States -- not the Federal Energy Regulatory Commission -- may hold the key to encouraging reforms in the way electric power generators in competitive markets operate, in the view of FERC Commissioner Tony Clark.
Clark, a Republican in his third year of a five-year term, has a unique perspective among top regulators on what states can do to make gas and electric markets function more efficiently. He came to FERC after having served as chairman of the North Dakota Public Service Commission, to which he was first elected in 2000.
A majority of states are now part of one of the so-called organized electricity markets, the first of which were established as independent system operators (ISOs) by FERC in the late 1990s.
Today, market rules vary. Some are single-state markets, such as California, New York and Texas, while the rest include multiple states or portions of multiple states. And that complicates matters, as some ISOs, such as ISO New England and PJM Interconnection, are made up of states with "restructured" markets, where electric power plants are not owned by utilities but by independent merchant generators.
"They're not pure markets. A lot of these are administratively heavy-type markets," Clark said in a recent interview.
"So there's a lot of judgment calls that are made that are in a lot of ways very much out-of-market-type calls," he said. "It does interject FERC into it more than it would in a purely free market."
States have a choice, Clark said. They can be restructured and let the market make decisions about power generation, or states can regulate conventional electric utility companies. "But trying to be both is where we have real trouble," Clark said.
"From a FERC standpoint, the agency has always been pretty clear," he said. "We are not in the business of picking generation resources. We set the rules up and [let] markets run. You live with the result of that market.
"The challenge for states, especially those that have restructured," is a jurisdictional one, vis-à-vis FERC, he said.
"States that have at least nominally restructured have placed an enormous burden on a merchant fleet that doesn't have a captive rate base to support their operations, and so you need to have efficient market signals," Clark said.
States are questioning whether maintaining a large fleet of merchant power plants is the best path forward, Clark said. "So you get state public policies layered on top of a wholesale market that's FERC jurisdictional, [and] that may not work very well with the marketplace," Clark said.
New England bottlenecks
The six-state electricity market served by ISO New England has been struggling with how to better ensure fuel supplies for generators, especially in times of winter peak demand, when competition for home heating strains the gas supply system.
One idea being explored is for electric utilities to charge electricity consumers for the construction of more gas pipelines.
But as envisioned, that would require approval of an unprecedented change in the ISO's tariff by FERC.
"I'm not going to throw cold water on an idea before it gets here," Clark said.
"If you file it, we'll take a look at it," Clark has told stakeholders in the proposal. "But the challenge is going to be, this is new, this is really outside-the-box thinking," he said. "It's not something that has been done before, so there's going to have to be a good deal of legal legwork put into thinking about how it fits into the Federal Power Act, which is not self-evident."
To Clark, the proposal sounds as if electricity ratepayers would pay the costs of building infrastructure to ship more natural gas to power plants -- where today, pipeline companies would first solicit customer guarantees before investing in expansions to meet rising regional demand.
"I'm not saying a case can't be made that those type of costs can be built into an ISO tariff," Clark said. "But it's also not self-evident that it fits into the way that FERC has traditionally thought about the Federal Power Act.
"So I've encouraged them to think about other ways that wouldn't require FERC to take any action at all, but could clearly be done within state authority," Clark said.
"Even within a restructured state, there's a lot of things that I could think of off the top of my head that could be done that wouldn't implicate FERC or wouldn't cause questions or concerns about the Federal Power Act to come into play," the commissioner said.
"You could directly subsidize through your [local distribution companies'] gas pipeline build-out," he said. "You could require certain fuels to be used by your load-serving entities, which would then eventually work its way into rates. States have renewable portfolio standards. There's no reason you couldn't have some other sort of energy standard, some sort of fuel standard. States could create state-bonding authorities.
"I know in my home state of North Dakota, we created a pipeline authority where the state would actually become a funder of last resort for pipelines that were needed to get built," he said. "Now that was all for the export market. There's no reason a state that feels they want to have greater import capability for pipelines couldn't create a state pipeline authority to do the same thing on the flip side."
Are power and gas colliding?
As natural gas becomes such a dominant fuel for generating electric power in most regions, there has been a greater need for cooperation between gas suppliers and pipelines and electricity generators.
For example, the industries are still working on a better alignment of the trading days for their commodities. Also, regulators are looking for some resolution of an impasse on how to improve generators' contracting for gas supply.
But neither industry seems willing to significantly alter its business model to make its new relationship go more smoothly.
"I mean, there haven't been a lot of concerns about the natural gas industry and interstate natural gas pipelines," Clark said. "It's been a model that's been universally recognized as a big success story in American energy.
"And you've got another model which is intensely regional and has lots of cracks in the foundation that people have pointed to," he said, speaking of the nation's electricity markets.
"These are very new markets, and it hasn't been an overwhelming success everywhere yet, because if they were, we wouldn't be getting all the complaints and filings that we've been having.
"So I've contended we want to make sure that we don't break up too much of the model that we know works to try to fix what is in some ways a very regional problem in specific regions of the country," he said. "I'd rather see if we can thread the needle and get those markets working on the electricity side before we start tinkering around with the gas side anymore."