Tony Clark on Electric Market Turmoil: Be True to Your School

The legendary Beach Boys rock group in 1963 recorded “Be True to Your School” on their early album “Little Deuce Coupe.” Among the lyrics, “Now what’s the matter buddy, ain’t you heard of my school, it’s number one in the state.”

Electric markets roil over what appear to be fundamental challenges to the market restructuring of the end of the 20th century. A federal district court recently ruled that Illinois can legally put its thumb on the scale of competitive wholesale market auctions at the PJM regional market to aid nuclear bidders. That’s the latest challenge to the competitive markets that now dominate the Northeast and Mid-Atlantic region.

Former Federal Energy Regulatory Commissioner Tony Clark has offered his advice on how to reconcile what have become multiple state and federal approaches to how to govern the making and sale of electricity in the U.S. His advice: stay true to you school.

Tony Clark

Tony Clark

In a paper – Regulation and Markets: Ideas for Solving the Identity Crisis — for the summer meeting of the National Association of Regulatory Utility Commissioners this week, the Wilkinson, Barker, Knauer senior advisor and former North Dakota Republican state legislator and regulator, said, “A state can choose to be like any of our nation’s three largest states. It can be like Texas and fully restructure. It can be like California and have vertically integrated utilities within an organized market. It can be like Florida and maintain its organization as a vertically-integrated state with a bilateral market. But no state should choose to be Texas, California and Florida all at once. That is one path all restructured states should seek to avoid, the path of the RINO – Restructured in Name Only – attempting to straddle the middle of the road between a merchant market while simultaneously deploying state-sponsored around-market resource selection.”

Clark quoted legendary Texas liberal provocateur Jim Hightower, “There’s nothing in the middle of the road but a yellow stripe and dead armadillos.”

Clark’s paper landed at the NARUC meeting just as the federal district court judge upheld the Illinois legislation. The non-utility generators who filed the court challenge immediately said they would appeal to the 7th Circuit Court of Appeals in Chicago. Similar litigation is pending in New York and the dispute could end up at the U.S. Supreme Court.

Clark is critical of the actions of Illinois and New York, as well as moves by other states in restructured markets to subsidize preferred generation, including renewables, in competitive markets. States in those markets (primarily the PJM Interconnection, New York Independent System Operator, and Independent System Operator-New England) “have engaged in arguably deleterious actions that have undercut the [competitive market.]”  The states “are now seeking to procure vast amounts of megawatts of capacity around markets that were designed with the merchant generator model in mind. Accordingly, we have reached the tipping point where things can no longer be benignly ignored.”

“Stay true to your model,” advises Clark. “Each of the major models of utility regulation has its own strengths.” Advancing the musical analogy, he advises that states don’t fall into the trap defined by the 1976 Johnny Cash song “One Piece at a Time,” about a General Motors assembly line worker who decides to build a Cadillac for himself by taking a piece of at a time. It ended up being a ’49, ’50, ’51, ’52, ’53 Rube Goldberg contraption.

Looking at the response of the restructured market institutions to the moves from Illinois and New York to subsidize nuclear capacity, and thumbs-on-the-scale for renewables from most of the states in those markets, Clark writes, “While I applaud their efforts to look at creative solutions, I am skeptical of whether further dissection of administration auctions into state-sponsored resources and competitive resources can succeed,” a comment on the plans of PJM and ISO-NE for two-stage auctions. “The complexity of these administrative constructs is remarkable as it exists today. Layering even more auctions, set-asides and carve-outs onto the current construct may ultimately tumble the house of cards.”

Clark says, “While it can be alluring to think one can maintain all the benefits of a restructured market while also selecting your generation winners and losers, I have concluded that is a siren’s call best left unanswered. There may be plenty of reasons a state might wish to exert more control over its generation mix, some of them entirely legitimate. But it must be well thought out and not done haphazardly.”