1. 11/24/2018
Class 11 Network Industries, Spring, Engineering Electricity Markets
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
Copyright © Randal C. Picker. All Rights Reserved.

2. Why Electricity is Hard
11/24/2018
Why Electricity is Hard
Can’t Store It
Needs to be created when it is used
Travels over system at speed of light
Flows Can’t Be Controlled
“The flow of alternating current (AC) electricity cannot be controlled like a liquid or gas by opening or closing a valve in a pipe, or switched like calls over a long-distance telephone network.”
November 24, 2018

3. Why Electricity is Hard
11/24/2018
Why Electricity is Hard
“Electricity flows freely along all available paths from the generators to the loads in accordance with the laws of physics—dividing among all connected flow paths in the network, in inverse proportion to the impedance (resistance plus reactance) on each path”
See Final Report on the August 14, 2003 Blackout in the United States and Canada p.6
November 24, 2018

4. US Net Electricity Generation (billions of kilowatthours)
11/24/2018
Source:
November 24, 2018
US Net Electricity Generation (billions of kilowatthours)

5. US Net Electricity Generation vs US Real GDP
November 24, 2018
US Net Electricity Generation vs US Real GDP

6. US Electricity Generation: By Major Category
11/24/2018
Source:
November 24, 2018
US Electricity Generation: By Major Category

7. US Electricity Generation: By Major Fuel 2011
11/24/2018
Source:
November 24, 2018
US Electricity Generation: By Major Fuel 2011

8. US EPA on Natural Gas Emissions
November 24, 2018
US EPA on Natural Gas Emissions

9. US Electricity Generation: By Major Source 1949-2011
11/24/2018
Source:
November 24, 2018
US Electricity Generation: By Major Source

10. FERC, 2013 State of the Markets Report (Mar 20, 2014)
November 24, 2018
FERC, 2013 State of the Markets Report (Mar 20, 2014)

11. U.S. Solar Market Insight 2013 Report
11/24/2018
Source: US Solar Market Insight Report, 2013 Year-in-Review
November 24, 2018
U.S. Solar Market Insight 2013 Report

12. U.S. Solar Market Insight 2013 Report
November 24, 2018
U.S. Solar Market Insight 2013 Report

13. US Electricity: By Type of Use
November 24, 2018
US Electricity: By Type of Use

14. November 24, 2018
US Electricity Prices

15. US Electricity Price Variation
November 24, 2018
US Electricity Price Variation

16. US Electricity Price Variation
November 24, 2018
US Electricity Price Variation

17. US Electricity Price Variation
November 24, 2018
US Electricity Price Variation

18. The Creation of Federal Authority over Electricity
11/24/2018
The Creation of Federal Authority over Electricity
The Run Up to the Federal Power Act of 1935
States regulate utilities intrastate
With vertically-integrated local monopolies, approach works except for sales near state lines
Attleboro (US, 1927)
States lack authority to regulate interstate power sales
November 24, 2018

19. The Supreme Court Defines the Limits of Federal Authority
PUC of Rhode Island v. Attleboro, 273 U.S. 83 (1927)
In 1917, Narragnasett Electric Lighting Co., based in RI, entered into a 20 year contract with Attleboro Steam & Electric Co., based in Mass., to supply all of the power required by Attleboro
Attleboro dismantled its power plant
November 24, 2018

20. The Limits of Federal Authority in Attleboro
Narragansett filed a contract with RI PUC and the contract was authorized by commission
In 1924, Narrangansett filed a new rate schedule with RI PUC purporting to cancel original rate schedule for Attleboro and proposed new rates
November 24, 2018

21. The Limits of Federal Authority in Attleboro
Cost of generating electricity had risen; RI PUC approved new rate based on operating loss and that new rate was reasonable and would produce a fair return.
Attleboro challenged as impermissible burden on interstate commerce
November 24, 2018

22. The Attleboro Gap Supreme Court Holding
“Furthermore, if Rhode Island could place a direct burden upon the interstate business of the Narragansett Company because this would result in indirect benefit to the customers of the Narragansett Company in Rhode Island, Massachusetts could, by parity of reasoning, reduce the rates on
November 24, 2018

23. The Attleboro Gap Supreme Court Holding
“such interstate business in order to benefit the customers of the Attleboro Company in that State, who would have, in the aggregate, an interest in the interstate rate correlative to that of the customers of the Narragansett Company in Rhode Island.
November 24, 2018

24. The Attleboro Gap Supreme Court Holding
“Plainly, however, the paramount interest in the interstate business carried on between the two companies is not local to either State, but is essentially national in character.
November 24, 2018

25. The Attleboro Gap Supreme Court Holding
“The rate is therefore not subject to regulation by either of the two States in the guise of protection to their respective local interests; but, if such regulation is required it can only be attained by the exercise of the power vested in Congress.”
November 24, 2018

26. November 24, 2018
1935 Act H. Rep

27. November 24, 2018
Public Utility Act of 1935

28. November 24, 2018
1935 Act: Interconnection

29. 1935 Act: More Interconnection
November 24, 2018
1935 Act: More Interconnection

30. 1935 Act: Federal Power Commission Ratesetting Authority
November 24, 2018

31. 1935 Act: Federal Power Commission Ratesetting Authority
November 24, 2018

32. Mapping to Current Law 1935 Federal Power Act
11/24/2018
Mapping to Current Law
1935 Federal Power Act
16 USC 824. Declaration of policy; application of subchapter (§ 201)
16 USC 824d. Rates and charges; schedules; suspension of new rates; automatic adjustment clauses (§ 205)
16 USC 824e. Power of Commission to fix rates and charges; determination of cost of production or transmission (§ 206)
November 24, 2018

33. November 24, 2018
Energy Policy Act of 1992

34. 1992 Act H. Rep. 102-474: Rise of Wholesale Electricity Markets
November 24, 2018

35. 1992 Act H. Rep. 102-474: Clarification of FERC Authority
IPP: Independent power producer
PURPA: Public Utility Regulatory Policy Act of 1978
1992 Act H. Rep : Clarification of FERC Authority
November 24, 2018

36. November 24, 2018
FERC Order 888 (Apr 24, 1996)

37. New York v. FERC, 535 U.S. 1 (2002) (upholding FERC authority re Order 888)
November 24, 2018

38. Order 888: Changes in Economies of Scale of Electricity Generation
11/24/2018
Source: Federal Register version of Order 888
Order 888: Changes in Economies of Scale of Electricity Generation
November 24, 2018

39. Order 888: Changes in Economies of Scale of Electricity Generation
November 24, 2018

40. Order 888: Changes in Economies of Scale of Electricity Generation
November 24, 2018

41. Orders 888/889: Creating a Nondiscriminatory Market
11/24/2018
Orders 888/889: Creating a Nondiscriminatory Market
Major Steps
Separate rates for generation, transmission and ancillary services
Common information system, for both the owner of the grid and outsiders (the OASIS—Open Access Same-Time Information System)
Owner of transmission grid must “buy” as outsider would
November 24, 2018

42. Combined Transition Simultaneous Moves at Federal Level and States
FERC, wholesale, through Order 888 framework
States, retail, both of grid and local generation resources
California as “leading” example
November 24, 2018

43. California AB 1890 Key Dates Passed Sept. 24, 1996
11/24/2018
California AB 1890
Key Dates
Passed Sept. 24, 1996
Retail competition by Jan. 1, 1998
Transition to be done by March 31, 2002
November 24, 2018

44. California AB 1890 Path From
11/24/2018
California AB 1890 Path
From
“the regulatory framework existing on January 1, 1997, in which retail electricity service is provided principally by electrical corporations subject to an obligation to provide ultimate consumers in exclusive service territories with reliable electric service at regulated rates”
November 24, 2018

45. 11/24/2018
California AB 1890 Path To
“a framework under which competition would be allowed in the supply of electric power and customers would be allowed to have the right to choose their supplier of electric power.”
November 24, 2018

46. A.B Wish List
Six Items
1. Accelerated, equitable, nonbypassable recovery of transition costs associated with uneconomic utility investments and contractual obligations.
2. An immediate rate reduction of no less than 10 percent for residential and small commercial ratepayers.
November 24, 2018

47. A.B Wish List
Six Items
3. The financing of the rate reduction through the issuance of “rate reduction bonds” that create no new financial obligations or liabilities for the State of California.
November 24, 2018

48. A.B Wish List
Six Items
4. An anticipated result through implementation of this act of a subsequent, cumulative rate reduction for residential and small commercial customers of no less than 20 percent by April 1, 2002.
November 24, 2018

49. A.B Wish List
Six Items
5. A “fire wall” that protects residential and small business consumers from paying for statewide transition cost policy exemptions required for reasons of equity or business development and retention.
November 24, 2018

50. A.B Wish List
Six Items
6. Protection of the interests of utility employees who might otherwise be economically displaced in a restructured industry.
November 24, 2018

51. Evolution of Regulatory Approach
11/24/2018
Evolution of Regulatory Approach
Generation
Switch from regulated prices at wholesale and retail levels to prices generated through competition
Critical to guarantee generators access to natural monopoly grid
November 24, 2018

52. Evolution of Regulatory Approach
11/24/2018
Evolution of Regulatory Approach
Transmission
Move from
regulators—FERC and CPUC—controlling interested parties To
Decisions made by independent party—ISO Governing Board and equivalent board for PX—still subject to regulatory authority
November 24, 2018

53. Critical Regulatory Design Choices
11/24/2018
Critical Regulatory Design Choices
Four Choices
1. Separation of transmission from generation
2. Creation of auction market—the Power Exchange—to allocate access to the grid and the sale of generation
3. Requirement of generation divestiture and obligation to buy and sell through the PX by incumbents
November 24, 2018

54. Critical Regulatory Design Choices
11/24/2018
Critical Regulatory Design Choices
Four Choices
4. Governance mechanisms to implement all of that
November 24, 2018

55. PG&E 1996 Annual Report: Background
November 24, 2018
PG&E 1996 Annual Report: Background

56. PG&E 1996 Annual Report: Background
November 24, 2018
PG&E 1996 Annual Report: Background

57. PG&E 1996 Annual Report: ISO/PX setup and Generation Divestiture
November 24, 2018

58. PG&E 1997 Annual Report: ISO/PX setup
November 24, 2018

59. PG&E 1997 Annual Report: Generation Divestiture
November 24, 2018

60. PG&E 1997 Annual Report: Generation Divestiture
November 24, 2018

61. PG&E 1998 Annual Report: ISO/PX setup
November 24, 2018

62. PG&E 1998 Annual Report: ISO/PX setup
November 24, 2018

63. PG&E 1998 Annual Report: Generation Divestiture
November 24, 2018

64. US EIA on California Crisis
November 24, 2018
US EIA on California Crisis

65. November 24, 2018

66. Summer 2000: Volumes and Prices
11/24/2018
November 24, 2018
Summer 2000: Volumes and Prices

67. Summer 2000: California Residential Rates
11/24/2018
November 24, 2018
Summer 2000: California Residential Rates

68. US EIA on California Crisis
November 24, 2018
US EIA on California Crisis

69. US EIA on California Crisis
November 24, 2018
US EIA on California Crisis

70. ISO Org Developments 11/1/2000 1/18/2001
11/24/2018
ISO Org Developments
11/1/2000
FERC issues order proposing new appointed board structure for Cal ISO
1/18/2001
Cal legislature acts: new structure is five member board appointed by governor
November 24, 2018

71. ISO Org Developments Jan, 2001
11/24/2018
ISO Org Developments
Jan, 2001
Cal Dept Water Resources (DWR) starts purchasing wholesale power in Cal markets
November 24, 2018

72. FERC Authority Once More
11/24/2018
FERC Authority Once More
Cal ISO v. FERC (D.C. Cir. 2004)
Can FERC impose its ISO organization plan in the face of the plan adopted by the California legislature?
November 24, 2018

73. November 24, 2018

74. 11/24/2018
FERC, Final Report on Price Manipulation in Western Markets (March 2003)
November 24, 2018