This post will examine the California Independent System Operator’s (CAISO) June 9th, 2016 Proposed Principles for Governance of a Regional ISO. This document builds upon previous whitepapers, testimony, presentations, and comments addressing the governance structure of an expanded regional ISO in the west. It also serves as the focal point for the June 16th, 2016 joint stakeholder meeting between the CAISO and CEC. This post will lay out the proposed principles and examine other relevant regional transmission operator governance structures to inform the reader about the purpose and issues surrounding the proposed CAISO principles for governance.
The Proposed Principles for Governance of a Regional ISO lays out eight principles for the governance structure of an expanded regional ISO. These eight principles and explanations are as follows:
- Preservation of State Authority:
- Inclusions of binding provisions in the bylaws or other corporate governance structure that preserve state authority over procurement policy, resource planning, certificates of public convenience and necessity (CPCN) approvals for utilities within their jurisdiction, and resource or transmission siting within their state.
- Inclusion of provision(s) in bylaws or other corporate governance document that prevents the ISO from adopting any policy that would diminish or impair state or local authority in the above areas.
- Prohibition on proposing or endorsing any centralized market for forward procurement of electric capacity products (i.e. a capacity market like in PJM).
- Requires changes to bylaw or corporate governance documents relating to state authority to have unanimous approval by the ISO Board and approval by the new body of state regulators (see number 7 below).
- Greenhouse Gas Accounting:
- Request comments and proposals to mitigate the SB 350 preliminary study results that show an increase in GHG emission in 2020.
- Development of a transparent methodology for tracking and accounting for greenhouse gas emissions for a regional balancing authority spanning multiple states. The methodology must includes a means to attribute emissions to California load and resources located in California as well as out-of-state resources serving California load.
- Transmission Owner Withdrawal:
- The governance structure must ensure the right of participating transmission owners to withdraw voluntarily or by order of their respective state regulator from the ISO.
- Transitional Committee of Stakeholders
- Creation of a transitional committee on governance to implement the governance design.
- The transitional committee, composed of stakeholders and state regulator appointed by the CAISO Board, will submit its proposal to the Board within 6 months of its inception, with CAISO support as needed.
- If accepted, the transitional committee will oversee drafting of the corporate documents implementing its proposal. This will require new legislation in California that sunsets or revises existing California law that establishes the CAISO’s current governance structure. Implementation may also be contingent on FERC regulatory review and the IRS review for non-profit tax status.
- Initial Board and Transition Period:
- Five members of the current CAISO Board and four new members selected by other states within the expanded footprint through a process endorsed by those states will compose the initial board.
- The new board will become effective upon the approval of the new corporate governance structure by the CAISO.
- A transition period will ensue with the approved initial board serving until a new nomination and approval structure is in place.
- Members of the initial board will have staggered terms that allow California-appointed members to constitute a majority of the state-selected members during the transition period. After the transition period, the board will be comprised of individuals selected by the new nomination and appointment method.
- Composition of Regional ISO Board:
- A transition board created new nomination and approval process will begin to appoint members to the permanent regional ISO board, either at the end of the transition period or at the expiration of the shortest initial board member term.
- The new process will include stakeholder input on board candidates, intend to establish a board with professional expertise in relevant areas, and include a role for states in the nomination or approval process.
- The regional ISO board will consist of nine members that meet FERC requirements, including financial independence from market participants.
- Establishment of a Body of State Regulators
- An incorporated, non-profit body of state regulators, separate from the ISO but funded through a FERC approved tariff mechanism, will constitute part of the governance structure to provide policy direction and input on matters of collective state interest.
- One regulator from each state in the expanded ISO footprint will serve on the body.
- One individual appointed by the publicly-owned utilities within the ISO footprint will serve on the body in a non-voting, advisory capacity. This individual will participate in all deliberations of the body and provide input on matters of interest to the public power entities.
- Once a regional governance structure is in place and approved by FERC, the body of state regulators will have primary authority over regional ISO policy initiatives on topics within the general subject areas of transmission cost allocation and aspects of resource adequacy, that will be more defined by the transitional committee in consultation with state regulators and the CAISO.
- Primary authority means the body will play the lead role for its defined areas of the authority in directing policy for the regional ISO, and policy approval by the regulators body would be a prerequisite to any ISO Section 205 filing with FERC.
- The body will have a voting rule for approval of policies within its primary authority that, at a minimum, will require an affirmative vote of a majority of the members of the body, as well as members representing at least a majority of load in the regional footprint.
- For matters within the regulatory body’s primary authority, the transitional committee will develop provisions that:
- Permit the ISO to file at FERC without regulatory body approval, on a temporary basis, when reliability is imminently threatened (but only after giving the regulatory body as much notice and opportunity to address the issue as the emergency circumstances may allow); and
- Permit submission of both a proposal approved by the regulatory body and an alternative approved by the ISO board if a supermajority of the ISO board concluded that the proposal approved by the regulatory body would severely undermine reliable operation of the grid or cause the ISO to violate a mandatory federal reliability standard or other binding FERC requirement.
- Stakeholder Processes and Stakeholder Participation:
- The transition committee will consider changes to the current ISO stakeholder process to facilitate broad and robust stakeholder participation.
- Specific topics will include:
- Possible process improvements to facilitate broad participation in stakeholder proceedings;
- Possible creation of a formal stakeholder committee(s) and possible composition and role; and
- Possible establishment of a funding mechanism to facilitate participation by state consumer advocacy bodies, and if so, who would qualify for such funding, bear the cost, and how funding would be allocated.
The CAISO proposed principles respond to input from stakeholder, particularly western utilities and their regulators, as well as taking governance principles from the two closest multi-state ISO/RTOs, the Midcontinent Independent System Operator (MISO) and Southwest Power Pool (SWP). The ISO proposals creates a governance structures in the form of a Body of State Regulators that differs from existing RTO structures. These principles attempt to blending state and federal oversight under a federally authorized structure that provides a significant role for state regulators, who would otherwise be preempted, to play a role in the governance of an interstate wholesale electric market. This will serve as the focus of the following section.
Creation of a Body of State Regulators and the Blurring Lines Between State and Federal Jurisdiction
Proposal 7 of CAISO’s Principles of Governance calls for the creation of a Body of State Regulators that exhibits “primary authority” over transmission cost allocation and resource adequacy. The Southwest Power Pool’s (SPP), one of the seven ISO/RTOs in the United States with a footprint across Montana, North Dakota, South Dakota, Minnesota, Iowa, Missouri, Nebraska, Kansas, Texas, Oklahoma, Arkansas, Louisiana, Texas, and New Mexico, created a similar entity in the form of a Regional State Committee under Section 7.2 of its bylaws. SPP’s Regional State Committee (RSC) is composed of one designated commissioner from each state regulatory commission having jurisdictions over an SPP member. The RSC provides direction and input on all matters pertinent to the participation of the Members in the SPP. More specifically, the RSC has “primary responsibility” for determining regional proposals and transition processes in the following areas:
- Whether and to what extent participating funding will be used for transmission enhancements;
- Whether license plate or postage stamp rates will be used for the regional access charge;
- Firm transmission rights (FTR) allocation, where a locational price methodology is used; and
- The transition mechanism to be used to assure that existing firm customers receive FTRs equivalent to the customers’ existing firm rights.
The RSC also determines the approach to resource adequacy across the entire SPP regional footprint, determines whether transmission upgrades for remote resources will be included in the regional transmission planning process, and the roles of transmission owners in proposing transmission upgrades in the regional planning process.
The proposed principles governing the creation of the regional ISO Body of State Regulators uses similar member composition and responsibilities as the SPP. The primary difference between the CAISO’s proposed principles of governance and the existing SPP bylaws stems from the limitation that policy approval by the regulators body would be a prerequisite to any ISO Section 205 filing with FERC. Under SPP’s bylaws, “As the RSC reaches decisions on the methodology that will be used to address any of these issues, SPP will file this methodology pursuant to Section 205 of the Federal Power Act. However, nothing in this section prohibits SPP from filing its own related proposal(s) pursuant to Section 205 of the Federal Power Act.” In light of the regional ISO’s federal nature, it remains unclear whether FERC will accept this level of oversight by a separate body composed of state regulators over policies that determine the operation of a wholesale market. The SPP bylaws avoid this type of issue by allowing the SPP Board of Directors tol file its own related proposal(s) pursuant to Section 205 of the Federal Power Act.
Additionally, the Organization of MISO States, Inc. (OMS) offers a different approach to state representation in a wholesale market in the MISO footprint. OMS is a non-profit, self-governing organization composed of representatives from each state with regulatory jurisdiction (17 states and provinces members and 11 consumer or public agency associate members) over entities participating in MISO. OMS coordinates regulatory oversight among the states and makes recommendations to MISO, the MISO Board of Directors, FERC, and other relevant government entities and state commissions. Article IV Section 8 of the OMS bylaws governs the OMS Board of Directors policy positions. This section provides authority for the OMS Board of Directors to direct the formation of issue statements pursuant to its approved process for FERC and MISO. A position approved by a majority of the OMS Board or Directors may be issued by OMS as its position. The position is referred to Member states and provincial regulatory authority, who “retain all rights to object to, support, or otherwise comment on, issue statements of the Organization, including the attachment of a minority report or dissenting opinion…”. Additionally, the OMS Board of Directors may also “authorize intervention in proceedings before federal regulatory agencies and in related judicial expression…”. OMS exists as an independent entity, not a committee as in SPP or the proposed ISO regional governance entity, that represents state interests separate from the MISO committees and processes. This line of separation maintains a clear line of demarcation between state and federal jurisdictions and entities without binding one to the other.
The reason for examining this principle more closely stems from history. AB 1890 created the CAISO and the Power Exchange (PX) when California made its first attempt at deregulation. An Electricity Oversight Board (EOB) composed of a five-member board was established to oversee the ISO and PX. The EOB appointed the governing boards for both the ISO and PX. While the current proposal does not create the same issues around California residency for appointees or how board member appointments were controlled in a California centric way, it does propose granting authority over certain areas that may infringe on the independence of the new regional entity in its duties to oversee interstate transmission and wholesale power markets. In other words, it may be viewed as a multi-state effort to exercise influence or control over a wholesale market and transmission system. Based on past actions, FERC will exercise jurisdiction over the bylaws of the new entity to ensure its independence as an institution with full regional participation and representation. This will set clear limits to state authority over the newly created regional ISO entity.
Maintaining a clear jurisdictional boundary is made more complicated by changes in the electric industry. The bright line between state and federal jurisdiction is becoming blurred by advances in technology, policy changes, and market changes. The primary threat to the bright line comes from how wholesale markets affect state jurisdiction through a wholesale market and operator’s ability to change and adapt more quickly than state regulations and regulators. For example, FERC recently approved the CAISO’s tariff changes that will allow distributed energy resource aggregation participation in the market. The California Public Utilities Commission (CPUC) is also addressing how to utilize and value these types of resources at the retail level. However, the process to create a mechanism to incorporate these resources in a way that does not conflict with the ISO tariff and dispatch orders remains underway with no clear completion time frame or understanding of further need for a statutory amendment. This is complicated by the multiple related adjudications and rate cases at the CPUC. While the newly created regional ISO entity and its bylaws will enshrine the preservation of existing state authority, the momentum in the electric sector appears to be changing where federal and state line of authority begin and end based on how entities participate in the wholesale market. The full effect of these changes will be felt overtime and may cause potential participants in the regional expansion to take pause.