decisionmaking, whether there's support for it, but I think that the critical factor with LNG facilities is safety.

Mary O'Driscoll: OK. Well, I wanted to get onto some of the issues that are going to be coming up in the coming months. One in particular is some important work on return of equity, return on equity for natural gas pipelines. I don't want to talk about that case specifically, but generally speaking when you're talking about energy infrastructure, pipelines, LNG plants, transmission lines, what do you think FERC's policy needs to do in order to be able to attract investment, private investment to these important infrastructures?

Suedeen Kelly: Well, thank you for mentioning that we can't talk about any pending case, and indeed we can't. But one of the questions that has been asked is with the development of master limited partnerships, which has been a vehicle approved by Congress as a corporate way to, well, it's not a corporation, it's a partnership, as a way to get infrastructure built. And it's been used particularly in the oil and gas industry to build pipelines. And the question has been presented, does the nature of that entity, an MLP, require us to handle differently our process for determining what the appropriate return on equity is? And traditionally our process has been using the discounted flow model, and that's been approved by the DC circuit as an acceptable way to arrive at a just and reasonable rate, and a good ROE. And I do not see, on the commission, much interest in changing that, but I do see interest across the board in ensuring that the proxy group that's used for the discounted flow model be an appropriate one and not contain any anomalies.

Mary O'Driscoll: OK. So you think that maybe not just in specific cases, but just across the board you need to look at the new structures that the industry is using to be able to put their business models together?

Suedeen Kelly: You do. You do, and you need to facilitate the use of those structures.

Mary O'Driscoll: OK. Another issue that you've got coming up, another important issue is the reformation of Order 888, which its 10 years old already, and this is the open access rule for open access transmission. And the commission is looking at kind of fixing it up a little bit to make it adapt to the market realities of today. What specifically are you looking for in any kinds of changes? What, I don't want to have you prejudge anything, but what are you looking for when you're trying to reform that? What are some of your concerns about Order 888?

Suedeen Kelly: Well, really we don't have to worry too much about prejudging because it's a rulemaking. We can talk about policy freely. What animates my concerns about Order 888 are the many, many, many complaints around the country that we don't have enough transmission. We get complaints from generators. We get a lot of complaints from municipalities who are dependent on the transmission system to get more generation into their territory. And I look at Order 888 as open access, as a broader term than meaning people can get access to the grid that already exists. But rather I look at it as a way to have the grid that exists better handle the existing traffic. For example, one of the issues is a transparent way to calculate the available transmission capacity. I want Order 888 to help solve that problem and eliminate some of those concerns that the ATC calculation is not transparent, and, therefore, it's hard to know whether it's being done as appropriately as it should be or not. Because we have limited amount of transmission all the available capacity should be calculated and should be put to use. There are people who want to use it and our goal should be to facilitate that. The other issue is planning of transmission. There are so many entities that want more transmission. It's not an easy job to just create more transmission, just to build more transmission, but one of the keys is to plan for it. And the planning has to be open enough and broad enough, transparent enough, and regional enough so that all the needs are taken into account and so that the best solution for the region can be arrived at. So I am looking at Order 888 as a way to facilitate further, more open, transparent, regional transmission planning.

Mary O'Driscoll: OK. And of course all eyes are now on DOE when they're putting together their congestion paths, the areas where there might be some federal backstop authority on ordering transmission line siting. What do you expect FERC will be doing, is this going to be something, do you think FERC will have to exercise its authority rarely if at all, or frequently, or how do you see that playing out?

Suedeen Kelly: I really see the FERC will exercise its authority rarely, and that's the way the legislation was written, with an understanding that primary jurisdiction for siting transmission lines has always lied with the states. And the states, as I've gone around and talked to state commissioners, they're anxious to retain that authority. And what Congress said was if the states act within a year, there's no need for FERC to get involved. And I know the states are looking at their processes to ensure that they can meet those requirements.

Mary O'Driscoll: OK. Well we're going to have to end it on that note. Thank you so much for joining us today.

Suedeen Kelly: Thank you.

Mary O'Driscoll: And thank you for watching. I'm Mary O'Driscoll. This is OnPoint.

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