The Threats to the Vertically Integrated Utility Model

Unlike other parts of the country, the 11 western US states have not joined together in a regional transmission organization (RTO) to more efficiently and cost-effectively administer their respective electrical transmission systems. In this episode, Michael Wara, director of the Climate and Energy Policy Program at the Stanford Woods Institute for the Environment, discusses the current status of a potential western RTO and the political factors affecting the conversation.

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David Roberts

In about half the country, power utilities have turned over administration of their electrical transmission systems to regional transmission organizations (RTOs), or what amounts to the same thing, independent system operators (ISOs). RTOs and ISOs oversee wholesale electricity markets and do regional transmission planning, which increases system efficiency and reduces costs for ratepayers.

The power utilities in the 11 western US states are not joined together in an RTO. California has its own ISO, but it only covers that one state. In the rest of the region, utilities are islands — they each maintain their own reserves and do their own transmission planning within their own territories. It leads to enormous duplicated efforts and inefficiencies.

For years, there has been discussion of creating a western RTO, to bring the western states together to share resources and coordinate transmission planning. Analysts have found that an RTO could save the region’s ratepayers billions of dollars a year.

Recently the discussion has begun to heat up again. A regionalization bill in California was tabled this year but promises to return next session. Governor Gavin Newsom expressed his support for the idea. Nonetheless, numerous sticky technical and political issues remain to be hashed out.

To explore the promise and risks of a western RTO, I contacted Michael Wara, director of the Climate and Energy Policy Program at the Stanford Woods Institute for the Environment. We discussed the political forces pushing for and against an RTO, the way the west's electrical system has changed since the last time this discussion came up, and incremental steps that can be taken in the direction of greater regional cooperation.

All right then, with no further ado, Michael Wara, welcome to Volts. Thank you so much for coming.

Michael Wara

Thanks for having me.

David Roberts

So we're here to discuss something that is somewhat complex and rests on a set of concepts that might not be — that everybody might not come in understanding. But because I want to talk about the specifics and I don't just want this to be a 101 kind of thing, I'm going to assume Volts listeners have some basic background. So I think the main thing to know is the US electricity system is sort of divided in two. On the one hand, you have the traditional old school, vertically integrated utilities which own the generation and the transmission and the customer interaction, the whole deal.

And then the other half is what's called "deregulated" or "liberalized" or whatever the term is. Basically have created markets, wholesale energy markets, where generators compete and sell into the markets. And then distribution utilities which interact with customers buy power from those markets and sell it to customers. And those areas with energy markets are overseen by organizations called Regional Transmission Operators or sometimes Independent System Operators. RTOs and ISOs, as everyone in our world is so familiar with saying over and over again I'll just use RTO, I think from now on as a shortcut for those. So in these liberalized areas RTOs sort of manage regional transmission planning.

And the idea is if a bunch of different utilities can sort of share backup and share reserves and share generally they're going to lower costs for ratepayers. And so there are RTOs in the Midwest, there's one in the Northeast, et cetera. Listeners might be familiar with PJM and MISO. These are all regional transmission operators in various parts of the country. So as it happens, the western states, the eleven western states of the United States are almost all old school vertically integrated utilities which means they operate as islands. There's not a lot of sharing. So California has its own RTO or ISO, in this case California ISO or CAISO, but it only does planning for California.

So what we are here to discuss is the long standing discussion about whether the western states should form an RTO of their own, join together into a regional organization so that they can do more of this sharing. That is the question before us. And there are all sorts of ins and outs and details about this but that is the basic background. So maybe the place to start is just at a very general level, sort of abstract level. You could explain what are the advantages of joining an RTO versus just operating as an island? What is the pot of gold at the end of this rainbow?

Michael Wara

I'd want to start by saying that there are advantages and disadvantages, right? And it's important to be straight about that. I think the key thing for listeners to remember and understand is that the primary mission of an RTO or an ISO is to operate. It's to operate the electricity system in a particular geographic footprint. And in general it is the case that it is more cost effective to operate across a larger footprint. And so a discussion around increasing the size of the California ISO or CAISO is about increasing the operational efficiency of the overall system. What I'd say also is that it's important to think both about the average conditions or kind of the expected conditions and then periods of extreme stress on the system.

I guess my view is that the discussions around regionalization or growing the California ISO further outside of its California footprint have really become more important because of the challenges of the reliability that we've had in California and elsewhere. But especially in California over the last several years due to drought, the unavailability of hydro as a result, and the growth of intermittent renewables.

David Roberts

The duck curve.

Michael Wara

The duck curve.

David Roberts

The dreaded duck curve. Yeah. So the idea here is just if you have more states or a wider area involved, you just have a larger pool to draw. And so if you're having a sort of like choke point or grid congestion here or a shortage of power here, there's maybe power over there that you can import just the larger geographic area you're covering, the larger sort of base of power and the larger variety of power sources you're drawing from. And that generally leads to resilience.

Michael Wara

Yeah, I think an intuitive way for people to think about this is kind of national borders and trade, right? If you ship goods across an international border, they have to go through customs, and there are barriers to that. And we have rules about how those barriers are supposed to be under the WTO and other agreements we have with other countries. But it's just harder to ship things internationally than it is to ship something from California to Nevada, because we're all within a free trade zone. And what these ISOs or RTOs really create when they're done well is a free trade zone where electricity can be traded at very low cost.

And what that means is that the optimal power plants turn on within a system footprint to meet the electricity demand that exists within that footprint. So that lowers costs because it means that you're not buying something expensive within your little market because it would cost money to get something cheaper that's just across the border.

David Roberts

Right. So it's just easier to share. And it's also worth saying, all these islanded utilities, the vertically integrated utilities, they're required by law to have a certain amount of backup available, basically resource backup in case of problems. And if you operate in an island, you have to have enough backup for your own island, which is and then the next island over also has to have enough backup for its island, et cetera, et cetera, et cetera. So you end up duplicating efforts over and over and over again. You have sort of like duplicated backups. And what this wider area allows you to do is sort of have a pool of backup, right?

So not everybody has to have —

Michael Wara

That's right.

David Roberts

enough to cover, and that also reduces costs. So these are the, I think, the sort of abstract benefits. Like a larger footprint means more sharing, better planning, lower costs. So back in 2016, 2017, there was a bill that came up in California, because at least one pathway to this, the first step would be right now, California's ISO is more or less controlled by California. The governor appoints the members and the California Senate approves them. So it's a very California-centric operation. So if you were going to expand that to incorporate other states, obviously you would have to restructure CAISO, so that it's not California-centric, because, like, other states are not going to join if California completely controls who's on it and how it works.

So there was a bill back in 2016, 2017 to restructure CAISO this way, and that sort of prompted a whole round of this discussion back then. So what I thought I would do is sort of throw out at you some of the sort of worries and objections that were voiced back then and then maybe you could tell us, are those worries? Were they valid then and are they valid now? Have things changed, sort of catch us up on sort of stakeholder worries and issues. So I think probably the strongest opposition to the whole notion of regionalization, especially back then, came from unions because California's climate laws have a lot of domestic content requirements, so they require that the power be generated in California, which means a lot of jobs in California, a lot of union jobs in California.

And I think the unions worried if we expand the footprint to include multiple states, California will be able to find cheaper power elsewhere and we'll just import it and that will mean fewer jobs here in California. So maybe you could say, was that a valid worry in 2017 and has anything changed now to address that worry?

Michael Wara

So that, I think, is a primary worry about this proposal, and it does reflect the desire of the unions in California that have really benefited from the renewable portfolio standard here to make sure that those benefits don't evaporate. And I think it also in less maybe self-interested sense, the cooperation and support of labor unions in California has been critical to the political economy of getting hard bills through the legislature and signed by the governor that have been really important in terms of driving the climate policy situation forward in California. So we don't want to damage that. And the situation in 2017 was that you could build solar in California.

If you do that, you have to pay prevailing wage and have an apprenticeship program, which basically means you're hiring unions to do the work. And that is not the case in many neighboring states. And so that was the situation circa 2017, I think there was a legitimate concern about that issue. There was some attempt to kind of massage the legal questions using clever language, which at the time made many of us, I think many of us were skeptical that that language would survive review if challenged. It's notable that the language in the California RPS, which you correctly point out, David, is I don't know if I'd call it protectionist, but it's certainly designed with particular outcomes in mind about where generation gets built, has never been challenged.

So fast forward to today and the situation is different in a few respects that I think are worth talking about. The first respect, and this was actually true in 2017, but people didn't focus on it so much, is that we need to be real about who's going to want to join a sort of common electricity market with California. And probably it's not going to be states like Wyoming which are committed to subsidizing their coal-fired power plants as long as possible and in whatever way is legally tolerated by various courts and they also happen to have a really nice wind resource which if it were interconnected to California's grid would be extremely valuable. Rather than try to link up with Wyoming in a market sense what the CAISO is doing is actually building its own transmission line that it will control out to Wyoming to connect with Wyoming Wind.

Right? So it's sort of decided that there's not a future where that happens. And I think many of the benefits that were envisioned for kind of out-of-state generation resources circa 16, 17 really depended on this vision where the entire west is in a single RTO. I personally think that's highly unrealistic. It's unrealistic today for two reasons. The first one is what I just mentioned that very conservative states do not want to share power with a very blue state like California. So I think it's unlikely those states are going to want to join whatever the economic benefits.

It's a tribal issue. The second issue though is that there's a competing RTO under development in the west now that will be kind of the eastern side of the western interconnect and will involve a lot of these other states. SPP, which is an existing RTO based in Little Rock, is in the pretty advanced stages of getting ready to file with FERC to create an RTO across western states. So that's one set of issues. The big talk back in 16, 17 was "We'll get Wyoming Wind in the CAISO and that's going to really be great for various reasons" which it's still true it would be great to have more of that resource in the electricity mix in California.

The other thing though that's changed is federal law: The Inflation Reduction Act passed. The Inflation Reduction Act says that if you want to get the full PTC, the production Tax credit then you need to pay prevailing wage and have an apprenticeship program. Period. Full stop. Starting on January 1 of next year. So any projects that would be a part of the California ISO and hope to receive federal tax credits which are material to the economics of these projects is going to have to pay wages and have unionized labor apprenticeship programs that are very similar to California's. Now the prevailing wage in Nevada or Arizona may be somewhat lower than in Kern County where a lot of the solar gets built in California or in the western part of the Central Valley and in the Westlands Water District.

But at least a significant chunk of the kind of economic advantage to building out of state is eliminated by the changes to the Inflation Reduction Act the pro-union measures that the Biden administration has put in place. So I'd say we're actually doing some economic analysis right now to try to understand this with current data but none of the assessments that have been done of the ISO RTO concept and sort of regionalization really take account of this change and it's incredibly important. The unions are still opposed. And that may be the reason why we don't do this.

They are very nervous. From the perspective of a California union, it might not matter whether nonunionized labor or a Nevada union construct.

David Roberts

I was going to say it's not necessarily quiet their worries to say "Oh, these jobs that will be taken from you will be given to a union somewhere else."

Michael Wara

This is just anecdotal. But what I've heard is that there aren't actually unionized construction workers in a lot of these neighboring states to California because they're right-to-work states. And so some of what's happening is that in order to qualify for the Inflation Reduction Act tax credit structure, workers from California are being moved to Nevada or other states to construct these facilities. Kind of like man camp style. Because they need to make sure, right, they want to make sure that they check all the boxes to get the full tax credit.

David Roberts

Right.

Michael Wara

And that's a part of it. And so it's a somewhat fluid situation. I personally can't believe that that sort of approach will be sustained in the long run. But the general picture is that — I guess the other thing I'd say is that and maybe this is a third point I should have said there are three because it was better three. Is that California is running up against the challenges of really achieving the SB 100 objectives. We are sketching out construction rates, starting to procure, attempt to procure renewables at a rate that is really unprecedented in California. And we're going to need to build everything.

And this is kind of a key message that I bring to this conversation. We need to make sure that we're building all the rooftop we possibly can. We need to make sure that we're building all of the in-state generation that we possibly can. And we are going to need to procure a lot of out-of-state generation.

David Roberts

Yes. And even then, those goals are going to be very difficult to hit. This was, I thought, the strongest point you made. I was reading what you've written about this. It's just that California, its goals are so ambitious that this is not a scarcity situation. This is not an either-or situation. It has to go flat out to get all the power it can from everywhere it can. And even then, it might not be able to get enough.

Michael Wara

I really think that's the right way to view the situation in California right now. And we are working in our group on policies that will reduce barriers to in-state construction, reduce the barriers around interconnection, which are really the big delay right now.

David Roberts

Oh, yeah, I want to pause and emphasize this point too, before you move past it, because I thought it was another great point you made in your writing, which is that the real — if you're worried that there's not enough in-state construction happening. The prospect of imports from other states is the least of your worries. Like that's not what's holding up construction of new power in California. It's all these things that Volts listeners are very familiar with permitting, NIMBYism, et cetera.

Michael Wara

That's right. And I think the challenges there in California are quite acute. They also interact with just how much else the other jobs that our utilities have that are kind of even more pressing than achieving the SB 100 goals like not having wildfires ignited by their equipment. And many of the engineers and line workers that are needed to do the kind of renewables build-out in California are busy with that work as well. And so we have resource constraints in California that are real. We need to work on those, we need to train more line workers, we need to train.

All of this needs to scale. But there are things we should be doing in California and we've been working on them. Many others are working on these issues as well. The PUC at the ISO, at the Energy Commission as well, of course, is to remove the barriers that exist to building things in California at the same time as we facilitate greater use of imported power that's actually clean and not just the old way. California has long imported large amounts of electric power. We built our coal-fired power plants in other western states and on the res and we have shut those down, mostly.

A lot of it has been replaced by natural gas-fired power that we import and some renewables that we're importing as well.

David Roberts

Let me pause and emphasize that point too because another of the objections back in 2017 or whatever were from environmentalists who say "Here in California we've got laws mandating clean power. But once you open it up, you're going to get a bunch of these coal plants in other states, generate cheap power and sell it into the RTO. And we're going to end up in California getting coal power in our mix when we don't want it."

Michael Wara

Is that is just much less of a concern than it was in 2016 for a whole bunch of reasons. But the fundamental and most important one is that coal is a five cent product in a three cent market and it is just the economic loser pretty much no matter how you slice it. And the states that are trying to prop it up frankly can't afford to do that.

David Roberts

Yeah. And the last thing they want is market competition. Right. I mean the more you expose it to market competition, the less well coal will do.

Michael Wara

That's absolutely right. And so exposing coal, especially to markets that have a lot of renewables in them, so there's a big daily cycle in prices is really challenging for that type of resource. So I guess I look forward and I'll say I think about this also this proposal in terms of what the situation will be like, not right now, but in about five years, because it's going to take several years to get — eve if this law or a law like it were to pass this session, or frankly, it's not going to pass this session, it passed next session, then there would have to be preparation of a proposal that the ISO would share with the state government and then would submit to FERC, and FERC would review that proposal and approve it.

And only after that approval would the ISO be able to implement it. And I think we're looking at the late two thousand and twentys at best. So really you need to ask how much coal is left in the western United States circa 2028? And I think the answer is not very much. And even if it's there, it's not running. So then the question is, what about the other resources? And certainly there's a lot of natural gas in the west, and we might import some of it if — we would import some of that power if we were more strongly tied to other western states.

But California has its own issues with burning lots of natural gas to generate electric power. We generate enormous amounts of electric power using natural gas. And many of the gas plants we utilize are older, they have significant environmental impacts, they're located in EJ communities. And we are on the record of saying "We want to shut them down." So all of us in the west that have renewables goals and clean energy goals are going to be working on this question. But it's not like we're better, we're cleaner than other western states. And I guess the other point that you alluded to, David, that I want to come back to is the situation has changed fundamentally with respect to other states renewables goals as well.

In 2016, 17, we were out way ahead with SB 100, proud of that fact, and looking at most states in the west that had either very timid RPSs from California's perspective or no policy at all. Today, six of the states in the west have 100% clean energy goals, just like California. And there are several additional utilities that have taken on those goals and haven't just taken them on, but are proposing integrated resources plans that are consistent with them. So near term action to achieve those goals. And they're doing it because of the favorable economics of doing it right, that a mix of wind and solar combined with some batteries and natural gas is the cost-effective portfolio to have these days.

Now, it may get harder, we'll see, right? It could be that all of us get to 80% clean and things get really hard, and then some of these folks that are saying they want to do that now change their minds, but that's in 10 to 15 years. We've have a lot to do in the meantime, and a lot of potential partners in achieving those goals that we didn't have five, six years ago.

David Roberts

Yeah. And not only are a bunch of states now targeting 100% clean energy, but it's worth noting that Colorado and Nevada specifically passed laws saying we support the RTO idea, we like the idea of a wider area here. So there's some momentum out in those other states.

Michael Wara

Absolutely. I think there are a set of partners, some of which have become public and some of which are less public, that are sort of looking to see what happens. Right. There's this proposal from SPP. There's a lot of discussion in California. My sense is that the partners want to see, like, if there were to be a California option, the economics of it are highly favorable to others because California is just such a big chunk of the population in the west, 40 million out of 100 million people. So there's a lot of potential buyers of electricity in California, and having access to that market for other players in the west could create a lot of benefits for them and also benefits for California because California would be able to purchase lower-cost power.

I think where the other parties start to get worried is when we, and I say we, I'm a Californian, start to want to impose our values on others.

David Roberts

Great segue because the third and sort of final objection I was going to raise to that law when it came up then was just the general worry that with a California-only ISO, California is very tightly in control of it and can ensure that the values of the ISO reflect Californians' values, the sustainability goals, et cetera, et cetera. The worry is if you dilute that, California will to some degree lose control over the running of the common ISO, or at least it will just be one voice among many. And I think some people in California, some lawmakers, some environmentalists, are worried that you're going to end up with an RTO that doesn't reflect what California wants. And at that point, California will be just up the creek.

There's nothing you can really do once you, once you have committed to the RTO.

Michael Wara

Yeah, so I guess I think this is a valid concern. If the governance structure of the ISO is not designed with some care.

David Roberts

Bracket that because we're going to return to precisely that question.

Michael Wara

Okay, so let me just speak at a high level then. Certainly there are a bunch of states, one of whom I mentioned, Wyoming, that have really different priorities for their energy systems than California. California also is so kind of tribal in its blueness and its pro-climate policies, that can be a real turn off to more intermountain conservative states. Even with utilities that are a little bit out of step with their state. And I would note that Idaho Power has a 100% clean energy goal, but the state of Idaho does not, right?

David Roberts

To say the least.

Michael Wara

And so Idaho Power needs to be careful and I think they're interested in participating in the regional sort of markets that the California ISO — We haven't talked about this —

David Roberts

But that's our next topic. So you're setting it up perfectly.

Michael Wara

So California has spent, since the last effort at full-blown regionalization creating a regional RTO, California has spent a lot of time developing kind of what I term like halfway houses to an RTO.

David Roberts

Right.

Michael Wara

This thing called the energy imbalance market and then the enhanced day-ahead market proposal.

David Roberts

Let's talk about those. Right now, CAISO is operating what's called the Western Energy Imbalance Market, which involves multiple western states. And then it is developing what's called a day-ahead market, which will have a bunch of those same participants. Maybe you could just tell us, what does the energy imbalance market do? What would the day-ahead market do that the energy imbalance market doesn't do? And what would a full-fledged RTO do that the day-ahead market doesn't do? What are these halfway houses like? How big of a step is the energy imbalance market and what's the next step?

Michael Wara

Sure. So the energy imbalance market has been something that's generated a fair amount of benefit for all the states that participate. And basically what it says is you optimize in your footprint. And that optimization typically happens mostly a day ahead. Right. So power plants are on, they're not on, whatever based on a forecast a day ahead. But those forecasts are never perfect. And so there's always some kind of leftovers that — maybe there's too much in one place or not enough in another. And what the EIM does is allow trading in that real-time or almost real-time space where the day-ahead forecast was wrong and somebody has a little extra, somebody has not enough, and they can exchange and create benefit from that exchange.

And the real benefit is not having to turn on a power plant or call on a resource that would be expensive but can turn on quickly.

David Roberts

So it's an incremental bit of sharing there.

Michael Wara

Yeah, it's like the tip of the iceberg of benefits from lowering barriers to trade. And then there's this giant iceberg underneath, which is the day ahead.

David Roberts

And the day ahead is not yet running.

Michael Wara

No.

David Roberts

It is in development.

Michael Wara

Yes. And the day-ahead is where you, say if you're a grid operator, look at the weather forecast and make an estimate of what electric demand is going to be, and then you decide which power plants you're going to utilize to cost-effectively meet that demand. So coordination across and I should say, even if there isn't a market right, like in these vertically integrated states, the utility is making that decision every day. So what the day-ahead market, The EDAM, as people call it around here, the Enhanced Day-Ahead Market Proposal will allow, is states if they want to, and if their utility commissions will allow them to, which is an important caveat, allow some utilities to kind of opt into participating in a single optimization across the footprint. Now, the challenge here, though, is it gets complicated to know what will really happen. And the reason is that many parties that say they're interested in the EDAM in this day-ahead market proposal say they are interested in it as a halfway step to an RTO and they are much less interested in participating in it if there is not an RTO proposal.

David Roberts

If it's a terminal EDAM.

Michael Wara

If it's the end, yeah. And the reason for that is, understandably, utilities don't want to — what an ISO RTO kind of construct is turning over your system to somebody else to operate. And if that somebody is in Folsom, California and you have no say over how the rules are written, no seat at the table in terms of designing future transmission expansion proposals, that strikes many people as unfair, let me just put it that way in simple terms. And certainly the players that do have a seat at that table are going to seek to maximize their benefits from whatever gets decided.

And that's going to mean that the utilities in California, PG&E, Edison, and San Diego Gas and Electric principally get the most benefit.

David Roberts

Right. So EDAM is run out of CAISO, basically. And so the worry from other utilities is California utilities are going to get they're going to be at the head of the line here. They're going to get sort of favorable treatment.

Michael Wara

And California has bent over backward to create a governance mechanism for the EIM, the tip of the iceberg market that is really multistate and fair and is functioning well. And I think in many ways, many of the concerns that were raised in 16, 17 about what the governance would look like once California shared some power can be actually pretty well answered by just looking at how EIM governance functions today and has been functioning for several years. And it's a very successful model. It's widely perceived as fair.

David Roberts

And the participants are happy, the utilities —

Michael Wara

Everybody's happy.

David Roberts

Yeah.

Michael Wara

Everybody loves it. That's why the EDAM project has moved forward, because the people that participate in the EIM, both California and non-California entities, have said, "Let's go further." But as this project has neared completion and it is getting close to that, two things are happening. One is this competition from SPP, which I think will thin out participation in the EIM, which is spread out quite far across the western grid and it will also limit participation in this new program, the enhanced day-ahead market. So the real story here is that to some degree, if California wants to have sort of day-ahead integration, it needs to maintain momentum toward power sharing.

David Roberts

And so what would the RTO do beyond the day-ahead market?

Michael Wara

Well, the other thing that it would do is actually plan transmission.

David Roberts

Yes.

Michael Wara

Right.

David Roberts

Yes. Praise be.

Michael Wara

Yeah, right? Yes. And so today, in the footprint that a western RTO centered on California might contain, there's internal transmission planning each utility or within the California ISO, the ISO plans transmission build-out and then there are seams. And the seams are where different markets meet each other. They're kind of the border. And there are real limitations on planning across the border, planning transmission lines that cross these state lines and cross market barriers and just planning what people are today starting to call transfer capacity, which is the ability to move power for California, especially out of the Pacific Northwest and into California.

And I just add to that another challenge that we've all confronted in the west in the last few years also is the effects that large wildfires can have on these transmission lines. Because there may be like four lines that connect California to the Pacific Northwest, but they're all in one right of way. And so if there's a big wildfire that's putting a lot of smoke into that right of way, it can shut down the whole thing.

David Roberts

Right.

Michael Wara

And so there's kind of an additional need for greater redundancy which will create resilience to wildfire.

David Roberts

Speaking of that, I'm going to throw one more twist here at listeners who are now juggling whatever a half dozen acronyms we've thrown at them so far. But there's also something called the Western Resource Adequacy program.

Michael Wara

Yeah, WRAP.

David Roberts

WRAP. Tell us what that is and how it fits in with that silent w.

Michael Wara

Well, so one thing to say, another big objection, way back when, was the fear of imposing a capacity market. As you mentioned earlier, David, resource adequacy is an important goal that all utilities or system operators plan for. They need to have enough power available on those hot, in California, it's the hot summer afternoon into evening to make sure that we don't have to do rolling blackouts like what happened in Texas.

David Roberts

Right. You need enough resources to meet the maximum conceivable demand.

Michael Wara

Yes.

David Roberts

Which, as we say, if you're doing it over and over again in each one of these utility islands, just leads to huge amounts of capacity that is idle almost all the time.

Michael Wara

That's right. It's incredibly wasteful. So there's a developing program for utilities in the west to try to plan some of that resource adequacy together and sort of share resources more than they have in the past. How and whether this interacts with the burgeoning proposals both from CAISO and from the SPP group to have RTOs I think really depends on the rules in the markets. California has made it very clear that there's never going to be a capacity market in California and that the states that join any RTO created under — by governance change at the California ISO will maintain control over their RA.

It doesn't mean that the amount of resources might change. Right. So it might be that you need a little bit less because you're in this larger footprint utility, and the ISO say "Well, we can get by with this much instead of this much plus a gigawatt or something" because we're operating the whole system as one. But what those resources actually are will be determined by the participants and ultimately then by the state commissions that regulate the participants in an ISO or an RTO. That's like kind of a non-negotiable item for California.

David Roberts

Is there a particular reason that it's so uptight about this particular point?

Michael Wara

Well, I think it relates back to our earlier point about kind of California wanting to have some real say over the power plants that it's using to meet load. Also, I think it has to do with the observations from the outside of experiences with capacity markets within PJM, especially where there's been litigation over the desire of states to build new capacity in their own state as opposed to having it be controlled by an auction mechanism. I think anybody who's participated in some of these auction mechanisms as a market participant will tell you that they're problematic, very hard to design well. Often in retrospect, designed poorly, and then the market operator is left trying to fix things after the auction, after money's changed hands, kind of change the rules retroactively, and so no one's super happy with them.

It may be the least worst thing, but from California's perspective, they don't want anything to do with it. It's a non-starter, and that'll be written into the legislation. Any viable legislation that would allow for power sharing would say, power sharing fine, but there will be no capacity market. And if there ever were, California would withdraw.

David Roberts

Got it. We've got the energy imbalance market as a little step forward. Then they've got the day-ahead market, which is going to be a really substantial step forward. Beyond that, I mean, I think it's worth pausing just to say that sort of analyses of these things show benefits of the day-ahead market that just dwarf the benefits of the energy imbalance market.

Michael Wara

Yeah, but let me just back up to these studies. Yes, they do. However, the studies that have been done to date typically assume full participation. So they ignore — they're like engineers sitting down to say "What would be the coolest electricity market we can imagine in the west?" Rather than people who are connected to the political process, which is very important in all of this, saying "Who are the most likely partners?" Or I would frame it somewhat differently who are the most valuable partners that California could have in an RTO, and what do we need to do to get those people?

And who cares if all the western states join? It really doesn't matter. What matters is and I'll just call out one particular partner, like, what are the things that we can do to induce the participation of Bonneville Power Authority? If you want to think about really successful heavily reliant on renewables systems. Think about like northern Europe and Norway. That is a system that we should aspire to be like where Norwegian hydro balances German and other European wind. Right? And today a lot of that happens. Right. We trade power every day in large quantities with Bonneville. But if we could induce participation of Bonneville and a number of the northwestern utilities in a California ISO that would do an enormous amount to simplify having more renewables on the system.

David Roberts

Right. So there's the day-ahead market that's being hashed out there's, the resource adequacy program going alongside here and these are all sort of envisioned, I think by a lot of people at least, as steps towards an RTO. So let's pause for a minute and just think about if you're sitting down with a blank sheet of paper today and designing a western RTO what are the sort of main design issues that you want to make sure — because there's not like a set blueprint, right? There's not like a blueprint. You take off the shelf and say here's our RTO.

These are all sort of designed in somewhat bespoke ways and would need to be designed in somewhat bespoke ways to fit the values of the participants. So what in your mind are sort of the top issues that anyone designing an RTO for the western states ought to keep in mind? I know that stakeholder input is a huge one, so maybe we could start there.

Michael Wara

Yeah, well, as I look at it, I think we need to design a system that takes account of the real circumstances in the west and that isn't just a cookie-cutter approach. The EIM did an important first step toward that, but the reality is it doesn't go quite far enough. So I would say we should look at what's happened there, look at the successes and failures in the EIM, mostly successes. Honestly, I can't really think of real negatives and start there. But we'd also need to say there's not going to be a capacity market. We're going to give states sovereignty over their resource adequacy as long as they show that it meets the requirements for the system.

And then we need to work out some kind of a body of state regulators that has voting rights that reflect the complexity of the west, where we have a few states with very large urban populations that are going to be, particularly in the early years of a California ISO, the vast majority of load and so be paying most of the transmission access charge. But we also need to make sure that states that have relatively small populations have a real voice, not some sort of nominal participation where they don't really have any power, so that they feel less concerned that California might just go on some spending spree and run up their transmission charges because Californians can afford it, and other states are much more price sensitive to the cost of electricity. So to me, this sounds a lot like the problem that the Founders solved with the Senate and the House. It's also a problem that's regularly tackled in international agreements.

And the basic model is you say you need two majorities to move forward, you need a majority of states and you need a majority of load to make a recommendation and that's going to ensure that all the recommendations that come forward are really consensus-based and it gives everybody power to shape what happens. Another key kind of governance characteristic, that I think will be ultimately important is to make sure that the states that do participate in this market and in the body of state regulators that will be created have what's called Section 205 filing authority, at least for the really important issues that come up within an ISO and an RTO. And that basically just means that if the board of the RTO were to take some action that the body of state regulators really objected to, just basically the board kind of goes AWOL and starts taking their own independent actions without really consulting and considering what the states want. That the states can go to FERC with a relatively low burden of proof to get before FERC and have their issues considered on the merits.

David Roberts

Oh, interesting. Just pause here and say back in 2016, 2017. Another one of the worries about an RTO is that at the time the Trump administration was in power, it was sort of bullying RTOs to allow more coal and just to be dirtier in general. And some of the RTOs were sort of seen as kind of bullying the states involved, disrespecting states, sort of clean energy goals, basically not giving states their independent due. So that was another of the worries about this is just when you give power to an RTO, you are giving up some power and I guess you just want some guarantees that you're not going to get that the RTO is not going to go bad and start steamrolling you over stuff.

Michael Wara

Yeah. So this is an important reason why not having a capacity market is a good idea, right? That's an insurance policy. So what the Trump FERC was doing was really interfering in a material way in the issues around what kind of power plants exist in particular states within these RTOs. And if you just take that off the table by saying that that's not going to be a question that the RTO is really concerned with, then you can go a long way toward avoiding that problem. But we don't have any guarantees that a future administration will not wreak havoc with western electricity policy.

That is possible. And that's why it's important that everybody vote who cares about the clean energy transition. Try to make sure that never happens. But there are lots of ways beyond FERC. I mean, you want to interfere, you could simply eliminate the tax credit provisions in the IRA if you had a cooperative Congress.

David Roberts

Yeah.

Michael Wara

So it's a problem that is just present in a country that is evenly divided politically on this issue, as the United States is. And given that FERC has jurisdiction over all the high voltage transmission, right, so it's not just these federally regulated electricity markets where there's a greater FERC role, for sure. But also FERC oversees all of the high voltage transmission in the United States because it's in interstate commerce. Even those vertically integrated utilities that kind of do things on their own. They still have to go to FERC and get approval for things. And if FERC wanted to, they could do things to make life difficult.

David Roberts

Notoriously in transmission planning, one of the difficulties is cost allocation. Who pays for what? Who gets the benefits of a transmission line and who pays for it? Do RTOs help with that? Would an RTO help smooth that issue?

Michael Wara

It can remove some challenges, but it doesn't remove them all. And this is also getting to why having a good participation model for the body of state regulators, which would be kind of a subsidiary body to the board of directors but would provide a lot of input to the board, is important. Some RTOs have been very successful at building transmission to enable build out of renewables. Probably MISO is one that stands out.

David Roberts

I did a pod on that.

Michael Wara

Yes, you did. And it was a good pod.

David Roberts

Listeners want to go Google that.

Michael Wara

Other RTOs have been less successful. See PJM's long-standing cost allocation disputes. So I think it just really depends on the context and on creating a mechanism where there's mutual interest in seeing these new transmission lines get built. As I said at the beginning, I think we need to build them. And the ISO in California is building new transmission lines out to even distant other western states. We also need to build a lot of intrastate transmission. Right. And I think if that's the way to get things done, I'm sort of a person who's like "What can we get done?"

What's going to push us further down the track toward where we need to be and also create a political and economic situation where there's strong support for continued transition? And I do think that those problems are solvable as long as you don't try to pit people against each other.

David Roberts

Right. Well, you sort of raised another issue which I wanted to ask about, which is there's a couple of really big utilities in the region whose disposition on this question will be very important. So I think like PacifiCorp and Xcel, for instance, and there's this idea, I think, like, if you listen to Southern Company, say a utility in the southeast, they are busy fighting off these efforts, fighting off efforts in the south to create a more unified market, to take steps towards an RTO, et cetera, et cetera. Even though all the same considerations apply. An RTO would be great for the southeast, for all the obvious reasons, but I think utilities like Southern Company view an RTO as kind of a direct threat to the vertically integrated utility model.

What do you think? PacifiCorp and Xcel, where are they on this? And do you think that the vertically integrated utility model is under threat? Once you start this process, once you start going down this road toward more sharing and pooling of resources.

Michael Wara

What I'd say is, it is potentially under threat in some ways, but the question again is, what are the costs and benefits? And does your vertically integrated utility also have an independent subsidiary that builds merchant renewable generation? Right. And PacifiCorp is one vertically integrated utility within a basket of utilities and other companies that are owned by Berkshire Hathaway Energy. And I think BHE is able to take a higher level perspective on what's valuable for all of its assets and what the potential market opportunities might be. But I also think the situation is somewhat different because the west is so different than the southeast, where in the west market access to California is super valuable for some of these utilities.

And so I think PacifiCorp looks at the situation and says "Yeah, well, there might be some more merchant generation that gets built in our footprint, but you know what? We could build it, A). And B) then we can sell all the energy to California and meet this, be a part of this really big market that we have trouble getting access to."

David Roberts

So you think most of the big utilities in the west, generally speaking, are on board with the general movement in this direction?

Michael Wara

I think so. I think that the other thing is that it's challenging for a state as big as California with all the generation portfolio that we have to manage the transition to a solar heavy grid. But if you're smaller, that problem gets even more challenging. And so a lot of these utilities are also Portland General Electric or Seattle. Power and Light, I think is —

David Roberts

City Light

Michael Wara

or City Light. Thank you. Yeah. Are looking at what they understand to be their future, right? And saying, "Wow, there's even additional benefit today to being integrated into a larger system."

David Roberts

Yeah. If you're just building fossil fuel plants to satisfy your own load in your own footprint, it's all very simple. But once you start moving to variable renewables, the value, the need for these larger footprints and more sharing just rises and rises and rises.

Michael Wara

I think that's right. And also the ability to do things that are — to have pretty sophisticated demand response programs, to have the ability to integrate distributed resources and then bid them into the market becomes more valuable. Those are still kind of nascent technologies. But utilities are looking at this problem five years — like I said, they're not thinking about now, they're thinking about five years from now.

David Roberts

Yeah, those things are going to get overwhelming for a single utility to manage, I feel like pretty quick. I've always felt that about distributed resources particularly. It's like —

Michael Wara

Absolutely.

David Roberts

one thing when you have a dozen participants in your wholesale energy market, but what about when you have 1000 or 10,000 or 100,000 with DERs? Things get complicated quick.

Michael Wara

And particularly managing electric vehicle charging in a way that is grid supportive rather than grid destructive. I think it's going to be really important. There's a whole bunch of things that are coming at utilities relatively quickly and there's value in having scale. And a lot of the really innovative policies, like the innovative policies for integrating storage into wholesale electricity markets, those have come out of California.

David Roberts

Right.

Michael Wara

And ultimately become national FERC orders. But the early experiments happened here and I think there's a greater consensus, at least within the electric power industry, that that is the direction we are heading.

And so then that makes participation in an RTO more valuable and particularly in one like California's.

David Roberts

So let's return to something I've previewed a couple of times here, which is a little chaos agent in this mix, which is this other RTO, the Southwest Power Pool. SPP is at the, how did you put it, the eastern end of the western states. It has started to do a couple of things. One is it launched something called the Western Energy Imbalance Service, which sounds similar to and is similar to CAISO's Western Energy Imbalance Market. It's sort of a competitor to the EIM and it's sort of out there trying to lure states and utilities into that service rather than the EIM.

And then it's also got designs on expanding its own footprint. So basically what you have now that I think is new in the equation is this other RTO out there talking to western states saying "Hey, never mind California, come join our thing, come join our Energy Imbalance Market and then eventually come join our RTO." So a couple of questions about this. Like why? Why does SPP all of a sudden have these sort of imperial ambitions? Why does it want to expand? Why is it doing it now? And then do you think that has a chance of succeeding?

You can really see, you could imagine the western states, the western region kind of being split between two RTOs. So what's your take on all that?

Michael Wara

So the first thing to say about the two RTO thing is like "okay, fine," there's lots of RTOs in the US.

David Roberts

Right.

Michael Wara

And the west is a big place. And while certain system planners have long kind of imagined that sort of the apple in their eye, like this one market —

David Roberts

Yes!

Michael Wara

spanning across the entire interconnect, I don't think the sky falls if there are two. And it may actually be better for some of the parties to be I think there are real tensions that would come up in the body of state regulators, potentially, with having states that really just — it's not even that they don't care about climate. They view climate as a tribal issue, and they're on the other side, and California is on one side, and it's going to be hard to divorce some of those questions.

So I'm sort of like, actually, this could be a positive. It might mean that some resources aren't available to California that otherwise would be very economic to have, and that's too bad.

David Roberts

But at least everybody involved in the California ISO would be on the same page, right. Moving in the same direction.

Michael Wara

Or at least sort of roughly. I don't think we can go too far there, but I think that there's flavors of that. So why is SPP doing this? I do think part of it is kind of a desire to expand, just sort of like empire building. But there's also the fact that they're meeting a need. Right? There is a need for greater interstate coordination. The EIM was a market test of that need. It proved that this is really something people want. And the EDAM is another step in that direction to meet that need. And SPP is recognizing that there is a void created by the sort of idiosyncratic governance structure of the California ISO, which is a legacy of the California electricity crisis, remember?

David Roberts

Right.

Michael Wara

None of the other ISOs work have governance that's like this. The reason California has it and the reason FERC tolerates it is what happened in California. And that also when you go to the legislature in California, not so much the legislators because of term limits, but the staff remember.

David Roberts

PTSD.

Michael Wara

Absolutely. I don't know if it's active anymore, but surprisingly recently, last few years, there's been active litigation still over who pays the costs of that debacle. And so the California governance structure is unique because of that. It creates challenges to regionalization that would otherwise not be there if there were an independent board, which is what all the other RTOs have.

And as a result, SPP sees an opportunity and they're stepping into it. And so the question really is, does California see wisdom in also stepping into that space?

David Roberts

Kind of puts a clock on things, right? It was either nothing or a western RTO before, but now it's like, you need to move, or your competitor is going to suck up all your —

Michael Wara

Yeah, we'll lose some opportunities. Although I think you see that some utilities do switch RTOs. That does happen. Little Rock, Arkansas, where SPP is headquartered, is not a part of SPP.

David Roberts

Hilarious.

Michael Wara

Because the utilities switched out because it didn't like the deal it was getting.

David Roberts

So it's not permanent. Like these things are fluid even after the —

Michael Wara

They can be there are significant costs, and I think especially, and this is important to emphasize, there would be very high cost for California to withdraw. Might be easier for another state that's a smaller part of it to switch out of California as RTO. But once you get rid of your control room, you're kind of committed, or you have to move to another person's, another entity that has a control room.

David Roberts

And I also hear worries about basically like, if SPP hoovers up all the states that California will be isolated in, this growing reliability problem that you alluded to earlier, this sort of serial crises, this growing duck curve, et cetera, et cetera. It's going to be that much harder to solve those problems if California remains isolated. Just if CAISO as an island amidst a larger SPP, do you give any credence to those worries?

Michael Wara

Yeah, I mean, I think California as an island is not a situation that we want to be in. I'm a little bit skeptical that that's going to happen in the near term. And if it were to start to happen, I think that California, that would increase pressure on California to respond by creating a pathway toward shared governance. I guess that the other thing I would just sort of say about all of this is that people in California tend to be really afraid of this shared governance idea of sharing power. But I think we need to be confident about what we've accomplished, how that has changed where other utilities think the future lies, and in our ability to persuade other states and other utilities to come with us on this journey.

And I think we can.

David Roberts

On the politics of it, I forgot to ask this earlier, but I just throw it in now. There was a bill this session to restructure CAISO along these lines to take the first big step toward an RTO, and it ended up not advancing. And then, like the week after it died, Governor Newsom came out and endorsed it, which I think was puzzling to me as an outsider. What's going on there? Like, is Newsom on the side of the angels here? Are there internal political dynamics that are worth kind of calling out?

Michael Wara

Well, I think what happened with that bill was that it was essentially a reintroduction of the thing that did not pass in 2017 rather than an attempt to update it to the new circumstances. And so that was not perceived favorably. However, the issue is one that Newsom's team views as important. Remember, these are the people that have had to deal with the serial emergencies that have occurred on the California grid. The buck stops with Newsom. He understands that if there are rolling blackouts, à la Texas, he's politically accountable for that. And there's a sad history of what happens to governors in California that no one wants to go anywhere near.

And so I think Newsom's team has long been supportive of this, but maybe not ready to step out and publicly say that. And the point at which this bill was going to fail was the point at which Newsom decided that this is something that he had to get involved in. And so without supporting the bill, what he is supportive of, and this is I think, where many of us are, is the process is developing a workable proposal that can pass, that addresses some of the legitimate concerns and that keeps us moving. And so it's my understanding that at the staff level within the administration and also at the agencies, at the CEC and the PUC, there's high level attention being paid to this issue that's going to hopefully produce something that can pass.

David Roberts

Right. So you think the politics are good, there's momentum going —

Michael Wara

Well.

David Roberts

the big stakeholders are on board, more or less.

Michael Wara

Let me be clear. I think the politics are still challenging. Anything that unions are opposed to in California —

David Roberts

Right.

Michael Wara

has challenging politics.

David Roberts

And is there any prospect of bringing them on board, of persuading them? Like I'm sure the arguments have been made to them a million times. Are they immovable on this?

Michael Wara

IBEW is the shop union, is the union for the California ISO. All the California ISO employees are in IBEW 1245. But I think the bigger issue is the building trades and how the people that do all of the work that is not electrical when you build a big utility scale solar farm. And there the question is going to, I think, ultimately going to turn — and this is also actually where having the governor involved is really useful and important. The question is going to ultimately turn on what else do the building trades need?

David Roberts

Right.

Michael Wara

And is there a trade where the governor's team feels like giving something along some other dimension is worth it —

David Roberts

I see.

Michael Wara

to get this value?

David Roberts

Interesting.

Michael Wara

Because it's never just one dimensional, it's never just one thing that any organization as complex and powerful as the building trades needs.

David Roberts

I say. I've always found this comes up again and again, the sort of opposition of the building trades to clean energy bills in a bunch of different states. Somewhat mysterious to me because it just seems to me like of all the worries you might have about a clean energy transition, a shortage of building work should be at the bottom of your list. You're just going to build a crapload of stuff everywhere, everybody, all the time. It seems like an odd worry. Like, if anything, the building trades are going to be overwhelmed with the amount of work.

Michael Wara

Well, trades are generally supportive, like trades supported SB 100 trades are generally supportive of a lot of the clean energy legislation in California. They're worried about moving stuff out of state. And I guess the thing that I point to, and I think the issue that I feel California legislators and other stakeholders should be most focused on is the reliability question for the following reason: I'm old enough to remember the aftermath of the electricity crisis in California, where the basic political response was to roll back all the things that had led to that series of rolling blackouts. And what I worry about is a sustained heat wave in the context of a drought in California where we have significant rolling blackouts.

And the political response to that is rollback of SB 100 goals. And I think that is not something we should rule out of hand.

David Roberts

Wow, that's dystopian.

Michael Wara

I don't think it's dystopian. I mean, electric reliability is incredibly important, particularly in a heat wave. People will die. Like, there are real near term concerns with that kind of a reliability crisis like what happened in Texas in February of last year or two years ago. It's totally unacceptable.

David Roberts

Well, yeah, and you look at the response of the Texas legislature and it does not augur well for —

Michael Wara

Without weighing in on their inadequate response, I would hope that California would have a more substantive and adequate response to a crisis like that were it to occur. I actually have confidence that we would, but I do think that it would raise real questions about particularly that last 20% of the SB 100 goal. And I don't want to see those. I want to see us succeed. And I want to see us do the things where we execute on that goal, ideally ahead of schedule. And so reducing risks is an important part of that. That's the reason why I think building trades should support this, because it's going to allow us to build more stuff.

Like it avoids a situation where we have an emergency stop or at least an emergency pause.

David Roberts

Right, that's a good point. Final question here is and it gets to the schedule as you just brought up, whatever happens in this process of taking steps towards an RTO, it's going to take a while, as you said, late 2020, as earliest, probably more like 2030. There's a dire, immediate need for more transmission and better transmission planning in the western region. And I think everyone can agree that it would be really bad if all of that waited until 2030 to get started and if California didn't start regional transmission planning until 2030 when an RTO was in place.

So are there ways to get more regional transmission planning going parallel to this RTO effort?

Michael Wara

There are, and you see some of it in the current transmission planning process at the California ISO. So one alternative option is to begin to build transmission lines that are owned and operated by the California ISO, but which exist in other footprints. And that's something that has started to happen. It's happening with respect to connecting Wyoming Wind or a big slug of Wyoming Wind to California. I think we may want to think about that for sources of clean, firm power as they develop in the western interconnect. There are a lot of interesting geothermal proposals in Nevada and in Utah.

And without weighing into the nuclear conversation, there's some news. A lot of the small modular reactors are going to get built in Utah first. And so how we leverage our existing transmission to these states, as the coal units that were the original rationale for it shut down, and whether we construct new transmission on the California dime where California recognizes paying for these lines, no one else's to interconnect new sources of especially valuable supply to California demand. I think it's something we need to look at in the near term. The good news is that the California ISO over the last couple of years has really pivoted from being pretty reluctant to build new lines to being maybe making some parties uncomfortable with the ambition of what they are proposing.

And I think that's healthy. I think we need to be very ambitious in the near term because these lines take so many years to build and we need to be looking at where the puck is going to be, not where it is and thinking about systematic build out of the system to incorporate much larger renewable shares. And the ISO is moving aggressively in that direction. I think there's still room for them to move, but they are off the base and running, so that's good.

David Roberts

Thank you so much for coming on and walking through this all. It's super fascinating. There's just so much going on in the electricity system. Everywhere you look. This is a really interesting little subdrama chapter here, so thanks for walking through it. Michael Wara of Stanford. Thanks for coming on, Volts.

Michael Wara

Pleasure. Thanks for having me, David. Great to talk to you.

David Roberts

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